2-17 Direct, indirect, fixed, and variable costs.

Best Breads manufactures two types of bread, which are sold as wholesale products to various specialty retail bakeries. Each loaf of bread requires a three-step process. The first step is mixing. The mixing department combines all of the necessary ingredients to create the dough and processes it through high speed mixers. The dough is then left to rise before baking. The second step is baking, which is an entirely automated process. The baking department molds the dough into its final shape and bakes each loaf of bread in a high temperature oven. The final step is finishing, which is an entirely manual process. The finishing department coats each loaf of bread with a special gla e, allows the bread to cool, and then carefully packages each loaf in a specialty car-ton for sale in retail bakeries. !. "osts involved in the process are listed next. #or each cost, indicate whether it is a direct variable, direct fixed, indirect variable, or indirect fixed cost, assuming $units of production of each kind of bread% is the cost ob&ect. "osts' (east ) direct variable #lour ) direct variable *ackaging materials ) direct variable +epreciation on ovens ) indirect fixed +epreciation on mixing machines ) indirect fixed ,ent on factory building ) indirect fixed #ire insurance on factory building ) indirect fixed #actory utilities ) indirect variable #inishing department hourly laborers ) direct variable -ixing department manager ) indirect fixed -aterials handlers in each department ) indirect fixed "ustodian in factory ) indirect fixed .ight guard in factory ) indirect fixed -achinist /running the mixing machine0 ) indirect fixed -achine maintenance personnel in each department ) indirect fixed -aintenance supplies for factory ) indirect variable "leaning supplies for factory ) indirect fixed

1. 2f the costs ob&ect were the $mixing department% rather than units of production of each kind of bread, which preceding costs would now be direct instead of indirect costs3 +epreciation on ovens +epreciation on mixing machines -ixing department manager -aterials handlers

-achinist -achine maintenance personnel -aintenance supplies

2-26 Total costs and unit costs. 4 student association has hired a band and a caterer for a graduation party. The band will charge a fixed fee of 5!,666 for an evening of music, and the caterer will charge a fixed fee of 5766 for the party setup and an additional 58 per person who attends. 9nacks and soft drinks will be provided by the caterer for the duration of the party. 9tudents attending the party will pay 5: each at the door. !. +raw a graph depicting the fixed cost the variable cost and the total cost to the student association for different attendance levels.

1. 9uppose !66 people attend the party. ;hat will be the total cost to the student association3 ;hat will be the cost per person3 The total cost to the student association for !66 people is 51,666 and the cost per person is 516.

<. 9uppose :66 people attend the party. ;hat will be the total cost to the student association and the cost per attendee3 The total cost for :66 people to attend the student association is 5<,766 and 5=.16 per attendee. >. +raw a graph depicting the cost per attendee for different attendance levels. 4s president of the student association, you want to request a grant to cover some of the party costs. ;ill you use the per attendee cost numbers to make your case3 ;hy or why not3

4s president of the student association requesting a grant for the party, 2 would not use the per attendee cost numbers to make my case. 2 would use the fixed cost of 5!,766 that 2 will incur whether :6 students show up or none at all. 2 would try to get the grant to cover as much of the

fixed costs as possible as well as a variable portion to cover as much of the 5: variable cost to the student association for each person attending the party.

2-35 Interpretation of statements continuation of 2-3!" !. ?ow would the answer to *roblem 1-<1 be modified if you were asked for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured3 Be specific. *roblem 1-<1 can be modified by including the beginning and ending finished goods inventory figures in the supporting schedule, instead of on the actual income statement.

1. ;ould the sales manager@s salary /included in marketing, distribution, and customer-service costs0 be accounted for any differently if the ?owell "orporation were a merchandising-sector company instead of a manufacturing-sector company3 Asing the flow of manufacturing costs outlined in Exhibit 1-8, describe how the wages of an assembler in the plant would be accounted for in this manufacturing company. The sales manager salary would be a marketing cost by both manufacturing and merchandising companies. <. *lant supervisory salaries are usually regarded as manufacturing overhead costs. ;hen might some of these costs be regarded as direct manufacturing costs3 Bive an example. 9ome manufacturing overhead costs will be regarded as direct manufacturing costs when that cost can be traced to one product. #or example, anything that becomes part of the product, anyone who touches the product to make it, and all the costs of the facilities and management incurred to make the product. >. 9uppose that both the direct materials used and the plant and equipment depreciation are related to the manufacture of ! million units of product. ;hat is the unit cost for the direct materials assigned to those units3 ;hat is the unit cost for plant and equipment depreciation3 4ssume that yearly plant and equipment depreciation is computed on a straight-line basis. +irect materials used C 5<1:,666,666 D !,666,666 units C 5<1: per unit +epreciation on plant equipment C 5E6,666,666 D !,666,666 units C 5E6 per unit

:. 4ssume that the implied cost-behavior patterns in requirement > persist. That is, direct material costs behave as a variable cost and plant and equipment depreciation behaves as a fixed cost. ,epeat the computations in requirement >, assuming that the costs are being predicted for the manufacture of !.1 million units of product. ?ow would the total costs be affected3 +irect materials unit cost would still be 5<1: per unit. +epreciation cost per unit would be 5E6,666,666 D !,166,666 C 577.7= per unit. Total direct materials costs would increase to 5<86,666,666 /5<1: per unit F !,166,666 units0, but total depreciation would not be affected at 5E6,666,666. 7. 4s a management accountant explain concisely to the president why the unit costs differed in requirements > and :. Anit costs are averages, and they must be interpreted with caution. The 5<1: direct materials unit cost is valid for predicting total costs because direct materials is a variable costG total direct materials costs change as output levels change.
2-37 Terminolo#$, interpretation of statements

!. "alculate total prime costs and total conversion costs.

+irect materials used +irect manufacturing labor costs *rime costs

5E> million >1 million 5!17 million

+irect manufacturing labor costs 2ndirect manufacturing costs "onversion costs

5 >1 million 1= million 5 E8 million

1. "ompute total inventoriable costs and period costs. *lant utilities 2ndirect manufacturing labor +epreciationHplant and equipment -iscellaneous manufacturing overhead +irect materials used +irect manufacturing labor *lant supplies used *roperty tax on plant Total inventoriable costs 58 1= 7 !: E> >1 > 1 5!E8

<. +esign costs and ,I+ costs are not considered product costs for financial statement purposes. ;hen might some of these costs be regarded as product costs3 Bive an example. ,I+ has no probable benefits. They are &ust simply research and development costs. ?owever, it is &ust appropriate to capitali e the same if the firm has already produced a technical feasibility for it and it is probable that future economic benefits will flow to the enterprise. >. 9uppose that both the direct materials used and the depreciation on plant and equipment are related to the manufacture of 2 million units of product +etermine the unit cost for the direct materials assigned to those units and the unit cost for depreciation on plant and equipment 4ssume that yearly depreciation is computed on a straight-line basis.

+irect materials used C 5E>,666,666 D 1,666,666 units C 5>1 per unit +epreciation on plant and equipment C 57,666,666 D 1,666,666 units C 5< per unit

:. 4ssume that the implied cost-behavior patterns in requirement > persist. That is, direct material costs behave as a variable cost and depreciation on plant and equipment behaves as a fixed cost. ,epeat the computations in requirement >, assuming that the costs are being predicted for the manufacture of !.: million units of product +etermine the effect on total costs.

+irect materials unit cost would be unaffected at 5>1. +epreciation unit cost would be 57,666,666 D 1,666,666 C 5< per unit. Total direct materials costs would be at 5!7E,666,666 /5E> per unit F 1,666,666 units0. Total depreciation cost of 57,666,666 would not change.

7. 4ssume that depreciation on the equipment /but not the plant0 is computed based on the number of units produced because the equipment deteriorates with units produced. The depreciation rate on equipment is 5> per unit. "alculate the depreciation on equipment assuming /a0 ! million units of product are produced and /b0 !.: million units of product are produced. Equipment depreciation is a variable cost in relation to the unit output. The amount of equipment depreciation will change in direct proportion to the number of units produced. /a0 +epreciation will be 5> million /! million F 5>0 when ! million units are produced. /b0 +epreciation will be 57 million /!.: million F 5>0 when !.: million units are produced.