Cost Management

PGP, 2015
Session 1
Introduction - Assignments

Problem 2-43 (p105)

San Fernando Fashions Company

Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 20x2

1. Schedule of cost of goods manufactured

Direct Material:
Raw-material inventory, January 1
Add: Purchases of raw material
Raw material available for use
Deduct: Raw-material inventory, December 31
Raw material used
Direct Labor
Manufacturing overhead:
Indirect material
Indirect labor
Utilities: plant
Depreciation: plant and equipment
Other
Total manufacturing overhead
Total manufacturing costs
Add: Work-in-process inventory, January 1
Subtotal
Deduct: Work-in-process inventory, December 31
Cost of goods manufactured

$
$

40,000
200,000
240,000
25,000
$

215,000
200,000

10,000
15,000
40,000
80,000
80,000
$
$
$

225,000
640,000
40,000
680,000
20,000
660,000
2

SAN FERNANDO FASHIONS COMPANY

SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2

Problem 2-43 continued

2. Schedule of cost of goods sold

Finishedgoodsinventory,January1
Add:Costofgoodsmanufactured
Costofgoodsavailableforsale
Deduct:Finishedgoodsinventory,December31
Costofgoodssold

20,000
660,000

680,000
50,000

630,000

980,000

3. Income Statement

Salesrevenue
Less:Costofgoodssold
Grossmargin
Sellingandadministrativeexpenses
Incomebeforetaxes
Incometaxexpense
Netincome

630,000
$

350,000
150,000

200,000
90,000

110,000
3

Problem 2- 41 (page 104)

1. Schedule of cost of goods manufactured
CASE A
DirectMaterial:
Raw-material inventory, January 1
$ 60,000
100,000
Add:Purchasesofrawmaterial
Raw material available for use
$ 160,000
90,000
Deduct:Rawmaterialinventory,December31
Raw material used
$
DirectLabor
Total manufacturing overhead
Total manufacturing costs
$
Add:Workinprocessinventory,January1
$
Subtotal
Deduct:Workinprocessinventory,December31
Cost of goods manufactured
$

70,000
200,000
250,000
520,000
35,000
555,000
30,000
525,000

2. Schedule of cost of goods sold

Finishedgoodsinventory,January1
Add:Costofgoodsmanufactured
Costofgoodsavailableforsale
Deduct:Finishedgoodsinventory,December31
Costofgoodssold

50,000
525,000
575,000
30,000
545,000

800,000
545,000
255,000
105,000
150,000
40,000
110,000

3. Income Statement
Salesrevenue
Less:Costofgoodssold
Gross margin
Sellingandadministrativeexpenses
Income before taxes
Incometaxexpense
Net income

$
$
$

$
$
$
$

CASE B

CASE C

$ 10,000
85,000
$ 95,000
0

$ 10,000
90,000
$ 100,000
45,000
$

$
$
$

$
$

$
$
$

95,000
100,000
150,000
345,000
20,000
365,000
35,000
330,000

55,000
125,000
160,000
$ 340,000
15,000
$ 355,000
5,000
$ 350,000

40,000
330,000
370,000
40,000
330,000

500,000
330,000
170,000
70,000
100,000
45,000
55,000

$ 480,000
345,000
$ 135,000
45,000
$ 90,000
40,000
$ 50,000

20,000
350,000
$ 370,000
25,000
$ 345,000

SELF - PRACTICE PROBLEMS

PROBLEM 2-40 (p103)

COST BEHAVIOUR

1. Fixed manufacturing overhead per unit: $600,000/24,000 units produced = $25

Direct material..
Direct labor
Variable manufacturing overhead..

$ 20
37
48

Fixed manufacturing overhead

Average unit cost..

25
$130

Production.
Sales
Ending finished-goods inventory

24,000 units
20,000 units
4,000 units

1. Cost of December 31 finished-goods

inventory: 4,000 units x $130 = $520,000

Net income:
Sales revenue (20,000 units x $185)

$3,700,000

Cost of goods sold (20,000 units x $130)..

2,600,000

Gross margin.

$1,100,000

Selling and administrative expenses..

860,000

Income before taxes

$ 240,000

Income tax expense ($240,000 x 30%)

72,000

Net income.

$ 168,000

(a) No change. Direct labor is a variable

cost, and the cost per unit will remain
constant.
(b) No change. Despite the decrease in the
number of units produced, this is a fixed cost,
which remains the same in total.

(c) No change. Selling and administrative costs move more closely with changes in
sales than with units produced. Additionally, this is a fixed cost.
(d) Increase. The average unit cost of production will change because of the per-unit
fixed manufacturing overhead. A reduced production volume will be divided into the
fixed dollar amount, which increases the cost per unit.

Cost Classification
(p106& 110)
2-45
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

2-56
a, d, g, i
a, d, g, j
b, d, g, k
b, f
a, d, g, k
b, d, g, k
a, d, g, j
b, c, f
b, d, g, k
b, c and d*, e and f and g*, k*

*The building is used for several purposes.

11.
12.
13.
14.
15.

b, c, f
b, c, h
b, c, f
b, c, e
b, d, g, k

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.

b, c, g, h, j, m
a, c, i, j, l
b, d, i, j, m
a, d, i, j, l
a, c, i, j, l
e
a, c, i, j, l
f
b, d, k, m
a, c, i, j, m
b, c, i, j, l
a, c, i, j, l
b, c, g, j, l
b, d, i, j, l
b, c, i, j, l

Case 2-60
a.

FastQ Company would be indifferent to acquiring either the small-volume copier, 1024S, or
the medium-volume copier, 1024M, at the point where the costs for 1024S and 1024M are
equal. This point may be calculated using the following formula, where X equals the
number of copies:
(Variable costS XS) + fixed costS = (variable costM XM) + fixed costM
1024S
1024M
$.12X + $8,000 = $.07X + $11,000
$.05X = $3,000
X = 60,000 copies
The conclusion is that FastQ Company would be indifferent to acquiring either the 1024S
or 1024M machine at an annual volume of 60,000 copies.
b.

A decision rule for selecting the most profitable copier, when the volume can be
estimated, would establish the points where Fast Q Company is indifferent to each
machine. The volume where the costs are equal between alternatives can be calculated
using the following formula, where X equals the number of copies:
(Variable costS XS) + fixed costS = (variable costM XM) + fixed costM
For the 1024S machine compared to the 1024M machine:
1024S
1024M
$.12X + $8,000 = $.07X + $11,000
$.05X = $3,000
X = 60,000 copies

CASE 2-60 (CONTINUED)

For the 1024M machine compared to the 1024G machine:
1024M
1024G
$.07X + $11,000 = $.03X + $20,000
$.04X = $9,000
X = 225,000 copies
The decision rule is to select the alternative as shown in the following chart.
Anticipated Annual Volume
060,000
60,000225,000
225,000 and higher

Optimal Model Choice

1024S
1024M
1024G

2. a. The previous purchase price of the endor on hand, $5.00 per gallon, and the
average cost of the endor inventory, $4.75 per gallon, are sunk costs. These costs were
incurred in the past and will have no impact on future costs. They cannot be changed by
any future action and are irrelevant to any future decision.
Although the current price of endor is $5.50 per gallon, no endor will be purchased
at this price. Thus, it too is irrelevant to the current special order.
If the order is accepted, the required 800 gallons of endor will be replaced at a cost of
$5.75 per gallon. Therefore, the real cost of endor for the special order is $4,600 (800
$5.75).

CASE 2-60 (CONTINUED)

b. The$20,000paidbyAlderon foritsstockoftatooine isasunkcost.Itwasincurredinthe

pastandisirrelevanttoanyfuturedecision.
Thecurrentmarketpriceof$11perkilogramisirrelevant,sincenomoretatooine willbe
purchased.
Ifthespecialorderisaccepted,Alderon willuse1,500kilogramsofitstatooine stock,thereby
losingtheopportunitytosellitsentire2,000kilogramstockfor$14,000.Thus,the$14,000is
anopportunitycostofusingthetatooine inproductioninsteadofsellingittoSoloIndustries.
Moreover,ifAlderon uses1,500kilogramsoftatooine inproduction,itwillhavetopay
$1,000foritsremaining500kilogramstobedisposedofatahazardouswastefacility.This
$1,000disposalcostisanoutofpocketcost.
Therealcostofusingthetatooine inthespecialorderis$15,000($14,000opportunitycost+
$1,000outofpocketcost).
c.

Theprojecteddonationsfromthewildlifeshowamountto$100,000(10percentoftheTV
audienceat$10,000per1percentoftheviewership).Theprojecteddonationsfromthe
manufacturingseriesamountto$75,000(15percentoftheTVaudienceat$5,000per1
percentoftheviewership).Therefore,thedifferentialrevenueis$25,000,withtheadvantage
goingtothewildlifeshow.
However,ifthemanufacturingshowisaired,thestationwillbeabletosellthewildlifeshowto
networkTV.Therefore,airingthewildlifeshowwillresultintheincurrenceofa$25,000
opportunitycost.
Theconclusion,then,isthatthestation'smanagementshouldbeindifferentbetweenthetwo
shows,sinceeachwouldgeneraterevenueof$100,000.
Wildlife show (10 $10,000)
Manufacturing show (15 $5,000)
Manufacturing show (sell wildlife show)

$100,000
$ 75,000
25,000
$100,000

donation
donation
sales proceeds
total revenue

Extra Exercise - Product Cost, Period Cost

Product Costs or Period Costs ?

Product
Cost

Period
Cost

Depreciation on salespersons cars

Rent on equipment used in the factory

Lubricants used for maintenance of machines

Salaries of finished goods warehouse personnel

Soap and paper towels used by factory workers at the end of a shift

Factory supervisors salaries

Heat, water, and power consumed in the factory

Materials used for boxing products for shipment overseas (units are not normally boxed)

Advertising costs

10

Workers compensation insurance on factory employees

11

Depreciation on chairs and tables in the factory lunchroom

12

The wages of the receptionist in the administrative offices

13

Lease cost of the corporate jet used by the company's executives

14

Rent on rooms at a Florida resort for holding the annual sales conference

15

Attractively designed box for packaging the companys productbreakfast cereal

X
11

Extra Exercise on COST Classification

Variable
Non-manufacturing
or Fixed
Cost
(V or F) Selling
Administrative

1. Depreciation, executive jet.

2. Costs of shipping finished goods to

customers.

3. Wood used in manufacturing furniture.

4. Sales managers salary

5. Electricity used in manufacturing
furniture.
6. Salary of the secretary to the company
president.

Manufacturing
Cost
Direct

Indirect

x
x
x
x

7. Aerosol attachment placed on a spray can

produced by the company.

8. Billing costs.

9. Packing supplies for shipping products

overseas.

10. Sand used in manufacturing concrete.

11. Supervisors salary, factory.

12. Executive life insurance.

13. Sales commissions.

14. Fringe benefits, assembly-line workers.

15. Advertising costs.

16. Property taxes on finished goods

warehouses.

17. Lubricants for production equipment.

x
x
x
x
x

12

Thank You

13