BKAM2013 Management Accounting I

Topic 2: Cost Terms, Concepts and Classifications

Exercise 1

The following is the information of High-tech Company for the year ended 31
December 2006:

RM
Administrative salaries 2,400
Advertising expense 1,200
Utilities costs 3,500
Depreciation expense 4,800
Direct labor cost ?
Beginning raw materials inventory 2,100
Ending raw materials inventory 3,200
Beginning finished goods inventory 46,980
Ending finished goods inventory 44,410
Administration insurance expense 2,240
Indirect labor cost 15,700
Factory insurance expense 3,400
Purchases of raw materials 14,600
Factory repair and maintenance 3,900
Marketing and selling salaries 2,000
Tax on factory 4,440
Sales commissions 1,410
Beginning work in process inventory 1,670
Ending work in process inventory 1,110

Additional information:
1. 80% of the utilities costs apply to factory operations; the remaining
amounts apply to selling and administrative activities.
2. 70% of the depreciation expense is for the factory equipment; 30% is for
the office equipment.
3. Direct labor cost is 40% of conversion cost.

REQUIRED:

(a) Prepare a schedule of cost of goods manufactured for the year ended 31
December 2006.

(b) Calculate the cost of goods sold for the year ended 31 December 2006.

Exercise 2

1
 BKAM2013 Management Accounting I

The following information has been taken from the accounting records of Line
Klear Company for last year:

RM
Selling expenses 140,000
Raw materials inventory, 1 January 2006 90,000
Raw materials inventory, 31 December 2006 60,000
Utilities, factory 36,000
Direct labor cost 150,000
Depreciation, factory 162,000
Purchases of raw materials 750,000
Sales 2,500,000
Insurance, factory 40,000
Indirect materials 15,000
Administrative expenses 270,000
Indirect labor 300,000
Maintenance, factory 87,000
Work in process inventory, 1 January 2006 180,000
Work in process inventory, 31 December 2006 100,000
Finished goods inventory, 1 January 2006 260,000
Finished goods inventory, 31 December 2006 210,000

Management wants these data organized in a better format so that financial

statements can be prepared for the year.

REQUIRED:

(a) Prepare a schedule of cost of goods manufactured for the year ended 31
December 2006.

(b) Calculate the cost of goods sold.

(c) Prepare an income statement for Line Klear Company.

Exercise 3

2
 BKAM2013 Management Accounting I

Dania Fitness Company operates a chain of fitness centers in Sintok area. The
companys controller is accumulating data to be used in preparing its annual
profit plan for the coming year. The cost behavior pattern of the companys
equipment maintenance costs must be determined. The accountant has
suggested the use of an equation, in the form of Y = a + bX, for maintenance
costs. Companys last year data is as follows:

Month Hours of Maintenance

Maintenance Costs (RM)
January 1,400 11,350
February 1,200 11,350
March 1,100 11,050
April 2,600 12,120
May 1,800 11,400
June 2,000 12,000
July 2,400 12,550
August 2,200 11,100
September 1,000 10,200
October 1,300 11,250
November 1,600 11,300
December 1,800 11,700

REQUIRED:

(a) Using the high-low method, calculate the variable and fixed cost
components in the maintenance costs of Dania Fitness Company.

(b) Write the high-low equation for the maintenance costs.

(c) Using your answer in requirement (b), calculate the predicted

maintenance costs at 2,300 hours of activity.

Exercise 4

3
 BKAM2013 Management Accounting I

Servqual Company is the Malaysian manufacturing company whose total factory

overhead costs fluctuate somewhat from year to year according to the number of
machine-hours worked in its production facility. These costs at high and at low
levels of activity over recent years are given below:

Level of Activity
Low High
Machine-hours 60,000 80,000
Total factory overhead costs RM274,000 RM312,000

The factory overhead costs above consist of indirect materials, rent and
maintenance. The company has analyzed these costs at the 60,000 machine-
hours level of activity as follows:

Indirect materials (variable) RM90,000

Rent (fixed) RM130,000
Maintenance (mixed) RM54,000
Total factory overhead costs RM274,000

For planning purposes, the company wants to break down the maintenance cost
into its variable and fixed cost elements.

REQUIRED:

(a) Estimate how much of the factory overhead cost of RM312,000 at the high
level of activity above consists of maintenance cost.

(b) Using the high-low method of cost analysis, estimate a cost formula for
maintenance.

(c) What total overhead costs would you expect the company to incur at an
operating level of 65,000 machine-hours?