Unit 2 Exercises: COST CONCEPT AND CLASSIFICATION
I. Consider the following items:
A. Bananas used in the manufacture of Del Monte ketchup.
B. Administrative salaries of executives employed by Nissin Philippines.
C. Wages of assembly-line workers at a Toyota plant.
D. Marketing expenditures of the Warriors basketball team.
E. Commissions paid to Globe salespeople.
F. Straight-line depreciation on manufacturing equipment owned by Apple.
G. Shipping charges incurred by SL Ruiz on out-going orders.
H. Speakers used in Devant home-theater systems.
I. Insurance costs related to Mary Kay manufacturing plant.
Required: Complete the table that follows and classify each of the costs listed as (1)
a product cost or period cost and (2) a variable or fixed cost by placing an “X” in the
appropriate column.
Product or Period Variable or Fixed
Cost Cost
Item Product Period Variable Fixed
A
B
C
D
E
F
G
H
I
II. Butler Hospital wants to estimate the cost for each patient stay. It is a general health
care facility offering only basic services and not specialized services such as organ
transplants.
a. Classify each of the following costs as either direct or indirect with respect to
each patient.
b. Classify each of the following costs as either fixed or variable with respect to
hospital costs per day.
Direct Indirect Fixed Variable
Electronic
Monitoring
Meals for patients
Nurses’ salaries
Parking maintenance
Security
III.Lucas Manufacturing has three cost objects that it uses to accumulate costs for its
manufacturing plants. They are:
Cost object #1: The physical buildings and equipment
Cost object #2: The use of buildings and equipment
Cost object #3: The availability and use of manufacturing labor
The following manufacturing overhead cost categories are found in the accounting
records.
a. Depreciation on buildings and equipment
b. Lubricants for machines
c. Property insurance
d. Supervisors’ salaries
e. Fringe benefits
f. Property taxes
g. Utilities
Required: Assign each of the above costs to the most appropriate cost object.
IV.Giant Manufacturing Co. Ltd. Specializes in manufacturing many different models of
bicycles. Assume that a new model, the Jaguar, has been well accepted. As a result, the
company has established a separate manufacturing facility to produce these bicycles. The
company produces 1,000 bicycles per month. Giant’s monthly manufacturing cost and other
expenses data related to these bicycles are as follows:
1. Rent on manufacturing equipment (lease cost) P2,000/month.
2. Insurance on manufacturing building P750/month.
3. Raw materials (frames, tires, etc.) P80/bicycle.
4. Utility costs for manufacturing facility P1,000/month.
5. Supplies for administrative office P800/month.
6. Wages for assembly line workers in manufacturing facility P30/bicycle.
7. Depreciation on office equipment P650/month.
8. Miscellaneous materials (lubricants, solders, etc.) P1.20/bicycle.
9. Property taxes on manufacturing building P2,400/year.
10. Manufacturing supervisor’s salary P3,000/month.
11. Advertising for bicycles P30,000/year.
12. Sales commissions P10/bicycles.
13. Depreciation on manufacturing building P1,500/month.
Required:
1. Classify the cost as direct materials, direct labor, manufacturing overhead
and period costs.
2. Compute total manufacturing costs for the month.
ITEM PRODUCT COST/MANUFACTURING COST PERIOD
COST/NON-
MANUFACTURING
Direct Direct Labor MOH
Materials
1. Rent
2. Insurance
3. Raw Materials
4. Utility Cost
5. Office Supplies
6. Wages
7. Depreciation on
OE
8. Miscellaneous
materials
9. Property taxes
10. Manufacturing
supervisor’s
salary
11. Advertising
12. Sales
Commissions
13. Depreciation on
Manufacturing
building
TOTAL
V. The AGUILA Co. is to submit on the production of 10,000 units ceramic salad bowls. It is
estimated that the cost of material will be P75,000 and the direct labor, P101,000. Factory
overhead is applies at P5 per direct labor hour in the Molding Dept. and at 120% of the
direct labor cost in the Finishing Dept. It is estimated that 800 direct labor hours will
be required in Molding and that direct labor cost in the Finishing will be P43,000. The
company wishes a bid price consisting of a markup of 40% of its total production costs.
Required: a. Estimated prime cost c. Estimated conversion cost
b. Estimated cost to produce d. Bid price
VI.Jean Smith knows the following about the production process of her plant:
Department 1: Prime costs are 40 percent of total manufacturing costs
Direct labor is 25 percent of factory overhead costs
Factory overhead is P600,000
Department 2: Direct product costs are materials and direct labor
Conversion costs are 300% of materials.
Indirect product costs are 50% of conversion costs.
Total manufacturing costs are P600,000.
a. Find total manufacturing costs for Department 1.
b. Find material costs for Department 2.
MULTIPLE-CHOICE QUESTIONS
1. An example of a fixed cost is
A. total indirect material cost. C. cost of water.
B. total weekly wages D. straight-line depreciation
2. The term “prime cost refers to
A. all manufacturing costs incurred to produce units of output
B. all manufacturing costs other than direct labor and raw materials costs
C. raw materials purchased and direct labor costs
D. the raw material used and direct labor costs
3. Which of the following is not a product cost component?
A. rent on a factory equipment C. indirect production labor wages
B. janitorial supplies used in factory D. commission on the sale of a product
4. Conversion cost does not include
A. factory depreciation. C. supervisor’s salaries.
B. direct labor. D. direct material.
5. All costs related to the manufacturing function in a firm are
A. conversion costs. C. prime costs.
B. product costs. D. direct costs.
6. Which of the following employees of a commercial printer/publisher would be classified as
direct labor?
A. Payroll supervisor C. Sales representative
B. Book binder D. Plant security guard
7. The determination of a cost as being either direct or indirect depends upon
A. the cost tracing system. C. the allocation system.
B. the accounting system. D. the cost object chosen.
8. Indirect manufacturing costs
A. can be traced to the product that created the costs.
B. may include both variable and fixed costs.
C. generally include the cost of material and cost of labor.
D. can be easily identified with the cost object.
9. The distinction between direct and indirect costs depends on whether a cost
A. is variable or fixed.
B. is controllable or non-controllable.
C. will increase with changes in levels of activity.
D. can be conveniently and physically traced to a cost object under consideration.
10. The indirect costs of converting raw material into finished goods are called
A. period costs. B. overhead costs. C. prime costs. D. conversion costs.
11. Which of the following costs would be considered overhead in the production of chocolate
chip cookies?
A. Sugar B. Flour C. Oven electricity D. Chocolate chips
12. A selling cost is a(n)
PRODUCT COST PERIOD COST INVENTORIABLE COST
A. yes yes no
B. yes no no
C. no yes no
D. no yes yes
13. Actual costs are
A. the costs incurred. C. budgeted costs
B. estimated costs. D. forecasted costs.
14. Which of the following statements is true?
A. The word “cost” has the same meaning in all situations in which it is used.
B. Cost data, once classified and recorded for a specific application, are appropriate
for use in any application.
C. Different cost concepts and classifications are used for different purposes.
D. Costs incurred in one year are always meaningful in the following year.
15. Which is NOT a common accounting classification of costs?
A. by the method of payment for expenditure
B. by the objective of expenditure
C. by behavior
D. by the function incurring the expenditure
16. The components of manufacturing costs are
A. variable costs, fixed costs, and overhead costs.
B. materials, direct labor, and overhead.
C. purchases, wages, and manufacturing overhead.
D. wages and salaries, maintenance and repairs, utilities, and depreciation.
17. Factory overhead includes all manufacturing costs except direct material and direct labor.
Which of the following items would not be considered to be a factory overhead cost?
A. repainting the corporate office building
B. indirect labor
C. repair and maintenance expenditures on factory machinery
D. small expenditures pertaining to items like rags, screws, adhesive, etc., used in
the production process
18. If one would prepare a graph with a horizontal axis representing fixed production cost be
drawn?
A. as a straight-line sloping downward to the right
B. as a vertical line
C. As a straight-line sloping upward to the right
D. As a horizontal line
19. Which of the following statements is conceptually incorrect?
A. All expired costs represent expenses.
B. All unexpired costs represent assets.
C. All expenses represent expired costs.
D. All assets represent unexpired costs.
20. Which of the following statements is true?
A. Product costs affect only the balance sheet.
B. Product costs affect only the income statement.
C. Period costs affect both the balance sheet and the income statement.
D. Product costs eventually affect both the balance sheet and the income statement.
