Gazi University
Department of Industrial Engineering
IE 226 Cost Analysis
Study Set
Chapter 01-02 (Questions)
Terms to Learn: actual cost, average cost, budgeted cost, conversion costs, cost, cost
accumulation, cost allocation, cost assignment, cost driver, cost object, cost of goods
manufactured, cost tracing, direct costs of a cost object, direct manufacturing labor costs, direct
material costs, direct materials inventory, factory overhead costs, finished goods inventory, fixed
cost, indirect costs of a cost object, indirect manufacturing costs, inventoriable costs,
manufacturing overhead costs, manufacturing-sector companies, merchandising-sector
companies, operating income, period costs, prime costs, product cost, relevant range, revenue,
service-sector companies, unit cost, variable cost, work-in-process inventory
2-16 Computing and interpreting manufacturing unit costs. Minnesota Office Products
(MOP) produces three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and
Regular. Each product has its own dedicated production line at the plant. It currently uses the
following three-part classification for its manufacturing costs: direct materials, direct
manufacturing labor, and manufacturing overhead costs. Total manufacturing overhead costs of
the plant in July 2011 are $150 million ($15 million of which are fixed). This total amount is
allocated to each product line on the basis of the direct manufacturing labor costs of each
line. Summary data (in millions) for July 2011 are as follows:
Supreme Deluxe Regular
Direct material costs $ 89 $ 57 $ 60
Direct manufacturing labor costs $ 16 $ 26 $8
Manufacturing overhead costs $ 48 $ 78 $ 24
Units produced 125 150 140
1. Compute the manufacturing cost per unit for each product produced in July 2011.
2. Suppose that in August 2011, production was 150 million units of Supreme, 190 million units
of Deluxe, and 220 million units of Regular. Why might the July 2011 information on
manufacturing cost per unit be misleading when predicting total manufacturing costs in August
2011?
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 glaze, allows the bread to cool, and
then carefully packages each loaf in a specialty carton for sale in retail bakeries.
1. Costs involved in the process are listed next. For 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 object.
1
Costs:
Yeast Mixing department manager
Flour Materials handlers in each department
Packaging materials Custodian in factory
Depreciation on ovens Night guard in factory
Depreciation on mixing machines Machinist (running the mixing machine)
Rent on factory building Machine maintenance personnel in each department
Fire insurance on factory building Maintenance supplies for factory
Factory utilities Cleaning supplies for factory
Finishing department hourly laborers
2. If the cost object were the “mixing department” rather than units of production of each kind of
bread, which preceding costs would now be direct instead of indirect costs?
2-19 Classification of costs, merchandising sector. Home Entertainment Center (HEC)
operates a large store in San Francisco. The store has both a video section and a music (compact
disks and tapes) section. HEC reports revenues for the video section separately from the music
section. Classify each cost item (A–H) as follows: Required
a. Direct or indirect (D or I) costs with respect to the total number of videos sold.
b. Variable or fixed (V or F) costs with respect to how the total costs of the video section change
as the total number of videos sold changes. (If in doubt, select on the basis of whether the total
costs will change substantially if there is a large change in the total number of videos sold.)
You will have two answers (D or I; V or F) for each of the following items:
Cost Item D or I V or F
A. Annual retainer paid to a video distributor
B. Electricity costs of the HEC store (single bill covers entire store)
C. Costs of videos purchased for sale to customers
D. Subscription to Video Trends magazine
E. Leasing of computer software used for financial budgeting at the HEC store
F. Cost of popcorn provided free to all customers of the HEC store
G. Earthquake insurance policy for the HEC store
H. Freight-in costs of videos purchased by HEC
2-21 Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small
restaurant. She is on a tight budget and must choose between the following long-distance phone
plans:
Plan A: Pay 10 cents per minute of long-distance calling.
Plan B: Pay a fixed monthly fee of $15 for up to 240 long-distance minutes, and 8 cents per
minute thereafter (if she uses fewer than 240 minutes in any month, she still pays $15 for the
month).
Plan C: Pay a fixed monthly fee of $22 for up to 510 long-distance minutes and 5 cents per
minute thereafter (if she uses fewer than 510 minutes, she still pays $22 for the month).
1. Draw a graph of the total monthly costs of the three plans for different levels of monthly long-
distance calling.
2. Which plan should Ashton choose if she expects to make 100 minutes of long-distance calls?
240 minutes? 540 minutes?
2
2-26 Total costs and unit costs. A student association has hired a band and a caterer for a
graduation party. The band will charge a fixed fee of $1,000 for an evening of music, and the
caterer will charge a fixed fee of $600 for the party setup and an additional $9 per person who
attends. Snacks and soft drinks will be provided by the caterer for the duration of the party.
Students attending the party will pay $5 each at the door.
1. Draw a graph depicting the fixed cost, the variable cost, and the total cost to the student
association for different attendance levels.
2. Suppose 100 people attend the party. What is the total cost to the student association? What is
the cost per person?
3. Suppose 500 people attend the party. What is the total cost to the student association and the
cost per attendee?
4. Draw a graph depicting the cost per attendee for different attendance levels. As president of
the student association, you want to request a grant to cover some of the party costs. Will you use
the per attendee cost numbers to make your case? Why or why not?
2-28 Inventoriable costs versus period costs. Each of the following cost items pertains to one
of these companies: General Electric (a manufacturing-sector company), Safeway (a
merchandising-sector company), and Google (a service-sector company):
a. Perrier mineral water purchased by Safeway for sale to its customers
b. Electricity used to provide lighting for assembly-line workers at a General Electric refrigerator
assembly plant
c. Depreciation on Google’s computer equipment used to update directories of Web sites
d. Electricity used to provide lighting for Safeway’s store aisles
e. Depreciation on General Electric’s computer equipment used for quality testing of refrigerator
components during the assembly process
f. Salaries of Safeway’s marketing personnel planning local-newspaper advertising campaigns
g. Perrier mineral water purchased by Google for consumption by its software engineers
h. Salaries of Google’s marketing personnel selling banner advertising
1. Distinguish between manufacturing-, merchandising-, and service-sector companies.
2. Distinguish between inventoriable costs and period costs.
3. Classify each of the cost items (a–h) as an inventoriable cost or a period cost. Explain your
answers.
2-29 Computing cost of goods purchased and cost of goods sold. The following data are for
Marvin Department Store. The account balances (in thousands) are for 2011.
Marketing, distribution, and customer-service costs $ 37,000
Merchandise inventory, January 1, 2011 27,000
Utilities 17,000
General and administrative costs 43,000
Merchandise inventory, December 31, 2011 34,000
Purchases 155,000
Miscellaneous costs 4,000
Transportation-in 7,000
Purchase returns and allowances 4,000
Purchase discounts 6,000
Revenues 280,000
3
1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.
2. Prepare the income statement for 2011.
2-33 Cost of goods manufactured, income statement, manufacturing company. Consider the
following account balances (in thousands) for the Piedmont Corporation:
Beginning of End of
Piedmont Corporation 2011 2011
Direct materials inventory 65,000 34,000
Work-in-process inventory 83,000 72,000
Finished goods inventory 123,000 102,000
Purchases of direct materials 128,000
Direct manufacturing labor 106,000
Indirect manufacturing labor 48,000
Indirect materials 14,000
Plant insurance 2,000
Depreciation—plant, building, and equipment 21,000
Plant utilities 12,000
Repairs and maintenance—plant 8,000
Equipment leasing costs 32,000
Marketing, distribution, and customer-service costs 62,000
General and administrative costs 34,000
1. Prepare a schedule for the cost of goods manufactured for 2011.
2. Revenues for 2011 were $600 million. Prepare the income statement for 2011.
2-34 Income statement and schedule of cost of goods manufactured. The Howell Corporation
has the following account balances (in millions):
For Specific Date For Year 2011
Direct materials inventory, Jan. 1, 2011 $15 Purchases of direct materials $325
Work-in-process inventory, Jan. 1, 2011 10 Direct manufacturing labor 100
Finished goods inventory, Jan. 1, 2011 70 Depreciation—plant and equipment 80
Direct materials inventory, Dec. 31, 2011 20 Plant supervisory salaries 5
Work-in-process inventory, Dec. 31, 2011 5 Miscellaneous plant overhead 35
Finished goods inventory, Dec. 31, 2011 55 Revenues 950
Marketing, distribution, and customer-
service costs 240
Plant supplies used 10
Plant utilities 30
Indirect manufacturing labor 60
Prepare an income statement and a supporting schedule of cost of goods manufactured for the
year ended December 31, 2011.
2-40 Comprehensive problem on unit costs, product costs. Denver Office Equipment
manufactures and sells metal shelving. It began operations on January 1, 2011. Costs incurred for
2011 are as follows (V stands for variable; F stands for fixed):
4
Direct materials used $147,600 V
Direct manufacturing labor costs 38,400 V
Plant energy costs 2,000 V
Indirect manufacturing labor costs 14,000 V
Indirect manufacturing labor costs 19,000 F
Other indirect manufacturing costs 11,000 V
Other indirect manufacturing costs 14,000 F
Marketing, distribution, and customer-service costs 128,000 V
Marketing, distribution, and customer-service costs 48,000 F
Administrative costs 56,000 F
Variable manufacturing costs are variable with respect to units produced. Variable marketing,
distribution, and customer-service costs are variable with respect to units sold.
Inventory data are as follows:
Beginning: January 1, 2011 Ending: December 31, 2011
Direct materials 0 lb 2,400 lbs
Work in process 0 units 0 units
Finished goods 0 units ? units
Production in 2011 was 123,000 units. Two pounds of direct materials are used to make one unit
of finished product. Revenues in 2011 were $594,000. The selling price per unit and the purchase
price per pound of direct materials were stable throughout the year. The company’s ending
inventory of finished goods is carried at the average unit manufacturing cost for 2011. Finished-
goods inventory at December 31, 2011, was $26,000.
1. Calculate direct materials inventory, total cost, December 31, 2011.
2. Calculate finished-goods inventory, total units, December 31, 2011.
3. Calculate selling price in 2011.
4. Calculate operating income for 2011.
