Deck 2: Basic Cost Management Concepts

Question 1

Income Statement
Jean and Tom Perritz own and manage Happy Home Helpers, Inc. (HHH), a house-cleaning service. Each cleaning (cleaning one house one time) takes a team of three house cleaners about 1.5 hours. On average, HHH completes about 15,000 cleanings per year. The following total costs are associated with the total cleanings:

Next year, HHH expects to purchase $25,600 of direct materials. Projected beginning and ending inventories for direct materials are as follows:

There is no work-in-process inventory and no finished goods inventory; in other words, a cleaning is started and completed on the same day. HHH expects to sell 15,000 cleanings at a price of $45 each next year. Total selling expense is projected at $22,000, and total administrative expense is projected at $53,000.
Required:
1. Prepare an income statement in good form.
2. What if Jean and Tom increased the price to $50 per cleaning and no other information was affected? Explain which line items in the income statement would be affected and how.

Answer 1

Happy Homes Helpers' inc. takes 1.5 hours to clean one house and completes about 15,000 cleanings per year.
Given:
HHH expects to purchase $25,600 of direct materials in the next year. From the information of the inventories the following calculations are made:
Given:
1.The income statement of Happy Home Helpers is as follows:
Operating Income is obtained by subtracting gross margin from operating expenses
2.If the price increases to $50 per cleaning then the sales would become 750,000 that an increase of $75,000, there would be increase in the gross margin as well as the operating income.

Question 2

Prime Cost, Conversion Cost, Preparation of Income Statement: Manufacturing Firm
Kildeer Company makes easels for artists. During the last calendar year, a total of 30,000 easels were made, and 31,000 were sold for $52 each. The actual unit cost is as follows:

The selling expenses consisted of a commission of $1.30 per unit sold and advertising copayments totaling $95,000. Administrative expenses, all fixed, equaled $183,000. There were no beginning and ending work-in-process inventories. Beginning finished goods inventory was $132,600 for 3,400 easels.
Required:
1. Calculate the number and the dollar value of easels in ending finished goods inventory.
2. Prepare a cost of goods sold statement.
3. Prepare an absorption-costing income statement. Add a column for percentage of sales.

Answer 2

Killdeer Company makes easels for artists. Total production was 30,000 easels and 31,000 were sold. Each was sold for $52.Given:
From the other information given, the following is calculated:
1.Total units of ending finished goods is
The finished goods ending inventory is calculated as
2.The statement of cost of goods sold is as follows:
3.The absorption-costing income statement for Killdeer Company is as follows:

Question 3

Income Statement, Cost of Goods Manufactured
Spencer Company produced 200,000 cases of sports drinks during the past calendar year. Each case of 1-liter bottles sells for $36. Spencer had 2,500 cases of sports drinks in finished goods inventory at the beginning of the year. At the end of the year, there were 11,500 cases of sports drinks in finished goods inventory. Spencer's accounting records provide the following information:

Required:
1. Prepare a cost of goods manufactured statement.
2. Compute the cost of producing one case of sports drink last year. (Round your answer to the nearest cent.)
3. Prepare an income statement on an absorption-costing basis. Include a column showing the percent of each line item of sales. (Round your percentage answers to two significant digits, e.g., 45.67%.)

Answer 3

1.Cost of goods manufactured statement is prepared to determine the total costs incurred to manufacture the goods transferred from work-in-process inventory to finished goods inventory during a period.
Prepare the required cost of goods manufactured statement as follows:
Cost of goods manufactured during last year is
.
2.Cost of producing one case of sports drink last year should be computed by dividing the total cost of goods manufactured by the number of cases manufactured.
Therefore,
Cost of producing one case of sports drink is
.
3.Income statement for last year under absorption costing should be prepared in the following manner:
a. Compute the number of cases sold last year.
b. Compute cost of goods sold last year.
c. Prepare the required income statement under absorption costing.

Question 4

What does traceability mean?

Question 5

Cost of Goods Manufactured and Sold
Anglin Company, a manufacturing firm, has supplied the following information from its accounting records for the last calendar year:


Required:
1. Prepare a cost of goods manufactured statement.
2. Prepare a cost of goods sold statement.

Question 6

Cost of Goods Manufactured, Cost Identification, Solving for Unknowns
Allright Test Design Company creates, produces, and sells Internet-based CPA and CMA review courses for individual use. Davis Webber, head of human resources, is convinced that question development employees must have strong analytical and problem-solving skills. He asked Andrea Benson, controller for Allright Test Design, to help develop problems for use in screening applicants before they are interviewed. One of the problems Andrea developed is based on the following data for a mythical company (Mythic, Inc.) for the previous year:
a. Conversion cost was $140,000 and was four times the prime cost.
b. Direct materials used in production equaled $5,000.
c. Cost of goods manufactured was $154,000.
d. Ending work in process is 40 percent of the cost of beginning work in process.
e. There are no beginning or ending inventories for direct materials.
f. Cost of goods sold was 110 percent of cost of goods manufactured.
g. Beginning finished goods inventory was $22,400.
Required:
1. Using the above information, prepare a cost of goods manufactured statement.
2. Using the above information, prepare a cost of goods sold statement.

Question 7

Product Costs
Pietro Frozen Foods, Inc., produces frozen pizzas. For next year, Pietro predicts that 50,000 units will be produced, with the following total costs:

Required:
1. Calculate the prime cost per unit.
2. Calculate the conversion cost per unit.
3. Calculate the total variable cost per unit.
4. Calculate the total product (manufacturing) cost per unit.
5. What if the number of units increased to 55,000 and all unit variable costs stayed the same? Explain what the impact would be on the following costs: total direct materials, total direct labor, total variable overhead, total fixed overhead, unit prime cost, and unit conversion cost. What would the product cost per unit be in this case?

Question 8

What is allocation?

Question 9

Income Statement, Direct and Indirect Cost Concepts, Service Company Lakeesha Barnett owns and operates a package mailing store in a college town. Her store, Send It Packing, helps customers wrap items and send them via UPS, FedEx, and the USPS. Send It Packing also rents mailboxes to customers by the month. In May, purchases of materials (stamps, cardboard boxes, tape, Styrofoam peanuts, bubble wrap, etc.) equaled $11,450; the beginning inventory of materials was $1,050, and the ending inventory of materials was $950. Payments for direct labor during the month totaled $25,570. Overhead incurred was $18,130 (including rent, utilities, and insurance, as well as payments of $14,050 to UPS and FedEx for the delivery services sold). Since Send It Packing is a franchise, Lakeesha owes a monthly franchise fee of 5 percent of sales. She spent $2,750 on advertising during the month. Other administrative costs (including accounting and legal services and a trip to Dallas for training) amounted to $3,650 for the month. Revenues for May were $102,100.
Required:
1. What was the cost of materials used for packaging and mailing services during May?
2. What was the prime cost for May?
3. What was the conversion cost for May?
4. What was the total cost of services for May?
5. Prepare an income statement for May.
6. Of the overhead incurred, is any of it direct? Indirect? Explain.

Question 10

Income Statement, Cost of Services Provided, Service Attributes
Mason, Durant, and Westbrook (MDW) is a tax services firm. The firm is located in Oklahoma City and employs 15 professionals and eight staff. The firm does tax work for small businesses and well-to-do individuals. The following data are provided for the last fiscal year. (The Mason, Durant, and Westbrook fiscal year runs from July 1 through June 30.)

Required:
1. Prepare a statement of cost of services sold.
2. Refer to the statement prepared in Requirement 1. What is the dominant cost? Will this always be true of service organizations? If not, provide an example of an exception.
3. Assuming that the average fee for processing a return is $850, prepare an income statement for Mason, Durant, and Westbrook.
4. Discuss three differences between services and tangible products. Calculate the average cost of preparing a tax return for last year. How do the differences between services and tangible products affect the ability of MDW to use the last year's average cost of preparing a tax return in budgeting the cost of tax return services to be offered next year?

Question 11

What is an accounting information system?

Question 12

Systems Concepts
In general, systems are described by the following pattern: (1) interrelated parts, (2) processes, and (3) objectives. Operational models of systems also identify inputs and outputs.
The dishwashing system of a college cafeteria consists of the following steps. First, students dispose of any waste paper (e.g., napkins) in a trash can; then they file by an opening to the dishwashing area and drop off their trays. Persons 1 and 2 take the trays; rinse the extra food down the disposal; and stack the dishes, glasses, and silverware in heavy-duty plastic racks. These racks slide along a conveyor into the automatic dishwasher. When the racks emerge from the other end of the dishwasher, they contain clean, germ-free items. Person 3 removes the racks and, with Person 4, empties them of clean items; stacking the dishes, silverware, glasses, and trays for future use. The empty racks are returned to the starting position in front of Persons 1 and 2. The following items are associated with this dishwashing system:
a. Automatic dishwasher
b. Racks to hold the dirty glasses, silverware, and dishes
c. Electricity
d. Water
e. Waste disposal
f. Sinks and sprayers
g. Dish detergent
h. Gas heater to heat water to 180 degrees Fahrenheit
i. Conveyor belt
j. Persons 1, 2, 3, and 4
k. Clean, germ-free dishes
l. Dirty dishes
m. Half-eaten dinner
n. Aprons
Required:
1. What is the objective of the dishwashing system? What processes can you identify?
2. Classify the items into one of the following categories:
a. Interrelated parts
b. Inputs
c. Outputs
3. Draw an operational model for the dishwashing system.
4. Discuss how a cost management information system is similar to and different from the dishwashing system.

Question 13

Product Cost Definitions, Value Chain
Millennium Pharmaceuticals, Inc. (MPI), designs and manufactures a variety of drugs. One new drug, Glaxane, has been in development for seven years. FDA approval has just been received, and MPI is ready to begin production and sales.
Required:
Refer to Exhibit 2.5. Which costs in the value chain would be considered by each of the following managers in their decision regarding Glaxane?
1. Shelly Roberts is plant manager of the New Bern, North Carolina, plant where Glaxane will be produced. Shelly has been assured that Glaxane capsules will use well-understood processes and not require additional training or capital investment.
2. Leslie Bothan is vice president of marketing. Leslie's job involves pricing and selling Glaxane. Because Glaxane is the first drug in its "drug family" to be commercially produced, there is no experience with potential side effects. Extensive testing did not expose any real problems (aside from occasional heartburn and insomnia), but the company could not be sure that such side effects did not exist.
3. Dante Fiorello is chief of research and development. His charge is to ensure that all research projects, taken as a whole, eventually produce drugs that can support the R D labs. He is assessing the potential for further work on drugs in the Glaxane family.

Question 14

Cost of Goods Manufactured, Income Statement
Orman Company produces neon-colored covers for tablets (e.g., iPads). For last year, Orman reported the following:

Last year, Orman produced 89,000 units and sold 90,500 units at $10.50 per unit.
Required:
1. Prepare a statement of cost of goods manufactured.
2. Prepare an absorption-costing income statement.

Question 15

Cost of Goods Manufactured
Refer to Cornerstone Exercise 2.1. For next year, Pietro predicts that 50,000 units will be produced, with the following total costs:

Next year, Pietro expects to purchase $119,300 of direct materials. Projected beginning and ending inventories for direct materials and work in process are as follows:

Required:
1. Prepare a statement of cost of goods manufactured in good form.
2. What if the ending inventory of direct materials increased by $2,000? Which line items on the statement of cost of goods manufactured would be affected and in what direction (increase or decrease)?

Question 16

Explain how driver tracing works.

Question 17

Traditional versus Activity-Based Cost Management Systems
Jazon Manufacturing produces two different models of cameras. One model has an automatic focus, whereas the other requires the user to determine the focus. The two products are produced in batches. Each time a batch is produced, the equipment must be configured (set up) for the specifications of the camera model being produced. The manual-focus camera requires more parts than the automatic-focus model. The manual-focus model is also more labor intensive, requiring much more assembly time but less machine time. Although the manual model is more labor intensive, the machine configuration required for this product is more complex, causing the manual model to consume more of the setup activity resources than the automatic camera. Many, but not all, of the parts for the two cameras are purchased from external suppliers. Because it has more parts, the manual model makes more demands on the purchasing and receiving activities than does the automatic camera. Jazon currently assigns only manufacturing costs to the two products. Overhead costs are collected in one plantwide pool and are assigned to the two products in proportion to the direct labor hours used by each product. All other costs are viewed as period costs.
Jazon budgets costs for all departments within the plant-both support departments like maintenance and purchasing and production departments like machining and assembly. Departmental managers are evaluated and rewarded on their ability to control costs. Individual managerial performance is assessed by comparing actual costs with budgeted costs.
Required:
1. Is Jazon using a traditional or an activity-based cost management system? Explain.
2. Assume that you want to design a more accurate cost accounting system. What changes would you need to make? Be specific. Explain why the changes you make will improve the accuracy of cost assignments.
3. What changes would need to be made to implement an activity-based operational control system? Explain why you believe the changes will offer improved control.

Question 18

High drug costs are often in the news. Consumer groups contend that the pricing for some drugs (e.g., HIV anti-retrovirals, Betaseron for multiple sclerosis) is "too high" considering that the cost to manufacture each dose is so low. They talk of price gouging and excessive profits. Pharmaceutical companies defend the prices charged on the basis of research and development costs. They state that the percentage of successful drugs emanating from research efforts is low and that it may take years before a promising drug passes through Food and Drug Administration (FDA) requirements and becomes available for sale.
Required:
1. Which cost definition from Exhibit 2.5 is being used by the consumer groups? The pharmaceutical companies? What is included in the cost figures cited by consumer groups? What are the pharmaceutical companies including in their discussion of product cost? Which costs do you think should be included when comparing the cost of a drug with its price?
2. Suppose that you are the accountant for the pharmaceutical company who is charged with the responsibility for compiling costs associated with your newest drug. The cost figures will be used in pricing and to determine profitability of the drug. What costs do you think you would include? Does the IMA Statement of Ethical Professional Practice have any bearing on your choice? Discuss.

Question 19

What is the difference between a financial accounting information system and a cost management information system?

Question 20

Cost Accounting Information System
The following items are associated with a cost accounting information system:
a. Usage of direct materials
b. Assignment of direct materials cost to each product
c. Direct labor cost incurrence
d. Depreciation on production equipment
e. Cost accounting personnel
f. Submission of a bid, using product cost plus 25 percent
g. Power cost incurrence
h. Materials handling cost incurrence
i. Computer
j. Assignment of direct labor costs to products
k. Costing out of products
l. Decision to continue making a part rather than buying it
m. Printer
n. Report detailing individual product costs
o. Assignment of overhead costs to individual products
Required:
1. Classify the preceding items into one of the following categories:
a. Interrelated parts
b. Processes
c. Objectives
d. Inputs
e. Outputs
f. User actions
2. Draw an operational model that illustrates the cost accounting information system-with the preceding items used as examples for each component of the model.
3. Based on your operational model, identify which product cost definition is being used: value-chain, operating, or product (manufacturing).

Question 21

Direct Materials Cost, Prime Cost, Conversion Cost, Cost of Goods Manufactured
Ellerson Company provided the following information for the last calendar year:

During the year, direct materials purchases amounted to $278,000, direct labor cost was $189,000, and overhead cost was $523,000. During the year, 100,000 units were completed.
Required:
1. Calculate the total cost of direct materials used in production.
2. Calculate the cost of goods manufactured. Calculate the unit manufacturing cost.
3. Of the unit manufacturing cost calculated in Requirement 2, $2.70 is direct materials and $5.30 is overhead. What is the prime cost per unit? Conversion cost per unit?

Question 22

Cost of Goods Sold
Refer to Cornerstone Exercise 2.2.
Pietro expects to produce 50,000 units and sell 49,300 units. Beginning inventory of finished goods is $42,500, and ending inventory of finished goods is expected to be $34,000.
Required:
1. Prepare a statement of cost of goods sold in good form.
2. What if the beginning inventory of finished goods decreased by $5,000? What would be the effect on the cost of goods sold?

Question 23

What is a tangible product?

Question 24

Cost of Goods Sold, Income Statement
Refer to Exercise 2.21. Last calendar year, Ellerson recognized revenue of $1,312,000 and had selling and administrative expenses of $204,600.
Required:
1. What is the cost of goods sold for last year?
2. Prepare an income statement for Ellerson for last year.

Question 25

What are the objectives of a cost management information system?

Question 26

Cost Assignment Methods
Nizam Company produces speaker cabinets. Recently, Nizam switched from a traditional departmental assembly line system to a manufacturing cell in order to produce the cabinets. Suppose that the cabinet manufacturing cell is the cost object. Assume that all or a portion of the following costs must be assigned to the cell:
a. Depreciation on electric saws, sanders, and drills used to produce the cabinets
b. Power to heat and cool the plant in which the cell is located
c. Salary of cell supervisor
d. Wood used to produce the cabinet housings
e. Maintenance for the cell's equipment (provided by the maintenance department)
f. Labor used to cut the wood and to assemble the cabinets
g. Replacement sanding belts
h. Cost of janitorial services for the plant
i. Ordering costs for materials used in production
j. The salary of the industrial engineer (she spends about 20 percent of her time on work for the cell)
k. Cost of maintaining plant and grounds
l. Cost of plant's personnel office
m. Depreciation on the plant
n. Plant receptionist's salary and benefits
Required:
Identify which cost assignment method would likely be used to assign the costs of each of the preceding activities to the cabinet manufacturing cell: direct tracing, driver tracing, or allocation. When driver tracing is selected, identify a potential activity driver that could be used for the tracing.

Question 27

(2009 CPA Exam) Which of the following is a primary function of a database management system?

A) report customization
B) capability to create and modify the database
C) financial transactions input
D) database access authorizations

Question 28

Income Statement
Refer to Cornerstone Exercises 2.2 and 2.3. Next year, Pietro expects to produce 50,000 units and sell 49,300 units at a price of $12.50 each. Beginning inventory of finished goods is $42,500, and ending inventory of finished goods is expected to be $34,000. Total selling expense is projected at $26,000, and total administrative expense is projected at $134,000.
Required:
1. Prepare an income statement in good form. Be sure to include the percent of sales column.
2. What if the cost of goods sold percentage for the past few years was 65 percent? Explain how management might react.

Question 29

What is a service? Explain how services differ from tangible products.

Question 30

(2009 CPA Exam) Which of the following terms best describes a payroll system?

A) database management (DBMS)
B) transaction processing system (TPS)
C) decision support system (DSS)
D) enterprise resource planning (ERP) system

Question 31

Define and explain the two major subsystems of the cost management information system.

Question 32

Product Cost Definitions
Three possible product cost definitions were introduced: (1) value-chain, (2) operating, and (3) product or manufacturing. Identify which of the three product cost definitions best fits the following situations (justify your choice):
a. Determining which of several potential new products should be developed, produced, and sold
b. Deciding whether to produce and sell a product whose design and development costs were higher than budgeted
c. Setting the price for a new product
d. Valuation of finished goods inventories for external reporting
e. Determining whether to add a complementary product to the product line
f. Choosing among competing product designs
g. Calculating cost of goods sold for external reporting
h. Deciding whether to increase the price of an existing product
i. Deciding whether to accept or reject a special order, where the price offered is lower than the normal selling price

Question 33

(2010 CPA Exam) Which of the following ratios would be used to evaluate a company's profitability?

A) current ratio
B) inventory turnover ratio
C) debt to total assets ratio
D) gross margin ratio

Question 34

Costs of Services
Jean and Tom Perritz own and manage Happy Home Helpers, Inc. (HHH), a house-cleaning service. Each cleaning (cleaning one house one time) takes a team of three house cleaners about 1.5 hours. On average, HHH completes about 15,000 cleanings per year. The following total costs are associated with the total cleanings:

Required:
1. Calculate the prime cost per cleaning.
2. Calculate the conversion cost per cleaning.
3. Calculate the total variable cost per cleaning.
4. Calculate the total service cost per cleaning.
5. What if rent on the office that Jean and Tom use to run HHH increased by $1,500? Explain the impact on the following:
a. Prime cost per cleaning
b. Conversion cost per cleaning
c. Total variable cost per cleaning
d. Total service cost per cleaning

Question 35

Give three examples of product cost definitions. Why do we need different product cost definitions?

Question 36

(2010 CPA Exam) An enterprise resource planning (ERP) system has which of the following advantages over multiple independent functional systems?

A) Modifications can be made to each module without affecting other modules.
B) Increased responsiveness and flexibility while aiding in the decision-making process.
C) Increased amount of data redundancy since more than one module contains the same information.
D) Reduction in costs for implementation and training.

Question 37

What is a cost object? Give some examples.

Question 38

Cost Definitions
Wyandotte Company provided the following information for the last calendar year:

During the year, direct materials purchases amounted to $256,900, direct labor cost was $176,000, and overhead cost was $308,400. There were 40,000 units produced.
Required:
1. Calculate the total cost of direct materials used in production.
2. Calculate the cost of goods manufactured. Calculate the unit manufacturing cost.
3. Of the unit manufacturing cost calculated in Requirement 2, $6.62 is direct materials and $7.71 is overhead. What is the prime cost per unit? Conversion cost per unit?

Question 39

Selected information concerning the operations of a company for the year ended December 31 is as follows:

Work in process inventories at the beginning and end of the year were zero. Beginning inventory of finished goods was $9,650 (for 1,000 units). Cost of goods sold was $174,600. What was the company's finished goods inventory cost at December 31?

A) $98,050
B) $29,100
C) $29,050
D) $40,600

Question 40

Cost of Services Produced
Jean and Tom Perritz own and manage Happy Home Helpers, Inc. (HHH), a house-cleaning service. Each cleaning (cleaning one house one time) takes a team of three house cleaners about 1.5 hours. On average, HHH completes about 15,000 cleanings per year. The following total costs are associated with the total cleanings:

Next year, HHH expects to purchase $25,600 of direct materials. Projected beginning and ending inventories for direct materials are as follows:

There is no work-in-process inventory; in other words, a cleaning is started and completed on the same day.
Required:
1. Prepare a statement of services produced in good form.
2. What if HHH planned to purchase $30,000 of direct materials? Assume there would be no change in beginning and ending inventories of materials. Explain which line items on the statement of services produced would be affected and how (increase or decrease).

Question 41

Identify the three cost elements that determine the cost of making a product (for external reporting).

Question 42

Cost Assignment Methods
Brody Company makes industrial cleaning solvents. Various chemicals, detergent, and water are mixed together and then bottled in 10-gallon drums. Brody provided the following information for last year:

Last year, Brody completed 100,000 units. Sales revenue equaled $1,200,000, and Brody paid a sales commission of 5 percent of sales.
Required:
1. Calculate the direct materials used in production for last year.
2. Calculate total prime cost.
3. Calculate total conversion cost.
4. Prepare a cost of goods manufactured statement for last year. Calculate the unit product cost.
5. Prepare a cost of goods sold statement for last year.
6. Prepare an income statement for last year. Show the percentage of sales that each line item represents.

Question 43

What is an activity? Give some examples of activities within a manufacturing firm.

Question 44

Cost Definitions and Calculations
For each of the following independent situations, calculate the missing values:
1. The Belen plant purchased $78,300 of direct materials during June. Beginning direct materials inventory was $2,500, and direct materials used in production were $73,500. What is ending direct materials inventory?
2. Forster Company produced 14,000 units at an average cost of $5.90 each. The beginning inventory of finished goods was $3,422. (The average unit cost was $5.90.) Forster sold 14,120 units. How many units remain in ending finished goods inventory?
3. Beginning work in process (WIP) was $116,000, and ending WIP was $117,300. If total manufacturing costs were $349,000, what was the cost of goods manufactured?
4. If the conversion cost is $84 per unit, the prime cost is $55, and the manufacturing cost per unit is $105, what is the direct materials cost per unit?
5. Total manufacturing costs for August were $412,000. Prime cost was $64,000, and beginning WIP was $76,000. The cost of goods manufactured was $434,000. Calculate the cost of overhead for August and the cost of ending WIP.

Question 45

Cost Information and Decision Making, Resource and Activity Drivers, Activity-Based versus Traditional Systems
Wright Plastic Products is a small company that specialized in the production of plastic dinner plates until several years ago. Although profits for the company had been good, they have been declining in recent years because of increased competition. Many competitors offer a full range of plastic products, and management felt that this created a competitive disadvantage. The output of the company's plants was exclusively devoted to plastic dinner plates. Three years ago, management made a decision to add additional product lines. They determined that existing idle capacity in each plant could easily be adapted to produce other plastic products. Each plant would produce one additional product line. For example, the Atlanta plant would add a line of plastic cups. Moreover, the variable cost of producing a package of cups (one dozen) was virtually identical to that of a package of plastic plates. (Variable costs referred to here are those that change in total as the units produced change. The costs include direct materials, direct labor, and unit-based variable overhead such as power and other machine costs.) Since the fixed expenses would not change, the new product was forecast to increase profits significantly (for the Atlanta plant).
Two years after the addition of the new product line, the profits of the Atlanta plant (as well as other plants) had not improved-in fact, they had dropped. Upon investigation, the president of the company discovered that profits had not increased as expected because the so-called fixed cost pool had increased dramatically. The president interviewed the manager of each support department at the Atlanta plant. Typical responses from four of those managers are given next.
Materials handling : The additional batches caused by the cups increased the demand for materials handling. We had to add one forklift and hire additional materials handling labor. Inspection: Inspecting cups is more complicated than plastic plates. We only inspect a sample drawn from every batch, but you need to understand that the number of batches has increased with this new product line. We had to hire more inspection labor.
Purchasing : The new line increased the number of purchase orders. We had to use more resources to handle this increased volume.
Accounting : There were more transactions to process than before. We had to increase our staff.
Required:
1. Explain why the results of adding the new product line were not accurately projected.
2. Could this problem have been avoided with an activity-based cost management system? If so, would you recommend that the company adopt this type of system? Explain and discuss the differences between an activity-based cost management system and a traditional cost management system.

Question 46

Cost of Services Sold
Jean and Tom Perritz own and manage Happy Home Helpers, Inc. (HHH), a house-cleaning service. Each cleaning (cleaning one house one time) takes a team of three house cleaners about 1.5 hours. On average, HHH completes about 15,000 cleanings per year. The following total costs are associated with the total cleanings:

Next year, HHH expects to purchase $25,600 of direct materials. Projected beginning and ending inventories for direct materials are as follows:

There is no work-in-process inventory and no finished goods inventory; in other words, a cleaning is started and completed on the same day.
Required:
1. Prepare a statement of cost of services sold in good form.
2. How does this cost of services sold statement differ from the cost of goods sold statement for a manufacturing firm?

Question 47

How do the income statements of a manufacturing firm and a service firm differ?

Question 48

Systems Concepts, Traditional versus Activity-Based Cost Accounting Systems
The following items are associated with a traditional cost accounting information system, an activity-based cost accounting information system, or both (that is, some elements are common to the two systems):
a. Usage of direct materials
b. Direct materials cost assigned to products using direct tracing
c. Direct labor cost incurrence
d. Direct labor cost assigned to products using direct tracing
e. Setup cost incurrence
f. Setup cost assigned using number of setups as the activity driver
g. Setup cost assigned using direct labor hours as the activity driver
h. Cost accounting personnel
i. Submission of a bid, using product cost plus 25 percent
j. Purchasing cost incurrence
k. Purchasing cost assigned to products using direct labor hours as the activity driver
l. Purchasing cost assigned to products using number of orders as the activity driver
m. Materials handling cost incurrence
n. Materials handling cost assigned using the number of moves as the activity driver
o. Materials handling cost assigned using direct labor hours as the activity driver
p. Computer
q. Costing out of products
r. Decision to continue making a part rather than buying it
s. Printer
t. Customer service cost incurred
u. Customer service cost assigned to products using number of complaints as the activity driver
v. Report detailing individual product costs
w. Commission cost
x. Commission cost assigned to products using units sold as the activity driver
y. Plant depreciation
z. Plant depreciation assigned to products using direct labor hours
Required:
1. For each cost system, classify the relevant items into one of the following categories:
a. Interrelated parts
b. Processes
c. Objectives
d. Inputs
e. Outputs
f. User actions
2. Explain the choices that differ between the two systems. Which system will provide the best support for the user actions? Explain.
3. Draw an operational model that illustrates each cost accounting system-with the items that belong to the system used as examples for each component of the model.
4. Based on the operational models, comment on the relative costs and benefits of the two systems. Which system should be chosen?

Question 49

What is a direct cost? An indirect cost?

Question 50

Cost of Goods Manufactured and Sold
LeMans Company produces specialty papers at its Fox Run plant. At the beginning of June, the following information was supplied by its accountant:

During June, direct labor cost was $143,000, direct materials purchases were $346,000, and the total overhead cost was $375,800. The inventories at the end of June were:

Required:
1. Prepare a cost of goods manufactured statement for June.
2. Prepare a cost of goods sold schedule for June.

Question 51

Activity-Based versus Traditional Operational Control Systems
The actions listed next are associated with either an activity-based operational control system or a traditional operational control system:
a. Budgeted costs for the maintenance department are compared with the actual costs of the maintenance department.
b. The maintenance department manager receives a bonus for "beating" budget.
c. The costs of resources are traced to activities and then to products.
d. The purchasing department is set up as a responsibility center.
e. Activities are identified and listed.
f. Activities are categorized as adding or not adding value to the organization.
g. A standard for a product's material usage cost is set and compared against the product's actual materials usage cost.
h. The cost of performing an activity is tracked over time.
i. The distance between moves is identified as the cause of materials handling cost.
j. A purchasing agent is rewarded for buying parts below the standard price set by the company.
k. The cost of the materials handling activity is reduced dramatically by redesigning the plant layout.
l. An investigation is undertaken to find out why the actual labor cost for the production of 1,000 units is greater than the labor standard allowed.
m. The percentage of defective units is calculated and tracked over time.
n. Engineering has been given the charge to find a way to reduce setup time by 75 percent.
o. The manager of the receiving department lays off two receiving clerks so that the fourth- quarter budget can be met.
Required:
Classify the preceding actions as belonging to either an activity-based operational control system or a traditional control system. Explain why you classified each action as you did.