a. Using the high-low method, determine the cost formula for maintenance costs.
b. What aspect of the estimated equation is bothersome? Provide an explanation for this situation.
c. Within the relevant range, can the formula be reliably used to predict maintenance costs? Can the a and b values in the cost formula be interpreted as fixed and variable costs? Why or why not?
37. (Predictors and cost drivers; team activity) Accountants often use factors that change in a consistent pattern with costs to explain or predict cost behavior.
a. As a team of three or four, select factors to predict or explain the behavior of the following costs:
1. Salesperson's travel expenses
2. Raw material costs at a pizza restaurant
4. Maintenance costs for a lawn service company b. Prepare a presentation of your chosen factors that also addresses whether the factors could be used as cost drivers in addition to predictors.
38. (Direct vs. indirect costs) Babin Cutlery Inc. manufactures kitchen knives. Following are some costs incurred in the factory in 2000 for knife production:
Stainless steel $400,000
Equipment oil and grease 8,000
Plastic and fiberglass for handles 15,000
Wooden knife racks for customer storage 9,200
Equipment operators $200,000
Equipment mechanics 50,000
Factory supervisors 118,000
a. What is the direct material cost for 2000?
b. What is the direct labor cost for 2000?
c. What are the indirect material and total indirect labor overhead costs for 2000?
39. (Direct vs. indirect costs) Midwestern State University's College of Business has five departments: Accounting, Finance, Management, Marketing, and Decision Sciences. Each department chairperson is responsible for the department's budget preparation. Indicate whether each of the following costs incurred in the Marketing Department is direct or indirect to the department:
a. Chairperson's salary b. Cost of computer time of campus mainframe used by members of the department c. Marketing faculty salaries d. Cost of equipment purchased by the department from allocated state funds e. Cost of travel by department faculty paid from externally generated funds contributed directly to the department f. Cost of secretarial salaries (secretaries are shared by the entire college)
g. Depreciation allocation of the college building cost for the number of offices used by department faculty h. Cost of periodicals/books purchased by the department
40. (Labor cost classification) House & Home Inc. produces a variety of household products. The firm operates 24 hours per day with three daily work shifts. The first-shift workers receive "regular pay." The second shift receives a 10 percent pay premium, and the third shift receives a 20 percent pay premium. In addition, when production is scheduled on weekends, the firm pays an overtime premium of 50 percent (based on the pay rate for first-shift employees). Labor premiums are included in overhead. The August 2001 factory payroll is as follows:
Total wages for August for 18,000 hours $168,000
Normal hourly wage for Shift #1 employees $8
Total regular hours worked, split evenly among the three shifts 15,000
a. How many overtime hours were worked in August?
b. How much of the total labor cost should be charged to direct labor? To overhead?
c. What amount of overhead was for second- and third-shift premiums? For overtime premiums?
41. (Product and period costs) Alexander Company incurred the following costs in August 2000:
Paid a six-month premium for insurance of company headquarters, $12,000. Paid three months of property taxes on its factory building, $7,500. Paid a $40,000 bonus to the company president.
Accrued $10,000 of utility costs, of which 30 percent was for the headquarters and the remainder for the factory.
a. What expired period cost is associated with the August information?
b. What unexpired period cost is associated with the August information?
c. What product cost is associated with the August information?
d. Discuss why the product cost cannot be described specifically as expired or unexpired in this situation.
42. (Essay) A portion of the costs incurred by business organizations is designated as direct labor cost. As used in practice, the term direct labor cost has a wide variety of meanings. Unless the meaning intended in a given context is clear, misunderstanding and confusion are likely to ensue. If a user does not understand the elements included in direct labor cost, erroneous interpretations of the numbers may occur and could result in poor management decisions.
In addition to understanding the conceptual definition of direct labor cost, management accountants must understand how direct labor cost should be measured.
Write a paper that discusses the following issues:
a. Distinguish between direct labor and indirect labor.
b. Discuss why some nonproductive labor time (such as coffee breaks, personal time) can be and often is treated as direct labor, whereas other nonproductive time (such as downtime or training) is treated as indirect labor.
c. Following are labor cost elements that a company has classified as direct labor, manufacturing overhead, or either direct labor or manufacturing overhead, depending on the situation.
Direct labor: Included in the company's direct labor are cost production efficiency bonuses and certain benefits for direct labor workers such as FICA (employer's portion), group life insurance, vacation pay, and workers' compensation insurance.
Manufacturing overhead: Included in the company's overhead are costs for wage continuation plans in the event of illness, the company-sponsored cafeteria, the personnel department, and recreational facilities. Direct labor or manufacturing overhead: Included in the "situational" category are maintenance expense, overtime premiums, and shift premiums.
Explain the rationale used by the company in classifying the cost elements in each of the three presented categories.
d. The two aspects of measuring direct labor costs are (1) the quantity of labor effort that is to be included, that is, the types of hours that are to be counted; and (2) the unit price by which each of these quantities is multiplied to arrive at a monetary cost. Why are these considered separate and distinct aspects of measuring labor cost? (CMA adapted)
43. (Predetermined overhead rate) Walton Company has developed a monthly overhead cost formula of $2,760 + $4 per direct labor hour for 2000. The firm's 2000 expected annual capacity is 24,000 direct labor hours, to be incurred evenly each month. Two direct labor hours are required to make one unit of the company's product.
a. Determine the total overhead to be applied to each unit of product in 2000.
b. Prepare journal entries to record the application of overhead to Work in Process Inventory and the incurrence of $10,430 of actual overhead in a month in which 1,850 direct labor hours were worked.
44. (Overhead application) Brooke & Associates applies overhead at a combined rate for fixed and variable overhead of 175 percent of professional labor costs. During the first three months of 2000, the following professional labor costs and actual overhead costs were incurred:
Month Professional Labor Cost Actual Overhead
January $270,000 $480,000
February 247,500 427,800
March 255,000 450,000
a. How much overhead was applied to the services provided each month by the firm?
b. What was underapplied or overapplied overhead for each of the three months and for the quarter?
45. (Underapplied or overapplied overhead) At the end of 2000, Schmitt Corporation has the following account balances:
Manufacturing Overhead (credit) $ 20,000
Work in Process Inventory 128,000
Finished Goods Inventory 32,000
Cost of Goods Sold 240,000
a. Prepare the necessary journal entry to close the overhead account if the balance is considered immaterial.
b. Prepare the necessary journal entry to close the overhead account if the balance is considered material.
c. Which method do you feel is more appropriate for the company and why?
46. (Underapplied or overapplied overhead) Hume Company uses a normal cost system. At year-end, the balance in the manufacturing overhead control account is a $50,000 debit. Information concerning relevant account balances at year-end is as follows:
Work in Process
Cost of Goods Sold
Direct materials Direct labor Factory overhead
a. What overhead rate was used during the year?
b. Provide arguments to be used for deciding whether to prorate the balance in the overhead account at year-end.
c. Prorate the overhead account balance based on the relative balances of the appropriate accounts.
d. Prorate the overhead account balance based on the relative overhead components of the appropriate account balances.
e. Identify some possible reasons why the company had a debit balance in the overhead account at year-end.
47. (CGM and CGS) Holiday Products Company had the following inventory balances at the beginning and end of March 2000:
March 1, 2000 March 31, 2000
Raw Materials Inventory $12,000 $16,000
Work in Process Inventory 68,000 84,000
Finished Goods Inventory 32,000 24,000
All raw materials are direct to the production process. The following information is also available about March manufacturing costs:
Cost of raw materials used $128,000
Direct labor cost 162,000
Factory overhead 116,000
a. Calculate the cost of goods manufactured for March.
b. Determine the cost of goods sold for March.
48. (Cost of services rendered) The following information is related to the Perrrfect Veterinary Clinic for April 2001, the firm's first month in operation:
Veterinarian salaries for April $12,000
Assistants' salaries for April 4,200
Medical supplies purchased in April 1,800
Utilities for month (80 percent related to animal treatment) 900
Office salaries for April (20 percent related to animal treatment) 2,600
Medical supplies on hand at April 30 800
Depreciation on medical equipment for April 600
Building rental (70 percent related to animal treatment) 700
49. (CGM and CGS) Cathy's Custom Clocks' August 2001 cost of goods sold was $2,300,000. August 31 work in process was 40 percent of the August 1 work in process. Overhead was 225 percent of direct labor cost. During August, $768,500 of direct materials were purchased. Other August information follows:
Direct materials Work in process Finished goods
August 1, 2001
August 31, 2001
a. Prepare a schedule of the cost of goods sold for August.
b. Prepare the August cost of goods manufactured schedule.
c. What was the amount of direct production costs incurred in August?
d. What was the amount of conversion costs incurred in August?
50. (Financial statement classifications) Cajun Airboats purchased a plastics extruding machine for $100,000 to make boat hulls. During its first operating year, the machine produced 5,000 units and depreciation was calculated to be $12,500 on the machine. The company sold 4,000 of the hulls.
a. What part of the $100,000 machine cost is expired?
b. Where would each of the amounts related to this machine appear on the financial statements?
51. (Appendix-Least squares) Below are data on number of shipments received and the cost of receiving reports for Pacific Supply Company for the first seven weeks of 2000:
Number of Shipments Received
Cost of Receiving Report
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