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# Cost Classification (Wollogong Group) Ethics and the Manager

PROBLEM 2-14 Cost Classification [L02, L03, L06, LOS]

Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building about 10 years ago. For several years, the company has rented out a small annex attached to the rear of the building. The company has received a rental income of \$30,000 per year on this space. The renter's lease will expire soon, and rather than renewing the lease, the company has decided to use the space itself to manufacture a new product.
Direct materials cost for the new product will total \$80 per unit. To have a place to store finished units of product, the company will rent a small warehouse nearby. The rental cost will be \$500 per month. In addition, the company must rent equipment for use in producing the new product; the rental cost will be \$4,000 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to \$60 per unit. The space in the annex will continue to be depreciated on a straight-line basis, as in prior years. This depreciation is \$8,000 per year.
Advertising costs for the new product will total \$50,000 per year. A supervisor will be hired to overĀ­ see production; her salary will be \$1 ,500 per month. Electricity for operating machines will be \$!.20 per unit. Costs of shipping the new product to customers will be \$9 per unit.
To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of about \$3,000 per year.
Required:

Name
of the Variable Fixed
Cost Cost Cost
Product Cost
Direct Direct Manufacturing
Cost
Opportunity Sunk
Cost Cost

List the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X's under several column headings for a single cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.)
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PROBLEM 2-18 Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior [L02, L03,
L04, LOS, LOG]
Various cost and sales data for Meriwell Company for the just completed year appear in the worksheet below:
Of the \$105,000 of manufacturing overhead, \$15,000 is variable and \$90,000 is fixed.
Required:
1. Prepare a schedule of cost of goods manufactured.
2. Prepare an income statement.
3. Assume that the company produced the equivalent of 10,000 units of product during the year just
completed. What was the average cost per unit for direct materials? What was the average cost per unit for fixed manufacturing overhead?
4. Assume that the company expects to produce 15,000 units of product during the coming year. What
average cost per unit and what total cost would you expect the company to incur for direct materials at this level of activity? For fixed manufacturing overhead? Assume that direct materials is a variable cost. '
5. As the manager responsible for production costs, explain to the president any difference in the average costs per unit between (3) and (4) above.
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PROBLEM 2-22 Ethics and the Manager [L03]
M. K. Gallant is president of Kranbrack Corporation, a company whose stock is traded on a national exchange. In a meeting with investment analysts at the beginning of the year, Gallant had predicted that the company's earnings would grow by 20% this year. Unfortunately, sales have been less than expected for the year, and Gallant concluded within two weeks of the end of the fiscal year that it would be impossible to ultimately report an increase in earnings as large as predicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever possible, expenditures should be postponed to the new year-including canceling or postponing orders with suppliers, delaying planned maintenance and train?ing, and cutting back on end-of-year advertising and travel. Additionally, Gallant ordered the company's controller to carefully scrutinize all costs that are currently classified as period costs and reclassify as many as possible as product costs. The company is expected to have substantial inventories of work in process and finished goods at the end of the year.

1. Why would reclassifying period costs as product costs increase this period's reported earnings?
2. Do you believe Gallant's actions are ethical? Why or why not?
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#### Solution Preview

Tutorial:

See Excel for the first two problems.

P 2-22:

Why would reclassifying period costs as product costs increase this period's reported earnings?

Reclassifying period costs as product costs removes some expenses from the current period . Why? Because the costs would be spread to all units produced, some of which are not sold and so are still in inventory on the balance sheet (not yet expensed). So, you would be inflating assets and understating expenses during the period.

Do you believe Gallant's actions are ethical? Why or why not?

There are two aspects here, the postponing of expenditures and the reclassification of costs.

First, the postponing of expenditures by itself is not unethical. What might be unethical is if you did ...

#### Solution Summary

Your discussion of ethical issues is 428 words and talks about the delay and the reclassifications separately. The classifications, computations, and income statement are presented in Excel (click in cells to see calculations) for your study and learning.

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