1. Why is it that a direct cost for one department can become an indirect cost for another?
2. How would you make an argument in favor of adopting the direct method for your company?
3. How would you handle a company with a department that not only services other departments, but also produces products?© BrainMass Inc. brainmass.com October 17, 2018, 3:14 am ad1c9bdddf
1. Why is it that a direct cost for one department can become an indirect cost for another?
The direct cost for one department can become an indirect cost for another is important. This is because they both have completely different budgets and use their money differently. For example, in a college, the direct costs for getting textbooks can cost thousands of dollars; however, the indirect costs occur when management has to pay for them on behalf of the other person. As a result, both are affected by having to make the choice to make the decision to make sure that they get everything needed for the college, so that the students are a success in academics and in the workplace. As one can tell, they are not much different, but it is the approach that is quite different because of the financial aspect of the ...
This solution discussed direct cost and direct method within a business setting.
15 multiple choice questions on product/overhead costs and 3 long answer questions on ABC costing, manufacturing costs and job costing
1. Product costs are expensed when the product is
2. During December 2002, ABC Company purchased $50,000 of raw materials. The company's manufacturing overhead totaled $40,000 and total manufacturing costs were $130,000. Assuming beginning inventory of raw materials of $20,000 and an ending inventory of raw materials of $10,000, direct labor must be
3. XYZ Inc. developed a cost function for manufacturing overhead costs of manufacturing overhead = $20,000 + ($3 times the number of direct labor hours used). Estimate the manufacturing overhead costs at 8,000 units, which uses 4 direct labor hours per unit of production would be
4. The following cost functions were developed for manufacturing overhead costs:
Manufacturing Overhead Cost Cost Function
Supervisors' salaries $3,000 per month
Indirect materials $2 per machine hour
Electricity $8,000 + $3 per machine hour
Maintenance $1,000 + $4 per machine hour
If October production is expected to be 2,000 units requiring 4,000 machine hours, estimated manufacturing overhead costs would be
The following computer printout was generated using the least squares method for use in estimating overhead costs:
Coefficient of Determination .8
Activity variable Machine hours
5. Refer to Figure 1. The cost formula would be
a. $6,000 - 3X
b. $6,000 * .8
c. $6,000 + 3X
d. $6,000 + (3 * .8)
6. Refer to Figure 1. An estimate of costs at an activity level of 3,000 Machine hours would be
7. Refer to Figure 1. What percentage change in overhead costs can be explained by changes in machine hours?
Selling and administrative costs 30,000
Raw materials inventory, beginning 40,000
Raw materials inventory, ending 10,000
Work in process, beginning 30,000
Work in process, ending 20,000
Finished goods, beginning 60,000
Finished goods, ending 50,000
Raw materials purchases 60,000
Direct labor 40,000
Manufacturing overhead 50,000
Cost of goods manufactured ?
Cost of goods sold ?
8. Refer to Figure 2. The cost of goods manufactured would be
9. Refer to Figure 2. The cost of goods sold would be
10. The following information was available about supplies cost for the first four months of the year:
Month Volume Cost
January 7,000 $60,000
February 4,000 40,000
March 10,000 88,000
April 6,000 50,000
Using the high-low method, an estimate of supplies cost at 8,000 units of production would be
11. Which of the following lists the most to least accurate method of cost assignment?
a. direct tracing, driver tracing, allocation
b. driver tracing, direct tracing, allocation
c. allocation, direct tracing, driver tracing
d. allocation, driver tracing, direct tracing
12. Prime costs consist of
a. direct materials and direct labor
b. direct labor and manufacturing overhead
c. direct materials and manufacturing overhead
d. fixed and variable costs
13. The salary of vice-president of advertising would be classified as
a. Direct materials
a. Direct labor
b. Manufacturing overhead
c. Selling and administrative costs
d. None of the above
14. A rental of a copier that specifies a payment of $1,000 per month plus $.01 per sheet copied is an example of a
a. mixed cost
b. variable cost
c. step cost
d. fixed cost
15. The distinction between indirect and direct costs depends on
a. whether the costs are product costs or period costs
b. whether the costs are variable or fixed
c. whether the costs can be easily traced to specific units of production
d. the manager responsible for controlling the cost
Problem 1 - Worth 13pts.
Cornfield Company manufactures three products-Product A, Product B, and Product C. Management has noticed a decline in profit and has asked you to investigate the accuracy of the current costing system.
The current costing system assigns manufacturing overhead to products based on direct labor hours. For the current year, the company has estimated that it will incur $264,000 in manufacturing overhead cost and produce 8,000 units of Product A, 2,000 units of Product B and 20,000 units of Product C. Product A uses 2 hours of direct labor hours per unit, Product B uses 4 direct labor hours per unit, and Product C uses 1 direct labor hour per unit. Material and labor costs per unit are as follows:
Product A Product B Product C
Direct materials $10 $30 $40
Direct Labor 20 40 10
a. Using direct labor-hours as the base for assigning overhead cost to products, compute the predetermined overhead rate.
b. Using this rate, determine the unit cost for each product.
You have investigated the production process and have come to the conclusion that direct labor hours is not adequate to determine the overhead that is being used by each product. You have decided to use activity based costing. You have identified the following activity cost pools and cost drivers.
Activity Cost Pool Cost Driver overhead Cost
Purchasing Purchase orders issued $60,000
Processing Machine-hours 54,000
Rework Rework orders issued 110,000
Shipping Number of shipments 40,000
Cost Driver Product A Product B Product C Total
#purchase orders 200 300 100 600
Machine-hours 20,000 35,000 45,000 100,000
Rework orders 3,000 4,500 2,500 10,000
#Shipments 500 1,000 2,500 4,000
1. Calculate the activity pool rate for each of the activities.
2. Using the activity rates determined above:
a. Compute the total amount of the manufacturing overhead cost that should be applied to each product using the activity-based costing system. Determine the overhead cost per unit of each product.
b. Compute the unit product cost using ABC to allocate the costs.
Discuss factors that may have accounted for the company's drop in profit.
Problem 2 - Worth 12 pts.
Table Inc. manufactures tables. The company expects to manufacture and sell 9,000 tables. The average selling price for table is $70. Use the assumptions from chapter 2 and 3 concerning what costs are normally variable (if we make one more table will we need more of this resource, if you answer yes, it is a variable cost) and which ones are fixed (if we make one more table the cost will not change, if you answer yes, it is a fixed cost ) to determine the cost behavior. The titles of the cost should aid you in this determination. There are no beginning or ending work in process or finished goods. Projected costs for the 9,000 tables are as follows:
Fixed selling and administrative costs $99,000
Variable selling and administrative costs 36,000
Variable manufacturing overhead 9,000
Fixed manufacturing overhead 54,000
Direct materials 72,000
Direct labor 63,000
Required: Manufacturing costs mean the same thing as production costs.
1. Determine the total variable manufacturing costs to produce 9,000 tables.
2. Determine the variable manufacturing cost per unit.
3. Determine the total fixed manufacturing costs to produce 9,000 tables.
4. What is the cost formula for the total manufacturing costs, using units as the cost driver?
5. Determine the total manufacturing costs to produce 9,000 tables. Hint: Remember there is no beginning and ending work in process, so total manufacturing costs equals cost of goods manufactured.
6. Determine the total variable selling and administrative costs to produce 9,000 tables.
7. Determine the variable selling and administrative cost per unit.
8. Determine the total fixed selling and administrative costs to produce 9,000 tables.
9. What is the cost formula for selling and administrative costs for Table Inc?
10. Determine the total selling and administrative costs to produce 9,000 tables.
11. Prepare an income statement for Table Inc., if the company produces and sells 9,000 tables. Hint: Remember there is no beginning and ending finished goods, so cost of goods manufacturer equals cost of goods sold. Use the format on page 44, but realize you already have COGS calculated and selling and admin. Expense have been added together for this example.
12. Prepare an income statement for Table Inc., if the company produces and sells 10,000 tables. This is a what if analysis. You should use the 2 cost formulas to assist you in calculating COGS and Selling and admin. Expense for 10,000 units.
13. Explain the differences in income in #11 & #12.
Problem 3 - worth 15 pts.
The Film Company uses a job-order costing system and a predetermined overhead rate based on camera hours. Estimated manufacturing overhead for the coming year was $2,500,000 and estimated camera hours was 500,000. On June 1, the company had four jobs in work in process Job No. 100 with total costs so far of $18,000, Job 103 with total costs of $39,000, Job 105 with total costs so far of $20,000, and Job 106 with total costs of $25,000. The company has two jobs in finished goods Job No. 101 with total costs of $50,000 and Job No. 104 with total costs of $125,000. The following information pertains to the company's activities for the month of June:
a. Materials and supplies were purchased on account for $900,000.
b. Jobs 108 and 109 were started during the month.
c. Materials totaling $780,000 were requisitioned for use in production. Of this total, $20,000 was for indirect materials. The direct materials were distributed as follows:
Job No. 100 $ 70,000
Job No. 103 $200,000
Job No. 105 $ 30,000
Job No. 106 $180,000
Job No. 108 $160,000
Job No. 109 $120,000
d. Total payroll for the month totaled $400,000, of which $50,000 was for indirect labor. The direct labor was distributed as follows:
Job No. 100 $ 20,000
Job No. 103 $ 60,000
Job No. 105 $ 10,000
Job No. 106 $ 70,000
Job No. 108 $ 90,000
Job No. 109 $100,000
e. Advertising costs of $100,000 were incurred.
f. The company had depreciation of $100,000 (90% represents depreciation of production studio equipment and the remainder is for administrative activities).
g. Prepaid insurance expired during the year, $70,000. (70% is related to production studio operations and the remaining is for marketing activities)
h. Manufacturing overhead was applied using the predetermined overhead rate. The company recorded 41,000 of camera-hours
The following is the distribution of Camera hours (CH) for June:
Job No. 100 2,000
Job No. 103 7,000
Job No. 105 1,000
Job No. 106 8,000
Job No. 108 11,000
Job No. 109 12,000
i. Job Nos. 103, 105, 106 were completed during the month.
j. Job Nos. 101, 105, and 106 were sold during June at a selling price of 130 percent of manufacturing cost.
Beginning balances as of June 1 were as follows:
Work in Process ?????
Finished Goods ?????
1. What was the beginning balance (June 1st) of Work in process?
2. What was the beginning balance (June 1st) of Finished Goods?
3. What is the ending balance in the Materials account?
4. Calculate the total costs assigned to the following jobs. Show the total costs assigned to each of the jobs individually.
Job 100 Job 103 Job 105 Job 106 Job 108 Job 109
5. What is the ending balance in Work in Process on June 30. Give the dollar amount and the Job number(s).
6. What is the ending balance in finished goods on June 30. Give dollar amount and the job number(s).
7. Calculate the unadjusted cost of goods sold for the month ending June 30. Give dollar amount and the job number(s).
8. Calculate the total sales for the month ending June 30.
9. Determine the dollar amount of the over or underapplied overhead for the month and indicate whether the amount is under or overapplied.