Cost Concepts Exercises

Problem 1
Classify the following items as direct or indirect materials
1. Gold to make jewelry – direct materials
2. Sandpaper used in furniture making – indirect materials
3. Paper used in furniture making – indirect materials
4. Milk to make ice cream – direct materials
5. Water to make ice - direct materials
6. Seats to be installed in a car - direct materials
7. Leather to make gloves - direct materials
8. Tape measure used by tailors - indirect materials
9. Flour used in making bread - direct materials
10. Pineapple in a fruit cocktail - direct materials
Problem 2
Classify the following as either manufacturing (M), selling (S), or administrative (A)
1. Factory supplies - M
2. Advertising - S
3. Rent on factory building - M
4. Freight-out - S
5. President’s salary - A
6. Cost of machine breakdown - M
7. Legal expenses - A
8. Samples - S
9. Bad debts - S
10. Travel expenses of salesmen - S
Problem 3
Classify the following selected costs by completing the table below.. (a) Variable or fixed (b)
Product or Period costs (c) Direct or indirect in relation to units of product.
1. Wood is used in the manufacture of the tables, at a cost P100 per table.
2. The tables are assembled by workers, at a cost of P40 per table
3. Workers assembling the tables are supervised by a factory supervisor who is P25,000
per month
4. Electrical costs of P20 per machine hour are incurred in the factory in the
manufacture of the tables. (4 machine hours per table)
5. The depreciation cost of the machines used in the manufacture of the tables is
P40,000 a year.
6. The salary of the president of the company is P100,000 a month.
7. The company spends P250,000 per year to advertise its products.
8. Salespersons are paid a commission of P300 for each table sold.
9. Rent paid for the factory building is P20,000 a month.
10. Insurance premiums paid for the general office is P15,000 a year.

(a) V or F (b) Product or Period (c) D or I

1. Wood V Product D
2. Salary - V Product D
workers
3. Supervisor’s F Product I
salary
4. Electrical costs V Product I
5. Depreciation - F Product I
 machines
6. President’s F Period I
salary
7. Advertising F Period I
expense
8. Sales V Period D
commissions
9. Rent expense F Product I
10. Insurance F Period I
premiums

Problem 4
Classify each of the following costs of Bug Company in two ways: (a) as variable (V), fixed costs
(F); (b) as inventoriable costs (I) or period costs (P):

(a) V or F (b) I or P
Example: Direct labor V I
1. Salary of company controller F P
2. Fire Insurance on direct materials V I
3. Property taxes on finished goods held for sale V I
4. Direct materials used V I
5. Factory rent F I
6. Sales commissions V P
7. Overtime premium of machine operators V I
8. Straight-line depreciation of factory equipment F I
9. Straight-line depreciation of trucks used for F P
delivery of sales to customers
10. Salary of factory supervisor F I

Problem 5
Mighty Muffler, Inc. operates an automobile service facility, which specializes in replacing
mufflers on cars. The following table shows the costs incurred during a month when 750
mufflers were replaced.

Number of Muffler Replacements

500 750 1000
Total costs
Fixed costs A 60,000 P60,000 B 60,000
Variable costs C 25,000 P37,500 D 50,000
Total costs E 85,000 P97,500 F 110,000
Cost per muffler
replacement
Fixed cost G 120 H 80 I 60
Variable cost J 50 K 50 L 50
Total cost per M 170 N 130 O 110
replacement

Required: Fill in the missing amounts.

Problem 6
Listed below are several costs incurred by the loan department of J P Morgan and Chase Bank.
For each cost, indicate which of the following classification best describe the cost. More than
one classification may apply to the same cost item.
Cost classification
a. Controllable by the loan department
b. Uncontrollable by the loan department
c. Direct cost of the loan department
d. Indirect cost of the loan department
e. Differential cost
f. Marginal cost
g. Opportunity cost
h. Sunk cost
i. Out-of-pocket cost
Cost items
1. Salary of the loan department manager – a, c, i
2. Salary of a loan department clerk – a, c, i
3. Cost of office supplies used in the loan department – a, c, i
4. Cost of the department’s personal computer purchased by the department manager
last year. a, c, h
5. Cost of general advertising by the bank, which is allocated to the loan department. –
b, d, i
6. Revenue that the loan department would have generated for the bank if a branch
loan office had been located downtown instead of in the next province. - g
7. Difference in the cost incurred by the bank when one application loan application is
processed. E, f
8. Cost of electricity allocated to the loan department. B, d, i
9. Price of office supplies purchased and used by the loan department. A, c, i
10. Depreciation of the office equipment used in the loan department. A, c,

Problem 7
The financial statements of Mother Goose Company included these items:
Marketing costs P 160,000
Direct labor cost 245,000
Administrative costs 145,000
Direct materials used 285,000
Fixed factory overhead costs 175,000
Variable factory overhead costs 155,000
Compute:
1. Prime cost - 285,000 + 245, 000 = 530,000
2. Conversion cost – 245,000 + 175,000 + 155,000 = 575,000
3. Total inventoriable/product cost = 285,000 + 245,000 + 175,000 + 155,000 = 860,000
4. Total period cost = 160,000 + 145,000 = 305,000

Problem 8
 April May
Sales in units 3,200 4,500
Cost:
Cost S P 6,400 P 9,000
Cost T 5,600 5,600
Cost U 7,100 7,100
Cost V 4,480 6,300
Cost W 3,950 5,250
a. Which of the following classifications describes Cost T?
a. Variable c. Fixed
b. Curvilinear d. Mixed
b. Which of the following classifications describes Cost V?
a. Variable c. Fixed
b. Curvilinear d. Mixed
c. Which of the following classification describes Cost W?
a. Variable c. Fixed
b. Curvilinear d. Mixed
Problem 9
Blanche Corporation estimated its unit costs of producing and selling 12,000 units per month as
follows:
Direct materials used P 32.00
Direct labor 20.00
Variable manufacturing overhead 15.00
Fixed manufacturing overhead 6.00
Variable marketing costs 3.00
Fixed marketing costs __4.00
Estimated unit cost P 80.00
Compute:
1. Total variable costs per month – 32 + 20 + 15 + 3 = 70 x 12,000 units = 840,000

2. Total fixed costs per month – 6 + 4 = 10 x 12,000 units = 120,000

Problem 10
Given the following facts, complete the requirements below:
Sales price P 200 per unit
Fixed costs:
Marketing and administrative 24,000 per period
Manufacturing overhead 30,000 per period
Variable costs:
Marketing and administrative 6 per unit
Manufacturing overhead 9 per unit
Direct labor 30 per unit
Direct materials 60 per unit
Units produced and sold 1,200 per period

Required: Compute for the following

1. Variable manufacturing cost per unit = 60 +30 +9 = 99
2. Variable cost per unit = 60 + 30 + 9 + 6 = 105
3. Full manufacturing cost per unit = 60 + 30 + 9 + (30,000/1,200 ) = 124
4. Full cost to make and sell per unit = 124 + 6 + (24,000/ 1200) = 150

TRUE-FALSE QUESTIONS
Indicate whether the following statement are true or false by inserting in the blank space
provided a capital “T” for true or “F” for false.
F___1. The materials, labor, and overhead costs incurred to produce a product are called period
costs.
__F_2. Marketing, Selling, and Administrative Costs are the three broad classifications of costs
incurred by a manufacturing company.
_T__3. Lumber can be both a finished product and a material.
_F__4. Product cost consists of the sum of prime cost and conversion cost.
_T__5. Total fixed costs decrease with increase in the number of units produced and increase
with decrease in output.
_T__6. Period costs are found in both merchandising and manufacturing firms.
__F_7. The three cost elements of a manufactured good are direct materials, direct labor, and
marketing costs.
__T_8. A cost that is present under one alternative but absent in whole or part under another
alternative is known as a differential cost.
__F_9. Like product costs, period costs are not necessarily treated as expenses in the period in
which they are incurred.
__T_10. Variable costs are costs that change, in total, in direct proportion to changes in the
level of activity.
_F__11. The salary paid to the manager in charge of a warehouse is probably a variable cost.
_F__12. Indirect materials/factory supplies are classified as administrative expense.
_T__13. The salary paid to a factory foreman is classified as factory overhead.
_F__14. In a manufacturing setting, prime costs are fixed.
__F_15. Fixed cost remains constant if expressed on a unit basis.
_T__16. Differential costs can be either fixed or variable.
_F__17. A fixed cost is constant per unit of product.
__T_18. A decrease in production will ordinarily result in an increase in fixed production cost
per unit.
_F__19. A factory supervisor’s salary would be classified as a direct cost of a unit of product.
__T_20. Factory rent is included in manufacturing overhead, but office rent is a period cost.