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Chapter 2 - Examples - Solutions

This document contains 10 problems related to cost accounting and analysis. Problem 1 asks to list fixed and variable costs for a chemical plant. Problem 2 asks to classify cost items as fixed or variable. Problem 3 asks to determine the optimal location for a waste site based on hauling costs. Problem 4 asks to determine the optimal machine speed based on production costs.

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Ahmed walid
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151 views

Chapter 2 - Examples - Solutions

This document contains 10 problems related to cost accounting and analysis. Problem 1 asks to list fixed and variable costs for a chemical plant. Problem 2 asks to classify cost items as fixed or variable. Problem 3 asks to determine the optimal location for a waste site based on hauling costs. Problem 4 asks to determine the optimal machine speed based on production costs.

Uploaded by

Ahmed walid
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 2 Problems

1) A company in the process industry produces a chemical compound


that is sold to manufacturers for use in the production of certain
plastic products. The plant that produces the compound employs
approximately 300 people. Develop a list of six different cost
elements that would be fixed and a similar list of six cost elements
that would be variable

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2) Classify each of the following cost items as mostly fixed or
variable:

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3) A municipal solid-waste site for a city must be located at Site A or
Site B. After sorting, some of the solid refuse will be transported to
an electric power plant where it will be used as fuel. Data for the
hauling of refuse from each site to the power plant are shown in the
following table.

If the power plant will pay $8.00 per cubic yard of sorted solid
waste delivered to the plant, where should the solid-waste site be
located? Use the city’s viewpoint and assume that 200,000 cubic
yards of refuse will be hauled to the plant for one year only. One
site must be selected.

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4) The following results were obtained after analyzing the operational
effectiveness of a production machine at two different speeds:

A set of unsharpened tools costs $1,000 and can be ground 20


times. The cost of each grinding is $25. The time required to
change and reset the tools is 1.5 hours, and such changes are made
by a tool-setter who is paid $18/hour. The production machine
operator is paid $15/hour, including the time that the machine is
down for tool sharpening. Variable overhead on the machine is
charged at the rate of $25/hour, including tool-changing time. A
fixed-size production run will be made (independent of machine
speed).
a) At what speed should the machine be operated to minimize
the total cost per piece? State your assumptions.
b) What is the basic trade-off in this problem?

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5) A bicycle component manufacturer produces hubs for bike wheels.
Two processes are possible for manufacturing, and the parameters
of each process are as follows:

Assume that the daily demand for hubs allows all defect-free hubs
to be sold. Additionally, tested or rejected hubs cannot be sold.
Find the process that maximizes profit per day if each part is made
from $4 worth of material and can be sold for $30. Both processes
are fully automated, and variable overhead cost is charged at the
rate of $40 per hour.

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6) A company is analyzing a make-versus-purchase situation for a
component used in several products, and the engineering
department has developed these data: Option A: Purchase 10,000
items per year at a fixed price of $8.50 per item. The cost of
placing the order is negligible according to the present cost
accounting procedure. Option B: Manufacture 10,000 items per
year, using available capacity in the factory. Cost estimates are
direct materials = $5.00 per item and direct labor = $1.50 per item.
Manufacturing overhead is allocated at 200% of direct labor (=
$3.00 per item). Based on these data, should the item be purchased
or manufactured?

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7) One method for developing a mine containing an estimated
100,000 tons of ore will result in the recovery of 62% of the
available ore deposit and will cost $23 per ton of material removed.
A second method of development will recover only 50% of the ore
deposit, but it will cost only $15 per ton of material removed.
Subsequent processing of the removed ore recovers 300 pounds of
metal from each ton of processed ore and costs $40 per ton of ore
processed. The recovered metal can be sold for $0.80 per pound.
Which method for developing the mine should be used if your
objective is to maximize total profit from the mine?

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8) Two alternative designs are under consideration for a tapered
fastening pin. The fastening pins are sold for $0.70 each. Either
design will serve equally well and will involve the same material
and manufacturing cost except for the lathe and drill operations.
Design A will require 16 hours of lathe time and 4.5 hours of drill
time per 1,000 units. Design B will require 7 hours of lathe time
and 12 hours of drill time per 1,000 units. The variable operating
cost of the lathe, including labor, is $18.60 per hour. The variable
operating cost of the drill, including labor, is $16.90 per hour.
Finally, there is a sunk cost of $5,000 for Design A and $9,000 for
Design B due to obsolete tooling.

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9) A manufacturer makes 7,900,000 memory chips per year. Each
chip takes 0.4 minutes of direct labor at the rate of $8 per hour. The
overhead costs are estimated at $11 per direct labor hour. A new
process will reduce the unit production time by 0.01 minutes. If the
overhead cost will be reduced by $5.50 for each hour by which
total direct hours are reduced, what is the maximum amount you
will pay for the new process? Assume that the new process must
pay for itself by the end of the first year.

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10) In the design of an automobile radiator, an engineer has a
choice of using either a brass–copper alloy casting or a plastic
molding. Either material provides the same service. However, the
brass–copper alloy casting weighs 25 pounds, compared with 20
pounds for the plastic molding. Every pound of extra weight in the
automobile has been assigned a penalty of $6 to account for
increased fuel consumption during the life cycle of the car. The
brass–copper alloy casting costs $3.35 per pound, whereas the
plastic molding costs $7.40 per pound. Machining costs per casting
are $6.00 for the brass–copper alloy. Which material should the
engineer select, and what is the difference in unit costs?

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