A foundry employee worked a normal 40-hour shift, but four hours were idle due to a small fire in the

plant. The employee earns $18 per hour.

A loom operator in a textiles factory earns $16 per hour. By contract, the employee earns $24 (time and
a half) for overtime hours. The operator worked 45 hours during the first week of May, and overtime is
paid after the usual 40 hours.
Required:
1. Compute the loom operator’s compensation for the week.
2. Calculate the employee’s total overtime premium for the week.
3. How much of the employee’s total compensation for the week is direct-labor cost? How much is
overhead?

Consider the following costs that were incurred during the current year:
1. Tire costs incurred by Ford Motor Company.
2. Sales commissions paid to the sales force of Dell Inc.
3. Wood glue consumed in the manufacture of Rooms To Go furniture (assume that the cost of glue
used is insignificant).
4. Hourly wages of refinery security guards employed by ExxonMobil.
5. The salary of a financial vice president of Hewlett Packard.
6. Advertising costs of Coca-Cola.
7. Straight-line depreciation on factory machinery of Boeing Corporation.
8. Wages of assembly-line personnel of Whirlpool Corporation.
9. Delivery costs incurred by Ben & Jerry’s for a shipment of their ice cream to a grocery store.
10. Newsprint consumed in printing at The New York Times.
11. Plant insurance costs of Texas Instruments.
12. LED costs incurred in light-bulb manufacturing of GE Lighting.
Required: Evaluate each of the preceding and determine whether the cost is (a) a product cost or a period
cost, (b) variable or fixed in terms of behavior, and (c) for the product costs only, whether the cost is prop
erly classified as direct material, direct labor, or manufacturing overhead. Item 1 is done as an example.

Sales revenue was $1,105,000 for the year. Selling and administrative expenses for the year amounted to
$110,000. The firm’s tax rate is 40 percent.
Required:
1. Prepare a schedule of cost of goods manufactured.
2. Prepare a schedule of cost of goods sold.
3. Prepare an income statement.
A hotel pays the phone company $100 per month plus $.25 for each call made. During January 6,000
calls were made. In February 5,000 calls were made.
Required:
1. Calculate the hotel’s phone bills for January and February.
2. Calculate the cost per phone call in January and in February.
3. Separate the January phone bill into its fixed and variable components.
4. What is the marginal cost of one additional phone call in January?
5. What was the average cost of a phone call in January?

Martin Chuzzlewit purchased a vacant lot outside of London for £1,350,000, because he heard that a
shopping mall was going to be built on the other side of the road. He figured that he could make a bundle
by putting in a fast-food outlet on the site. As it turned out, the rumor was false. A sanitary landfill was
located on the other side of the road, and Martin’s land was worthless. (£ denotes the British monetary
unit, pounds sterling.)*
Required: With respect to the economic characteristics of costs, what type of cost is the £1,350,000
that Chuzzlewit paid for the vacant lot?
Orbital Communications, Inc., manufactures communications satellites used in TV signal transmission.
The firm currently purchases one component for its satellites from a European firm. An Orbital Com
munications engineering team has found a way to use the company’s own component, part number
A200, instead of the European component. However, the Orbital Communications component must be
modified at a cost of $500 per part. The European component costs $8,900 per part. Orbital Communi
cations’ part number A200 costs $5,100 before it is modified. Orbital Communications currently uses 10
of the European components per year.
Required: Calculate the annual differential cost between Orbital Communications’ two production
alternatives.

The state Department of Education owns a computer system, which its employees use for word process
ing and keeping track of education statistics. The governor’s office recently began using this computer
also. As a result of the increased usage, the demands on the computer soon exceeded its capacity. The
director of the Department of Education was soon forced to lease several personal computers to meet the
computing needs of her employees. The annual cost of leasing the equipment is $140,000.
Required:
1. What type of cost is this $140,000?
2. Should this cost be associated with the governor’s office or the Department of Education? Why?

Suppose you paid $150 for a ticket to see your university’s football team compete in a bowl game. Some
one offered to buy your ticket for $400, but you decided to go to the game.
Required:
1. What did it really cost you to see the game?
2. What type of cost is this?

List the costs that would likely be included in each of the following marginal-cost calculations.
1. The marginal cost of one additional passenger on an American Airlines flight.
2. The marginal cost of serving one additional customer in a Chipotle Mexican Grill.
3. The marginal cost of United Airlines adding a flight from Honolulu to Seattle.
4. The marginal cost of keeping a Bank of America branch bank open one additional hour on
Saturdays.
5. The marginal cost of manufacturing one additional Burton snowboard.
Consider the following cost items:
1. Salaries of players on the Boston Red Sox.
2. Year-end completed goods of Levi Strauss jeans.
3. Executive compensation costs at Home Depot.
4. Advertising costs for Sony.
5. Costs incurred during the period to insure a Ford plant against fire and flood losses.
6. Current year’s depreciation on a Carnival Cruise Line ship.
7. The cost of printer ink and paper used during the period by Shutterfly.
8. Assembly-line wage cost incurred at a Kona bicycle plant.
9. Year-end production in process at Lenovo computer manufacturer.
10. The cost of products sold to customers of a Target store.
11. The cost of products sold to distributors of carpet manufacturer Shaw Floors.
Required:
1. Evaluate the costs just cited, and determine whether the associated dollar amounts would be found
on the firm’s balance sheet, income statement, or schedule of cost-of-goods-manufactured. (Note:
In some cases, more than one answer will apply.)
2. What major asset will normally be insignificant for service enterprises and relatively substantial
for retailers, wholesalers, and manufacturers? Briefly discuss.
3. Briefly explain the major differences between income statements of service enterprises versus
those of retailers, wholesalers, and manufacturers.

Required:
1. Calculate Lone Oak’s manufacturing overhead for the year.
2. Calculate Lone Oak’s cost of goods manufactured.
3. Compute the company’s cost of goods sold.
4. Determine net income for 20x1, assuming a 30% income tax rate.
5. Determine the number of completed units manufactured during the year.

On April 12, after the close of business, Singh & Sons had a devastating fire that destroyed the company’s
work-in-process and finished-goods inventories. Fortunately, all raw materials escaped damage because
materials owned by the firm were stored in another warehouse. The following information is available:
Sales revenue through April 12 ................................................................................. $330,000
Income before taxes through April 12 ............................................................................68,000
Direct labor through April 12 .........................................................................................120,000
Cost of goods available for sale, April 12 ....................................................................275,000
Work-in-process inventory, January 1 .......................................................................21,000
Finished-goods inventory, January 1 .........................................................................37,000
Gross margin ............................................................................................................... 30% of sales
The firm’s accountants determined that the cost of direct materials used normally averages
25 percent of prime costs (i.e., direct material + direct labor). In addition, manufacturing overhead is
50 percent of the firm’s total production costs.
Required: Singh & Sons is in the process of negotiating a settlement with its insurance company.
Prepare an estimate of the cost of work-in-process and finished-goods inventories that were destroyed
by the fire.
Required:
1. Determine the cost of the December 31 finished-goods inventory.
2. Compute Mason’s net income for the current year ended December 31.
3. If next year’s production decreases to 23,000 units and general cost behavior patterns do not
change, what is the likely effect on
a. The direct-labor cost of $37 per unit? Why?
b. The fixed manufacturing overhead cost of $600,000? Why?
c. The fixed selling and administrative cost of $860,000? Why?
d. The average unit cost of production? Why?
Required:
1. Compute each of the following costs for the year just ended: (a) total prime costs, (b) total manufac
turing overhead costs, (c) total conversion costs, (d) total product costs, and (e) total period costs.
2. One of the costs listed above is an opportunity cost. Identify this cost, and explain why it is an
opportunity cost.
Highlander Cutlery manufactures kitchen knives. One of the employees, whose job is to cut out wooden
knife handles, worked 48 hours during a week in January. The employee earns $12 per hour for a 40-hour
week, and overtime is paid after 40 hours. For additional hours, the employee is paid an overtime rate of
$18 per hour. The employee’s time was spent as follows:
Raw-material inventory, January 1 ....................................................................................40,000
Direct labor ........................................................................................................................200,000
Utilities: plant ..................................................................................................................…40,000
Depreciation: plant and equipment .....................................................................................60,000
Finished-goods inventory, December 31 ............................................................................50,000
Finished-goods inventory, January 1 .................................................................................20,000
Indirect material ..................................................................................................................10,000
Indirect labor .......................................................................................................................15,000
Other manufacturing overhead ........................................................................................... 80,000
Regular duties involving cutting out knife handles ..............................................................38 hours
General shop cleanup duties ...............................................................................................9 hours
Idle time due to power outage ............................................................................................1 hour
Required:
1. Calculate the total cost of the employee’s wages during the week described above.
2. Determine the portion of this cost to be classified in each of the following categories:
a. Direct labor
b. Manufacturing overhead (idle time)
c. Manufacturing overhead (overtime premium)
d. Manufacturing overhead (indirect labor)
Cape Cod Shirt Shop manufactures T-shirts and decorates them with custom designs for retail sale on the
premises. Several costs incurred by the company are listed below. For each cost, indicate which of the fol
lowing classifications best describe the cost. More than one classification may apply to the same cost item.
Cost Classifications
a. Variable
b. Fixed
c. Period
d. Product
e. Administrative
f. Selling
g. Manufacturing
h. Research and development
i. Direct material
j. Direct labor
k. Manufacturing overhead
Cost Items
1. Cost of fabric used in T-shirts.
2. Wages of shirtmakers.
3. Cost of new sign in front of retail T-shirt shop.
4. Wages of the employee who repairs the firm’s sewing machines.
5. Cost of electricity used in the sewing department.
6. Wages of T-shirt designers and painters.
7. Wages of sales personnel.
8. Depreciation on sewing machines.
9. Rent on the building. Part of the building’s first floor is used to make and paint T-shirts. Part of it
is used for the retail sales shop. The second floor is used for administrative offices and storage of
raw material and finished goods.
10. Cost of daily advertisements in local media.
11. Wages of designers who experiment with new fabrics, paints, and T-shirt designs.
12. Cost of hiring a pilot to fly along the beach pulling a banner advertising the shop.
13. Salary of the owner’s secretary.
14. Cost of repairing the gas furnace.
15. Cost of insurance for the production employees.
Heartland Airways operates commuter flights in three Midwestern states. Due to a political convention
held in Topeka, the airline added several extra flights during a two-week period. Additional cabin crews
were hired on a temporary basis. However, rather than hiring additional flight attendants, the airline
used its current attendants on overtime. Monica Gaines worked the following schedule on August 10.
All of Gaines’s flights on that day were extra flights that the airline would not normally fly.

Regular time: 2 round-trip flights between Topeka and St. Louis (8 hours)
Overtime: 1 one-way flight from Topeka to Kansas City (3 hours)
Gaines earns $12 per hour and is paid time and a half when working overtime. Fringe benefits cost the
airline $3 per hour for any hour worked, regardless of whether it is a regular or overtime hour.
Required:
1. Compute the direct cost of compensating Gaines for her services on the flight from Topeka to
Kansas City.
2. Compute the cost of Gaines’s services that is an indirect cost.
3. How should the cost computed in requirement 2 be treated for cost accounting purposes?
4. Gaines ended her workday on August 10 in Kansas City. However, her next scheduled flight
departed Topeka at 11:00 a.m. on August 11. This required Gaines to “dead-head” back to Topeka
on an early-morning flight. This means she traveled from Kansas City to Topeka as a passenger,
rather than as a working flight attendant. Since the morning flight from Kansas City to Topeka
was full, Gaines displaced a paying customer. The revenue lost by the airline was $82. What type
of cost is the $82? To what flight, if any, is it chargeable? Why?

San Diego Sheet Metal, Inc., incurs a variable cost of $40 per pound for raw material to produce a spe
cial alloy used in manufacturing aircraft.
Required:
1. Draw a graph of the firm’s raw material cost, showing the total cost at the following production
levels: 10,000 pounds, 20,000 pounds, and 30,000 pounds.
2. Prepare a table that shows the unit cost and total cost of raw material at the following production
levels: 1 pound, 10 pounds, and 1,000 pounds.

Hightide Upholstery Company manufactures a special fabric used to upholster the seats in power boats.
The company’s annual fixed production cost is $100,000.
Required:
1. Draw a graph of the company’s fixed production cost showing the total cost at the following pro duction
levels of upholstery fabric: 10,000 yards, 20,000 yards, 30,000 yards, and 40,000 yards.
2. Prepare a table that shows the unit cost and the total cost for the firm’s fixed production costs at
the following production levels: 1 yard, 10 yards, 10,000 yards, and 40,000 yards.
3. Prepare a graph that shows the unit cost for the company’s fixed production cost at the following
production levels: 10,000 yards, 20,000 yards, 30,000 yards, and 40,000 yards.

For each of the following costs, indicate whether the amount is a direct or indirect cost of the equipment
maintenance department. Also indicate whether each cost is at least partially controllable by the department
supervisor.
1. Cost of the plant manager’s salary, which is allocated to the maintenance department.
2. Cost of property taxes allocated to the maintenance department.
3. Cost of electricity used in the maintenance department.
4. Depreciation on the building space occupied by the maintenance department.
5. Idle time of maintenance department employees.

Indicate for each of the following costs whether it is a product cost or a period cost.
1. Wages of aircraft mechanics employed by an airline.
2. Wages of drill-press operators in a manufacturing plant.
3. Cost of food in a microwavable dinner.
4. Cost incurred by a department store chain to transport merchandise to its stores.
5. Cost of grapes purchased by a winery.
6. Depreciation on pizza ovens in a pizza restaurant.
7. Cost of plant manager in a computer production facility.
8. Wages of security personnel in a department store.
9. Cost of utilities in a manufacturing facility.

During 20x1, the company operated at about half of its capacity, due to a slowdown in the econ omy.
Prospects for 20x2 are slightly better. Jared Lowes, the marketing manager, forecasts a 20 percent
growth in sales over the 20x1 level.
Required: Categorize each of the costs listed above as to whether it is most likely variable or fixed.
Forecast the 20x2 cost amount for each of the cost items listed above.
The following terms are used to describe various economic characteristics of costs.
a. Opportunity cost
b. Out-of-pocket cost
c. Sunk cost
d. Differential cost
e. Marginal cost
f. Average cost
Required: Choose one of the terms listed above to characterize each of the amounts described below.
1. The cost of feeding 500 children in a public school cafeteria is $800 per day, or $1.60 per child per
day. What economic term describes this $1.60 cost?
2. The cost of including one extra child in a day-care center.
3. The cost of merchandise inventory purchased two years ago, which is now obsolete.
4. The management of a high-rise office building uses 2,500 square feet of space in the building for
its own management functions. This space could be rented for $250,000. What economic term
describes this $250,000 in lost rental revenue?
5. The cost of building an automated assembly line in a factory is $800,000. The cost of building a
manually operated assembly line is $375,000. What economic term is used to describe the differ ence
between these two amounts?
6. Referring to the preceding question, what economic term is used to describe the $800,000 cost of
building the automated assembly line?
7. The cost incurred by a computer manufacturer to produce one more unit in its most popular line of
laptop computers.

Several costs incurred by Bayview Hotel and Restaurant are given in the following list. For each cost,
indicate which of the following classifications best describe the cost. More than one classification may
apply to the same cost item.
Cost Classifications
a. Direct cost of the food and beverage department
b. Indirect cost of the food and beverage department
c. Controllable by the kitchen manager
d. Uncontrollable by the kitchen manager
e. Controllable by the hotel general manager
f. Uncontrollable by the hotel general manager
g. Differential cost
h. Marginal cost
i. Opportunity cost
j. Sunk cost
k. Out-of-pocket cost
Cost Items
1. The cost of general advertising by the hotel, which is allocated to the food and beverage department.
2. The cost of food used in the kitchen.
3. The difference in the total cost incurred by the hotel when one additional guest is registered.
4. The cost of space (depreciation) occupied by the kitchen (assuming the hotel general manager has
control over the total space allocated to the kitchen).
5. The cost of space (depreciation) occupied by a sauna next to the pool. The space could otherwise
have been used for a magazine and bookshop.
6. The profit that would have been earned in a magazine and bookshop, if the hotel had one.
7. The discount on room rates given as a special offer for a “Labor Day Getaway Special.”
 8. The wages earned by table-service personnel.
9. The salary of the kitchen manager.
10. The cost of the refrigerator purchased 13 months ago. The unit was covered by a warranty for 12 months,
during which time it worked perfectly. It stopped cooling after 13 months, despite an original estimate that it
would last five years.
11. The hotel has two options for obtaining fresh pies, cakes, and pastries. The goodies can be pur chased
from a local bakery for approximately $1,600 per month, or they can be made in the hotel’s
kitchen. To make the pastries on the premises, the hotel will have to hire a part-time pastry chef.
This will cost $600 per month. The cost of ingredients will amount to roughly $700 per month.
Thus, the savings from making the goods in the hotel’s kitchen amount to $300 per month.
12. The cost of dishes broken by kitchen employees.
13. The cost of leasing a computer used for reservations, payroll, and general hotel accounting.
14. The cost of a pool service that cleans and maintains the hotel’s swimming pool.
15. The wages of the hotel’s maintenance employees, who spent 11 hours (at $14 per hour) repairing
the dishwasher in the kitchen.

The Department of Natural Resources is responsible for maintaining the state’s parks and forest lands,
stocking the lakes and rivers with fish, and generally overseeing the protection of the environment. Sev eral
costs incurred by the agency are listed below. For each cost, indicate which of the following clas sifications
best describe the cost. More than one classification may apply to the same cost item.
Cost Classifications
a. Variable
 b. Fixed
d. Uncontrollable by the department director
e. Differential cost
f. Marginal cost
g. Opportunity cost
h. Sunk cost
i. Out-of-pocket cost
j. Direct cost of the agency
k. Indirect cost of the agency
l. Direct cost of providing a particular service
m. Indirect cost of providing a particular service
Cost Items
1. Cost of the automobiles used by the department’s rangers. These cars were purchased by the state,
and they would otherwise have been used by the state police.
2. Cost of live-trapping and moving beaver that were creating a nuisance in recreational lakes.
3. The department director’s salary.
4. Cost of bringing firefighting teams from out of state to help fight forest fires that are threatening
private property.
5. Cost of the fish purchased from private hatcheries, which are used to stock the state’s public waters.
6. The difference between (a) the cost of purchasing fish from private hatcheries and (b) the cost of
running a state hatchery.
7. Cost of producing literature that describes the department’s role in environmental protection.
This literature is mailed free, upon request, to schools, county governments, libraries, and
private citizens.
8. Cost of sending the department’s hydroengineers to inspect one additional dam for stability and
safety.
9. Cost of operating the state’s computer services department, a portion of which is allocated to the
Department of Natural Resources.
10. Cost of administrative supplies used in the agency’s head office.
11. Cost of providing a toll-free number for the state’s residents to report environmental problems.
12. The cost of replacing batteries in sophisticated monitoring equipment used to evaluate the effects
of acid rain on the state’s lakes.
13. Cost of a ranger’s wages, when the ranger is giving a talk about environmental protection to ele mentary
school children.
14. Cost of direct-mailing to 1 million state residents a brochure explaining the benefits of voluntarily
recycling cans and bottles.
15. The cost of producing a TV show to be aired on public television. The purpose of the show is to
educate people on how to spot and properly dispose of hazardous waste.
Hoboken Industries currently manufactures 30,000 units of part MR24 each month for use in produc tion of
several of its products. The facilities now used to produce part MR24 have a fixed monthly cost
of $150,000 and a capacity to produce 84,000 units per month. If the company were to buy part MR24
from an outside supplier, the facilities would be idle, but its fixed costs would continue at 40 percent of
their present amount. The variable production costs of part MR24 are $11 per unit.
Required:
1. If Hoboken Industries continues to use 30,000 units of part MR24 each month, it would realize a
net benefit by purchasing part MR24 from an outside supplier only if the supplier’s unit price is
less than what amount?
2. If Hoboken Industries is able to obtain part MR24 from an outside supplier at a unit purchase price
of $12.875, what is the monthly usage at which it will be indifferent between purchasing and mak ing part
MR24?