CHAPTER 2

BASIC COST MANAGEMENT CONCEPTS

QUESTIONS FOR WRITING AND DISCUSSION

1. A system is a set of interrelated parts that 8. A direct cost is a cost that can be easily and
performs one or more processes to accurately traced to a cost object. An
accomplish specific objectives. indirect cost is a cost that cannot be easily
traced to cost objects.
2. An accounting information system is a
system consisting of interrelated manual 9. Traceability is the ability to assign a cost
and computer parts that uses processes directly to a cost object in an economically
such as collecting, recording, summarizing, feasible way using a causal relationship.
analyzing, and managing data to provide
output information to users. 10. Direct tracing is the process of assigning
costs to cost objects based on physically
3. The financial accounting information system observable causal relationships. Driver
is primarily concerned with producing
tracing is assigning costs using drivers,
outputs for external users using well-
which are causal factors. The driver tracing
specified economic events as inputs and
processes that meet certain rules. The cost approach relies on identification of factors
management information system, on the that allegedly capture the causal
other hand, produces outputs for internal relationship. Direct tracing relies on physical
users, and the criteria that govern inputs observation of the causal relationship and,
and processes are directly related to therefore, is more reliable.
management objectives. The cost
management information system, therefore, 11. Allocation is the assignment of indirect costs
has more flexibility than the financial to cost objects based on convenience or
accounting information system. assumed linkages.
4. The three broad objectives of a cost 12. Driver tracing is the use of drivers to trace
management information system are: (1) to costs to cost objects. Often this means that
cost out products, services, and other cost costs are first traced to activities using
objects; (2) to provide information for resource drivers and then to cost objects
planning and control; and (3) to provide using activity drivers.
information for decision making.
5. The cost accounting information system is a 13. Tangible products are goods that are made
cost management information subsystem by converting raw materials through the use
designed to assign costs to products, of labor and capital inputs.
services, and other objects as management
needs specify. The operational control 14. A service is a task or an activity performed
information system is a cost management for a customer or an activity performed by a
information subsystem designed to provide customer using an organization’s products
accurate and timely feedback concerning or facilities.
the performance of managers and others 15. Services differ from tangible products on
relative to their planning and control of three important dimensions: intangibility,
activities. perishability, and inseparability. Intangibility
6. A cost object is any item for which costs are means that buyers of services cannot see,
measured and assigned, including such feel, taste, or hear a service before it is
things as products, plants, projects, bought. Perishability means that services
departments, and activities. cannot be stored. Inseparability means that
7. An activity is a basic unit of work performed producers of services and buyers of
within an organization. Examples include services must be in direct contact (which is
material handling, inspection, purchasing, not true for tangible products).
billing, and maintenance.

17
16. Three examples of product cost definitions 19. There are seven essential differences.
are value-chain, operating, and traditional Activity-based cost management systems
definitions. The value-chain definition use both unit-based and nonunit-based
includes cost assignments for research and drivers; are tracing intensive instead of
development, production, marketing, and allocation intensive; use broad, flexible
customer service (all value-chain activities). product cost definitions; focus on managing
Operational product costs include all costs activities instead of managing costs; provide
except for research and development. more
Traditional product costs include only detailed activity information; emphasize
production costs. Different costs are needed systemwide performance over individual unit
because they serve different managerial performance; and use both nonfinancial and
objectives. financial performance measures (functional-
based systems emphasize only financial
17. The three cost elements are direct measures).
materials, direct labor, and overhead.
20. Increasing error costs and decreasing
measurement costs could signal the need
18. The income statement for a service firm
for an activity-based cost system. Factors
does not need a supporting cost of goods
that affect the decision to move to more
manufactured or cost of goods sold
activity-based cost management systems
schedule. Since services cannot be stored,
include more powerful and cheaper
the cost of services produced equals the
computing capabilities, increased
cost of services sold (which is not
competition, more
necessarily true for a manufacturing firm).
focused production by competitors,
deregulation, and JIT manufacturing.

18
 EXERCISES

2–1

1. The objective of the dishwashing system is to provide clean, germ-free

dishes, glasses, and silverware. Processes include scraping uneaten food off
dishes into disposal, loading the racks, washing the dishes, and unloading
the racks.

2. The items are classified as follows:

a. automatic dishwasher—interrelated part
b. racks to hold the dirty glasses, silverware, and dishes—interrelated part
c. electricity—input
d. water—input
e. waste disposal—interrelated part
f. sinks and sprayers—interrelated parts
g. dish detergent—input
h. gas heater to heat water to 180 degrees Fahrenheit— interrelated part
i. conveyor belt—interrelated part
j. Persons 1, 2, 3, and 4—interrelated parts
k. clean, germ-free dishes—outputs
l. dirty dishes—inputs
m. half-eaten dinner—inputs
n. aprons—interrelated parts

3. Operational model—dishwashing system:

Inputs Processes Objectives

Detergent Scraping off food Clean dishes
Water Loading racks
Electricity Washing
Dirty dishes Unloading

4. The cost management information system is similar in that it has interrelated

parts: processes, objectives, inputs, and outputs. The differences are: inputs
are economic events, and there are users of information. The output of the
cost management information system produces user actions. Output can act
as the basis for action or can confirm that actions already taken had the
intended effects.
2–2

1. Interrelated parts: Cost accounting personnel, computer, printer

Processes: Cost assignment: direct materials, direct labor, and
overhead
Objectives: Costing out of products
Inputs: Direct materials, direct labor, depreciation, power, and
material handling
Outputs: Product cost report
User actions: Submission of a bid, make-or-buy decision

2. Operational model—cost accounting system:

Inputs Processes Objectives

Direct materials
Direct labor Cost assignment:
Depreciation Direct materials
Power Direct labor
Material handling Overhead Costing out of products

Users or User actions

Make-or-buy decision, Bidding decision

3. The inputs consist of only production costs, suggesting a functional-based

product cost definition.

2–3

a. Direct tracing h. Direct tracing

b. Allocation i. Driver tracing; potential driver—
c. Direct tracing number of orders
d. Driver tracing; potential driver— j. Direct tracing
machine hours k. Allocation
e. Direct tracing l. Driver tracing; potential driver—
f. Driver tracing; potential driver— number of employees
number of square feet occupied m. Allocation
g. Allocation n. Direct tracing
2–4

a. Value-chain. The price needs to cover all product costs, including the costs
of developing, selling, and servicing.
b. Manufacturing. This approach is mandated for external reporting.
c. Value-chain. Product mix decisions should consider all costs, and the mix
that is the most profitable in the long run should be selected.
d. Operating. The designs should be driven by the effect they have on
production, marketing, and servicing costs. Thus, the operating cost
definition is the most relevant.
e. Manufacturing. This approach is mandated for external reporting.
f. Operating. Research and design costs are not relevant for a price decision
involving an existing product. Production, marketing, and servicing costs are
relevant, however.
g. Operating. Any special order should cover its costs, which potentially
include production, marketing, and servicing costs.
h. Value-chain. This is a strategic decision and involves activities and costs
throughout the entire value chain.
i. Operating. At this point, the costs of design and development are sunk
costs. The decision to produce should consider the costs of producing,
marketing, and servicing the product.

2–5

1. Direct materials used = $31,200 + $150,000 – $49,300 = $131,900

2. Direct materials $131,900

Direct labor 210,000
Overhead 345,000
Total manufacturing costs $686,900
Add: Beginning WIP 55,400
Less: Ending WIP (26,900)
Cost of goods manufactured $715,400
Unit cost of goods manufactured = $715,400/20,000 = $35.77

3. Direct labor = $35.77 – $6.00 – $18.00 = $11.77

Prime cost per unit = $6.00 + $11.77 = $17.77
Conversion cost per unit = $11.77 + $18.00 = $29.77
2–6

1. Beginning DM inventory + Purchases – Ending DM inventory = DM used

$16,000 + $275,000 – Ending DM inventory = $200,000
Ending DM inventory = $91,000

2. Units in beginning finished goods inventory = $3,510/$5.85 = 600 units

Since 10,000 units were manufactured and 600 were in beginning finished
goods inventory, 10,600 units were available for sale. But 8,900 units were
sold, so ending finished goods inventory is 1,700.

3. Cost of goods manufactured = $93,000 + $50,000 – $18,750 = $124,250

4. Prime cost = $19.50 = Direct materials + Direct labor

Direct materials = $19.50 – Direct labor
Conversion cost = $32 = Direct labor + Overhead
Overhead = $32 – Direct labor
($19.50 – Direct labor) + Direct labor + ($32 – Direct labor) = $39.50
Direct labor = $12
Direct materials + Direct labor = $19.50
Direct materials + $12 = $19.50
Direct materials = $7.50

5. Total manufacturing costs + BWIP – EWIP = COGM

$156,900 + $60,000 – EWIP = $125,000
EWIP = $91,900
Prime cost + Overhead = Total manufacturing costs
$90,000 + Overhead = $156,900
Overhead = $66,900
2–7

1. Gaillaird Company
Statement of Cost of Goods Manufactured
For the Month of March
Direct materials:
Beginning inventory....................................... $ 40,300
Add: Purchases............................................... 70,000
Direct materials available for use................. $ 110,300
Less: Ending inventory.................................. 16,500
Direct materials used in production............. $ 93,800
Direct labor............................................................ 22,000
Overhead............................................................... 216,850
Total manufacturing costs.................................. $ 332,650
Add: Beginning work in process........................ 10,000
Less: Ending work in process............................ (7,350)
Cost of goods manufactured.............................. $ 335,300

2. Gaillaird Company
Cost of Goods Sold Schedule
For the Month of March
Cost of goods manufactured.................................................... $335,300
Add: Beginning finished goods inventory.............................. 5,450
Cost of goods available for sale............................................... $340,750
Less: Ending finished goods inventory.................................. 10,210
Cost of goods sold.................................................................... $330,540
2–8

1. Units in ending finished goods inventory = 13,500 + 200,000 – 207,000

= 6,500
Finished goods ending inventory = 6,500  $6.85* = $44,525

*Since the unit cost of beginning finished goods and the unit cost of current
production both equal $6.85, the unit cost of ending finished goods must
also equal $6.85.

2. Photosmart, Inc.
Cost of Goods Sold Schedule
For the Year Ended December 31
Cost of goods manufactured ($6.85  200,000)...................... $ 1,370,000
Add: Beginning finished goods inventory.............................. 92,475
Goods available for sale............................................................ $ 1,462,475
Less: Ending finished goods inventory.................................. 44,525
Cost of goods sold.................................................................... $ 1,417,950

3. Photosmart, Inc.
Income Statement: Absorption Costing
For the Year Ended December 31
Sales (207,000  $9.50)......................................... $ 1,966,500
Cost of goods sold............................................... 1,417,950
Gross margin........................................................ $ 548,550
Less operating expenses:
Commissions (207,000  $0.25)..................... $ 51,750
Administrative expenses............................... 74,000
Advertising copayments................................ 36,000 161,750
Operating income................................................. $ 386,800
2–9

1. Fazell Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31
Direct materials:
Beginning inventory....................................... $ 16,000
Add: Purchases.............................................. 95,000
Freight-in on materials......................... 1,000
Direct materials available for use................. $ 112,000
Less: Ending inventory.................................. 30,000
Direct materials used...................................... $ 82,000
Direct labor............................................................ 240,000
Overhead:
Material handling............................................ $ 26,750
Supplies........................................................... 3,570
Insurance......................................................... 4,000
Supervision and indirect labor...................... 160,300
Total overhead costs...................................... 194,620
Total manufacturing costs.................................. $ 516,620
Add: Beginning work in process........................ 217,000
Less: Ending work in process............................ (100,000)
Cost of goods manufactured.............................. $ 633,620

2. Fazell Company
Cost of Goods Sold Schedule
For the Year Ended December 31
Cost of goods manufactured.................................................... $633,620
Add: Beginning finished goods inventory.............................. 56,000
Cost of goods available for sale............................................... $689,620
Less: Ending finished goods inventory.................................. 37,000
Cost of goods sold.................................................................... $652,620
2–10

1. Beginning inventory, materials................ $1,050

+ Purchases............................................. 9,350
– Ending inventory, materials................ (750)
Materials used in production................... $9,650

2. Prime cost = $9,650 + $18,570 = $28,220

3. Conversion cost = $18,570 + $15,000 = $33,570

4. Direct materials.......................................... $ 9,650

Direct labor................................................. 18,570
Overhead.................................................... 15,000
Cost of services......................................... $ 43,220

5. Compufix
Income Statement
For the Month Ended May 31
Revenues.................................................................................... $ 60,400
Cost of services sold................................................................. 43,220
Gross margin.............................................................................. $ 17,180
Operating expenses:
Advertising expenses.......................................................... (5,000)
Administrative expenses..................................................... (3,000)
Operating income....................................................................... $ 9,180
2–11

1. Shelly is interested in the manufacturing costs of glaxane. In particular, the

costs of direct materials, direct labor, and overhead will be calculated to
budget for glaxane production.

2. Leslie will be concerned with all costs along the value chain. Clearly, the
after-sale costs will be an important factor in pricing since the potential for
fatal side effects will lead to both lawsuits and the withdrawal of glaxane
from the market. However, Leslie must also be concerned with the costs of
research, development, and production since pharmaceutical companies
attempt to link all of these costs to a drug to justify their pricing strategies.

3. Dante will be primarily concerned with the overall research and development
costs and the eventual revenue from the successful drugs. Any individual
potential drug can turn out to have no value as long as some drug projects
are successful and can justify the total efforts.
2–12

1. Given the description provided, we can conclude that Jazon uses a functional-
based cost management system. First, evidence exists that product costs are
determined only by production costs. Apparently, the financial accounting
system is driving the type of product cost information being produced.
Second, only direct labor hours, a unit-based driver, are used to assign
overhead costs. Since many overhead costs are likely to be caused by
nonunit drivers, this also suggests a strong reliance on allocation for cost
assignment. Third, the company attempts to control costs by encouraging
departmental managers to meet budgeted levels of expenditures. The focus
is on departmental performance rather than systemwide performance.
Further, departmental performance is measured only by financial
instruments.

2. Product costing accuracy can be improved by placing more emphasis on

tracing and less on allocation. There is enough information provided to
reveal that the two products make quite different demands on certain
activities. Setup, receiving, and purchasing resources are clearly consumed
differently by the two products. Furthermore, it is doubtful that direct labor
hours would have anything to do with the two products’ patterns of resource
consumption for these three activities. Thus, using activity drivers that better
reflect the differential resource consumption would improve the cost
assignments. Jazon would need to assign costs to the activities using direct
tracing and resource drivers and then assign the cost of the activities to the
two products using activity drivers. Jazon should also consider the
possibility of computing
different—more managerially relevant—product costs such as value-chain
costs and operational costs.

3. Jazon would need to change its control focus from managing costs to
managing activities. This also would entail a shift in emphasis from
departmental performance maximization to systemwide performance
maximization. To bring about this change, Jazon will need to provide detailed
information concerning activities. Since activities cause costs, managing
activities is a more logical approach to controlling costs.
 PROBLEMS

2–13

1. The decision was made assuming that the fixed cost pool would remain
unchanged. What management failed to realize was that additional demands
on activities would be made by the new product line. Their failure to
recognize this was due to the fact that they did not understand that costs
can be driven by factors that are unrelated to the number of units produced.
For example, material handling costs are apparently driven by the number of
moves, inspection costs by the number of batches, purchasing costs by the
number of orders, and accounting costs by the number of transactions.
Demand for these activities increased and so supply of the activities had to
be increased; each activity evidently did not have enough idle capacity to
handle the increased demands.

2. An activity-based cost management system provides information about both

unit-based and nonunit-based drivers and is concerned with tracing these
costs to the individual product lines. Using this system, the need for
additional resources would have been revealed, leading to a better decision.
Whether or not the company should adopt the activity-based system
depends on the costs of making bad decisions versus the cost of
implementing the more accurate system. Based on the reference to
competition and the experience with the new product lines, an ABC system
may very well be appropriate. One difference between an ABC and a
functional-based cost system has already been mentioned, i.e., the use of
additional drivers in an ABC system. The ABC system emphasizes tracing
and usually produces greater product costing accuracy. Broader and more
flexible product cost definitions are also available in this system. An ABC
system also focuses on managing activities and stresses systemwide
performance maximization (as opposed to the traditional approaches of
managing costs and maximizing individual unit performance). Finally, it
should also be mentioned that an ABC system uses both financial and
nonfinancial operational measures of performance.
2–14

1. Functional-Based Cost Accounting System:

Interrelated parts: Cost accounting personnel, computer, printer
Processes: Cost assignment:
 Direct tracing: Direct materials, direct labor
 Driver tracing: None
 Allocation (using direct labor hours for assignment): Setup
costs, purchasing costs, material handling costs, and plant
depreciation
Objectives: Costing out of products
Inputs: Direct materials cost, direct labor cost, setup cost, purchasing
cost, material handling cost, and plant depreciation
Outputs: Product cost report
User actions: Submission of a bid, make-or-buy decision

Note: A functional-based system would not use nonunitdrivers such as

number of setups, moves, and orders to assign overhead costs to products.
This leaves direct labor hours, a unit-based driver, as the only possibility.
Since
direct labor hours is not a good driver for the overhead activities listed, then
allocation is the principal means of cost assignment. Furthermore, a functional-
based cost system would not assign sales or service costs to products, so
these two items cannot be inputs for the system.

Activity-Based Cost Accounting System:

Interrelated parts: Cost accounting personnel, computer, printer
Processes: Cost assignment:
 Direct tracing: Direct materials, direct labor
 Driver tracing: Setup cost (number of setups), purchasing
cost (number of orders), material handling cost (number of
moves), commission cost (units sold), service cost
(number of complaints)
 Allocation: Plant depreciation (direct labor hours)
Objectives: Costing out of products
Inputs: Direct materials cost, direct labor cost, setup cost, purchasing
cost, material handling cost, commission cost, customer
service cost, plant depreciation
Outputs: Product cost report
User actions: Submission of a bid, make-or-buy decision
2–14 Continued

The differences between the two systems are found in the processes. The
ABC system is driver intensive; nonunit drivers are used to trace costs to
products, whereas this is not part of the functional-based system (which is
allocation intensive). The ABC system also assigns marketing and customer
service costs to products, giving a more comprehensive view of product
costs. Thus, although both systems provide product cost reports, the
content of the reports will differ. The increased accuracy of cost assignments
because of driver tracing and the additional marketing and customer service
cost information provided by the ABC system should increase the quality of
the bidding and make-or-buy decisions (i.e., reduce the error in decisions of
this type).

2. Operational model: Functional-based cost accounting system

Inputs Processes Objectives

Direct materials
Direct labor Direct tracing:
Setup cost Direct materials
Purchasing Direct labor
Material handling Allocation:
Plant depreciation Overhead Costing out of product

Users

Bidding decision, Make-or-buy decision

2–14 Concluded

Operational model: ABC cost accounting system

Inputs Processes Objectives

Direct materials
Direct labor
Direct materials Allocation:
Direct labor Plant depreciation
Setup cost Driver tracing:
Purchasing Setup cost
Material handling Purchasing
Plant depreciation Material handling
Commission cost Commission cost
Customer service Customer service Costing out of product

Users

Bidding decision, Make-or-buy decision

3. The operational models reveal that the ABC cost accounting system is more
complex, requires more inputs, and uses more complicated processes to
transform the inputs. Thus, we would expect this system to be more costly to
operate. On the other hand, the increased complexity provides increased
accuracy and a richer set of possible product cost definitions. The ABC
system can provide both traditional and operating product cost information.
Both these factors should provide an advantage when it comes to managerial
decision making. (The cost of making bad decisions is reduced.) Choosing
the ABC system depends on whether the benefits of improved decision
making outweigh the increased measurement costs.
2–15

Functional-Based Control System:

Actions Justification
a Performance; organizational subunit; managing costs
b Rewards manager for subunit performance
d Emphasizes performance of organizational subunit
g Emphasis on controlling costs
j Reward based on controlling costs (subunit performance)
l Emphasis on controlling costs
o Emphasis on subunit performance; controlling costs

Activity-Based Operational Control System:

Actions Justification
c Activity-based cost used as input for activity control
e Emphasis on activity analysis
f Emphasis on managing activities (activity analysis)
h Managing activities
i Driver analysis
k Driver analysis; activity management
m Nonfinancial measure of performance
n Driver analysis; activity performance
2–16

Fonseca Company
Statement of Costs of Goods Manufactured
For the Year Ended December 31
1. Direct materials:
Beginning inventory....................................... $ 310,000
Add: Purchases............................................... 1,850,000
Direct materials available for use................. $ 2,160,000
Less: Ending inventory.................................. 112,000
Direct materials used...................................... $2,048,000
Direct labor............................................................ 2,400,000
Overhead:
Indirect labor................................................... $ 790,000
Rent, factory building..................................... 1,200,000
Depreciation, factory equipment................... 630,000
Utilities, factory............................................... 150,000
Insurance on factory...................................... 200,000 2,970,000
Total manufacturing costs.................................. $7,418,000
Add: Beginning work in process........................ 500,000
Less: Ending work in process............................ (718,000)
Cost of goods manufactured.............................. $7,200,000

2. Unit cost = $7,200,000/120,000 = $60

3. Fonseca Company
Income Statement
For the Year Ended December 31
Sales (123,750*  $75).......................................... $9,281,250
Cost of goods sold:
Cost of goods manufactured......................... $7,200,000
Add: Beginning finished goods inventory. . 326,000
Goods available for sale................................ $7,526,000
Less: Ending finished goods inventory....... 403,000 7,123,000
Gross margin........................................................ $2,158,250
Less: Salary, sales supervisor.......................... $ 60,000
Commissions, salespersons.................. 180,000
Administrative expenses......................... 93,200 333,200
Operating income................................................. $1,825,050
*11,350 + 120,000 – 7,600 = 123,750 units sold
2–17

1. Whizbang Company
Statement of Cost of Goods Manufactured
For the Previous Year
Direct materials.......................................................................... $100,000
Direct labor.................................................................................. 20,000*
Overhead..................................................................................... 340,000*
Total manufacturing costs........................................................ $460,000
Add: Beginning work in process.............................................. 45,000**
Less: Ending work in process.................................................. (90,000)**
Cost of goods manufactured.................................................... $415,000

*Conversion cost = 3  Prime cost

$360,000 = 3(Direct materials + Direct labor)
$360,000 = 3($100,000 + Direct labor)
Direct labor = $20,000
Overhead = Conversion cost – Direct labor
Overhead = $360,000 – $20,000
Overhead = $340,000
**Beg. WIP = 0.5  Ending WIP
$460,000 + Beg. WIP – 2  Beg. WIP = $415,000
Beg. WIP = $45,000; Ending WIP = 2  $45,000 = $90,000

2. Whizbang Company
Cost of Goods Sold Schedule
For the Previous Year
Cost of goods manufactured.................................................... $415,000
Add: Beginning finished goods inventory.............................. 10,000
Cost of goods available for sale............................................... $425,000
Less: Ending finished goods inventory.................................. 51,500*
Cost of goods sold.................................................................... $373,500**
* Ending finished goods = $425,000 – $373,500 = $51,500

**COGS = 0.90  $415,000 = $373,500

2–18

1. Kreative Company
Statement of Cost of Services Sold
For the Year Ended July 31, 2004
Direct materials used................................................................. $ 30,000*
Direct labor................................................................................. 800,000
Overhead..................................................................................... 100,000
Total service costs added......................................................... $930,000
Add: Beginning work in process.............................................. 60,000
Less: Ending work in process.................................................. (100,000)
Cost of services sold................................................................. $890,000
*Because all other data for the statement are given, you can work backward
from the cost of services sold to get the direct materials used.

2. The dominant cost is direct labor (for the ten professionals). Although labor
is the major cost of providing many services, this is not always the case. For
example, the dominant cost for some medical services may be overhead
(e.g., CAT scans). In some services, the dominant cost may be materials (e.g.,
funeral services).

3. Kreative Company
Income Statement
For the Year Ended July 31, 2004
Sales (2,000  $700).............................................. $ 1,400,000
Cost of services sold........................................... 890,000
Gross margin........................................................ $ 510,000
Less operating expenses:
Selling expenses............................................. $60,000
Administrative expenses............................... 50,000 110,000
Operating income................................................. $ 400,000

4. Services have three attributes that are not possessed by tangible products:
(1) intangibility, (2) perishability, and (3) inseparability. Intangibility means
that the buyers of services cannot see, feel, hear, or taste a service before it
is bought. Perishability means that services cannot be stored. Therefore,
there will never be any finished goods inventories, making the cost of
services produced equal to the cost of services sold. Inseparability means
that providers and buyers of services must be in direct contact for an
exchange to take place.
2–19

1. Jordan Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2004
Direct materials:
Beginning inventory....................................... $ 15,600
Add: Purchases............................................... 118,400*
Less: Ending inventory.................................. (14,000)
Direct materials used...................................... $120,000
Direct labor............................................................ 72,000
Overhead:
Plant depreciation........................................... $ 9,500
Salary, production supervisor....................... 45,000
Indirect labor................................................... 36,000
Utilities, factory............................................... 5,700
Depreciation, factory equipment................... 25,000
Supplies (0.50  $4,000)................................. 2,000 123,200
Total manufacturing costs.................................. $315,200
Add: Beginning work in process........................ 13,250
Less: Ending work in process............................ (13,250)
Cost of goods manufactured.............................. $315,200
*$15,600 + Purchases – $14,000 = $120,000; Purchases = $118,400

2. Jordan Company
Income Statement
For the Year Ended December 31, 2004
Sales (127,000  $6).............................................. $762,000
Cost of goods sold:
Beginning finished goods inventory............ $170,000
Add: Cost of goods manufactured............... 315,200
Goods available for sale................................ $485,200
Less: Ending finished goods inventory....... 85,000 400,200
Gross margin........................................................ $361,800
Less operating expenses:
Administrative expenses............................... $ 52,000
Selling expenses*........................................... 108,000 160,000
Operating income................................................. $201,800
*$66,000 + 0.50  $4,000 + $40,000 = $108,000
 COLLABORATIVE LEARNING EXERCISE

Answers will vary.

CYBER RESEARCH CASE

Answers will vary.