CHAPTER 2

1. (Cost Behavior) Merry Olde Games produces coquet sets. The company makes fixed monthly payments to the
local utility based on prior year electrical usage. Any difference between actual and expected usage is paid in
January of the following usage. In February 2008, Merry Olde Games made 2,000 croquet sets and incurred
the following costs:

Cardboard boxes (1 per set) $ 1,000

Mallets (2 per set) 12,000
Croquet balls (6 per set) 9,000
Wire hoops(12 per set, including extras) 3,600
Total hourly wages for production workers 8,400
Supervisor salary 2,600
Building and Equipment rental 2,800
Utilities 1,300
Total $ 40,700

[Link] was the per unit cost of each croquet set component?
[Link] was the total cost per croquet set?
[Link] for March 2008 is expected to be 2,500 croquet sets. What is the estimated cost per set for
March?
2. (Cost Behavior) The next winner of America’s idol will perform at your fraternity’s charity event for free at
you school’s basketball arena (25,000 person capacity) on January 28, 2009. The school is charging your
fraternity $37,500 for the facilities and $10 for each ticket sold. The fraternity asks you, their only numbers-
astute member, to determine how much to charge for each ticket. The group wants to make a profit of $86 per
ticket sold. You assume that 15,000 tickets will be sold.
a. What is the total cost incurred by the fraternity if 15,000 tickets are sold?
b. What price per ticket must be charged for the fraternity to earn its desired profit margin?
c. Supposed that on January 28,2009, a major snow storm hit your area, bringing in 36 inches of snow and
ice. Only 5,000 tickets are sold because most students were going to buy their tickets at the door. What is
the total profit or loss to the fraternity?
d. What assumptions did you make about your calculations that should have been conveyed to the
fraternity?
e. Supposed instead that fair weather prevails and by showtime, 20,000 concert tickets had been sold. What
is the total profit or loss to the fraternity?

3. Wisdom Company produces athletic caps. The company incurred the following costs to produce
6,000 caps last month.

Cardboard for the brims 2,400

Cloth 6,000
Plastic for headbands 3,000
Straight-line depreciation 3,600
Supervisors' salaries 9,600
Utilities 1,800
Total 26,400

a. What did each cap component cost on a per-unit basis?

b. What is the probable type of behavior that each of the costs exhibits?
c. The company expects to produce 5,000 caps this month. Would you expect each type of cost to
increase or decrease? Why? Why can't the total cost of 5,000 caps be determined?

4. (Journal entries—service industry) Hopkins & Bruder CPAs incurred the following costs in
performing audits during September 2008. The firm uses a Work in Process Inventory account for
audit engagement costs and records overhead in fixed and variable overhead accounts. Prepare
journal entries for each of the following transactions:
a. Used $1,000 of previously purchased supplies on audit engagements.
b. Paid $2,000 of partner travel expenses to an accounting conference.
c. Recorded $6,500 of depreciation on laptops used in audits.
d. Recorded $1,800,000 of depreciation on the Hopkins & Bruder Building, located in downtown New
York; 10 percent of the space is used to house personnel.
e. Accrued audit partner salaries, $200,000.
f. Accrued remaining audit staff salaries, $150,000.
g. Paid credit card charges for travel costs for audit engagements, $9,400.
h. Paid insurance on the downtown building, $17,300.
i. Accrued $3,400 of office assistant wages; the office assistant works only for audit partners & staff.
j. Paid all accrued salaries and wages for the month.
5. (CGM, CGS) The cost of goods sold in March 2008 for Ragged Rocks Co. was $2,300,000. March 31
Work in Process Inventory was 40 percent of the March 1 Work in Process Inventory. Overhead
was 225 percent of direct labor cost. During March, $1,182,000 of direct material was purchased.
Other March information follows:

Inventories March 1 March 31

Direct Material $30,000 $42,000
Work in Process $90,000 ?
Finished Goods $125,000 $24,000

a. Prepare a schedule of the cost of goods sold for March.

b. Prepare the March cost of goods manufactured schedule.
c. What was the amount of prime cost incurred in March?
d. What was the amount of conversion cost incurred in March?

6. (CGM, CGS) It’s Kinda China produces collectible pieces of art. The company’s Raw Material
Inventory account includes the costs of both direct and indirect materials. Account balances for the
company at the beginning and end of July 2008 follow:

July 1 July 31
Raw Material Inventory $46,600 $34,800
Work in Process Inventory $73,200 $60,000
Finished Goods Inventory $36,000 $52,400

During the month, the company purchased $164,000 of raw material; direct material used during
the period amounted to $128,000. Factory payroll costs for July were $197,000, of which 85 percent
was related to direct labor. Overhead charges for depreciation, insurance, utilities, and maintenance
totaled $150,000 for July.
a. Prepare a schedule of cost of goods manufactured.
b. Prepare a schedule of cost of goods sold.

7. (Cost of services rendered) The following information is related to the Caspari Veterinary Clinic for
April 2008, the firm’s first month of operation:

Veterinarian salaries for April $36,000

Assistant salaries for April 12,600
Medical supplies purchased in April 4,800
Utilities for month (80 percent related to animal treatment) 2,700
Office salaries for April (20 percent related to animal treatment) 7,800
Medical supplies on hand at April 30 2,200
Depreciation on medical equipment for April 1,800
Building rent (70 percent related to animal treatment) 2,100

Compute the cost of services rendered.

8. (Cost classifications) Geoff Payne painted four houses during April 2008. For these jobs, he spent
$1,200 on paint, $80 on mineral spirits, and $300 on brushes. He also bought two pairs of coveralls
for $100 each; he wears coveralls only while he works. During the first week of April, Payne placed
a $100 ad for his business in the classifieds. He hired an assistant for one of the painting jobs; the
assistant was paid $25 per hour and worked 50 hours.
Being a very methodical person, Payne kept detailed records of his mileage to and from each
painting job. His average operating cost per mile for his van is $0.70. He found a $30 receipt in his
van for a metropolitan map that he purchased in April. He uses the map as part of a contact file for
referral work and for bids that he has made on potential jobs. He also had $30 in receipts for bridge
tolls ($2 per trip) for a painting job he did across town.
Near the end of April, Payne decided to go camping, and he turned down a job on which he
had bid $3,600. He called the homeowner long distance (at a cost of $3.20) to explain his reasons
for declining the job.
Using the following headings, indicate how to classify each of the April costs incurred by
Payne. Assume the job cost object is a house-painting job.

Type of Cost Variable Fixed Direct Indirect Period Product