E 1-19 Period Costs and Product Costs

Balls, Hoops, and Bats, Inc., a producer of sports equipment, incurs the following types of costs:

1. Depreciation on the production plant

2. Depreciation on the corporate offices

3. Wages of production-line employees

4. Paper, toner, and miscellaneous supplies for the office copy machines

5. Raw materials used in the production of sports equipment

6. Wages of the corporate headquarters' secretarial staff

7. Maintenance costs on the production equipment

8. Advertising costs

9. Shipping costs for products sold

10. Salaries of plant supervisors

11. Interest on bank loans

12. Property tax on the production plant

13. Property tax on the corporate offices

14. Commissions paid to sales personnel

15. Administrative salaries of corporate executives

Classify each cost as a period cost or a product cost. For each item classified as a product cost, indicate whether it would usually be included in direct materials, direct labor, or manufacturing overhead.

E 1-20 Manufacturing Costs

Jordan Industries is a manufacturing company that produces solid oak office furniture. During the year, the following costs were incurred. The building depreciation and the utilities are allocated three-fourths to production and one-fourth to administration. The cost of furniture parts can be traced to specific production runs.

1. Classify the costs into the following four categories: direct materials, direct labor, manufacturing overhead, and period costs.

2. Calculate the total amount of cost for each category.

E 1-21 Manufacturing and Nonmanufacturing Costs

The Benson Manufacturing Company produces rides for amusement parks. Parts for the rides are purchased from other suppliers. Rides are then assembled in various company plants.

Recently, Benson Manufacturing hired two new employees. One will be working in an assembly plant, and the other will be working in the marketing division of the corporate offices as a sales representative.

The assembly plant employee will be paid $17.00 per hour. Her time will be charged to the individual rides that she assembles. The marketing division employee will receive an annual salary of $30,000 plus commission. He will be responsible for both advertising and selling. His salary is for advertising responsibilities, and he will be paid a commission on sales of amusement rides.

1. Should the salary of the assembly plant employee be classified as a manufacturing or a nonmanufacturing cost? Should the salary of the marketing division employee be classified as a manufacturing or a nonmanufacturing cost? How is this classification made?

2. After classifying the salaries as manufacturing or nonmanufacturing costs, determine how the salary costs will affect the cost of assembling the amusement rides. Classify the employee costs as direct, indirect, fixed, variable, product, or period. (Each cost can be classified in more than one way.)

E 1-23 Cost Classifications

The following are costs associated with manufacturing firms, merchandising firms, or service firms:

1. Miscellaneous materials used in production

2. Salesperson's commission in a real estate firm

3. Administrators' salaries for a furniture wholesaler

4. Administrators' salaries for a furniture manufacturer

5. Freight costs associated with acquiring inventories for a grocery store

6. Office manager's salary in a doctor's office

7. Utilities for the corporate offices of a toy manufacturer

8. Line supervisor's salary for a clothing manufacturing firm

9. Training seminar for sales staff of a service firm

10. Fuel used in a trucking firm

11. Paper used at a printing business

12. Oil for machinery at a plastics manufacturing firm

13. Food used at a restaurant

14. Windshields used for a car manufacturer

Classify the costs as (1) product or period; (2) variable or fixed; and (3) for those that are product costs, as direct materials, direct labor, or manufacturing overhead. Write “not applicable (N/A)” if a category doesn't apply.

E 1-24 Cost Classifications

The following are costs associated with manufacturing firms, merchandising firms, or service firms:

1. Legal services for an accounting firm

2. Car leases for company management

3. Oil used to service manufacturing equipment

4. Office supplies for a grocery store

5. Entertainment expense for clients

6. Travel expenses for doctors in a medical firm

7. Plastic used in making computers

8. Collection costs of accounts receivable

9. Electricity to run saws at a lumber yard

10. Food for a company banquet

11. Advertising expense

12. Continuing education for a doctor

13. Commissions paid to salespersons

14. Depreciation on sports equipment by a professional football team

15. Calculators used by office employees

16. Fuel used in baggage transporters at an airport

17. Toll charges incurred because of business travel

18. Fuel used in manufacturing equipment

Classify the costs as (1) product or period; (2) variable or fixed; and (3) for those that are product costs, as direct materials, direct labor, or manufacturing overhead. Write “not applicable (N/A)” if a category doesn't apply.

E 1-25 C-V-P Analysis

Muffin, Inc., located in Nauvoo, Illinois, manufactures high-end trumpets. The firm's cost accountant, Lisa, has been assigned by the CEO to determine how many trumpets Muffin, Inc., needs to make and sell in order to break even. She is given the following data:

Determine how many trumpets Muffin, Inc., needs to make and sell in order to break even.

E 1-26 C-V-P Analysis

The Dallas Mavericks basketball team has hired you as its new accountant. On your first day on the job, Mavericks' owner, Mark Cuban, comes to you and asks, “How many tickets must we sell to pay for Dirk Nowitzki's salary?” He then hands you a sheet of paper with the following information:

1. Prepare your response to Mark's question.

2. How many tickets would the Mavericks have to sell to pay for the entire Mavericks team if the total team salary (including Nowitzki) is $97,496,177?

E 1-27 Product Costing

The total manufacturing cost data on Miro Company's specialty paint product line are provided below.

Assuming that Miro expects to produce 300,000 gallons in the next month, what appears to be the total manufacturing cost on average to produce one gallon of specialty paint?

E 1-28 Product Costing

BatsRUs, Inc., has created a unique line of aluminum baseball bats that, while illegal for league use, are designed to nearly double the average length of a batted ball. They are a great “hit” in the personal and family use market. Recently, a new competitor, Awesome Bats, Inc., has introduced a competing bat to the market. Suddenly, BatsRUs is experiencing severe market pressure to significantly lower its normal market price of $225. The problem is that management is not very confident about the actual production cost per bat. With some effort, the following data have been developed for management to use in setting a new market price and, more importantly, beginning an effort to better control costs.

1. What appears to be the average cost for BatsRUs to manufacture a single baseball bat?

2. Do you have any questions or concerns about how the data are being used to determine the cost of manufacturing a baseball bat at BatsRUs?

E 1-29 Product Costing and C-V-P Analysis

Wakefield, Inc., offers a CPA review course in cities throughout the eastern United States. Wakefield hires local CPAs to do the teaching. Each instructor is paid $115 an hour to teach the course; a course consists of 12 weeks of instruction with sessions taking place four evenings a week for two hours a session. Wakefield also pays for hotel conference rooms to host the course, which cost $800 per evening. Tuition for the course includes all course materials, which cost the company $210 for each student.

1. What is the product cost of providing one evening of instruction for all students?

2. What is the product cost of training a student over the entire course (there are 75 students in this particular course)?

3. Assuming that Wakefield charges each student $1,500 for the course, how many students would be required to break even on this course?

E 1-30 Decisions about Business Segments

You are the accountant for the largest manufacturer of sheet steel. The company's hottest product is the RX-6, which provides most of the firm's revenue. Management is considering dropping the RX-5 product line, which hasn't turned a profit for two consecutive years. The CFO comes to you and asks what you would do given the following data:

1. Distinguish between direct and indirect costs and find the segment profit for each product.

2. Determine the gain or loss that the firm would incur if it dropped the RX-5 product line. What figure would you provide the CFO?

3. Explain your recommendation to continue or discontinue product line RX-5.

E 1-31 Opportunity Costs

Clark is employed by a company that currently pays him $90,000 per year. He owns a new car that he bought for cash of $39,000. Clark is thinking about returning to school to obtain a law degree. Tuition for the school he wants to attend is $29,000 per year, books cost an average $1,400 per year, and room and board is $17,980 per year.

Determine the total sunk cost and the total opportunity cost for Clark if he decides to go back to law school for three years.

E 1-32 Segment Analysis and Opportunity Costs

Assume that sales of Kevlar® at DuPont have dropped significantly. DuPont reported the following results for this product line for the past month and expects this sales pattern to continue into the future.

1. Assume that approximately 30% of the fixed manufacturing overhead and none of the sales and administrative costs can be avoided if Kevlar is dropped. In order to determine the “true performance” of the Kevlar product line, what is its incremental segment profit or loss?

2. If DuPont were to drop the Kevlar product line and use the available resources to produce another product that provided an incremental profit of $1,500,000, what is the overall economic profit or loss of the Kevlar product line?