ACC325 Chapter1: Review Notes and Practice Problems
Review Notes
During the study of this chapter, students should focus on understanding the following:
1 Understand cost classifications used for assigning costs to cost object: direct costs & indirect costs.
2 Identify and give examples of each the three basic manufacturing cost categories.
3 Understand cost classifications used to prepare FS: product costs & period costs.
4 Understand cost classifications used to predict cost behavior.
5 Understand cost classifications used in making decisions.
6 Prepare income statements for merchandising company using the traditional & contribution formats .
1
No
1
2
3
4
5
6
7
8
Item
Cost of the old X-ray machine
The salary of the head of the Radiology Department
The salary of the head of the Laboratory Department
Cost of the new color laser printer
Rent on the space occupied by Radiology
The cost of maintaining the old machine
Benefits from a new DNA analyzer
Cost of electricity to run the X-ray machines
Differential Cost
Sunk Cost
x
Opportunity Cost
x
x
x
x
Note: The costs of the salaries of the head of the Radiology Department and Laboratory Department and the rent on the space occupied
by Radiology are neither differential costs, nor opportunity costs, nor sunk costs. These costs do not differ between the alternatives and
therefore are irrelevant in the decision, but they are not sunk costs because they occur in the future.
Exercise 1-11 Cost Behavior, Contribution Format Income Statement LO1-4 & LO1-6
2
Required:
1. Complete the above schedule of the company’s total costs and costs per unit.
2. Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a
contribution format income statement for the year.
3
1. The company’s variable cost per unit is:
$180,000
=$6 per unit.
30,000 units
The completed schedule is as follows:
Total Cost
Variable Cost
Fixed Cost
Total Costs
Cost per unit:
Variable Cost per unit
Fixed Cost per unit
Total Costs per unit:
30,000
Units produced and sold
40,000
50,000
30,000*6= 18,000
300,000
$480,000
40,000*6=$240,000
300,000
$540,000
50,000*6=$300,000
$300,000
$600,000
6
10
16
6
7.5
13.5
6
6
12
1. Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a
contribution format income statement for the year.
Sales (45,000 units × $16 per unit)
$720,000
Variable expenses (45,000 units × $6 per unit)
270,000
Contribution margin CM
450,000
Fixed expense
300,000
Net operating income
$150,000
4
5
No.
Name of the Cost item
(1)
Predicting Cost
behavior
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Rental revenue forgone, $30,000 per year
Direct materials cost, $80 per unit
Rental cost of warehouse, $500 per month
Rental cost of equipment, $4,000 per month
Direct labor cost, $60 per unit
Depreciation of the annex space, $8,000 per year
Advertising cost, $50,000 per year
Supervisor's salary, $3,500 per month
Electricity for machines, $1.20 per unit
Shipping cost, $9 per unit
Return earned on investments, $3,000 per year
None
Variable
Fixed
Fixed
Variable
Fixed
Fixed
Fixed
Variable
Variable
None
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Cost Classifications for:
(2)
(3)
Preparing
Manufacturers
Financial
Statements
None
None
Direct materials
Product
None
Period
Manufacturing overhead
Direct labor
Manufacturing overhead
None
Manufacturing overhead
Manufacturing overhead
Product
Product
Product
None
None
Period
None
(4)
Decision
Making
Opportunity cost
Sunk cost
Period
Product
Product
Opportunity cost
1. The differential cost is computed as follows:
Cost of a new model 300 (a) ........................................................
Cost of a new model 200 (b) ........................................................
Differential cost (a) ‒ (b) .............................................................
$313,000
$275,000
$38,000
2. The sunk cost is the cost of the machine purchased seven years ago for $319,000.
3. The opportunity cost is the $374,000 that could have been earned by pursuing the forgone option.
7