3.

34 Variable and Fixed cost

What follows are a number of resources that are used by a manufacturer of futons. Assume that the output
measure or cost driver is the number of futons produced. All direct labor is paid on an hourly basis, and hours
worked can be easily changed by management. All other factory workers are salaried.
Required: Classify the resource cost as variable or Fixed:
A. Power to operate a drill (to drill holes in the wooden frames of futons)
Variable Cost
B. Cloth to cover the futon mattress
Variable Cost
C. Salary of the factory receptionist
Fixed
D. Cost of food and decorations for the annual Fourth of July party for all factory employees
Fixed
E. Fuel for a forklift used to move materials in a factory
Variable Cost
F. Depreciation on the factory
Fixed
G. Depreciation on a forklift used to move partially completed goods
Fixed
H. Waged paid to workers who assemble the futon frame
Variable Cost
I. Waged paid to workers who maintain the factory equipment
Fixed
J. Cloth rags used to wipe the excess stain off the wooden frames
Variable Cost

3.36 Classifying Cost as Fixed and Variable in a service organization

Alva Community Hospital has five laboratory technicians whi are responsible for doing a series of standard blood
tests. Each technician is paid a salary of $30,000. The lab facility represents a recent addition to the hospital and
cost $300,000. It is expected to last 20 years. Equipment used for the testing cost $10,000 and has a life expectancy
of 5 years. In addition to the salaries, facility, and equipment, Alva expects to spend $200,000 for chemicals, forms,
power, and other supplies. This $200,000 is enough for 200,000 blood tests.

Assuming that the driver (measure if output) for each type of cost is the number of blood tests run, classify the cos
Required: by completing the following table. Put an X in the appropriate box for variable cost, discretionary fixed cost, or
committed fixed cost

Variable Discretionary Committed

Cost Category
Cost Fixed Cost Fixed Cost
Technician Salaries X
Laboratory Facility X
Laboratory Equipment X
Chemicals and other supplies X
 Use the following information for Ex 3-37 and 3-38: Alisha Incorpotated manufactures medical stents for use in
heart bypass surgery. Based on past experiances, Alisha has found that its total maintenance costs can be
represented by the following formula: Maintenance Cost= $1,750,000 + $125X, where X=number of heart stents.
Last year, Alisha produced 50,000 stents. Actual maintenance costs for the year were as expected. (Note: Round all
answers to two decimal places)

3-37 Cost Behavior

1. What is the total maintenance cost incurred by Alisha last year?
$1,750,000+($125*50,000) = $8,000,000
2. What is the total fixed maintenance cost incurred by Alisha last year?
$1,750,000
3. What is the total variable maintenance cost incurred by Alisha last year?
$125 * 50,000 = $6,250,000
4. What is the maintenance cost per unit produced?
$1,750,000 + ($125 * 50,000) = $8,000,000
$8,000,000 / 50,000 Units = $160
5. What is the fixed maintenance cost per unit?
$1,750,000 / 50,000 Units = $35
6. What is the variable maintenance cost per unit?
$125
Briefly explain how Alisha management could improve its cost function to better understand past maintenance
7. costs and predict future maintenance cost.
They can easily understand different cost drivers and can better address them.

3-38 Cost Behavior

Now assume that Alisha produced 25,000 medical stents (rather than 50,000)
1. What is the total maintenance cost incurred by Alisha last year?
$1,750,000+($125*25,000) = $4,875,000
2. What is the total fixed maintenance cost incurred by Alisha last year?
$1,750,000
3. What is the total variable maintenance cost incurred by Alisha last year?
$125 * 25,000 = $3,125,000
4. What is the maintenance cost per unit produced?
$1,750,000 + ($125 * 25,000) = $4,875,000
$4,875,000 / 25,000 Units = $195
5. What is the fixed maintenance cost per unit?
$1,750,000 / 25,000 Units = $70
6. What is the variable maintenance cost per unit?
$125
Briefy explain why Alisha's maintenance cost per unit is different in Ex 3-37 & 3-38. Should Alisha management use
7. maintenance cost per unit to make decisions?

3-57 Identifying Fixed, Variable, Mixed, and step costs

For Each situation, describe the cost as one of the following: fixed cost, variable cost, mixed cost, or step cost. (Hint:
Required: First, consider what the driver or output measure is. If additional assumptions are necessary to support your cost
type decision, be sure to write them down)
1.
A. A computer service agreement in which a company pays $150 per month and $15 per hour of technical time
Mixed
B. Fuel cost of the company's fleet of motor vehicles
Variable
C. The cost of beer for a bar
Variable
D. The cost of computer printers and copiers at your college
Step cost
E. Rent of a dental office
Fixed
F. The salary of receptionist in a law firm
Fixed
G. The wages of counter help in a fast food restaurant
Variable
H. The salaries of dental hygienist in a three dentist office. One hygienist can take care of 120 cleanings per month.
Step cost
I. Electricity cost which includes a $15 per month billing charge and an additional amount depending on the number
Mixed cost or can be variable cost also

2. Change your assumptions for each situation so that the cost type changes to a different cost type. List the new cost
 . Assume that the output
an hourly basis, and hours
ed.

oing a series of standard blood

nt addition to the hospital and
10,000 and has a life expectancy
d $200,000 for chemicals, forms,

f blood tests run, classify the cost

t, discretionary fixed cost, or
ures medical stents for use in
aintenance costs can be
ere X=number of heart stents.
ere as expected. (Note: Round all

nderstand past maintenance

. Should Alisha management use

st, mixed cost, or step cost. (Hint:

necessary to support your cost
per hour of technical time

e of 120 cleanings per month.

ount depending on the number of kilowatt-hours used

erent cost type. List the new cost type and the changes assumption
 4-36 Job-Order Costing versus Process Costing
Required:
Identify each of these preceding types of businesses as using either job-order or process costing
A. Hospital services Job order
B. Custom cabinet making Job order
C. Toy manufacturing Process
D. Soft Drink bottling Process
E. Airplane manufacturing Job order
F. Personal computer assembly Process
G. Furniture making Process
H. Custom furniture making Job order
I. Dental services Job order
J. Paper manufacturing Process
K. Nut an bolt manufacturing Process
L. Auto repair Job order
M. Architectural services Job order
N. Landscape design services Job order
O. Flashlight manufacturing Process

4-37 Job-Order Costing versus Process Costing

Required: For each of the given types of industries, give an example of a firm that would use job-order costing.
Then, give an example of a firm that would use process costing
A. Auto Manufacturing
A company that builds their cars from scratch or from a "kit" is job order costing. Larger manufacturers
however use process costing, as they wait until enough orders are received to build a run of identical
cars.
B. Dental services
Basic dental services are Job order costing. But teeth whitenning could be process costing as it can cost
the make for every customer
C. Auto repair

Your regular auto repair shop uses Job order costing. But auto service location that specialises on oil
changes can use process costing as they can change the same for a quart of oil.
D. Costume making

A small Talor shop would use job order costing. However, a large costume manufacturer that sews a
certain number of costume designs would use process costing.

4-38 Calculating the Predetermined Overhead rate, Applying Overhead to Production

At the beginning of the year, Debion Company estimated the following:
Overhead $522,900
Direct labor hours 83,000
Debion uses normal costing and applies overhead on the basis of direct labor hours. For the month of
March, direct labor hours were 7,600
Required:
1. Calculate the predetermined overhead rate for Debion
$522,900/83,000 = $6.30
 2. Calculate the overhead applied to production in March
$6.30 * 7,600 = $47,880

4-39 Calculating the Predetermined Overhead rate, Applying Overhead to Production, Reconcilling Overhead
at the end of the year, Adjusting COGS for under and Overapplied Overhead
At the beginning of the year, Han Company estimated the following:
Overhead $582,400
Direct labor hours 80,000
Han uses normal costing and applies overhead on the basis of direct labor hours. For the month of
January, direct labor hours were 6,950. By the end of the year, Han showed the following actual
amounts:
Overhead $613,320
Direct labor hours 84,100
Assume that unadjusted COGS for Han was $927,000
Required:
1. Calculate the Predetermined overhead rate for Han.
$582,400 / 80,000 = $7.28
2. Calculate the overhead applied to production in January. (Note: round to the nearest dollar)
$7.28 * 6,950 = 50,596
3. Calculate the total applied overhead for the year. Was overhead over or underapplied? By how much?
$7.28 * 84,100 = $612,248
Actual Overhead $613,320
Applied Overhead $612,248
Underapplied OH $1,072
4. Calculate adjusted COGS after adjusting for the overhead variance.
$927,000 + $1,072 = $928,072

4-40 Calculating Departmental Overhead rates and Applying Overhead to Production

At the beginning of the year, Glaser Company estimated the following:

Assembly Department Testing Department Total
Overhead $ 338,000.00 $ 630,000.00 $ 968,000.00
Direct Labor hours 130,000 40,000 170,000
Machine Hours 45,000 120,000 165,000

Glaser uses department overhead rates. In the assembly department, overhead is applied on the basis
of direct labor hours. In the testing department, overhead is applied on the basis of machine hours.
Actual data for the month of March are as follows:
Assembly Department Testing Department Total
Overhead $ 29,850.00 $ 58,000.00 $ 87,850.00
Direct Labor hours 11,700 3,450 15,150
Machine Hours 4,100 10,900 15,000
Required:
1. Calculate the predetermined overhead rates for the assembly and testing departments.
$338,000 / 130,000 = 2.60 Assembly Dep
$630,000 / 120,000 = 5.25 Testing Dep
 2. Calculate the overhead applied to production in each department for the month of March.
$2.60 * 11,750 = $30,420 Assembly Dep
$5.25 * 10,900 = $57,225 Testing Dep

3. By how much has each departments overhead been overapplied? Underapplied?

Assembly Department Testing Department
Actual OH 29,850.00 58,000.00
Predetermined OH 30,420.00 57,225.00
(570.00) 775.00
Assembly Dep has overapplied OH by $570 & Testing Dep has underapplied OH by $775

4-41 Job Order Costing Variables

On July 1, Job 46 had a beginning balance of $1,235. During July, prime cost added to the job totaled
$560. Of that amount, direct materials were three times as much as direct labor. The ending balance of
the job was $1,921.
Required:
1. What was overhead applied to the job during July?
$1,921 = $1,235 + $560 + Applied OH $126
2. What was direct materials for Job 46 for July? Direct Labor?
DM = 3 * DL
Prime cost = DM + DL
$560 = (3*DL) + DL
DL = $560/4 = $140
DM = 3*DL = 3($140) = $420
3. Assuming that overhead is applied on the basis of direct labor cost, what is the overhead rate for the
company?
$126 / 140 = .90

4-45 Balance of work in process and finished goods, COGS

Derry Company uses job order costing. At the end of the month, the following information was gathered:
Job Total Cost Complete? Sold?
301 $ 1,600.00 Yes No
302 $ 1,240.00 Yes Yes
303 $ 780.00 No No
304 $ 2,300.00 Yes No
305 $ 4,150.00 Yes No
306 $ 350.00 No No
307 $ 710.00 Yes Yes
308 $ 620.00 No No
309 $ 1,200.00 No No
310 $ 515.00 No No
The beginning balance of finished goods was $300, consisting of Job 300, which was not sold by the end
of the month.
Required:
1. Calculate the balance in WIP at the end of the month
$ 3,465.00
 2. Calculate the balance in finished goods at the end of the month
$ 8,050.00 + $300 = $8,350
3. Calculate COGS for the month
$ 1,950.00

4-55 Calculating Ending Work in Process, Income Statement

Pavlovich Prosthetics Company produces artificial limbs for individuals. Each prosthetic is unique. On
January 1, three jobs, identified by the name of the person being fitted with the prosthetic, were in
process with the following costs:
Carter Pelham Tillson
Direct Materials $ 210 $ 615 $ 1,290
Direct Labor $ 440 $ 700 $ 1,260
Applied Overhead $ 374 $ 595 $ 1,071
Total $ 1,024 $ 1,910 $ 3,621
During the month of January, two more jobs were started, Jasper and Dashell. Materials and labor costs
incurred by each job in January are as follows:
Materials Direct Labor
Carter $ 600 $ 300
Pelham $ 550 $ 200
Tillson $ 770 $ 240
Jasper $ 2,310 $ 2,100
Dashell $ 190 $ 240
Tillsons and Jasper's prosthetics were completed and sold by January 31
Required:
1. If overhead is applied on the basis of direct labor dollars, what is the overhead rate?
374 / 440 = .85
2. Prepare simple Job-order cost sheets for each of the five jobs in process suring January.
Carter Pelham Tillson Jasper Dashell
WIP $ 1,024 $ 1,910 $ 3,621
Direct Materials $ 600 $ 550 $ 770 $ 2,310 $ 190
Direct Labor $ 300 $ 200 $ 240 $ 2,100 $ 240
Applied Overhead $ 255 $ 170 $ 204 $ 1,785 $ 204
Total $ 2,179 $ 2,830 $ 4,835 $ 6,195 $ 634
3. What is the ending balance of WIP on January 31? What is the COGS in January?
Carter $ 2,179 Jasper & Tillsons were completed on the 31st therefor
Pelham $ 2,830 we do not include
Dashell $ 634 COGS = $4,835 + $6,195 = $11,030
Total $ 5,643
Suppose that Pavlovich Prosthetics Company prices its jobs at cost plus 30%. In addition,
4. during January, marketing and administration expenses of $2,635 were incurred. Prepare an
income statement for the month of January.

Sales $ 14,339.00
COGS $ 11,030.00
Gross Margin $ 3,309.00
Marketing & Admin Exp $ 2,635.00
Operating Income $ 674.00
 4-57 Overhead Rates, Unit Costs

Folsom Company manufactures specialty tools to customer order. There are three producing
departments. Departmental information on budgeted overhead and various activity
measures for the coming year is as follows:
Welding Assembly Finishing
Estimated overhead $ 220,000 $ 62,000 $ 150,000 $ 432,000
Direct labor hours 4,500 10,000 6,000
Direct labor cost $ 90,000 $ 150,000 $ 120,000
Machine hours 5,000 1,000 2,000 8,000

Currently, overhead is applied on the basis of machine hours using a plantwide rate.
However, Janine, the controller, has been wondering whether it might be worthwhile to use
departamental overhead rates. She has analyzed the overhead costs and drivers for the
various departments and decided that Welding and Finishing should base their overhead
rates on machine hours and that assembly should base its overhead rate on direct labor
hours. Janine has been asked to prepare bids for two jobs with the following information:
Job 1 Job 2
Direct materials $ 6,725 $ 9,340
Direct labor cost $ 1,800 $ 3,100
Direct labor hours:
Welding 20 10
Assembly 60 20
Finishing 20 70
Number of Machine hours:
Welding 50 50
Assembly 60 25
Finishing 90 125
The typical bid price includes a 35% markup over full manufacturing cost. Round all overhead
rates to the nearest cent. Round all bid prices to the nearest dollar.
Required:
1. Calculate a plantwide rate for Folsom Company based on machine hours. What is the bid
price of each job using this rate?
$432,000 / 8,000 = $54
Job 1 Job 2
Direct materials $ 6,725 $ 9,340
Direct labor cost $ 1,800 $ 3,100
OH ($54*200 $ 10,800 $ 10,800
Total Manufactured $ 19,325 $ 23,240
Plus 35% markup $ 6,763.75 $ 8,134.00
Bid Price $ 26,089 $ 31,374
2. Calculate departamental overhead rates for the producing departments. What is the bid
price of each job using these rates?
Welding Assembly Finishing
Estimated overhead $ 220,000 $ 62,000 $ 150,000
Direct labor hours 4,500 10,000 6,000
Machine hours 5,000 1,000 2,000
OH Rate $ 44.00 $ 6.20 $ 75.00
 Job 1 Job 2
Direct materials $ 6,725 $ 9,340
Direct labor cost $ 1,800 $ 3,100
Overhead:
Welding $ 2,200 $ 2,200
Assembly $ 372 $ 124
Finishing $ 6,750 $ 9,375
Total Manufactured $ 17,847 $ 24,139
Plus 35% markup $ 6,246.45 $ 8,448.65
Bid Price $ 24,093 $ 32,588
ocess costing

ob-order costing.

arger manufacturers
d a run of identical

costing as it can cost

t specialises on oil

cturer that sews a

. For the month of

Reconcilling Overhead
verhead

or the month of
lowing actual

lied? By how much?

applied on the basis

f machine hours.
to the job totaled
he ending balance of

erhead rate for the

rmation was gathered:

as not sold by the end

hetic is unique. On
osthetic, were in

terials and labor costs