Ma.

Lyn Bren

BS- Entrep 2B

APPLYING LEARNED CONCEPTS

1. Distinguish between fixed costs and variable costs.

Fixed cost are costs that are unaffected by changes in activity throughout a
specific time period (volume). Rent, property insurance, building maintenance and
repairs, and depreciation of manufacturing equipment are all examples of fixed costs.
Variable costs are the costs that fluctuate in response to changes in activity (volume).
Direct labor and direct materials are inclined in variable costs.

2. List three direct costs of the food and beverage department in a hotel.

3. Distinguish between product and period cost.

Product costs are all of the costs associated with acquiring or manufacturing a
product is included in the product costs. These costs include direct materials, direct
labor, and manufacturing overhead in the case of manufactured goods. Period costs are
all costs that are not included in product costs but are associated with accounting
periods are referred to as period costs. The cost of either purchased or created products
does not include the cost of the period. Selling and administrative expenses, such as
sales commissions, office rent, and transportation costs, are examples of period costs.

4. Why product costs also called inventoriable costs?

Product cost are also called inventoriable costs because they are also costs that
are “attach” or adhere the units that are created and reported and also these cost are
also used to value the inventory.

5. List and briefly describe the three types of manufacturing inventories.

Raw Materials – are materials that are used to make a product.

Work-in-process - consists of units of product that are only partially complete and will
require further work before they are ready for sale to a customer.

Finished Goods - consist of units of product that have been completed but have not yet
been sold to customers.

6. Contrast direct materials and indirect materials.

 Direct materials, all costs associated with the production of raw materials that
form a part of the finished product and may be easily and cost-effectively assigned to
specific units produced while indirect materials, the materials and supplies used in the
production process that do not become part of the finished product, such as equipment
oil and custodial cleaning fluids.

7. Describe how the income statement of a manufacturing company differs from the
income statement of a merchandising company.

The income statement of a manufacturing company and a merchandising

company may be look the same but they still differ from each other. The major
difference of this two is that the label of some entries in the cost of goods sold
computation.

8. “A variable cost is a cost that varies per unit of product, whereas a fixed cost is
constant per unit of product.” Do you agree? Explain.

No. I don’t agree. Variable costs are constant and fixed cost are not constant.
Variable costs are any costs that a company incurs that are associated with the
number of goods or services it produces while fixed costs remain the same regardless
of whether goods or services are produced or not. 

ASSESSING LEARNED CONCEPTS

Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income

Statement)

Amazing Aluminum Company, a manufacturer of recyclable soda cans, had the

following inventory balances at the beginning and end of 2018:

Inventory Classification January 1, 2018 December 31, 2018

Raw material P 60,000 P 70,000

Work in process 120,000 115,000

Finished goods 150,000 165,000

During 2018, the company purchased P250,000 of raw material and spend P400,000 on
direct labor. Manufacturing overhead costs were as follows:
 Indirect material P 10,000

Indirect labor 25,000

Depreciation on plant and equipment 100,000

Utilities 25,000

Other 30,000

Sales revenue was P1,105,000 for the year. Selling and administrative expenses for the
year amounted to P110,000. The firm’s tax rate is 40 percent.

Required:

1. Prepare a schedule of cost of goods manufactured.

2. Prepare a schedule of cost of goods sold.

3. Prepare an income statement.

 Amazing Alumni Company

Schedule of Cost of Goods Manufactured

For the Year Ended December 2018

Direct Materials

Beginning raw materials inventory P 60,000

Add: Purchases of raw materials 250, 000

Raw materials available for use 310,000

Deduct: Ending raw material inventory 70,000

Raw materials used in production P 240,000

Direct Labor 400,000

Manufacturing Overhand

Indirect Materials P 10,000

Indirect Labor 25,000

Depreciation on Plant and Equipment 100,000

Utilities 25,000

Others 30,000

Total Manufacturing Overhand P 190,000

Total Manufacturing Cost P 830,000

Add: Beginning Work in Process Inventory 120,000

P 950,000

Deduct: Ending Work in Process 115,000

Cost of Goods Manufactured P 835,000

 Amazing Alumni Company

Schedule of Cost of Goods Sold

For the Year Ended December 2018

Finished Goods Inventory, Jan. 1 P 150,000

Add: Cost of goods manufactured 835,000

Cost of goods available for sale P 935,000

Deduct: Finished goods inventory, Dec. 31 165,000

Cost of goods sold P 820,000

Amazing Alumni Company

Income Statement

For the Year Ended December 2018

Sales Revenue P 1, 105, 000

Less: Cost of goods sold 850,000

Gross Margin P 285,000

Selling and administrative expenses 110,000

Income before taxes P 175,000

Income tax expense 70,000

Net Income P 105,000

Exercise 2 (Cost Classifications; Manufacturer)

Daisy Ryan Shirt Shop manufactures T-shirts and decorates them with custom designs
for retail sale on the premises. Several costs incurred by the company are listed below.
For each cost, indicate which of the following classifications best describes the cost.
More than one classification may apply to the same cost item.

Cost Classification

a. Variable e. Administrative i. Direct material

b. Fixed f. Selling j. Direct labor

c. Period g. Manufacturing k. Manufacturing

overhead

d. Product h. Research and development

Cost Items

1. Cost of fabric used in T-shirts. Direct material

2. Wages of shirt makers. Direct Labor

3. Cost of new sign in front of retail T-shirt shop. Research and Development

4. Wages of the employee who repairs the firm’s sewing machines. Direct Labor

5. Cost of electricity used in the sewing department. Administrative

6. Wages of T-shirt designers and painters. Variable

7. Wages of sales personnel. Selling

8. Depreciation on sewing machines. Manufacturing

9. Rent on the building. Part of the building’s first floor is used to make and pain T-
shirts. Part of it is used for retail sales shop. The second floor is used for administrative
offices and storage of raw material and finished goods. Administrative

10. Cost of daily advertisements in local media. Administrative

11. Wages of designers who experiment with new fabrics, paints, and T-shirt designs.
Research and Development
12. Cost of hiring a pilot to fly along the beach pulling a banner advertising the shop.
Administrative

13. Salary of the owner’s secretary. Fixed

14. Cost of repairing the gas furnace. Administrative

15. Cost of insurance for the production employees. Fixed

PROBLEMS

Problem 1

Francis Andres has been working a part-time job that pays P1,100 a month. His
employer has offered to convert the job into a full-time position at P1,500 a month. Take
home pay is 70 percent of these amounts. In view of this offer, Francis is tempted not to
return to school for the coming year. His friend Josie is trying to convince him to return
to school. Francis remarks, “I’ve been talking to other friends and no matter how you
figure it, school is extremely expensive. Tuition is about P2,200 per year. Books and
supplies are another P300. Room and board will cost P3,700 a year even if I share a
room. It costs P2,400 a year to keep up my car and clothing, and other incidentals
amount to about P3,000 per year. I figure school will cost me the total of all these costs,
which is P11,600 plus my lost salary of P18,000 per year. At P29,600 a year, who can
justify higher education?” If you were Josie, how would you respond to Francis’
remarks?

Problem 2

Daisy Palisoc is a Partner in the consulting firm of Reyes, Santos and Dy. One of the
current clients is planning a major expansion of its production facilities and has asked
Daisy to prepare projected financial and cost data to be used by her client in requesting
a long-term loan to finance the expansion. Daisy’s client has suggested that she omit all
“sunk” costs in her reports and use only differential cost data.

a. List any “sunk” cost you think of that would be omitted form Daisy’s differential cost
reports.

b. Why do you think the client suggested a differential cost basis for the reports? If you
were the financing agency manager, why might you want to see the “sunk” costs that
are omitted?