-34 Classification of Costs (10 min)

1. Period
2. Product; indirect
3. Product: indirect
4. Product: direct
5. Period
6. Period
7. Product: direct
8. Period
9. Product: indirect
10. Period
11. Period

3-37 Activity Levels and Cost Drivers (10 Min)

Cost Object Cost Driver

1 Product line or Directly trace to product line, or each custom order
customer requiring design
2 Product line or Directly trace to product line, or each custom order
customer requiring testing
3 Product line Allocation base: product line
4 Product line Allocation base: number of purchase orders
5 Customer order Directly trace to customer
6 Customer order Directly trace to customer
7 Customer order Directly trace to customer
8 Customer order Directly trace to customer
9 Each customer Directly trace to customer
10 Customer order Directly trace to customer
11 Customer order Allocation base: number of orders
12 Individual products Allocation base: number of units produced

3-41 Classification of Costs (15 min)

1. While a variety of possible cost objects are possible for the dance studio, the
most reasonable choice is the studio since management’s goal is to analyze the
profitability of the studios.

2. Studios as the cost object

1. Direct: variable
2. Direct: variable
3. Direct: variable

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 4. Direct: variable
5. Direct: variable
6. Indirect: variable
7. Direct: variable
8. Direct: fixed

Or,

Lessons as the cost object

1. Direct: fixed
2. Indirect: fixed
3. Indirect: fixed
4. Indirect: fixed
5. Indirect: fixed
6. Indirect: fixed
7. Indirect: fixed
8. Indirect: fixed

3-53 Structural Cost Drivers (25 min)

Case A: A key structural issue for Food Fare is complexity. As the menu has
changed, so will costs and service. More complexity means higher food
purchasing costs, higher operating costs, and more complex operations. This
will require new types of training for employees and perhaps additional
employees. Moreover, it will be a challenge for Food Fare to continue to provide
the speed of service that was possible with the shorter menu. The change will
require careful attention to operations and to cost management issues for the
firm to continue to be profitable. Employee training and new uses of technology
to streamline the process of order-taking and order-filling are likely to be
necessary. Scale might also be an important issue in this case–how large must
each restaurant become, and how many restaurants must the chain have in
order to justify the increased purchasing and stocking costs and the new training
and technology costs?

Case B: A key issue in this case is the speed with which Gilman can provide
customer service. The speed of service provides value to the customer and
increases profitability, and technology is likely the key to speed. To increase the
speed of service, Gilman needs effective communication and coordination
among the service teams. This is probably being accomplished now by cell
phone. Gilman can research new and more effective ways to accomplish this,
perhaps using hand-held internet access devices, iPhone, or other modem-
equipped devices. The advantage of computer-based access is that computer-
based tools can be used in the scheduling and assignment of the service teams.
Additionally, the computer can be used by each service team to quickly
determine the availability of parts in the firm’s warehouse or in other service
vehicles, thereby allowing faster service time. Also, the computer can be used to
develop real-time analyses of customer demand and profitability–to better
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Education.
 understand which services and which types of customers are most profitable. Is
it in installation or service, Brand X or Brand Y, residential or commercial, etc.?

Scale is also an important cost driver for Gilman. To serve the large area it now
serves, there should be a careful strategic analysis to get the right balance
between order-getting costs (advertising and promotion to obtain new customers)
plus the costs of maintaining the truck fleet and service teams versus the
opportunity to provide additional services to existing customers.

Given the nature of the products, the experience levels of the service staff are
also likely to have an impact on execution.

3-54 Cost of Goods Manufactured and Sold (30 min)

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Education.
 Cornelius Company
Statement of Cost of Goods Manufactured
for the Year Ended December 31

Direct Materials
Beginning Materials Inventory $ 25,000
Materials Purchases 555,000
Materials Available 580,000
Ending Materials Inventory 40,000
Materials Used $ 540,000
Direct Labor-Wages 300,000
Factory Overhead
Factory Rent $ 380,000
Utilities for Factory 38,000
Indirect Materials 66,000
Indirect Labor 60,000
Total Factory Overhead 544,000
Total Manufacturing Costs 1,384,000
Beginning Work-in-Process Inventory 45,000
Total Manufacturing Costs 1,429,000
Ending Work-in-Process Inventory 40,000
Cost of Goods Manufactured $ 1,389,000

2. Calculate cost of goods sold.

Beginning Finished Goods Inventory $ 135,000

Plus: Cost of goods manufactured 1,389,000
Less: Ending Finished Goods Inventory 75,000
Cost of goods sold 1,449,000

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3-56 Cost of Goods Manufactured; Income Statement (30 min)
Huntersville, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended December 31

Direct Materials
Beginning Materials Inventory $ 19,000
Materials Purchases 155,000
Materials Available 174,000
Ending Materials Inventory 26,000
Direct Materials Used $ 148,000
Direct Labor-Wages 487,000
Factory Overhead
Depreciation Expense--Plant & Equip. $ 86,000
Heat, light, & power--Plant 44,000
Indirect Labor--Wages 25,000
Property taxes--Plant 34,000
Supervisor's Salary Plant 66,000
Supplies--Plant 29,000
Total Factory Overhead 284,000
Total Manufacturing Costs 919,000
Beginning Work-in-Process Inventory 23,000
Total Manufacturing Costs 942,000
Ending Work-in-Process Inventory 9,000
Cost of Goods Manufactured $ 933,000

Huntersville, Inc.
Income Statement
For the Year Ended December 31

Sales Revenue $ 1,495,000

Cost of Goods Sold
Beginning Finished Goods Inventory $ 15,000
Cost of Goods Manufactured 933,000
Cost of Goods Available for Sale 948,000
Ending Finished Goods Inventory 38,000

Cost of Goods Sold 910,000

Gross Margin 585,000

Sales Representatives' Salaries $ 145,000
Supplies--Administrative Office 16,000
Depreciation Expense--Admin. Office 32,000
Total Selling & Administrative 193,000

Operating Income $ 392,000

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Education.