Question EXERCISE 2–2 Classifying Manufacturing Costs [LO 2–2]

09 Jun Question EXERCISE 2–2 Classifying Manufacturing Costs [LO 2–2]

Question
EXERCISE 2–2 Classifying Manufacturing Costs [LO 2–2]

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small, and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that are incurred at the company.

Required:

For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, or an administrative cost.

1. The cost of a hard drive installed in a computer.

2. The cost of advertising in the Puget Sound Computer User newspaper.

3. The wages of employees who assemble computers from components.

4. Sales commissions paid to the company’s salespeople.

5. The wages of the assembly shop’s supervisor.

6. The wages of the company’s accountant.

7. Depreciation on equipment used to test assembled computers before release to customers.

8. Rent on the facility in the industrial park.

EXERCISE 2–3 Classification of Costs as Product or Period Cost [LO 2–3]

Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help it finance its growth. The bank requires financial statements before approving such a loan. You have been asked to help prepare the financial statements and were given the following list of costs:

1. Depreciation on salespersons’ cars.

2. Rent on equipment used in the factory.

3. Lubricants used for machine maintenance.

4. Salaries of personnel who work in the finished goods warehouse.

5. Soap and paper towels used by factory workers at the end of a shift.

6. Factory supervisors’ salaries.

7. Heat, water, and power consumed in the factory.

8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)

9. Advertising costs.

10. Workers’ compensation insurance for factory employees.

11. Depreciation on chairs and tables in the factory lunchroom.

12. The wages of the receptionist in the administrative offices.

13. Cost of leasing the corporate jet used by the company’s executives.

14. The cost of renting rooms at a Florida resort for the annual sales conference.

15. The cost of packaging the company’s product.

Required:

Classify the above costs as either product costs or period costs for the purpose of preparing the financial statements for the bank.

EXERCISE 2–4 Fixed and Variable Cost Behavior [LO 2–4]

Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22.

Required:

1. Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. Round off the cost of a cup of coffee to the nearest tenth of a cent.

Cups of Coffee Served in a Week

2,000

2,100

2,200

Fixed cost. . . . . . . . . . . . . . . . . . . . . . . . . .

?

?

?

Variable cost. . . . . . . . . . . . . . . . . . . . . . . .

?

?

?

Total cost . . . . . . . . . . . . . . . . . . . . . . . . . .

?

?

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Average cost per cup of coffee served . . . . . .

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2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases? Explain.