Chapter 1 Exercises

Step-by-Step Exercises

First, classify the firm’s costs as indirect product costs (manufacturing overhead), direct product costs (direct labor and direct materials), or period costs (non-manufacturing costs).

Question 1

Louisiana Company, who manufactures hand-carved wooden figurines, had the following costs last period:

Classify each cost as an indirect product cost, a direct product cost, or a period cost.

Question 2

Hawaii Corporation spent $3,000,000 on wages for its factory workers last period, and also paid salaries of $480,000 to factory supervisors, $200,000 to office workers, and $4,900,000 to executives, office managers, and sales and administrative staff. Hawaii’s fully depreciated building contains 10,000 square feet of factory space and 5,000 square feet of office space. Last period they paid $33,000 in property taxes. Utilities for the building cost $120,000, and insurance for the building cost $27,000. Direct materials cost $6,000,000. Depreciation on factory machinery cost $2,000,000, and depreciation on office equipment cost $50,000. Hawaii spent $7,000,000 to advertise and market its products. Other SG&A costs totaled $900,000.

Classify each cost as an indirect product cost, a direct product cost, or a period cost.

Next, calculate total manufacturing overhead costs, total costs that should go through the product costing system, and total period costs.

Question 3

Idaho, Inc. classified the following costs from last month as a direct product cost, and indirect product cost, or a period cost:

Calculate total manufacturing overhead costs, total costs that should go through the product costing system, and total period costs.

Question 4

Last month, Kansas Inc. spent $500,000 on labor: $200,000 was paid to workers who manufacture their goods (direct product cost), $95,000 was paid to manufacturing supervisors and maintenance personnel (indirect product cost), and $205,000 was paid to administrative personnel (period cost). Kansas Inc. also spent $350,000 on materials: $300,000 was paid for direct materials (direct product cost) and $50,000 was paid for indirect materials (indirect product cost). Kansas Inc. also paid $240,000 for manufacturing space (indirect product cost) and $80,000 for office space (period cost), recognized $140,000 in manufacturing equipment depreciation (indirect product cost) and $62,000 in office equipment depreciation (period cost), and spent $110,000 on selling, general, and administrative expenses (period cost).

Calculate total manufacturing overhead costs, total costs that should go through the product costing system, and total period costs.

Complete Problems

Question 5

Oklahoma Company spent $400,000 on payroll last period, ¼ of which was for administrative and sales labor, ½ of which was for direct manufacturing labor, and ¼ of which was for indirect manufacturing labor. In addition, Oklahoma spent $200,000 on direct materials and $50,000 on indirect materials last period. Manufacturing space cost a total of $40,000, and office space cost a total of $25,000. Selling, general, and administrative costs totaled $30,000. Oklahoma outsources their equipment maintenance, which cost $10,000 last period. 80% of the maintenance was performed on manufacturing equipment, while 20% was performed on office equipment.

Find total manufacturing overhead costs, all costs that should go through the product costing system, and period costs.

Question 6

Oregon Corporation rents a building that they use for both manufacturing and office space. The office space takes up 25% of the building. Last period, Oregon incurred the following costs:

Find total manufacturing overhead costs, all costs that should go through the product costing system, and period costs.

Question 7

Alaska, Inc. spent $35,000 on direct labor and $90,000 on direct materials last month. They paid the factory supervisor $7,000 and the factory equipment repairperson $3,500. Indirect materials cost $2,000, and factory supplies cost $500. Rent on the factory, including utilities and insurance, totaled $4,200, and rent on office space totaled $1,500. The general manager of the company earned $9,500, her administrative assistant earned $4,500, and the marketing director earned $6,000 last month. They spent $700 to print a new brochure advertising their product and incurred $1,200 for other marketing costs and $200 for office supplies. The cleaning service Alaska uses cost $2,400; they spent 30% of their time cleaning the office and 70% of their time cleaning the factory.

Find total manufacturing overhead costs, all costs that should go through the product costing system, and period costs.

Assignment Problem

Note: Check figures are not provided for assignment problems so your instructor may use them for homework.

Question 8

Connecticut Products works out of a building that includes both 12,000 square feet of factory space and 8,000 square feet of office space. The mortgage, insurance, and taxes on the building cost $240,000 per year. The factory space contains equipment that is depreciated on a straight-line basis at $310,000 per year. Utilities for the building cost $30,000 annually.

Last year, the company paid labor the following amounts:

• Workers who assemble products: $750,000
• Other workers in the factory (supervisors, maintenance, etc.): $320,000
• Office workers: $1,300,000

Connecticut Products also paid $4,000,000 for materials used in production, 99% of which were direct, and the other 1% of which were indirect. The company also spent $200,000 on marketing its product, $50,000 for administrative costs.

Find the total of each of the following:

1. Manufacturing overhead costs
2. All costs that should go through the product costing system
3. Period costs

Pre-Assessment Problems

Use these problems to check whether you are fully prepared for the assessments. Work the problems under assessment conditions — don’t use any notes or other materials!

Question 9

Explain the purpose of a product costing system. Include the following in your response:

• The costs included in a product costing system
• The accounts or financial statement items affected by a product costing system
• How a product costing system relates to the matching principle

Question 10

Texas Company spent $120,000 on direct materials and $45,000 on direct labor last period. Other costs included building rent of $22,000, building utilities of $11,000, administrative salaries of $21,000, sales commissions of $8,400, miscellaneous factory costs of $9,100, and miscellaneous administrative and marketing expenses of $3,000. The building contains 2,000 square feet of office space and 3,500 square feet of manufacturing space.

Find total manufacturing overhead costs, all costs that should go through the product costing system, and period costs.