Chap002 Basic Cost Management

8/11/2019 Chap002 Basic Cost Management

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CHAPTER 2

Basic Cost Management Concepts andAccounting for Mass Customization Operations

ANSWERS TO REVIEW QESTIONS

2-1 Product costs are costs that are associated with manufactured goods until the timeperiod during which the products are sold, when the product costs becomeexpenses. Period costs are expensed during the time period in which they areincurred.

2-2 Product costs are also called inventoriable costs because they are assigned tomanufactured goods that are inventoried until a later period, when the products aresold. The product costs remain in the Wor-in-Process or !inished-"oods #nventoryaccount until the time period when the goods are sold.

2-$ The most important difference between a manufacturing firm and a service industryfirm, with regard to the classification of costs, is that the goods produced by amanufacturing firm are inventoried, whereas the services produced by a serviceindustry firm are consumed as they are produced. Thus, the costs incurred inmanufacturing products are treated as product costs until the period during whichthe goods are sold. %ost of the costs incurred in a service industry firm to produceservices are operating expenses that are treated as period costs.

2.& The five types of production processes are as follows'

(ob shop' )ow production volume* little standardi+ation* one-of-a-ind

products. xamples include custom home construction, feature filmproduction, and ship building.

atch' %ultiple products* low volume. xamples include construction

euipment, tractor trailers, and cabin cruisers.

/ssembly line' / few ma0or products* higher volume. xamples include

itchen appliances and automobile assembly.

%ass customi+ation' igh production volume* many standardi+ed

components* customi+ed combination of components. /n example is thecomputer industry.

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ontinuous flow' igh production volume* highly standardi+ed commodity

products. xamples include food processing, textiles, lumber, andchemicals.

2-3 The term mass customi+ation is used to describe an industry such as the computer

industry, where large numbers of identical components are mass produced, and thenthese components are combined in a customi+ed way to customer specifications.!or example, when a customer places an order for a 4ell computer on line, thecompany assembles 0ust the components reuested by the customer, loads thereuested software, and ships the customi+ed computer system. 5iewed in thislight, the term mass customi+ation is not internally inconsistent.

2-6 The cost of idle time is treated as manufacturing overhead because it is a normalcost of the manufacturing operation that should be spread out among all of themanufactured products. The alternative to this treatment would be to charge the cost

of idle time to a particular 0ob that happens to be in process when the idle timeoccurs. #dle time often results from a random event, such as a power outage.harging the cost of the idle time resulting from such a random event to only the 0obthat happened to be in process at the time would overstate the cost of that 0ob.

2-7 8vertime premium is included in manufacturing overhead in order to spread theextra cost of the overtime over all of the products produced, since overtime often isa normal cost of the manufacturing operation. The alternative would be to charge theovertime premium to the particular 0ob in process during overtime. #n most cases,such treatment would overstate the cost of that 0ob, since it is only coincidental that

a particular 0ob happened to be done on overtime. The need for overtime to completea particular 0ob results from the fact that other 0obs were completed during regularhours.

2-9 The phrase :different costs for different purposes; refers to the fact that the word:cost; can have different meanings depending on the context in which it is used.ost data that are classified and recorded in a particular way for one purpose may beinappropriate for another use.

2-< The city of Tampa would use cost information for planning when it developed abudget for its operations during the next year. #ncluded in that budget would be

pro0ected costs for police and fire protection, street maintenance, and cityadministration. /t the end of the year this budget would be used for cost control. Theactual costs incurred would be compared to pro0ected costs in the budget. ityadministrators would also use cost data in maing decisions, such as where tolocate a new fire station.

2-1= / fixed cost remains constant in total across changes in activity, whereas the totalvariable cost changes in proportion to the level of activity.


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2-11 The fixed cost per unit declines as the level of activity >or cost driver? increases. Thecost per unit is reduced because the total fixed cost, which does not change asactivity changes, is spread over a larger number of activity units.

2-12 The variable cost per unit remains constant as the level of activity >or cost driver?

changes. Total variable costs change in proportion to activity, and the additionalvariable cost when one unit of activity is added is the variable cost per unit.

2-1$ / volume-based cost driver, such as the number of passengers, causes costs to beincurred because of the uantity of service offered by the airline. /n operations-based cost driver, such as hub domination, affects costs because of the basic way in

which the airline conducts its operations. "reater control over a hub airport@sfacilities and services gives an airline greater ability to control its operating costs.

2-1& a. Aumber of students' volume-based cost driver. This characteristic of the collegerelates to the uantity of services provided.

b. Aumber of disciplines offered for study' operations-based cost driver. Thegreater the diversity in a college@s course offerings, the greater will be the costsincurred, regardless of the overall si+e of the student body.

c. Brban versus rural location' operations-based cost driver. / college@s locationwill affect the type of housing and food facilities reuired, the cost of obtainingservices, and the cost of transportation for college employees acting on behalf ofthe college.

2-13 xamples of direct costs of the food and beverage department in a hotel include themoney spent on the food and beverages served, the wages of table servicepersonnel, and the costs of entertainment in the dining room and lounge. xamplesof indirect costs of the food and beverage department include allocations of thecosts of advertising for the entire hotel, of the costs of the grounds and maintenancedepartment, and of the hotel general manager@s salary.

2-16 osts that are liely to be controllable by a city@s airport manager include the wagesof personnel hired by the airport manager, the cost of heat and light in the airportmanager@s administrative offices, and the cost of some materials consumed in theprocess of operating the airport, such as cleaning, painting, and maintenance

materials. osts that are liely to be uncontrollable by the city@s airport managerinclude depreciation of the airport facilities, fees paid by the airport to the federalgovernment for air traffic control services, and insurance for the airport employeesand patrons.


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2-17 a. Bncontrollable cost

b. ontrollable cost

c. Bncontrollable cost

2-19 8ut-of-pocet costs are paid in cash at or near the time they are incurred. /nopportunity cost is the potential benefit given up when the choice of one actionprecludes the selection of a different action.

2-1< / sun cost is a cost that was incurred in the past and cannot be altered by anycurrent or future decision. / differential cost is the difference in a cost item undertwo decision alternatives.

2.2= / marginal cost is the extra cost incurred in producing one additional unit of output.The average cost is the total cost of producing a particular uantity of product or

service, divided by the number of units of product or service produced.

2.21 The process of registering for classes varies widely among colleges anduniversities, and the responses to this uestion will vary as well. xamples ofinformation that might be useful include the credit reuirements and coursereuirements to obtain a particular degree, and a list of the prereuisites for each ofthe elective courses in a particular ma0or. Cuch information could help the studentplan an academic program over several semesters or uarters. /n example ofinformation that might create information overload is a comprehensive listing ofevery course offered by the college in the past five years.

2-22 The purchase cost of the old bar code scanners is a sun cost, since it occurred inthe past and cannot be changed by any future course of action. The manager isexhibiting a common behavioral tendency to pay too much attention to sun costs.

2-2$ a. 4irect cost

b. 4irect cost

c. #ndirect cost

d. #ndirect cost


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SO&TIONS TO E'ERCISES

DE#C 2-2& >2= %#ABTC?

1. /dvertising costs' Period cost, fixed

2. Ctraight-line depreciation' Product cost, fixed, manufacturing overhead

$. Wages of assembly-line personnel' Product cost, variable, direct labor

&. 4elivery costs on customer shipments' Period cost, variable

3. Aewsprint consumed' Product cost, variable, direct material

6. Plant insurance' Product cost, fixed, manufacturing overhead

7. "lass costs' Product cost, variable, direct material

9. Tire costs' Product cost, variable, direct material

i.e., indirect material? depending on how significant the cost is

11. Wages of security guards' Product cost, variable, manufacturing overhead

12. Calary of financial vice-president' Period cost, fixed

DE#C 2-23 >1= %#ABTC?

The general formula for solving all three cases is as follows'

eginninginventory of

finished goods+

ost of goodsmanufacturedduring period

Fnding

inventory offinished goods

=

ost-of-goods sold

expense


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DE#C 2-23 >8AT#AB4?

Bsing this formula, we can find the missing amounts as follows'

ase

# ## ###eginning inventory of finished goods................ G 21,===H G 19,=== G $,3==/dd' ost of goods manufactured....................... 1=&,73= 1&2,3== 13$6 hours G16?.......................................................................... G376

8verhead >idle time' & hours G16?............................................................... 6&

Total compensation......................................................................................... G6&=

DE#C 2-27 >1= %#ABTC?

1. Eegular wages >&= hours G17?....................................................................... G 69=

8vertime wages >$ hours G22?....................................................................... 66

Total compensation............................................................................................ G 7&6

2. 8vertime hours................................................................................................... $ hrs.

8vertime premium per hour >G22 G17?.......................................................... G 3

Total overtime premium..................................................................................... G 13

$. lassification'

4irect labor >&$ hours G17?....................................................................... G 7$1

8verhead >overtime premium' $ hours G3?............................................. 13

Total compensation...................................................................................... G 7&6


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DE#C 2-29 >23 %#ABTC?

1. A&*AMBRAA&MINMCOM+AN,SC*E-&EO.COSTO./OO-SMAN.ACTRE-

.ORT*E,EAREN-E--ECEMBER$!0 #1'!

4irect material'Eaw-material inventory, (anuary 1......................................... G 33,===/dd' Purchases of raw material............................................. 2&=,===Eaw material available for use................................................ G2


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DE#C 2-29 >8AT#AB4?

$. A&*AMBRAA&MINMCOM+AN,INCOMESTATEMENT

.ORT*E,EAREN-E--ECEMBER$!0 #1'!

Cales revenue.................................................................................................. G1,21=,===)ess' ost of goods sold............................................................................... 9$2,==="ross margin................................................................................................... G $79,===Celling and administrative expenses............................................................. 1=3,===#ncome before taxes........................................................................................ G 27$,===#ncome tax expense >at $3I?.......................................................................... a? G36,=== G36,=== >b? G36,===5ariable costs............................................................... >c? 2&,=== 29,=== >d? $2,===

Total costs.............................................................. >e? G9=,=== G9&,=== >f? G99,===

ost per muffler replacement'!ixed cost..................................................................... >g? G h? G 9= >i? G 7=5ariable cost................................................................. >0? &=.==

>? &= >l? &=

Total cost per muffler replacement....................... >m? G1$$.$$ >n? G12= >o? G11=

HEounded.


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http://www.mhhe.com/hilton8ehttp://www.mhhe.com/hilton8e


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DE#C 2-$$ >3 %#ABTC?

1. The G12,3== is the opportunity cost associated with using the computer in the4epartment of ducation for wor in the governor@s office.

2. The G12,3== leasing cost should be assigned to the governor@s office. #t was incurredas a result of activity in that office.

DE#C 2-$& >1= %#ABTC?

1. Nour decision to see the game really cost you G1==, the amount forgone when yourefused to sell the ticet. / convenient way to thin about this is as follows' Noucould have sold the ticet for G1==, thereby resulting in a profit on the deal of G23>G1== sales proceeds minus G73 out-of-pocet purchase cost?. #nstead, you went to

the game, which left you relieved of your G73 out-of-pocet cost. The differencebetween the G73 reductionin your wealth and the G23profityou could have had isG1==. Thus, G1== is the true cost of going to the game.

2. The G1== is an opportunity cost./t the time you made the decision to attend thegame, the G73 you actually had paid for the ticet is a sunk cost.#t is not relevant toany future decision.

DE#C 2-$3 >3 %#ABTC?

/nnual cost using uropean component' G


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DE#C 2-$6 >8AT#AB4?

&. The marginal cost would include any food and beverages consumed by thepassenger and perhaps an imperceptible increase in fuel costs.

3. #n most cases, only the cost of the food and beverage consumed by the customerwould be a marginal cost. #t is unliely that the restaurant would need to employadditional service personnel, dishwashers, and so on.


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SO&TIONS TO +ROB&EMS

PE8)% 2-$7 >23 %#ABTC?

1. a. Total prime costs'

4irect material................................................................................... G 1,=3=,===4irect labor' Wages............................................................................................. 2&2,3== !ringe benefits.............................................................................. &7,3==Total prime costs............................................................................... G 1,$&=,===

b. Total manufacturing overhead'

4epreciation on factory building..................................................... G 37,3==

#ndirect labor' wages........................................................................ 7=,===Production supervisor@s salary........................................................ 22,3==Cervice department costs................................................................. 3=,===#ndirect labor' fringe benefits........................................................... 13,===!ringe benefits for production supervisor...................................... &,3==Total overtime premiums paid.......................................................... 27,3==ost of idle time' production employees........................................ 2=,===Total manufacturing overhead......................................................... G 267,===

c. Total conversion costs'

4irect labor >G2&2,3== M G&7,3==?..................................................... G 2


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PE8)% 2-$< >2= %#ABTC?

1. These costs would appear on the following statements or schedules.

1. #ncome statement

2. ost-of-goods-manufactured schedule$. ost of-goods-manufactured schedule&. alance sheet, cost-of-goods-manufactured schedule

3. #ncome statement6. #ncome statement7. #ncome statement9. alance sheetor very little? inventory. Eetailers and wholesalers normally stocconsiderable inventory. %anufacturers also carry significant inventories, typicallysubdivided into three categories' raw material, wor in process, and finished goods.

$. The income statements of service businesses normally have separate sections foroperating revenues, operating expenses, and other income >expenses?. #n contrast,those of retailers, wholesalers, and manufacturers disclose sales revenue, followedimmediately by cost of goods sold and gross margin. 8perating expenses are listednext followed by other income >expenses?.

&. The basic difference falls in the area of inventory. Traditional manufacturers producefinished goods, which are then placed in warehouses awaiting sale. #n contrast, witha direct-sales, mass-customi+ation firm, the receipt of a sales order triggers themanufacturing process as well as the purchasing system, the latter to acuireneeded raw materials. !inished-goods and raw-material inventories >along with worin process? of mass-customi+ers are, therefore, much lower than the inventoriescarried by traditional firms.


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PE8)% 2-&= >1= %#ABTC?

ost #tem Aumber Product ost or Period ost1. Product2. PeriodH

$. Product&. PeriodH3. Product6. PeriodH7. Product9. Product1= %#ABTC?

ost #temAumber

4irect or#ndirect

Partially ontrollable by4epartment Cupervisor

1. direct yes2. direct no$. direct yes

&. indirect no3. indirect no

PE8)% 2-&2 >2= %#ABTC?

1. $ hours >G1& M G&? L G3&

Aotice that the overtime premium on the flight is not a direct cost of the flight.

2. $ hours G1& .3 L G21

This is the overtime premium, which is part of "aines@ overall compensation.

$. The overtime premium should be included in overhead and allocated across all ofthe company@s flights.


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PE8)% 2-&2 >8AT#AB4?

&. The G97 is an opportunity cost of using "aines on the flight departing from Can4iego on /ugust 11. The cost should be assigned to the /ugust 11 flight departingfrom Can 4iego.

PE8)% 2-&$ >$3 %#ABTC?

1. &ARE-O&//A/ECOM+AN,SC*E-&EO.COSTO./OO-SMAN.ACTRE-

.ORT*E,EAREN-E--ECEMBER$!0 #1'#

4irect material'

Eaw-material inventory, (anuary 1............................................ G 2=,===/dd' Purchases of raw material................................................


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PE8)% 2-&$ >8AT#AB4?

$. &ARE-O&//A/ECOM+AN,INCOMESTATEMENT

.ORT*E,EAREN-E--ECEMBER$!0 #1'#

Cales revenue.................................................................................................. G&73,===)ess' ost of goods sold............................................................................... 2


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PE8)% 2-&& >8AT#AB4?

$. ost of goods sold'!inished-goods inventory, (an. 1OOOOO.. G 222,2==

/dd' ost of goods manufacturedOOOOO 1,926,&==ost of goods available for saleOOOOOO. G2,=&9,6==4educt' !inished-goods inventory, 4ec. $1O 1


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PE8)% 2-&3 >&= %#ABTC?

ase / ase ase Cales................................................................................ G1,6==,===H G1,3==,===H G2&=,===eginning inventory, raw material................................. 12=,===H 6=,=== 7,3==

nding inventory, raw material...................................... 19=,=== $=,===H 13,===Purchases of raw material............................................. 2==,=== 233,=== $3,===H4irect material used........................................................ 1&=,=== 293,=== 27,3==H4irect labor...................................................................... &==,===H $==,=== 62,3==%anufacturing overhead................................................ 3==,=== &3=,===H 9=,===Total manufacturing costs............................................. 1,=&=,=== 1,=$3,=== 17=,===eginning inventory, wor in process.......................... 7=,=== 6=,=== 7,3==Hnding inventory, wor in process................................ 6=,===H 1=3,=== 2,3==ost of goods manufactured......................................... 1,=3=,===


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PE8)% 2-&6 >23 %#ABTC?

1. !ixed manufacturing overhead per unit'

G1,2==,=== 2&,=== units produced L G3=

/verage unit manufacturing cost'4irect materialOOOOOOOOO.. G &=4irect laborOOOOOOOOOOO 7&5ariable manufacturing overhead.. 2=,=== units x G$7=?OOOO G7,&==,===ost of goods sold >2=,=== units x G26=?O.. 3,2==,==="ross marginOOOOOOOOOOOOOO. G2,2==,===Celling and administrative expensesOOO.. 1,72=,===

#ncome before taxesOOOOOOOOOOO G &9=,===#ncome tax expense >G&9=,=== x &=I?OOO 1a? Ao change. 4irect labor is a variable cost, and the cost per unit will remain

constant.

>b? Ao change. 4espite the decrease in the number of units produced, this is afixed cost, which remains the same in total.

>c? Ao change. Celling and administrative costs move more closely with changesin sales than with units produced. /dditionally, this is a fixed cost.

>d? #ncrease. The average unit cost of production will change because of the per-unit fixed manufacturing overhead. / reduced production volume will bedivided into the fixed dollar amount, which increases the cost per unit.


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PE8)% 2-&9 >23 %#ABTC?

1. "raph of fixed production cost'

2. Production )evel in)iters

Bnit!ixed ost

Total !ixedost

1 G3==,=== per liter G3==,===

3= G1=,=== per liter G3==,===3=,=== G1= per liter G3==,===

2==,=== G2.3= per liter G3==,===


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!ixed production cost

G3==,===

3=,=== 1==,=== 13=,===Production levels >liters?

2==,===


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PE8)% 2-&< >13 %#ABTC?

1. "raph of raw-material cost'

2. Production )evel in Qilograms Bnit ost Total ost1 G16 per ilogram G16

3= G16 per ilogram G9==3,=== G16 per ilogram G9=,===


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Eaw material cost

G2,&==,===

G1,6==,===

G9==,===

3=,=== 1==,=== 13=,===Eaw material >ilogram?

G$,2==,===


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PE8)% 2-3= >2= %#ABTC?

1. a, d, g, 0

2. b, c, f

$. b, d, g,

&. b, c and dH, e and f and gH, H

HThe building is used for several purposes.

3. b, c, f

6. b, c, h

7. b, c, f

9. b, c, e


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PE8)% 2-31 >&= %#ABTC?

1. aterpillar is a manufacturing firm. #ts income statement highlights the firm@s cost-of-goods-sold expense, which is the cost of all of the heavy euipment sold duringthe year. ost of goods sold is subtracted from sales revenue to arrive at the grossprofit. The company@s other operating expenses then are subtracted from the grossprofit.

Wal-%art Ctores, #nc. is a retail firm. #ts income statement also shows the firm@scost of sales, which is another name for cost of goods sold. The cost of salesincludes all of the costs of acuiring merchandise for resale. The company@s otheroperating expenses are identified separately from cost of sales.

Couthwest /irlines ompany is an airline, which is a service industry firm. Thecompany does not sell an inventoriable product, but rather provides air

transportation service. Therefore, the company@s income statement does not list anycost-of-goods-sold expense. /ll of its expenses are operating expenses.

2. ost-accounting data are used to measure all of the costs on all three companies@income statements. !or example, the cost-accounting system at aterpillarmeasures the cost of direct labor, direct material, and manufacturing overheadincurred in the manufacturing process. Wal-%art Ctores@ cost-accounting systemmeasures the cost of acuiring merchandise for resale. Couthwest /irlines@ cost-accounting system measures the cost of aviation fuel consumed.

$. The ticet agents@ salaries would be included in salaries, wages, and benefits.

4epreciation of the airline@s computer euipment would be included in depreciation.

&. Wal-%art Ctores@ cost of newspaper advertising would be included in sellingexpenses. The cost of merchandise sold would be included in cost of sales >same ascost of goods sold?.

3. The salary for a aterpillar brand manager would be included in selling expenses.Production employees@ salaries are product costs, so they are part of the cost ofgoods sold. Cimilarly, raw-material costs are product costs, and they are included incost of goods sold.


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PE8)% 2-3$ >13 %#ABTC?

5ariable or!ixed

2=x3!orecast xplanation

4irect material............................................... 5 G3,93=,=== G&,3==,=== 1.$=

4irect labor.................................................... 5 &,2primarily electricity?................. 5 27$,=== G21=,=== 1.$=

4epreciation on plant and euipment... ! $&3,=== same#nsurance................................................. ! 2&=,=== sameCupervisory salaries............................... ! &3=,=== sameProperty taxes......................................... ! $13,=== same

Celling costs/dvertising.............................................. ! 22= %#ABTC?

1. a, d, e,

2. a, d, e,

$. 0

&. g >The G2== cost savings is a differential cost.?

3. a, c, e

6. b, d, e,

7. d, e,

9. b, dH, e,

HBnless the dishwasher has been used improperly.


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PE8)% 2-3& >8AT#AB4?

1=. a, c, e,

11. h

12. a, d, eH, 0

HThe hotel general manager may have some control over the total space allocated tothe itchen.

1$. d, e, i, 0

1&. i

13. d, e, i

PE8)% 2-33 >1= %#ABTC?

1. G6== >G1,273 G673?

2. G&G2,$1= G1,913?

$. G&63 >G2,773 G2,$1=?

&. G6$7.3= >G1,273J2?

3. G377.3= >G2,$1=J&?

6. G333 >G2,773J3?

PE8)% 2-36 >13 %#ABTC?

1. a 8pportunity cost 3. f /verage cost

2. d 4ifferential cost 6. e %arginal cost

$. b 8ut-of-pocet cost 7. c Cun cost

&. e %arginal cost


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PE8)% 2-37 >13 %#ABTC?

1. #f the company buys &=,=== units of Part (E6$, at a price of GXper unit, its total costwill be'

>&=,=== GX? M G&3,===

#f the company manufactures the parts, its total cost will be'

>&=,=== G12? M G163,===

y euating these two expressions for total cost, we can solve for the price, X, atwhich the total cost is the same under the two alternatives'

( ) ( )

136==,===&=,===

163,===12&=,===&3,===&=,===

=

=

+=+

XX

X

Thus the firm will reali+e a net benefit by purchasing Part (E6$ if the outside suppliercharges a price less than G13.

2. #f the firm buys Yunits of Part (E6$ at a unit price of G1&, the total cost will be'

( G&3,===G1& + Y

#f the company manufactures Yunits of Part (E6$, the total cost will be'

G163,===>G12 + Y)

#f we euate these expressions, we can solve for the number of parts, Y,at which thefirm will be indifferent between maing and buying Part (E6$.

6=,===

12=,===2

163,===12&3,===1&

=

=

+=+

Y

Y

YY

Thus, the company will be indifferent between the two alternatives if it reuires6=,=== units of Part (E6$ each month.


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PE8)% 2-39 >23 %#ABTC?

1. 8utput>.73 liter bottles? alculation Bnit ost

1=,=== G212,&==J1=,=== G21.2&

13,=== G2$&,6==J13,===

G13.6&2=,=== G236,9==J2=,=== G12.9&

The unit cost is minimi+ed at a sales volume of 2=,=== bottles.

2. 8utput>.73 liter bottles?

CalesEevenue

Totalosts Profit

1=,=== G216,=== G212,&== G $,6==13,=== 27=,=== 2$&,6== $3,&==2=,=== 299,=== 236,9== $1,2==

Profit is maximi+ed at a production level of 13,=== bottles of wine.

$. The 13,===-bottle level is best for the company, since it maximi+es profit.

&. The unit cost decreases as output increases, because the fixed cost per unit declinesas production and sales increase.

/ lower price is reuired to motivate consumers to purchase a larger amount ofwine.


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SO&TIONS TO CASES

/C 2-3< >3= %#ABTC?

1. a. The previous purchase price of the endor on hand, G1=.== per gallon, and theaverage cost of the endor inventory, G


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/C 2-3< >8AT#AB4?

The decision rule is to select the alternative as shown in the following chart.

/nticipated /nnual 5olume 8ptimal %odel hoice=6=,=== 13==C

6=,===223,=== 13==%

223,=== and higher 13==)

$. The pro0ected donations from the wildlife show amount to G2==,=== >1= percent ofthe T5 audience at G2=,=== per 1 percent of the viewership?. The pro0ected donationsfrom the manufacturing series amount to G13=,=== >13 percent of the T5 audience at

G1=,=== per 1 percent of the viewership?. Therefore, the differential revenue isG3=,===, with the advantage going to the wildlife show. owever, if the manufacturingshow is aired, the station will be able to sell the wildlife show to networ T5.Therefore, airing the wildlife show will result in the incurrence of a G3=,===opportunity cost.

The conclusion, then, is that the station@s management should be indifferentbetween the two shows, since each would generate revenue of G2==,===.

Wildlife show >1= G2=,===? G2==,=== donation

%anufacturing show >13 G1=,===? G13=,=== donation

%anufacturing show >sell wildlife show? 3=,=== sales proceedsG2==,=== total revenue


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/C 2-6= >$= %#ABTC?

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Cub0ect' osts related to Printer ase 4epartment

The G$=,1== building rental cost allocated to the Printer ase 4epartment is part oflarger rental costs for the entire building. ven if the Printer ase 4epartment isclosed down, Pensacola Printer ompany still will occupy the entire building.Therefore, the entire rental cost, including the G$=,1== portion allocated to the Printer

ase 4epartment, will be incurred whether or not the department closes.

The real cost of the space occupied by the Printer ase 4epartment is the G&1,===the company is paying to rent warehouse space. This cost would be avoided if thePrinter ase 4epartment were closed, since the storage operation could be movedinto the companyKs main building. The G&1,=== rental cost is the opportunity costofusing space in the main building for the Printer ase 4epartment.

The supervisor of the Printer ase 4epartment will be retained by the companyregardless of the decision about the Printer ase 4epartment. owever, if the Printer

ase 4epartment is ept in operation, the company will have to hire a new supervisorfor the /ssembly 4epartment. The salary of that new supervisor is a relevant cost ofcontinuing to operate the Printer ase 4epartment.

/nother way of looing at the situation is to reali+e that with the Printer ase4epartment in operation, the company will need two supervisors' the current Printerase 4epartment supervisor and a new supervisor for the /ssembly 4epartment./lternatively, if the Printer ase 4epartment is closed, only the current Printer ase4epartment supervisor will be needed. e or she will move to the /ssembly4epartment. The difference, then, between the two alternatives is the cost of

compensation for the new /ssembly 4epartment supervisor if the Printer ase4epartment is not closed.


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Chap002 Basic Cost Management

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Transcript of Chap002 Basic Cost Management