Lecture 11 - Relevant costs for decision making

Question 1

Name three problems with unreliable cost information! (3)

Answer 1

• Wrong conclusions about performance
• Bad decisions regarding product mix
• Noncompetitive pricing of goods and services

Question 2

Explain product and period costs! (2)

Answer 2

• Product costs: All production costs necessary to get products ready to sell
• Period costs: All costs other than product costs

Question 3

Mark the following costs according to product and period (bold) costs! (8)

Answer 3

● Expired insurance on showroom
● Raw materials used
● Manufacturing supplies used
● Nonfactory office supplies used
● General and administrative salaries
● Production employees’ wages
● Production equipment rent
● President’s salary
● Depreciation on plant
● Nonfactory office rent
● Expired insurance on plant
● Depreciation on showroom
● Production supervisors’ salaries
● Plant maintenance
● Showroom maintenance
● Nonfactory office utilities
● Plant utilities
● Plant office supplies used

Solution:

● Expired insurance on showroom
● Raw materials used
● Manufacturing supplies used
● Nonfactory office supplies used
● General and administrative salaries
● Production employees’ wages
● Production equipment rent
● President’s salary
● Depreciation on plant
● Nonfactory office rent
● Expired insurance on plant
● Depreciation on showroom
● Production supervisors’ salaries
● Plant maintenance
● Showroom maintenance
● Nonfactory office utilities
● Plant utilities
● Plant office supplies used

Question 4

Write down an example for cost of goods manufactured! (4)

Answer 4

• Direct materials, labor
• Manufacturing overhead
• Beginning / Ending work in process (WIP) inventory
• Total manufacturing costs
  __

Question 5

How to write an income statement? (3x2)

Answer 5

INPUT (Debit/Credit)

Total Revenue (R)

• Sales Revenue,
• Interest Income

Total Expenses (E)

• Cost of Goods Sold
  (Salaries and Wages, Rent, Utilities, Depreciation, Interest),
• Selling & Administration

OUTPUT

• Gross Profit
  = Net Sales Revenue - Cost of Goods Sold
• Net Income