Cost Management Paper 2

Answer (D) is correct. Materials, labor, and overhead (both fixed and variable) are examples of product costs. Abnormal spoilage is an example of a period cost. Abnormal spoilage is not inherent in a production process and should not be categorized as a product cost. Abnormal spoilage should be charged to a loss account in the period that detection of the spoilage occurs.

Answer (B) is correct. Direct labor costs are wages paid to labor that can be specifically identified with the production of finished goods. Because the wages of a factory machine operator are identifiable with a finished product, the wages are a direct labor cost. Because a supervisor’s or vice-president’s salary is not identifiable with the production of specific finished goods, it is a part of factory overhead and not a direct labor cost.

Answer (D) is correct. Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Because the wages of machine operators are identifiable with the production of finished goods, their $145,000 of salaries are a direct labor cost. However, because the salaries and wages of the factory supervisors and machinery mechanics are not identifiable with the production of finished goods, their $60,000 and $25,000 of salaries are not direct labor costs.

Answer (B) is correct. Product costs can be associated with a specific product. Product costs include direct materials and direct labor. Factory overhead cannot be traced to specific products and therefore is allocated to all products produced. Thus, the amount of costs traceable to specific products in the production process is $228,000 ($120,000 + $108,000)

Answer (D) is correct. Direct materials costs are the costs of new materials included in finished goods that can be feasibly traced to those goods. Total purchases can be found based on the beginning and ending inventory, as well as products used. The following formula describes their relationship:
Purchases=Material used+Ending Inventory-Beginning Inventory
The question states that Atlantic used $200,000 of direct materials. Beginning inventory can be set as x, and since the balance of direct materials at the end of the the month was $30,000 more than at the beginning of the month, ending inventory can be set as [x + $30,000]. Thus the formula can be used to solve for purchases as follows:
Purchases = $200,000 + ($x + $30,000) – $x
Purchases = $200,000 + $30,0000 + $x – $x
Purchases = $230,000

Answer (C) is correct. The costs of holding or storing inventory are carrying costs. Examples include the costs of capital, insurance, warehousing, breakage, and obsolescence.

Answer (A) is correct. Direct costs are ones that can be associated with a particular cost object in an economically feasible way, that is, they can be traced to that object. Fixed costs are those that remain unchanged in total over the relevant range of production. A motel manager’s salary is traceable to the single location she manages, and it remains fixed over a set period of time regardless of the number of guests.

"Answer (D) is correct. Prime cost consists of direct materials and direct labor. Conversion cost consists of direct labor and manufacturing overhead. The per unit calculations are as follows:"
Direct materials $2,000,000 Direct labor 1,000,000 Total prime costs 3,000,000 Divided by: production level ÷ 200,000 Per unit prime cost 15
Direct labor 1,000,000 Manufacturing overhead 600,000 Total conversion costs 1,600,000 Divided by: production level ÷ 200,000 Per unit conversion cost 8

Answer (D) is correct. Using absorption costing, fixed manufacturing overhead is included in inventoriable (product) costs. Fixed manufacturing overhead costs are indirect costs because they cannot be directly traced to specific units produced.

Answer (B) is correct. Cost allocation is an internal matter that does not affect demand (except to the extent it results in a change in price).