Why must the word cost be accompanied by an adjective to be meaningful?

The word "cost" needs an adjective to specify the type, level, or context of the expense, making the term
more precise and meaningful.

Why is it necessary to specify a cost object before being able to distinguish between a direct cost and
an indirect cost?

It’s necessary to specify a cost object because direct costs and indirect costs are defined relative to a
particular cost object.

● Direct costs can be traced directly to a specific cost object (like a project or product).

● Indirect costs are shared across multiple cost objects and cannot be traced directly to a single
one.

Specifying the cost object clarifies which costs are directly attributable and which are not.

Why is it necessary for a company to specify a relevant range of activity when making assumptions
about cost behavior?

A company needs to specify a relevant range of activity to accurately predict and analyze cost behavior
because cost patterns can change outside this range.

● Within the relevant range, fixed and variable costs behave in predictable ways, making
budgeting and forecasting more reliable.

● Outside the relevant range, costs may change due to different economies of scale, capacity
constraints, or other factors, which can distort cost predictions.

Defining the relevant range ensures that cost assumptions and calculations are applicable and accurate
for the level of activity being considered.

How do cost drivers and cost predictors diff er, and why is the distinction important?

Cost drivers and cost predictors are related concepts but serve different purposes in cost management:

● Cost Drivers: These are factors that cause changes in the cost of an activity or product. They are
the actual activities or events that lead to an increase or decrease in costs (e.g., number of units
produced, hours worked, or machine hours).

● Cost Predictors: These are variables or indicators used to forecast or estimate future costs based
on past data or trends. They help anticipate how costs will behave under different scenarios
(e.g., historical sales data, market trends).

The distinction is important because:

 1. Accuracy in Cost Management: Identifying cost drivers helps in understanding the direct cause
of cost changes, enabling more accurate cost control and decision-making. Cost predictors help
in forecasting future costs based on these drivers.

2. Effective Planning: By distinguishing between drivers and predictors, companies can better plan
and budget. Drivers inform operational adjustments, while predictors guide financial forecasts.

Understanding both concepts allows businesses to manage and predict costs more effectively, leading to
better financial and operational decisions.

How do a product cost and a period cost diff er?

A product cost is the expense incurred to manufacture a product, including direct materials, direct labor,
and manufacturing overhead. It is capitalized as inventory and expensed when the product is sold.

A period cost is an expense not tied to production, such as selling, general, and administrative expenses.
It is expensed in the period it is incurred.

What are conversion costs? Why are they called this?

Conversion costs are the costs incurred to convert raw materials into finished products, including direct
labor and manufacturing overhead. They are called this because they represent the expenses associated
with transforming raw materials into a finished product.

In the past 10–15 years, which product cost category has been growing most rapidly? Why?

In the past 10–15 years, manufacturing overhead has been the product cost category growing most
rapidly. This increase is due to rising expenses related to advanced technology, automation, and
compliance with regulatory standards, which have added significant costs to production processes
beyond direct materials and labor.

How does an actual costing system diff er from a normal costing system? What advantages does a
normal costing system off er?

An actual costing system uses actual costs for direct materials, direct labor, and manufacturing
overhead. A normal costing system applies estimated overhead costs using a predetermined rate,
combined with actual direct materials and labor.

Advantages of normal costing include quicker cost reporting, smoother cost allocation, and simplified
accounting processes.

What is meant by the term cost of goods manufactured ? Why does this item appear on an income
statement?

Cost of Goods Manufactured (COGM) refers to the total cost of producing goods during a specific
period, including direct materials, direct labor, and manufacturing overhead. It appears on the income
statement to determine the cost of goods sold by linking the production costs to the goods available for
sale during that period.

EXERCISES

a. Accounting faculty salaries - Direct (These salaries are directly attributable to the Accounting
Department.)

b. Accounting chairperson’s salary - Direct (The chairperson’s salary is directly attributable to

the Accounting Department.)

c. Cost of computer time of university server used by members of the department - Indirect
(The cost is shared across departments and not solely attributable to the Accounting
Department.)

d. Cost of office assistant salaries (office assistants are shared by the entire college) - Indirect
(The salaries are shared among all departments and not directly attributable to the Accounting
Department alone.)

e. Cost of travel by department faculty paid from externally generated funds contributed
directly to the department - Direct (This cost is directly related to the Accounting Department’s
activities, funded by departmental-specific resources.)

f. Cost of equipment purchased by the department from allocated state funds - Direct (The
equipment is specifically for the Accounting Department, even though the funds are allocated.)

g. Depreciation allocation of the college building cost for the number of offices used by
department faculty - Indirect (The depreciation is distributed among departments and not
solely attributable to the Accounting Department.)
h. Cost of periodicals/books purchased by the department - Direct (These costs are specifically
for the Accounting Department’s use.)

i. Long-distance telephone calls made by accounting faculty - Direct (These calls are specifically
related to the activities of the Accounting Department.)

Here’s the classification of each raw material as direct or indirect depending on the cost object:
For the Cost Object: Laptop
a. Touch pad and buttons - Direct (These are specific components of the laptop.)
b. Glue - Direct (If used specifically in the laptop assembly.)
c. Network connector - Direct (This is a component specific to the laptop.)
d. Battery - Direct (A component directly used in the laptop.)
e. Paper towels used by line employees - Indirect (Used for general maintenance, not specific
to the laptop.)
f. AC adapter - Direct (Essential accessory specific to the laptop.)
g. CD drive - Direct (A component of the laptop if included in the model.)
h. Motherboard - Direct (A key component of the laptop.)
i. Screws - Direct (Used in the assembly of the laptop.)
j. Oil for production machinery - Indirect (Used for machinery maintenance, not specific to the
laptop.)

LO.1 (Association with cost object)

For the Cost Object: Computer Production Plant
a. Touch pad and buttons - Indirect (These are specific to laptops, not general to all
production.)
b. Glue - Indirect (While used in production, it is not specific to the plant as a whole.)
c. Network connector - Indirect (Specific to laptops, not used across all products in the plant.)
d. Battery - Indirect (Specific to laptops.)
e. Paper towels used by line employees - Direct (General maintenance supplies for the plant.)
f. AC adapter - Indirect (Specific to laptops.)
g. CD drive - Indirect (Specific to laptops.)
h. Motherboard - Indirect (Specific to laptops.)
i. Screws - Direct (Used in various products, including laptops, desktops, and servers.)
j. Oil for production machinery - Direct (Maintenance cost for machinery used in the plant.)
In summary, direct materials are those that are specifically used in the product being produced
(e.g., laptops), while indirect materials are either used across various products or for general
plant operations.

LO.1 (Association with cost object)

1. Kennedy’s Services
a. Four hours of Perkins’s time in preparing Kennedy’s financial statements - Direct (Directly
related to the specific service provided to Kennedy.)
b. Six hours of the assistant’s time in copying Kennedy’s tax materials - Direct (Directly related
to the work for Kennedy.)
f. Two hours of Perkins’s time spent with Kennedy and his banker discussing Kennedy’s
financial statements - Direct (Directly related to Kennedy’s services.)
g. One-half hour of Tompkin’s time spent talking to an IRS agent about a deduction taken on
Kennedy’s tax return - Direct (Directly related to Kennedy’s tax return.)
2. Tax Services Provided
b. Six hours of the assistant’s time in copying Kennedy’s tax materials - Direct (Directly related
to tax services provided to Kennedy.)
d. Eight hours of continuing education paid for by the firm for Tompkin to attend a tax update
seminar - Indirect (Not specific to any one client; general tax service improvement.)
g. One-half hour of Tompkin’s time spent talking to an IRS agent about a deduction taken on
Kennedy’s tax return - Direct (Directly related to tax services.)
i. Seven hours of Tompkin’s time preparing Kennedy’s tax return - Direct (Directly related to tax
services provided to Kennedy.)
3. The Accounting Firm
c. Three hours of Morris’s time playing golf with Kennedy - Indirect (Not related to actual
accounting services; a personal activity.)
e. One hour of the assistant’s time spent at lunch on the day that Kennedy’s tax return was
prepared - Indirect (Not related to the specific service provided.)
h. Forty hours of janitorial wages - Indirect (General office maintenance cost, not specific to
any client or service.)
In summary, direct costs are those specifically attributable to the service provided to a client or
a particular service category, while indirect costs are general or administrative expenses not
tied to specific client services.

LO.2 (Cost behavior)

LO.2 (Cost behavior) Merry Olde Games produces croquet sets. Th e company makes fi xed monthly
payments to the local utility based on the previous year’s electrical usage.
LO.2 (Predictors and cost drivers; team activity)
Presentation: Factors for Predicting and Explaining Cost Behavior
Objective: To identify and analyze factors that can predict or explain the behavior of specific
costs for Lawrence & Sluyter CPAs, and determine whether these factors can also serve as cost
drivers.

1. Staff Accountant’s Travel Expenses

Factors to Predict or Explain Cost Behavior:
● Number of Client Visits: More client visits generally result in higher travel expenses due
to increased mileage, lodging, and meal costs.
● Distance Traveled: Longer distances lead to higher travel costs, including fuel and
wear-and-tear on vehicles.
● Duration of Engagements: Longer engagements might require more frequent travel or
extended stays.
Cost Driver Analysis:
● Number of Client Visits: This can be a cost driver because the number of visits directly
impacts the amount of travel expenses incurred. More visits mean more travel costs.
● Distance Traveled: This is also a cost driver, as longer distances increase the cost of
travel proportionally.
● Duration of Engagements: While this can influence costs, it is a secondary factor and
may not always directly drive costs in the same way as the other two factors.
Conclusion: Both the number of client visits and distance traveled are effective cost drivers for
predicting travel expenses.

2. Office Supplies Inventory

Factors to Predict or Explain Cost Behavior:
● Number of Employees: More employees typically use more office supplies.
● Number of Office Hours: Longer hours may result in higher usage of office supplies due
to increased work activities.
● Number of Client Projects: More projects often require more supplies for
documentation and work-related tasks.
Cost Driver Analysis:
● Number of Employees: This is a primary cost driver as it directly affects the volume of
office supplies used.
● Number of Client Projects: This can also be a cost driver since more projects usually
mean increased demand for office supplies.
● Number of Office Hours: While it affects supply usage, it is less direct compared to the
number of employees and client projects.
Conclusion: The number of employees and number of client projects are primary cost drivers
for office supplies inventory.

3. Laptops Used in Audit Engagements

Factors to Predict or Explain Cost Behavior:
● Number of Audit Engagements: More engagements generally require more laptops or
increase the use of existing ones.
● Number of Auditors: More auditors may necessitate additional laptops or increase the
utilization of existing ones.
● Duration of Engagements: Longer engagements might require extended laptop use or
additional laptops.
Cost Driver Analysis:
● Number of Audit Engagements: This is a key cost driver because the number of
engagements directly impacts the need for laptops.
● Number of Auditors: This can also be a cost driver, as more auditors require more
laptops or more frequent use of existing ones.
● Duration of Engagements: While important, it is less directly impactful than the number
of engagements and auditors.
Conclusion: The number of audit engagements and number of auditors are effective cost drivers
for laptops used in audit engagements.

4. Maintenance Costs for the Firm’s Lawn & Grounds Service

Factors to Predict or Explain Cost Behavior:
● Size of the Grounds: Larger grounds require more resources and time to maintain.
 ● Frequency of Maintenance: More frequent maintenance increases costs due to more
labor and materials used.
● Seasonal Weather Conditions: Weather can affect the amount and type of maintenance
required, e.g., more maintenance after heavy rain.
Cost Driver Analysis:
● Size of the Grounds: This is a primary cost driver because larger areas require more
maintenance resources.
● Frequency of Maintenance: This is a significant cost driver as it directly affects the total
maintenance costs.
● Seasonal Weather Conditions: While it affects costs, it is a less direct driver and more of
a variable influencing factor.
Conclusion: The size of the grounds and frequency of maintenance are effective cost drivers for
maintenance costs.

LO.2 (Cost drivers) Assume that Dover Hospital performs the following activities in providing
outpatient service:
To determine the appropriate cost driver or drivers for each activity in Dover Hospital's
outpatient service, we need to identify the factor that best correlates with the cost of each
activity. The cost driver is a factor that causes the cost of an activity to change. Below is a list of
activities along with their likely cost drivers:
Activities and Their Cost Drivers
a. Verifying Patient’s Insurance Coverage
● Cost Driver: Number of Patients
o The cost of verifying insurance coverage is typically driven by the number of
patients who need this verification.
b. Scheduling Patient’s Arrival Date and Time
● Cost Driver: Number of Scheduled Appointments
o The cost associated with scheduling is related to the number of patient
appointments that need to be scheduled.
c. Scheduling Staff to Prepare Patient’s Surgery Room
● Cost Driver: Number of Surgeries Scheduled
 o The cost of scheduling staff to prepare surgery rooms depends on the number of
surgeries that need preparation.
d. Scheduling Doctors and Nurses to Perform Surgery
● Cost Driver: Number of Surgeries Scheduled
o The scheduling of medical personnel is directly related to the number of
surgeries planned.
e. Ordering Patient’s Tests
● Cost Driver: Number of Tests Ordered
o The cost of ordering tests correlates with the number of tests required.
f. Moving Patient to Laboratory to Administer Lab Tests
● Cost Driver: Number of Lab Tests
o The cost of moving patients is related to the number of lab tests that need to be
performed.
g. Administering Laboratory Tests
● Cost Driver: Number of Tests Administered
o The cost of administering tests is driven by the number of tests performed.
h. Moving Patient to the Operating Room
● Cost Driver: Number of Surgeries Scheduled
o The cost associated with moving patients to the operating room is based on the
number of surgeries scheduled.
i. Administering Anesthetic
● Cost Driver: Number of Surgeries Scheduled
o The cost of administering anesthetic is linked to the number of surgeries that
require anesthesia.
j. Performing Surgery
● Cost Driver: Number of Surgeries Scheduled
o The cost of performing surgery is driven by the number of surgeries performed.
k. Administering Postsurgical Medications
● Cost Driver: Number of Surgeries Performed
 o The cost of administering post-surgical medications is related to the number of
surgeries, as it is a post-surgery activity.
l. Moving Patient to Recovery Room
● Cost Driver: Number of Surgeries Performed
o The cost of moving patients to the recovery room depends on the number of
surgeries performed.
m. Discharging Patient
● Cost Driver: Number of Patients Discharged
o The cost of discharging patients correlates with the number of patients being
discharged.
n. Billing Patient’s Insurance Company
● Cost Driver: Number of Billable Events
o The cost of billing is related to the number of billable events or claims processed,
which could be influenced by the number of patients or services rendered.
Summary
● Number of Patients: Verifying insurance coverage, moving patients to the lab, recovery
room, and discharging.
● Number of Scheduled Appointments: Scheduling patient’s arrival date and time.
● Number of Surgeries Scheduled: Scheduling staff for surgery room preparation,
scheduling doctors and nurses, moving patients to the operating room, administering
anesthetic, and performing surgery.
● Number of Tests Ordered/Administered: Ordering and administering laboratory tests.
● Number of Surgeries Performed: Administering postsurgical medications, moving
patients to the recovery room.
● Number of Billable Events: Billing insurance company.
Understanding these cost drivers helps in better cost management and resource allocation
within the hospital's outpatient services.
LO.2 & LO.3 (Cost behavior and classification) (19)
Here’s the classification of each item as variable (V), fixed (F), or mixed (M) cost and whether it
is a product/service (PT) or period (PD) cost:
a. Wages of factory maintenance workers
● Type: Fixed (F)
● Cost Classification: Product (PT)
● Reason: These wages do not vary with production volume and are necessary to maintain
the factory, hence classified as fixed. They are also product costs because they are part
of the manufacturing process.
b. Wages of forklift operators who move finished goods from a central warehouse to the
outbound loading dock
● Type: Variable (V)
● Cost Classification: Product (PT)
● Reason: The wages vary with the amount of finished goods moved. Since they are part
of the logistics involved in delivering goods, they are considered product costs.
c. Insurance premiums paid on the headquarters of a manufacturing company
● Type: Fixed (F)
● Cost Classification: Period (PD)
● Reason: Insurance premiums do not change with production volume and are associated
with the general operation of the business rather than the manufacturing process,
making them fixed and period costs.
d. Cost of labels attached to shirts made by a company
● Type: Variable (V)
● Cost Classification: Product (PT)
● Reason: The cost of labels varies with the number of shirts produced and is directly
associated with the product, hence a variable and product cost.
e. Property taxes on a manufacturing plant
● Type: Fixed (F)
● Cost Classification: Product (PT)
 ● Reason: Property taxes remain constant regardless of the production level and are part
of the cost of owning the manufacturing facility, thus considered fixed and product costs.
f. Paper towels used in factory restrooms
● Type: Variable (V) or Mixed (M)
● Cost Classification: Period (PD)
● Reason: Paper towels usage can vary with the number of people in the factory, making it
variable. However, it might not scale exactly with production levels, so it could also be
seen as mixed. It is a period cost as it relates to the facility’s operation.
g. Salaries of office assistants in a law firm
● Type: Fixed (F)
● Cost Classification: Period (PD)
● Reason: Salaries are fixed in nature and do not change with the level of services
provided. They are period costs because they are related to general office
administration.
h. Freight costs of acquiring raw material from suppliers
● Type: Variable (V)
● Cost Classification: Product (PT)
● Reason: Freight costs vary with the quantity of raw materials purchased and are directly
associated with the cost of goods sold, thus a variable and product cost.
i. Computer paper used in an accounting firm
● Type: Variable (V)
● Cost Classification: Period (PD)
● Reason: The cost of computer paper varies with usage and is an operational expense
rather than related to manufacturing, making it a variable period cost.
j. Cost of wax to make candles
● Type: Variable (V)
● Cost Classification: Product (PT)
● Reason: The cost of wax varies with the number of candles produced and is a direct
material cost, making it a variable and product cost.
k. Freight-in on a truckload of furniture purchased for resale
 ● Type: Variable (V)
● Cost Classification: Product (PT)
● Reason: Freight-in costs vary with the quantity of furniture purchased and are directly
associated with getting inventory ready for sale, making them a variable and product
cost.
LO.2 (Cost behavior) The next winner of America’s Idol will perform at your fraternity’s charity
event for free at your school’s basketball arena (15)
Summary
● Total Cost with 15,000 Tickets Sold: $187,500
● Price Per Ticket for $8 Profit: $20.50
● Profit or Loss with 5,000 Tickets Sold: $15,000 Profit
● Profit or Loss with 20,000 Tickets Sold: $172,500 Profit
These calculations are based on the assumptions provided and are crucial for setting the ticket
price and understanding potential outcomes under varying ticket sales scenarios.
LO.2 & LO.3 (Cost behavior and classification) 20.
Classification of Manufacturing Costs
a. Factory Supervision
● Type: Fixed (F)
● Cost Classification: Overhead (OH)
● Reason: Factory supervision costs do not vary with the number of units produced and
are part of manufacturing overhead.
b. Aluminum Tubing
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of aluminum tubing varies with the number of bicycles produced, as it
is a raw material used directly in the product.
c. Rims
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of rims varies with the number of bicycles produced, as they are
directly used in each bicycle.
d. Emblem
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of emblems varies with the number of bicycles produced, as each
bicycle requires an emblem.
e. Gearbox
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of gearboxes varies with the number of bicycles produced, as they are
a direct component of each bicycle.
f. Straight-Line Depreciation on Painting Machine
● Type: Fixed (F)
 ● Cost Classification: Overhead (OH)
● Reason: Depreciation is a fixed cost because it does not vary with the number of units
produced and is part of manufacturing overhead.
g. Fenders
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of fenders varies with the number of bicycles produced, as each bicycle
requires a fender.
h. Raw Material Inventory Clerk’s Wages
● Type: Fixed (F)
● Cost Classification: Overhead (OH)
● Reason: The wages of the inventory clerk are typically fixed and do not vary directly with
the number of bicycles produced, though they are part of manufacturing overhead.
i. Quality Control Inspector’s Salary
● Type: Fixed (F)
● Cost Classification: Overhead (OH)
● Reason: The salary of the quality control inspector is fixed and does not change with the
number of bicycles produced. It is part of manufacturing overhead.
j. Handlebars
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of handlebars varies with the number of bicycles produced, as they are
a direct component of each bicycle.
k. Metal Worker’s Wages
● Type: Variable (V)
● Cost Classification: Direct Labor (DL)
● Reason: The wages of metal workers vary with the number of bicycles produced, as they
are directly involved in the manufacturing process.
l. Roller Chain
 ● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of roller chains varies with the number of bicycles produced, as each
bicycle requires a roller chain.
m. Spokes (assuming cost is considered significant)
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of spokes varies with the number of bicycles produced, as they are a
direct material used in each bicycle.
n. Paint (assuming cost is considered significant)
● Type: Variable (V)
● Cost Classification: Direct Material (DM)
● Reason: The cost of paint varies with the number of bicycles produced, as each bicycle
requires paint. If the cost of paint is significant, it is classified as a direct material.
Summary
● Variable (V) Costs:
o Direct Material (DM): Aluminum Tubing, Rims, Emblem, Gearbox, Fenders,
Handlebars, Roller Chain, Spokes, Paint
o Direct Labor (DL): Metal Worker’s Wages
● Fixed (F) Costs:
o Overhead (OH): Factory Supervision, Straight-Line Depreciation on Painting
Machine, Raw Material Inventory Clerk’s Wages, Quality Control Inspector’s
Salary
LO.3 (Financial statement classification) Wayside Machine Tool Company
Summary:

● Expired Cost: $54,000 (this is the depreciation expense for the first year).
● Balance Sheet:
○ Machine listed at $600,000 with accumulated depreciation of $54,000, resulting
in a net book value of $546,000.
● Income Statement:
○ Depreciation expense of $54,000.

LO.3 (Financial statement classification) Babineaux Company (22)

a. Expired Period Costs

Expired period costs are those that have been incurred and are recognized as expenses in the current
period. These are typically non-manufacturing costs that benefit only the current period.

1. Seminar Fee for Salesperson: This is an expense for the current period because it pertains to
professional development that benefits the current period.
○ Amount: $1,000
2. Bonus to the Company President: This is a compensation expense for performance in May, so it
is an expired cost for the current period.
○ Amount: $10,000

Total Expired Period Costs: $1,000 (seminar fee) + $10,000 (bonus) = $11,000

b. Unexpired Period Costs

Unexpired period costs are costs that are prepaid and will benefit future periods. These costs are initially
recorded as assets and are expensed over time as they expire.

1. Insurance Premium: The insurance premium paid covers six months (May through October).
For May, only one-sixth of the premium will be expensed, and the remaining amount is
considered unexpired.
○ Total Premium: $18,600
○ May's Expense: $18,600 / 6 months = $3,100
○ Unexpired Portion: $18,600 - $3,100 = $15,500
2. Property Taxes on Factory: The property taxes paid cover three months (May through July). For
May, the expense related to the current period is recognized, and the unexpired portion is the
remaining months.
○ Total Property Taxes: $15,000
○ May's Expense: $15,000 / 3 months = $5,000
○ Unexpired Portion: $15,000 - $5,000 = $10,000
Total Unexpired Period Costs: $15,500 (insurance) + $10,000 (property taxes) = $25,500

c. Product Costs

Product costs are costs that are directly tied to the production of goods and are included in inventory until
the goods are sold.

1. Utility Costs: The utility costs accrued include a portion related to the factory.
○ Total Utility Costs: $20,000
○ Factory Portion: 60% of $20,000 = $12,000

Total Product Costs: $12,000 (factory utilities)

d. Discussion on Product Cost Classification

Product costs include all costs directly associated with manufacturing products. In this case, utility costs
related to the factory are considered product costs because they are directly tied to the production process.
Product costs are not specifically described as expired or unexpired since they relate to inventory. They
become expenses only when the products are sold, which is when they are recognized as Cost of Goods
Sold (COGS).

Summary:

● Expired Period Costs: $11,000 (seminar fee + bonus)

● Unexpired Period Costs: $25,500 (insurance + property taxes)
● Product Costs: $12,000 (factory utilities)

The product costs cannot be described as expired or unexpired because they are related to inventory,
which will be expensed as COGS only when the products are sold, not when incurred.

LO.4 (Company type) (23)

a. Depreciation—factory equipment

● Manufacturing (Mfg.): This term is associated with manufacturing companies because

depreciation of factory equipment is part of the manufacturing overhead.

b. Prepaid rent

● Manufacturing (Mfg.): Prepaid rent for factory space is an asset and is related to manufacturing.
● Retailing or Merchandising (Mer.): Prepaid rent for retail space falls under merchandising.
● Service (Ser.): Prepaid rent for office or service spaces is relevant for service companies.

c. Auditing fees expense

● Service (Ser.): Auditing fees are often considered a service expense for service companies.
 ● Retailing or Merchandising (Mer.): Retail and merchandising companies also incur auditing
fees as part of their operational expenses.
● Manufacturing (Mfg.): Manufacturing companies also have auditing fees as part of their
administrative expenses.

d. Merchandise inventory

● Retailing or Merchandising (Mer.): Merchandise inventory is directly related to retailing and

merchandising companies.
● Manufacturing (Mfg.): Manufacturing companies might not use the term "merchandise
inventory" but rather "raw materials," "work in progress," and "finished goods" inventory.
● Service (Ser.): Service companies typically do not have merchandise inventory.

e. Sales salaries expense

● Retailing or Merchandising (Mer.): Sales salaries are a key expense for retail and
merchandising companies.
● Service (Ser.): Sales salaries are also relevant for service companies, particularly those with sales
teams.
● Manufacturing (Mfg.): While not a direct manufacturing cost, sales salaries are relevant for
manufacturing companies with sales departments.

f. Finished goods inventory

● Manufacturing (Mfg.): Finished goods inventory is a key component of manufacturing

companies, representing products that are completed and ready for sale.

g. Cost of services rendered

● Service (Ser.): This term is specific to service companies and represents the cost associated with
providing services to clients.

h. Cost of goods sold

● Retailing or Merchandising (Mer.): Cost of goods sold (COGS) is a key expense for retail and
merchandising companies.
● Manufacturing (Mfg.): In manufacturing, COGS includes the costs associated with producing
the goods sold.

i. Direct labor wages

● Manufacturing (Mfg.): Direct labor wages are a direct cost in manufacturing, tied to the
production of goods.
● Retailing or Merchandising (Mer.): Direct labor wages might be applicable in merchandising if
the labor is directly tied to the handling or preparation of goods for sale.
● Service (Ser.): Direct labor wages are also relevant for service companies, where labor is directly
associated with providing the service.
LO.4 (Degrees of conversion)

a. Textbook Publisher

● High: A textbook publisher converts raw materials (e.g., paper, ink) into finished
products (textbooks) through complex processes involving writing, editing, design,
printing, and binding.

b. Convenience Store

● Low: A convenience store primarily sells finished goods with minimal conversion
processes involved. The store mainly involves stocking and selling products rather than
transforming raw materials.

c. Sporting Goods Retailer

● Low: Similar to a convenience store, a sporting goods retailer sells finished products with
minimal conversion. The retailer focuses on stocking and selling items such as sports
equipment and apparel.

d. Christmas Tree Farm

● Low: A Christmas tree farm involves growing and selling trees, which involves minimal
conversion compared to manufacturing. The primary activity is cultivation rather than
processing or transforming materials.

e. Custom Print Shop

● Moderate: A custom print shop converts raw materials (e.g., paper, ink) into customized
printed products (e.g., flyers, brochures) through processes like printing and finishing.
The degree of conversion is moderate because it involves both material transformation
and customization.

f. Bakery in a Grocery Store

● Moderate: A bakery transforms raw ingredients (e.g., flour, sugar) into baked goods
(e.g., bread, cakes) through baking processes. The degree of conversion is moderate, as
it involves significant transformation of materials.

g. Greek Restaurant

● Moderate: A Greek restaurant prepares and serves meals, involving the transformation
of raw ingredients into prepared dishes. The conversion involves cooking and food
preparation, leading to a moderate degree of conversion.
h. Jelly Manufacturer

● High: A jelly manufacturer processes raw ingredients (e.g., fruits, sugar) into finished
jelly products through cooking and canning processes. This involves significant
transformation of materials.

i. Auto Manufacturer

● High: An auto manufacturer converts raw materials (e.g., steel, rubber) into finished
vehicles through a complex and labor-intensive assembly process. The degree of
conversion is high due to the extensive manufacturing and assembly required.

j. Concert Ticket Seller

● Low: A concert ticket seller handles and sells tickets for events but does not involve the
transformation of raw materials. The conversion process is minimal, focusing on sales
and distribution.

LO.5 (Product cost classifications) Barbieri Co