2.

Cost is a more general term that refers to a sacrifice of resources and may be either
an opportunity cost or an outlay cost. An expense is the write-off of an outlay cost
against revenues in a particular accounting period and usually pertains only to
external financial reports.

2.22

(15 min) Basic cost concepts

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Cost Item
Sales commissions ........................................................................
Sales personnel office rent ...........................................................
Sales supervisory salaries ............................................................
Cost-management staff office rental ............................................
Administrative office heat and air conditioning ..........................
Transportation-in costs on material purchased..
Assembly line workers wages .....................................................
Property taxes on office buildings for administrative staff ........
Salaries of top executives in the company ..................................
Overtime pay for assembly workers .............................................

Fixed (F)
Variable (V)
V
F
F
F
F*
V
V
F
F
V

Period (P)
Product (R)
P
P
P
P
P
R
R
P
P
R

*Fixed with respect to activity. Utility costs vary, however, with respect to the weather.

2.27

(30 min) Prepare statements for a manufacturing company

ROTTERDAM COMMUNICATION COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED AND SOLD
FOR THE YEAR ENDED DECEMBER 31

Work-in-progress, Jan. 1
Manufacturing costs:
Direct material:
Beginning inventory, Jan. 1 ..................................
Add material purchases ........................................
Raw material available ...........................................
Less ending inventory, Dec. 31 .............................
Direct material used ...............................................
Direct labour ...............................................................
Manufacturing overhead:
Supervisory and indirect labour ...........................
Indirect material and supplies...............................
Plant utilities and power ........................................
Manufacturing building depreciation ...................

30,800
36,800
44,600
81,400
38,000
43,400
71,200
28,800
12,600
47,000
54,000

Property taxes, manufacturing plant ....................

Total manufacturing overhead .........................
Total manufacturing costs ............................
Total cost of work-in-progress during the year ............
Less work-in-progress, Dec. 31.................................
Costs of goods manufactured during the year ....
Beginning finished goods, Jan. 1 ..................................
Finished goods inventory available for sale.................
Less ending finished goods inventory, Dec. 31 ...........
Cost of sales ...................................................................

16,800
159,200
273,800
304,600
26,200
278,400
21,800
300,200
17,000
283,200

ROTTERDAM COMMUNICATION COMPANY

STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31
Sales revenue .................................................................

418,000

Less: Cost of sales .........................................................

Gross margin ..................................................................
Administrative costs ......................................................
Marketing costs (sales commissions) ..........................
Total marketing and administrative costs ....................
Operating profit...............................................................
2.36 (15 min) Characteristics of cost

283,200
$134,800

a.
b.
c.
d.

3, sunk cost
1, opportunity cost
4, direct cost
2, out-of-pocket cost; 6, average cost

2.43

87,500
29,000
116,500
18,300

e. 3, sunk cost
f. 5, conversion cost
g. 2, out-of-pocket cost; 6, average cost

(30 min) Cost data for managerial purposes

This problem demonstrates the ambiguity of cost-based contracting and, indeed, the
measurement of cost.
Recommended prices may range from the $42.90 suggested by NASA to the $53.35 charged
by Florida Fruits, Inc. The key is to negotiate the cost-based price prior to the signing of the
contract. Considerations which affect the base cost are reflected in the following options:
Option (1) Only the differential costs could be considered as the cost basis.
Option (2) The total cost per case for normal production of 80,000 cases could be used as
the cost basis.

Option (3) The total cost per case for production of 120,000 cases, excluding marketing
costs, could be used as the cost basis.
Option (4) The total cost per case for production of 120,000 cases, including marketing
costs, could be used as the cost basis.
Unit Cost Options
(one unit is one case of Fang)

Costs

Materials (variable)
Labour (variable)
Supplies (variable)
Indirect costs (fixed)
Marketing (variable)
Administrative (fixed)
Per case cost basis
Per case price (cost + 10%)

$12
19
8
440,000
2
160,000

(1)

(2)

(3)

(4)

$12
19
8
N/A
N/A
N/A
$39
$42.90

$12
19
8
5.50
2
2
$48.50
$53.35

$12
19
8
3.67
N/A
1.33
$44
$48.40

$12
19
8
3.67
2
1.33
$46
$50.60

We believe the most justifiable options exclude marketing costs and reflect the actual
production level of 120,000 cases. These are Options (1) and (3).
2.44

(30 min) Cost Analysis for Decision Making

a.
a. Delivery by vineyard
Purchase cost of grapes
Delivery cost
Total cost for delivered
grapes
b. Pick up by Le Vin
Purchase cost of grapes
Fuel cost to pick up fabric
order
Total cost of fabric order, with
pickup
Cost difference

3,000*
100
3,100

3,000
20**
3,020
80

* 3,000 = 2,000 per metric ton 1.5 metric tons purchased

** 20 = (100km average distance driven 7km per liter) 1.40 fuel cost per liter

c. Le Vin Ordinaire should only continue to operate its own trucks if the accumulated
annual cost savings from pick up is greater than the annual cost of truck operation. In

this screnario, 80 is saved when Le Vin Ordinaire picks up the grapes themselves.
However, a more complete analysis of annual delivery costs versus self pick up would
be necessary to determine the value of continued truck operations.
d. i. Accrual costs
Annual uses of committed resources
Delivery trucks (each)
Annual amortization of purchase cost
Annual maintenance, license & insurance
Truck drivers (each)
Annual salary and benefits
Total annual costs of committed resources
Normal annual kilometers available
Committed cost per kilometer
Kilometers driven to pick up grapes (return)
Accrued, committed cost of grapes
Out-of-pocket (cash) cost of fuel to pick up order

2.44

3,000*
5,300
42,000
50,300
30,000
1.6767
100
167.67
20.00

(Continued)

Total cost to pick up an order

Out of pocket (cash) cost of order
Total accrual cost of order

187.67
3,000.00
3,187.67

* 3,000 = 30,000 purchase price of truck 10 year useful life

ii. Athough the above calculations show that the accrual cost of owning and operating its
own trucks is more expensive in this scenario, this does not necessarily indicate that Le
Vin Ordinaire should discontinue its truck operations. The accrual cost includes sunk
costs such as the purchase of the trucks and salaries of the drivers that may not be fully
eliminated if truck operations are discontinued. We have not considered the
complexities of switching to wholesaler delivery.
iii. Qualitative considerations that should be made before Le Vin Ordinaire switches to
wholesaler delivery include reliability of delivery times and product damage during
transport.