CHAPTER 2 -

1. IN WHAT WAYS DOES A TYPICAL MANUFACTURING

BUSINESS DIFFER FROM A MANUFACTURING CONCERN? IN
WHAT WAYS ARE THEY SIMILAR?

Merchandising Business starts with finished product and markets

it. Because inventory is acquired in finished form, its cost is
easily ascertained, while Manufacturing Business is more
complex because direct materials are first acquired and then
converted to finished products.

Both business organizations have similarities, both require labor

and capital as inputs, and both transform them into a product or
service for the market.

2. WHAT ARE THE BASIC ELEMENTS OF PRODUCTION COSTS?

Direct materials, direct labor and factory overhead are the three
(3) basic elements of production cost.

3. DEFINE THE FOLLOWING COSTS

A. DIRECT MATERIALS
: materials that become part of finished products

B. INDIRECT MATERIALS
: minor materials and other production supplies that
cannot be conveniently and economically traced to specific
products.

C. DIRECT LABOR
: labor costs for specific work performed on products that
can be conveniently and economically traced to end
products.

D. INDIRECT LABOR
: for production related activities that cannot be
conveniently and economically traced to end products.

E. FACTORY OVERHEAD
: a varied collection of production-related costs that cannot
be practically or conveniently traced directly to end
products.
4. DEFINE PRIME COSTS AND CONVERSION COSTS
 Prime Costs is defined as the expenditures directly related to
creating finished products, while Conversion Costs are the
expenses incurred when turning raw materials into a product.

5. DOES PRIME COSTS PLUS CONVERSION COSTS EQUAL TO

THE TOTAL MANUFCATURING COSTS?

6. IN WHAT WAY DOES THE ACCOUNTING TREATMENT OF

FACTORY OVERHEAD DIFFER FORM THAT OF DIRECT
MATERIALS AND DIRECT LABOR COSTS?

7. EXPLAIN WHY THE FIXED COST PER UNIT DECLINES AS

VOLUME INCREASES. GIVE AN EXAMPLE

Fixed costs do not vary with the production level. Total fixed
costs remain the same, within the relevant range. However, the
fixed costs per unit decreases as production increases, because
the same fixed costs are spread over more units.

For example,
8. GIVE EXAMPLES OF VARIABLE OVERHEAD COSTS AND
FIXED OVERHEAD COSTS?

Some examples of variable overhead costs are supplies and

utilities while, fixed overhead costs are rent, salaries,
depreciation and insurance.

9. HOW WOULD YOU CLASSIFY THE MONTHLY BILL (PLAN)

FOR A SMART/GLOBE CELLPHONE?
 Postpaid mobile phones require the consumer to pay a fixed
amount at the end of the month in exchange for a set amount of
call/texts/data to use during the billing period.

10. CONSIDER EDUCATION AS A PRODUCT. WHAT ARE

THE DIRECT COSTS AND THE INDIRECT COSTS TO A
UNIVERSITY IN EDUCATING A STUDENT?

CHAPTER 3 –
PROBLEM 1

Legend:
A - Cost of goods sold statement
B - Statement of Comprehensive Income
C - Statement of Financial Position

1. Direct Labor A
2. Raw material in inventory, Jan
31
3. Work in process inventory, Dec
31
4. Finished goods inventory, Jan
31
5. Factory overhead applied A
6. Depreciation on office B
equipment
7. Work in process inventory, Jan
31
8. Finished goods inventory, Dec
31
9. Cost of goods manufactured
10. Cost of goods available for A
sale
11. Cost of materials purchased
12. Accumulated Depreciation – A
office equipment
13. Direct materials used A
14. Total manufacturing cost
15. Factory machinery