Cost Accounting Chapter 2 Solutions Kinney

Cost Accounting Chapter 2 Solutions Kinney Cost Accounting Chapter 2 Solutions Kinney This document provides solutions to the exercises found in Chapter 2 of the textbook Cost Accounting by Kinney Chapter 2 Cost Concepts and Behavior Learning Objectives Understand the different types of costs and their classification Analyze the behavior of costs in relation to changes in activity levels Apply cost concepts to solve practical business problems Differentiate between product and period costs Identify the relevant range and its implications Solutions Exercise 1 Classifying Costs Classify the following costs as product or period costs Direct Materials Product Cost Direct Labor Product Cost Manufacturing Overhead Product Cost Selling Expenses Period Cost Administrative Expenses Period Cost Exercise 2 Cost Behavior Identify the cost behavior pattern for each of the following costs Rent Fixed Cost Direct Materials Variable Cost Sales Commissions Variable Cost Depreciation on Equipment Fixed Cost Utilities Mixed Cost typically has a fixed component and a variable component Exercise 3 Relevant Range Explain the concept of the relevant range and its importance in cost behavior analysis 2 Solution The relevant range is the activity level over which the assumed cost behavior pattern is valid For example a company might assume that its utilities cost is a fixed cost within the range of 10000 to 20000 units produced However if the company produces more than 20000 units the utilities cost might become a variable cost as the company might need to purchase additional power to meet the higher production demand The relevant range is important because it helps managers make accurate cost predictions and decisions If a manager assumes a cost is fixed when it is actually variable outside of the relevant range they might make incorrect decisions about pricing production levels or other important business aspects Exercise 4 Mixed Costs A company has the following data for its electricity costs Month Units Produced Electricity Cost January 10000 10000 February 12000 11500 March 14000 13000 Using the highlow method separate the mixed costs into their fixed and variable components Solution 1 Identify the highest and lowest activity levels Highest activity level March 14000 units Lowest activity level January 10000 units 2 Calculate the variable cost per unit Variable cost per unit Cost at highest activity level Cost at lowest activity level Highest activity level Lowest activity level Variable cost per unit 13000 10000 14000 10000 075 per unit 3 Calculate the fixed cost Fixed cost Total cost at highest activity level Variable cost per unit Highest activity level Fixed cost 13000 075 14000 3000 Therefore the electricity cost has a fixed component of 3000 and a variable component of 075 per unit 3 Exercise 5 Cost Concepts and Product Costing A company manufactures furniture The following costs were incurred during the month Direct Materials 50000 Direct Labor 30000 Manufacturing Overhead 20000 Selling Expenses 10000 Administrative Expenses 5000 Calculate the total product cost and the total period cost Solution Total Product Cost 50000 Direct Materials 30000 Direct Labor 20000 Manufacturing Overhead 100000 Total Period Cost 10000 Selling Expenses 5000 Administrative Expenses 15000 Exercise 6 Cost Behavior and Decision Making A company is considering adding a new product line The following information is available Fixed Costs 50000 Variable Cost per Unit 10 Selling Price per Unit 20 Calculate the breakeven point in units and in dollars Solution Breakeven Point in Units Fixed Costs Selling Price per Unit Variable Cost per Unit 50000 20 10 5000 units Breakeven Point in Dollars Breakeven Point in Units Selling Price per Unit 5000 units 20 100000 Exercise 7 Relevant Cost Analysis A company has the opportunity to purchase a new piece of equipment The equipment costs 100000 and is expected to generate 20000 in annual savings The equipment has a useful life of 5 years and no salvage value Should the company purchase the equipment Solution To determine if the company should purchase the equipment we need to analyze the 4 relevant costs and benefits Relevant Costs The cost of the equipment 100000 is a relevant cost because it is an expense associated with the decision to purchase the equipment Relevant Benefits The annual savings of 20000 are a relevant benefit because they are directly related to the decision to purchase the equipment To calculate the net benefit we need to consider the present value of the annual savings Present Value Calculation Year 1 20000 Year 2 20000 1 Discount Rate Year 3 20000 1 Discount Rate2 Year 4 20000 1 Discount Rate3 Year 5 20000 1 Discount Rate4 The discount rate used should reflect the companys cost of capital or the minimum rate of return required for investments If the present value of the annual savings is greater than the cost of the equipment then the purchase would be financially beneficial Conclusion This document provides solutions to the exercises found in Chapter 2 of the textbook Cost Accounting by Kinney By understanding the different types of costs their behavior and how to analyze them managers can make better decisions about pricing production levels and other key business aspects The exercises presented in this document are designed to help students develop a solid understanding of these important cost concepts