BRIEF EXERCISE 16.9/Prime vs. Conversion Costs
Star Repairs Co. does all the repair work for a medium-sized manufacturer of handheld computer
games. The games are sent directly to Star, and after the games are repaired, Star bills the game
manufacturer for cost plus a 20 percent markup. In the month of February, purchases of parts
(replacement parts) by Star amounted to $97,000, the beginning inventory of parts was $38,500,
and the ending inventory of parts was $15,250. Payments to repair technicians during the month of
February totaled $52,500. Overhead incurred was $121,000.
a. What was the cost of materials used for repair work during the month of February?
b. What was the prime cost for February?
c. What was the conversion cost for February?
d. What was the total repair cost for February?
EXERCISE 16.1
Accounting Terminology
Listed below are eight technical accounting terms introduces or emphasized in this chapter:
Work in Process Inventory ——- Cost of finished goods manufactured
Conversion costs ————- Cost of Goods Sold
Period costs —————– Management accounting
Product costs ——————- Manufacturing overhead
Each of the following statements may (or may not) describe one of these technical terms. For each
statement, indicate the accounting term described, or answer “None” if the statement does not correctly
describe any of the terms.
a. The preparation and use of accounting information designed to assist managers in planning and
controlling the operations of a business.
b. All manufacturing costs other than direct materials used and direct labor.
c. Direct materials and direct labor used in manufacturing a product.
d. A manufacturing cost that can be traced conveniently and directly to manufactured units of
product.
e. The account debited at the time that the Manufacturing Overhead account is credited.
f. The amount transferred from the Work in Process Inventory account to the Finished Goods
Inventory account.
g. Costs that are debited directly to expense accounts when the costs are incurred.
EXERCISE 16.2
Basic Types of
Manufacturing Costs
Into which of the three elements of manufacturing cost would each of the following be classified?
a. Tubing used in manufacturing bicycles.
b. Wages paid by an automobile manufacturer to employees who test-drive completed automobiles.
c. Property taxes on machinery.
d. Gold bullion used by a jewelry manufacturer.
e. Wages of assembly-line workers who package frozen food.
f. Salary of plant superintendent.
g. Electricity used in factory operations.
h. Salary of a nurse in a factory first-aid station.
EXERCISE 16.3
Product Costs
and Period Costs
Indicate whether each of the following should be considered a product cost or a period cost. If
you identify the item as a product cost, also indicate whether it is a direct or an indirect cost. For
example, the answer to item 0 is “indirect product cost.” Begin with item a.
0. Property taxes on factory building.
a. Cost of disposal of hazardous waste materials to a chemical plant.
b. Amounts paid by a mobile home manufacturer to a subcontractor who installs plumbing in each
mobile home.
c. Depreciation on sales showroom fixtures.
d. Salaries of security guards in an administrative office building.
e. Salaries of factory security guards.
f. Salaries of office workers in the credit department.
g. Depreciation on the raw materials warehouse.
h. Income taxes on a profitable manufacturing company.
EXERCISE 16.6
Flow of Costs through
Manufacturing Accounts
The Ryde and Rowe Inc. had the following account balances as of January 1:
Direct Materials Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,200
Work in Process Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178,400
Finished Goods Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253,600
Manufacturing Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0–
During the month of January, all of the following occurred:
1. Direct labor costs were $442,000 for 18,000 hours worked.
2. Direct materials costing $335,750 and indirect materials costing $13,500 were purchased.
3. Sales commissions of $216,500 were earned by the sales force.
4. $326,000 worth of direct materials were used in production.
5. Advertising costs of $36,300 were incurred.
6. Factory supervisors earned salaries of $22,000.
7. Indirect labor costs for the month were $23,000.
8. Monthly depreciation on factory equipment was $24,500.
9. Utilities expense of $17,800 was incurred in the factory.
10. Equipment with manufacturing costs of $970,100 were transferred to finished goods.
11. Monthly insurance costs for the factory were $4,200.
12. $5,000 in property taxes on the factory were incurred and paid.
13. Equipment with manufacturing costs of $1,089,000 were sold for $1,550,000.
Instructions
a. If Ryde and Rowe assigns manufacturing overhead of $84,400, what will be the balances in
the Direct Materials, Work in Process, and Finished Goods Inventory accounts at the end of
January?
b. As of January 31, what will be the balance in the Manufacturing Overhead account?
c. What was Ryde and Rowe’s operating income for January?
