Problem 1-20A Effect of product versus period costs on financial statements
Hoehn Manufacturing Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciations, assume that all transactions are cash transactions.
1. Acquired $50,000 cash by issuing common stock.
2. Paid $8,000 for the materials used to make its products, all of which were started and completed during the year.
3. Paid salaries of $4,400 to selling and administrative employees.
4. Paid wages of $7,000 to production workers.
5. Paid $9,600 for furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $1,600 estimated salvage value and a four-year useful life.
6. Paid $13,000 for manufacturing equipment. The equipment was acquired on Jan. 1. It had a $1,000 estimated salvage value and a three – year useful life.
7. Sold inventory to customers for $25,000 that had cost $14,000 to make.
Problem 2-20A Context-sensitive nature of cost behavior classifications
Susan Hicks operates a sales booth in computer software trade shows selling an accounting software package, Dollar System. She purchases the package from a software manufacturer for $175 each. Booth space at the convention hall costs $10,000 per show.
a. Sales at past trade shows have ranged between 200 and 400 software packages per show Determine the average cost of sales per unit if Ms. Hicks sell 200, 250, 300, 350, or 400 units of Dollar System at a trade show. Use the following chart to organize your answer. Is the cost of booth space fixed or variable?
Sales Volume in Units
200 250 300 350 400
Total cost of software (a X $175) $35,000
Total cost of booth rental 10,000
Total cost of sales (b) $45,000
Average cost per unit (b/a) $225.00
b. If Ms. Hicks wants to earn a $50 profit on each package of software she sells at a trade show, what price must she charge at sales volumes of 200, 250, 300, 350, or 400 units?
c. Record the total cost of booth space if Ms. Hicks attends one, two, three, four, or five trade shows. Record your answers in the following chart. Is the cost of booth space fixed or variable relative to the number of shows attended?
Number of Trade Shows Attended
1 2 3 4 5
Total cost of booth rental $10,000
d. Ms. Hicks provides decorative shopping bags to customers who purchase software packages. Some customers take the bags; others do not. Some customers stuff more than one software packages into a single bag. The number of bags varies in relation to the number of units sold, but the relationship is not proportional. Assume that Ms. Hicks uses $30 of bags for every 50 software packages sold. What is the additional cost per unit sold? Is the cost fixed or variable?