EXERCISE 2-13 (15 MINUTES)

2. No, the president is not correct. The reported net operating income for

the year will differ depending on how the salary cost is classified. If the

salary cost is classified as a selling expense all of it will appear on the

income statement as a period cost. However, if the salary cost is classi-

fied as a manufacturing (product) cost, then it will be added to Work In

Process Inventory along with other manufacturing costs for the period.

To the extent that goods are still in process at the end of the period,

part of the salary cost will remain with these goods in the Work in Proc-

ess Inventory account. Only that portion of the salary cost that has been

assigned to finished units will leave the Work In Process Inventory ac-

count and be transferred into the Finished Goods Inventory account. In

like manner, to the extent that goods are unsold at the end of the pe-

riod, part of the salary cost will remain with these goods in the Finished

Goods Inventory account. Only the portion of the salary that has been

assigned to finished units that are sold during the period will appear on

the income statement as an expense (part of Cost of Goods Sold) for

the period. The remainder of the salary costs will be on the balance

sheet as part of inventories.

Problem 2-21 (15 minutes)

Variable or Fixed

with Respect to the

Direct or Indirect

Cost of Particular

Number of Seniors

Cost of the Meals-

Served by the

Seniors Served

Meals-On-Wheels

by the Meals-On-

On-Wheels Pro-

Wheels Program

gram

Program

Item Description Direct Indirect Direct Indirect Variable Fixed

a. The cost of leasing the meals-on-wheels van... X X X

b. The cost of incidental supplies such as salt, pep-

per, napkins, and so on ... X X* X

c. The cost of gasoline consumed by the meals-on-

wheels van ... X X X

d. The rent on the facility that houses Madison

Seniors Care Center, including the meals-on-

wheels program ... X X* X

e. The salary of the part-time manager of the

meals-on-wheels program... X X X

f. Depreciation on the kitchen equipment used in

the meals-on-wheels program ... X X X

g. The hourly wages of the caregiver who drives

the van and delivers the meals ... X X X

h. The costs of complying with health safety regu-

lations in the kitchen ... X X X

i. The costs of mailing letters soliciting donations

to the meals-on-wheels program ... X X X

Problem 2-22 (45 minutes)