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)
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