Question 2-51 Definition of Cost

Luisa Giovanni is a student at New York University. To help with college costs,

Luisa starts a dog walking service. He has 12 client dogs—six walked on the first shift

(06.30 and 17.00), and six people walk in the second shift (07.30 and 18.00).

Last month, Luisa noted the following:

1. Buy three leashes for $10 each (he brought them in case the leash broke while walking).

2. Internet service costs $40 per month. This allows him to stay in touch with his owners, their Bills via email, and so on.

3. $50 worth of dog treats as a reward for each dog at the end of their journey.

4. Raincoat and heavy hat for $100.

5. In the middle of the month, Luisa's friend, Jason, offered her the opportunity to play a small role in a film that was being shot on location in New York City. The job paid $100 and would have required Luisa to be on site at 6:00 AM. and let it sit for 12 hours. Unfortunately, Luisa refused.

6. Dog owners pay Luisa $250 per month per dog for her services.

Required:

1. At the end of the month, how does Luisa classify her $40 Internet payment—as an expense on the balance sheet or as an expense on the income statement?

2. CONCEPTUAL CONNECTION Which of the above items is an opportunity cost? Why?

3. How much does it cost? What is Luisa's total income for a month?

Question 2-52 Cost Identification and Analysis, Cost Assignment, Profit and Loss Statement

Melissa Vassar has decided to open a print shop. He has earned two contracts. One of them is a 5 year contract to print popular regional magazines. This contract requires 5,000 copies each month. The second contract is a 3 year agreement to print tourist brochures for the country. The state tourism office requires 10,000 brochures per month.

Melissa had rented the building for $1,400 per month. The printing equipment had been purchased for $40,000 and had a life expectancy of 20,000 hours with no salvage value. Depreciation is assigned to periods based on hours of use. Melissa has scheduled product deliveries so that two production runs are required. In the first round, the equipment is prepared for magazine printing. In the second round, the equipment is reconfigured for brochure printing. It took him twice as long to configure the equipment for magazine setup as it did for brochure setup. Total setup cost per month is $600.

Insurance costs for buildings and equipment are $140 per month. The power to operate printing equipment is closely related to the use of the machine. Printing equipment causes almost everything

electricity cost. Electricity costs will be $350 per month. Printed materials will be charged $0.40 per copy for

magazines and $0.08 per copy for brochures. Melissa will hire workers to run the printing press as needed (part-time workers are easy to hire). He had to pay $10 an hour. Each worker can produce 20 copies of magazines per hour of printing or 100 copies of brochures. Distribution costs $500 per month. Melissa will receive a salary of $1,500 per month. He was in charge of personnel, accounting, sales, and production—in fact, he was responsible for managing all aspects of the business.

Required:

1. What are the total monthly production costs?

2. What are the total monthly main costs? What is the total monthly prime cost for a regional magazine? For the brochure?

3. What is the total monthly conversion cost? Suppose Melissa wants to determine the monthly conversion cost for each product. Set a monthly conversion cost for each product useddirect search and driver search whenever possible. For costs that cannot be assigned using the tracking approach, you can assign them using direct labor hours.

4. Melissa received $1.80 per copy of the magazine and $0.45 per brochure. Prepare an income statement for the first month of operations.