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TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) “Cost” is defined by accountants as a resource sacrificed or foregone to
achieve a specific objective.
1) _______
2) Costs are typically accounted for in two stages of the cost system: (1)
accumulation and (2) payment.
2) _______
3) An actual cost is a predicted cost. 3) _______
4) Nearly all accounting systems accumulate forecasted costs. 4) _______
5) A cost object is anything for which a separate measurement of costs is
desired.
5) _______
6) Indirect costs cannot be economically traced directly to the cost
objective.
6) _______
7) Delivery charges are typically considered to be an indirect cost because
it cannot be traced to each customer.
7) _______
8) A cost is classified as a direct or indirect cost based on the applicable
cost object.
8) _______
9) Cost tracing assigns indirect costs to the chosen cost object. 9) _______
10) Factors affecting direct/indirect cost classifications are the materiality of
the cost in question, the information-gathering technology used, and the
design of the accounting system
10) ______
11) A relevant range is the range of the cost driver in which a specific
relationship between cost and driver is valid.
11) ______
12) Changes in particular cost drivers automatically result in decreases in
overall costs.
12) ______
13) A fixed cost is a cost that changes per unit as a cost driver changes. 13) ______
14) Variable costs do not change in direct proportion to changes in cost
drivers.
14) ______
15) When defining variable and fixed costs, it is assumed that there is only
one cost driver.
15) ______
16) A unit cost is computed by dividing a total cost by some number of
units.
16) ______
17) Unit costs are not considered to be an average cost per unit. 17) ______
18) When a manager is making a decision based on cost figures, it is
preferable that he (she) thinks in terms of unit costs.
18) ______
19) When 50,000 units are produced the fixed costs are $10 per unit.
Therefore when 100,000 units are produced fixed costs will remain at
$10 per unit.
19) ______
20) There are three different sectors of the economy: service, merchandising,
and manufacturing.
20) ______
21) Service Sector companies provide services or intangible products to
their customers.
21) ______
22) Merchandising-sector companies include companies engaged in
transporting goods from wholesalers to retailers.
22) ______
23) Manufacturing-sector companies purchase materials and other
resources for conversion into various finished goods.
23) ______
24) Service-sector companies use employees to produce products and
services for their customers.
24) ______
25) Manufacturing firms have three types of inventory: direct materials,
work in process, and merchandise.
25) ______
26) Direct materials inventory is products held for resale. 26) ______
27) Work-in-process consists of partially completed goods not yet ready for
sale.
27) ______
28) Rent for the building that contains the manufacturing and engineering
departments can all be charged as manufacturing overhead costs.
28) ______
29) The plant supervisor’s salary is a direct labour cost. 29) ______
30) Inventoriable costs are reported as an asset when incurred and expensed
on the income statement when the product is sold.
30) ______
31) Period costs are never included as part of inventory. 31) ______
32) Conversion costs include all direct manufacturing costs 32) ______
33) Overtime premium consists of wages paid to all workers in excess of
their straight- time wage rates.
33) ______
34) Operating income does not include interest expense and income taxes. 34) ______
35) Prime costs consist of direct and indirect manufacturing labour. 35) ______
36) Conversion costs are all manufacturing costs other than direct materials. 36) ______
37) Overtime premium is always a component of direct labour. 37) ______
38) Product costs are the sum of the costs assigned to a product for a
specific purpose.
38) ______
39) For purposes of calculating inventory costs under GAAP, only
production costs can be used.
39) ______
40) When producing for a government contract, all costs allowed by the
producer will be paid by the government.
40) ______
41) When producing to sell in the marketplace, all costs in the value chain
for getting the product to the customer are included in determining the
selling price.
41) ______
42) Management accountants help managers identify what information is
relevant and what information can be ignored.
42) ______
43) Obtaining information for performance evaluation is not one of the
features of cost and management accounting.
43) ______
44) Budgeting is the most commonly used tool for planning and control. 44) ______
45) Relevant information analysis is a key aspect of making decisions. 45) ______
46) Cost items that do not change between the alternative choices involved
in the decision are not relevant to the decision to be made as they will be
incurred no matter which alternative is chosen.
46) ______
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers
the question.
47) Anything for which a separate measurement of costs is desired is
known as:
47) ______
A) a cost item
B) a variable cost object
C) a cost object
D) a cost driver
E) a fixed cost item
48) All of the following are cost objects EXCEPT 48) ______
A) departments.
B) activities or processes.
C) customers.
D) outputs of processes.
E) cost assignments.
49) The collection of accounting data in some organized way is 49) ______
A) cost conversion
B) cost tracing.
C) cost assignment.
D) cost allocation
E) cost accumulation.
50) Actual costs are defined as 50) ______
A) indirect costs.
B) direct costs.
C) sunk costs.
D) predicted costs.
E) costs incurred.
51) The term used to identify both the tracing of accumulated costs and the
allocation of those costs to a cost object is
51) ______
A) cost allocation
B) cost assignment.
C) cost management
D) cost accumulation.
E) cost tracing.
52) Which one of the following items is typically an example of an indirect
cost of a cost object?
52) ______
A) manufacturing plant electricity
B) direct manufacturing labour
C) wood used for furniture manufacture
D) courier charges for shipment delivery
E) refundable sales tax on direct materials
53) Cost tracing is 53) ______
A) the assignment of direct costs to the chosen cost object.
B) the process of tracking both direct and indirect costs associated
with a cost object.
C) a function of cost allocation.
D) the process of comparing budgeted to actual costs.
E) the process of determining the actual cost of the cost object.
54) Which one of the following examples could be classified as a direct cost? 54) ______
A) advertising costs
B) The costs of an entire factory’s electricity related to a product; the
product line is the cost object.
C) The salary of a maintenance supervisor in the manufacturing
plant: Product A is the cost object.
D) The costs incurred for electricity in the office: Accounting
department is the cost object.
E) The printing costs incurred for payroll cheque processing: the
payroll cheque processing is the cost object.
55) The determination of a cost as being either direct or indirect depends
upon
55) ______
A) the accounting system.
B) the allocation system.
C) the cost tracing system.
D) the choice of the cost object, and the materiality of the cost in
question.
E) only the cost object chosen to determine its individual costs.
56) Competition places an increased emphasis on cost reductions. For an
organization to reduce costs it must focus on
56) ______
A) reporting non-value added costs separately from value-added
costs.
B) efficiently managing the use of the cost drivers in those valueadded
activities.
C) the cost allocation process.
D) reducing the number of cost drivers.
E) maximizing the cost allocation system.
57) All the following statements about cost management are TRUE EXCEPT 57) ______
A) changes in a cost driver doesn’t necessarily change total costs.
B) it requires efficient management of the use of the cost drivers in
the value-added activities
C) it focuses on value-added activities.
D) it is not affected by the organization’s customers.
E) it requires that managers actively strive to reduce costs.
58) Which one of the following is a variable cost in an insurance company? 58) ______
A) administrative salaries
B) president’s salary
C) property taxes
D) sales commissions
E) rent
59) Which of the following statements is a fixed cost in an automobile
manufacturing plant?
59) ______
A) machine electricity for each assembly line
B) parts used in assembly of the cars
C) administrative salaries
D) windows for each car produced
E) sales commissions
60) If each furnace required a hose that costs $20 and 2,000 furnaces are
produced for the month, the $40,000 total cost for hoses:
60) ______
A) is considered variable or fixed, depending on the relevant range.
B) is considered to be a direct fixed cost.
C) is considered to be a direct variable cost.
D) is considered to be an indirect fixed cost.
E) is considered to be an indirect variable cost.
Use the information below to answer the following question(s):
Macadamia Co. produced and sold 40,000 units last year. Per unit revenue and costs were as
follows:
Revenue $100.00
Cost of Goods Sold:
Direct Materials $15.00
Direct Labour 30.00
Variable Manufacturing Overhead 20.00
Fixed Manufacturing Overhead 10.00
Total Cost of Goods Sold $75.00
Gross Margin $25.00
Selling and Administrative Costs:
Sales Commissions (10% of Sales) $10.00
Administrative Salaries 20.00
Total Selling and Administrative $30.00
Operating Income <Loss> <$5.00>
The Fixed Manufacturing Overhead provides a capacity of 50,000 units.
61) Calculate last year’s operating income when the company produced and
sold 40,000 units.
61) ______
A) $ <200,000>
B) $ <500,000>
C) $0
D) $ <800,000>
E) None of the above.
62) Calculate this year’s operating income if the company plans to produce
and sell 50,000 units.
62) ______
A) $ <550,000>
B) $50,000
C) $0
D) $<250,000>
E) None of the above.
63) Calculate this year’s operating income if the company plans to produce
and sell 60,000 units.
63) ______
A) $0
B) $ <250,000>
C) $50,000
D) $ <550,000>
E) None of the above.
64) All of the following statements are CORRECT EXCEPT 64) ______
A) costs may be direct and variable.
B) costs may be direct and fixed.
C) costs may be indirect and variable.
D) costs may be indirect and fixed.
E) costs may not be indirect and fixed.
Use the information below to answer the following question(s).
Consider the following data of the Vancouver Company for the year 20×4:
Sandpaper-Plant $ 10,000 Leasing costs – plant $ 120,000
Materials handling-Plant 100,000 Amortization- equip. 70,000
Coolants-Plant 7,000 Property taxes – equip. 10,000
Indirect manufacturing labour 86,000 Fire insurance – equip. 5,000
Direct manufacturing labour 680,000 Direct materialspurchases 980,000
Direct materials, 1/1/x4 120,000 Direct materials 12/31/x4 86,000
Finished goods, 1/1/x4 210,000 Sales 4,000,000
Finished goods, 12/31/x4 400,000 Sales commissions 200,000
WIP, 1/1/x4 30,000 Sales salaries 180,000
WIP, 12/31/x4 20,000 Advertising costs 150,000
Administration costs 250,000
65) What is the unit cost for the direct materials for 20×4 assuming direct
materials costs are for the production of 1,014,000 units?
65) ______
A) $1.11 B) $0.95 C) $0.80 D) $1.00 E) $1.08
66) What is the unit cost for the plant leasing costs for 20×4 assuming plant
leasing costs are for the production of 1,014,000 units?
66) ______
A) $0.900
B) $0.118
C) $0.119
D) $0.110
E) $0.943
67) What is the unit cost for the direct materials for 20×4 assuming 2,000,000
units are produced (direct materials costs are $1.00 per unit when
1,014,000 units are produced)?
67) ______
A) $1.08 B) $0.95 C) $0.80 D) $1.10 E) $1.00
68) What is the unit cost for the plant leasing cost for 20×4 assuming
2,000,000 units are produced (plant leasing costs are $0.118 per unit
when 1,014,000 units are produced)?
68) ______
A) 0.35 B) 0.18 C) 0.06 D) 0.04 E) 0.12
Use the information below to answer the following question(s).
The following information pertains to Payton’s Shoe Manufacturing:
Manufacturing costs $1,000,000
Shoes manufactured 100,000
Beginning inventory 0 pairs
99,500 pairs of shoes are sold during the year for $18.
69) What is the manufacturing cost per pair of shoes? 69) ______
A) $100.00
B) $9.95
C) $10.00
D) $10.05
E) $18.00
70) When making decisions, it is best to use 70) ______
A) variable costs that would be incurred.
B) fixed costs that would be incurred.
C) average costs.
D) total cost, rather than unit cost.
E) unit cost, rather than total cost.
71) The following information pertains to the Stratford Company:
Beginning finished goods inventory $60,000
Cost of goods manufactured 410,000
Ending finished goods inventory 34,000
Wh
at is
the
cost
of
goo
ds
sold?
71) ______
A) $384,000
B) $316,000
C) $376,000
D) $444,000
E) $436,000
Use the information below to answer the following question(s).
Montreal Industries, Inc. had the following activities during the year::
Direct materials:
Beginning inventory $ 50,000
Purchases 154,000
Ending inventory 26,000
Direct manufacturing labour 40,000
Manufacturing overhead 30,000
Ending work in process inventory 10,000
Beginning work in process inventory 2,000
Ending finished goods inventory 40,000
Beginning finished goods inventory 60,000
72) What is Montreal’s cost of direct materials used during the year? 72) ______
A) $128,000
B) $178,000
C) $218,000
D) $204,000
E) $24,000
73) Which of the following is part of the service sector of our economy? 73) ______
A) a florist
B) a bank
C) a shoe producer
D) a jeweller
E) a shoe store
74) Manufacturing-sector companies 74) ______
A) purchase materials and convert them to finished goods.
B) provide services or intangible products.
C) buy goods and resell them.
D) do all of the above.
E) do none of the above.
75) Merchandising-sector companies 75) ______
A) provide services or intangible products.
B) purchase materials and convert them to finished goods.
C) buy goods and resell them.
D) do all of the above.
E) do none of the above.
76) Service-sector companies 76) ______
A) buy goods and resell them.
B) purchase materials and convert them to finished goods.
C) provide services or intangible products.
D) do all of the above.
E) do none of the above.
77) Manufacturing-sector companies report 77) ______
A) no inventory accounts.
B) only merchandise inventory.
C) only work in progress inventory.
D) only finished goods inventory.
E) direct materials inventory, work-in-process inventory, and
finished goods inventory accounts.
Use the information below to answer the following question(s).
The following information pertains to Payton’s Shoe Manufacturing:
Manufacturing costs $1,000,000
Shoes manufactured 100,000
Beginning inventory 0 pairs
99,500 pairs of shoes are sold during the year for $18.
78) What is the amount of ending finished goods inventory? 78) ______
A) $99,500
B) $8,000
C) $5,000
D) $0
E) $500
79) For a manufacturing company, direct material costs may be included in 79) ______
A) both work-in-process inventory and finished goods inventory.
B) merchandise inventory only.
C) direct materials inventory only.
D) direct materials inventory, work-in-process inventory, and
finished goods inventory accounts.
E) none of the above.
80) Which of the following statements would be INCORRECT in a
manufacturing plant?
80) ______
A) Partially completed goods are part of the work in process category.
B) Materials put into production are included in the direct materials
category.
C) There would be no merchandising inventory
D) Work in process may also be called “work in progress.”
E) Completed goods are included in the finished goods inventory.
Use the information below to answer the following question(s).
Montreal Industries, Inc. had the following activities during the year::
Direct materials:
Beginning inventory $ 50,000
Purchases 154,000
Ending inventory 26,000
Direct manufacturing labour 40,000
Manufacturing overhead 30,000
Ending work in process inventory 10,000
Beginning work in process inventory 2,000
Ending finished goods inventory 40,000
Beginning finished goods inventory 60,000
81) What is Montreal’s cost of goods manufactured during the year? 81) ______
A) $268,000
B) $248,000
C) $260,000
D) $240,000
E) $238,000
82) Wages paid to machine operators on an assembly line are an example of
which type of cost?
82) ______
A) direct manufacturing labour costs
B) direct materials costs
C) indirect manufacturing overhead costs
D) direct manufacturing overhead costs
E) indirect material costs
83) Which of the following is true concerning Prime Costs? 83) ______
A) Prime costs are direct manufacturing costs.
B) They equal the sum of fixed manufacturing costs plus conversion
costs.
C) They equal the sum of direct manufacturing costs plus conversion
costs.
D) They include direct manufacturing labour, in a two-part
classification.
E) They are indirect manufacturing costs.
Use the information below to answer the following question(s).
The following information pertains to Payton’s Shoe Manufacturing:
Manufacturing costs $1,000,000
Shoes manufactured 100,000
Beginning inventory 0 pairs
99,500 pairs of shoes are sold during the year for $18.
84) What is the amount of gross profit? 84) ______
A) $995,000
B) $1,791,000
C) $796,000
D) $1,000,000
E) none of the above
Use the information below to answer the following question(s).
Montreal Industries, Inc. had the following activities during the year::
Direct materials:
Beginning inventory $ 50,000
Purchases 154,000
Ending inventory 26,000
Direct manufacturing labour 40,000
Manufacturing overhead 30,000
Ending work in process inventory 10,000
Beginning work in process inventory 2,000
Ending finished goods inventory 40,000
Beginning finished goods inventory 60,000
85) What is Montreal’s cost of goods sold during the year? 85) ______
A) $240,000
B) $260,000
C) $200,000
D) $232,000
E) $220,000
86) Goods available for sale that are not in ending inventory 86) ______
A) are included in the work in process inventory at the end of the
year.
B) are incorporated in the cost of goods sold amount.
C) are included in beginning inventory.
D) are included in goods available for sale at the end of the year.
E) are not accounted for until the next year.
Use the information below to answer the following question(s).
Consider the following data of the Vancouver Company for the year 20×4:
Sandpaper-Plant $ 10,000 Leasing costs – plant $ 120,000
Materials handling-Plant 100,000 Amortization- equip. 70,000
Coolants-Plant 7,000 Property taxes – equip. 10,000
Indirect manufacturing labour 86,000 Fire insurance – equip. 5,000
Direct manufacturing labour 680,000 Direct materialspurchases 980,000
Direct materials, 1/1/x4 120,000 Direct materials 12/31/x4 86,000
Finished goods, 1/1/x4 210,000 Sales 4,000,000
Finished goods, 12/31/x4 400,000 Sales commissions 200,000
WIP, 1/1/x4 30,000 Sales salaries 180,000
WIP, 12/31/x4 20,000 Advertising costs 150,000
Administration costs 250,000
87) What is the amount of direct materials used for the year 20×4? 87) ______
A) $860,000
B) $1,014,000
C) $1,031,000
D) $946,000
E) $894,000
88) What is the manufacturing cost incurred in 20×4? 88) ______
A) $2,352,000
B) $2,132,000
C) $2,097,000
D) $2,102,000
E) $1,088,000
89) What is the cost of goods manufactured in 20×4? 89) ______
A) $2,102,000
B) $2,082,000
C) $2,132,000
D) $2,112,000
E) $2,097,000
90) What is the cost of goods sold in 20×4? 90) ______
A) $1,922,000
B) $1,502,000
C) $2,302,000
D) $1,712,000
E) $2,322,000
Use the information below to answer the following question(s).
Frazer, Inc. had the following activities in the year:
Direct materials:
Beginning inventory $100,000
Purchases 308,000
Ending inventory 52,000
Direct manufacturing labour 80,000
Manufacturing overhead 60,000
Ending work in process inventory 20,000
Beginning work in process inventory 4,000
Ending finished goods inventory 80,000
Beginning finished goods inventory 120,000
91) What is Frazer’s cost of goods manufactured? 91) ______
A) $512,000
B) $536,000
C) $496,000
D) $476,000
E) $480,000
92) What is Frazer’s cost of goods sold? 92) ______
A) $464,000
B) $516,000
C) $520,000
D) $400,000
E) $440,000
93) Which statement about conversion costs is CORRECT using the twopart
classification of costs?
93) ______
A) They include both direct manufacturing labour costs and
manufacturing overhead costs.
B) They include only direct manufacturing labour costs.
C) They include indirect manufacturing costs and direct
manufacturing labour costs.
D) They include indirect manufacturing labour costs but not
manufacturing overhead costs.
E) They include only indirect manufacturing costs.
94) Service organizations in our economy 94) ______
A) have a finished goods inventory account.
B) do not have a supply inventory account.
C) do not have a direct materials inventory account.
D) have a work in process inventory account.
E) have a raw materials account.
95) Which of the following formulae would determine costs of goods sold in
a merchandising entity?
95) ______
A) Beginning inventory + Purchases – Ending inventory
B) Beginning inventory – Purchases + Ending inventory
C) Ending Inventory – Beginning inventory – Purchases
D) Beginning inventory – Ending inventory – Purchases
E) Purchases – Ending inventory
96) Which of the following formulae would determine cost of goods sold in
a manufacturing entity?
96) ______
A) Beginning inventory + Ending inventory – Cost of goods
manufactured
B) Ending inventory – Beginning inventory – Cost of goods
manufactured
C) Beginning inventory – Ending inventory – Cost of goods
manufactured.
D) Cost of goods manufactured – Ending inventory + Beginning
inventory
E) Cost of goods manufactured + Ending inventory + Beginning
inventory
97) The following information pertains to Tom’s Country Wood Shop:
Beginning finished goods, 1/1/x4 $15,000
Ending finished goods, 12/31/x4 9,500
Cost of goods sold 56,000
Sales 112,500
Operating expenses 25,000
What is the cost of goods manufactured for 20×4?
97) ______
A) $31,500
B) $56,500
C) $66,500
D) $50,500
E) $61,500
98) Generally, costs which are initially recorded as an asset and sub sequent
ly
become
an
expense
are
called
98) ___
___
A) manufacturing costs.
B) non-capitalized costs.
C) non-inventoriable costs.
D) non-manufacturing costs.
E) inventoriable costs.
99) Which of the following is NOT TRUE of Period Costs? 99) ______
A) For manufacturing sector companies they include all
nonmanufacturing costs.
B) They are expected to benefit future periods.
C) For merchandising sector companies they include all costs not
related to the cost of goods purchased for resale.
D) They are all of the costs on the income statement except cost of
goods sold.
E) They are also called operating costs.
100) The components of prime costs and conversion costs include all of the
following EXCEPT
100) _____
A) direct manufacturing labour costs plus indirect manufacturing
costs.
B) indirect materials costs.
C) direct materials costs.
D) direct manufacturing labour costs.
E) indirect manufacturing costs.
101) The total of the costs assigned to a particular product for a specific
purpose is called its
101) _____
A) direct costs.
B) prime costs.
C) product costs.
D) marketing costs.
E) inventoriable costs.
102) Which of the following statements is FALSE? 102) _____
A) Inventoriable costs are a special case of product costs.
B) Conversion costs are all manufacturing costs other than direct
material costs.
C) Inventoriable costs are important for GAAP.
D) “Product costs” refers to the particular costs allocated to a product
for the purpose at hand.
E) Product costs and inventoriable costs are the same.
103) Which of the following statements about the key features of cost
accounting and cost management is FALSE?
103) _____
A) When making decisions managers must understand which
revenue and costs to consider and which ones to ignore.
B) The costing system traces direct costs and allocates indirect costs to
products.
C) When making decisions about what products to produce,
managers need to know how revenue and costs vary with changes
in output levels.
D) Managers need to distinguish between which costs are fixed and
which are variable.
E) Budgeting is used only for planning and control purposes.
SHORT ANSWER. Write the word or phrase that best completes each statement or answers
the question.
104) Sheen Manufacturing has three cost objects that it uses to assign
costs in its manufacturing plants. They are:
Cost object #1 The existence of buildings and equipment
Cost object #2 The use of buildings and equipment
Cost object #3 The availability and use of manufacturing
labour
The following manufacturing overhead costs categories are
found in the accounting records:
1. Amortization on buildings and equipment
2. Fringe benefits
3. Idle time wages
4. Lubricants for machines
5. Night security
6. Overtime premiums
7. Property insurance
8. Property taxes
9. Safety hats and shoes
10. Supervisor’s salaries
11. Utilities
Required:
Assign each of the cost categories to the one cost object you
consider most appropriate.
104) _ ___________
105) Office Supply Company manufactures office furniture. Recently
the company decided to develop a formal cost accounting
system. The company is currently converting all costs into
classifications as related to its manufacturing processes.
Required:
For the following items, label each as being appropriate for
∙ cost tracing to the finished furniture,
∙ cost allocation of an indirect manufacturing cost to the
finished furniture, or
∙ as a non-manufacturing item.
Item Cost Cost Nonmanu-
Tracing Allocation facturing
Car
pent
er
wag
es ________ ________ ________
Am
ortiz
atio
n –
offic
e
buil
ding ________ ________ Glue for
assembly ________ Lathe
department
supervisor ________ Lathe
amortization ________ Lathe
maintenance ________ Lathe operator
wages________ ________ Lumber ________
Sales
staff
wages
________
________
________
Metal
brackets
for
drawers ________ ________ ________
Washroo
m
supplies ________ ________ ________
105) ____
____
____
106) Boone Hospital wants to determine, to the extent possible, the
actual cost for each patient stay. It is a general health care
facility with all basic services but does not perform specialized
services such as organ transplants.
Required: Complete the following table by
a. Classifying each cost as a direct or indirect cost with respect
to each patient.
b. Classifying each item as fixed or variable with respect to the
number of patient days (sum of days each patient was in
hospital) the hospital incurs.
Cost Direct Indirect Fixed Variable
Cleaning
activities
Electronic
monitoring
Lab test charges
Meals for
patients
Medicine
Nurses’ salaries
Operating room
usage
Parking
maintenance
Security
106) _ ___________
107) Springfield Manufacturing produces electronic storage devices,
and uses the following three-part
classification for its manufacturing costs: direct materials, direct
manufacturing labor, and indirect
manufacturing costs. Total indirect manufacturing costs for
January were $300 million, and were
allocated to each product on the basis of direct manufacturing
labor costs of each line. Summary data (in
millions) for January for the most popular electronic storage
device, the Big Bertha, was:
Big Bertha
Direct manufacturing costs $9,000,000
Direct manufacturing labor costs $3,000,000
Indirect manufacturing costs $8,500,000
Units produced 40,000
Required:
a. Compute the manufacturing cost per unit b.
Suppose production will be reduced
107) ____________
108) Whippany manufacturing wants to estimate costs for each
product they produce at its Troy plant. The
Troy plant produces three products at this plant, and runs two
flexible assembly lines. Each assembly
line can produce all three products.
Required:
a. Classify each of the following costs as either direct
or indirect for each product.
b. Classify each of the following costs as either fixed
or variable with respect to the number of units
produced of each product.
Direct Indirect Fixed Variable
Assembly line labor wages ______ ______ ______ ______
Plant manager’s wages ______ ______ ______ ______
Depreciation on the
assembly line equipment ______ ______ ______ ______
Component parts for the
product ______ ______ ______ ______
Wages of security personnel
for the factory ______ ______ ______ ______
108) _ ___________
109) Macadamia Co. produced and sold 40,000 units last year. Per
unit revenue and costs were as follows:
Revenues $120.00
Cost of Goods Sold:
Direct Materials $15.00
Direct Labour 20.00
Variable Manufacturing Overhead 10.00
Fixed Manufacturing Overhead 6.00
Total Cost of Goods Sold $51.00
Gross Margin $69.00
Selling and Administrative Costs:
Sales Commissions (10% of Sales) $12.00
Administrative Salaries 5.00
Total Selling and Administrative Operating Income <Loss> The
Fixe
d
Man
ufac
turi
ng
Ove
rhea
d
prov
ides
a
capa
city
of
50,0
00 units. The
Production
Manager has
proposed
leasing a new
machine at a
cost of $80,000
per year. This
will reduce DL
by 30% and
improve
quality so the
the selling
price per unit
can be
increased by
$10.
Production
and sales are
expected to
remain the
same as last
year.
Required
:
Calculate
the new
operatin
g income
assumin
g the
leasing
proposal
is
accepted.
109) ____
____
____
110) Eichhorn Company’s Process Engineering department has the
responsibility of rearranging the individual work tasks for each
assembly line worker, with the goal of utilizing each worker as
much as possible. Currently, on average, each assembly line
worker only has tasks that require 47 minutes per hour, and the
plant manager wants this increased by at least 10 %. The
company builds the Eichorn Rocket Roadster, which is selling
out of dealer’s showrooms faster than the company’s assembly
plants can produce them. If production can’t be increased, then
sales will soon suffer.
Required:
Explain the effect on total costs of production, using the number
of engineering changes (from Process Engineering) and at least
two other cost drivers. Choose the cost driver that you think is
most logical in the circumstances, and begin your answer with a
brief explanation of a cost driver.
110) _ ___________
111) Harris and Dobbins Law Firm had the following financial
activities for June. Revenue was $860,000 with salaries and
wages of all employees being $600,000. Fringe benefits were 15
percent of salaries and wages. Rent on the building was
$100,000 and equipment amortization was $46,000. Office
supplies and utilities totalled $28,000. Income taxes withheld
from employees totalled $46,000 for the month while ending
accounts payable were $24,680. Cash flows from accounts
receivable totalled $880,000.
Required:
Using an appropriately formatted income statement, determine
the operating income of the partnership.
111) _ ___________
112) Ames Power Point had sales in October of $28,000,000 for its thre e stores in
Toronto.
The
beginnin
g
merchan
dise
inventori
es for
October
and
Novemb
er were
$5,000,00
0 and
$4,000,00
0,
respectiv
ely.
October
purchase
s totalled
$19,000,0
00 . All
sales are
on
account
(terms
2/15, net
30 days)
and are
collected
50
percent
in the
month of
the sale
and 50
percent
in the
followin
g month.
One-half
of all
sales
discount
s are
taken for
a total of
$265,000.
Septemb
er sales
totalled
$25,000,000 while November sales were $30,000,000. Additional
information for October is as follows:
Supplies used $1,000,000
Salaries and benefits 1,500,000
Maintenance 45,000
Amortization 9,000
Utilities 35,000
Principal payment on maturing bonds 2,000,000
Required:
Using an appropriately formatted income statement, determine
the operating income of the company.
112) _ ___________
113) Combs, Inc., reports the following information for September
sales:
Sales $15,000
Variable costs 3,000
Fixed costs 4,000
Operating income $ 8,000
Required:
If sales double in October, what is the projected operating
income?
113) _ ___________
114) Eschliman Manufacturing Company had the following account
balances for the quarter ending September 30, unless otherwise
noted:
Amortization of manufacturing equipment $88,000
Amortization of office equipment 41,200
Direct manufacturing labour 160,000
Direct materials used 126,000
Finished goods inventory (July 1) 180,000
Finished goods inventory (September 30) 170,000
General office expenses 101,800
Indirect manufacturing labour 62,000
Indirect materials used 28,000
Marketing distribution costs 10,000
Miscellaneous plant overhead 45,000
Plant utilities 30,800
Property taxes on building 9,600
Property taxes on salespersons’ company vehicles 4,000
Work in process inventory (July 1) 46,800
Work in process inventory (September 30) 57,000
Required:
a. Prepare a cost of goods manufactured schedule for the
quarter.
b. Prepare a cost of goods sold schedule for the quarter.
114) _ ___________
115) The following information is taken from the records of Britton
Company for March:
Purchases:
Direct materials $9,000,000
Indirect materials 200,000
Office supplies 420,000
Sales 36,000,000
Salaries and Benefits:
Selli
ng
and
adm
inist
rativ
e 4,000,000
Direct
manufacturing
labour Rent* Utilities* Advertising Inventories: March 1
Direct
materials $4,400,000 $1,600,000
Indirect
materials 500,000 600,000
Office
supplies 150,000 180,000
Finished
goods 24,000,000 16,000,000
* Of
these
costs, 60
percent
are
assigned
to
manufact
uring
and 40
percent
to selling
and
administ
ration.
Required
:
a.
Prepa
re a
schedule
of cost of
goods
manufact
ured.
b.
Prepa
re an
income
statemen
t for the
month.
c.
Comp
ute the
prime
costs,
conversi
on costs,
and
indirect
manufact
uring costs. 115) _ ___________
116) Farley Muffler, Inc. received the following monthly report from
its newly hired accountant, who quit after only a week on the
job.
Farley Muffler, Inc.
Cost of Goods Sold Schedule
Finished Goods Inventory (beginning) $15,000
Work in Process Inventory (beginning) 3,000
Total $18,000
Current Manufacturing Costs:
Salaries and wages:
Direct manufacturing labour $5,000
Indirect manufacturing labour 2,000
Sales salaries 4,000
Administrative 3,000 $14,000
Other:
Manufacturing supplies $1,500
Manufacturing amortization 3,500
Insurance on showroom 1,000
Miscellaneous factory overhead 6,500 12,500 26,500
Total Work in Process $44,500
Ending Work in Process and Finished Goods Inventory 0
Cost of Goods Sold $44,500
Farley Muffler, Inc.
Income Statement
Sales $100,000
Less direct materials 20,000
Gross profit $ 80,000
Less other expenses:
Cost of goods sold $44,500
Office supplies 250
Manufacturing utilities 1,000
Office utilities 250 46,000
Net Income $ 34,000
Required:
a. Prepare a cost of goods manufactured statement in good
form.
b. Prepare an income statement in good form.
116) _ ___________
117) Find the required amounts, assuming each is an independent
case.
a. Direct Materials Beginning balance $14,000
Ending balance 28,000
Purchases Direct materials used b.
Fi
nished Goods
Inventory Cost of goods manufactured Ending balance Cost of goods sold Beginning balance
c. Work
in
Process
Inventor
y
Endin
g
Balance 44,000
Cost of goods manufactured 42,000
Beginning balance 16,000
Current manufacturing costs ?
d.
Merc
handise
Inventor
y
Purch
ases 420,000
Cost of goods sold 446,000
Beginning balance 82,000
Ending balance ?
117) ____
____
____
118) Evans Inc., had the following activities during 2007:
Direct materials:
Beginning inventory $ 40,000
Purchases 123,200
Ending inventory 20,800
Direct manufacturing labor 32,000
Manufacturing overhead 24,000
Beginning work-in-process inventory 1,600
Ending work-in-process inventory 8,000
Beginning finished goods inventory 48,000
Ending finished goods inventory 32,000
Required:
a. What is the cost of direct materials used during
2007?
b. What is cost of goods manufactured for 2007?
c. What is cost of goods sold for 2007?
d. What amount of prime costs was added to
production during 2007?
e. What amount of conversion costs was added to
production during 2007?
118) _ ___________
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
119) Things are not going well for the widget industry this year. The well-known cyclical
nature of
widget
sales is
in a
downtur
n and
your
plant has
been
ordered
to cut
costs by
its
America
n parent
corporati
on. The
plant
manager
explains that he has shown the lead by negotiating a $1.50 hourly wage decrease
with the production workers, based on a formula that pegs a $1.50 per hour wage
increase/decrease to sales volume, and since sales are down this year, so are hourly
wage costs. In the quarterly management meeting, the sales manager complained
that sales could have been higher, but that somehow costs had increased, at least
that’s what the reports out of your office in management accounting, indicated. The
Purchasing manager assured everyone that she was able to obtain raw materials at
the same price as last year, and unfortunately, you as the management accountant,
were not in attendance at the meeting. Your assistant, a new employee attended in
your place, and promised at the meeting to redo the reports and find the errors.
Your assistant has come to you as he cannot find any errors in the reports.
Consequently, the plant manager wants you to redo the reports, find the error
reports produced by your department for the last quarter and to explain to your
boss, the plant manager, why average costs have increased.
Required:
Assuming there are no errors in the cost reports, explain to the plant manager how
direct labour costs could be decreased and direct materials costs could be the same
as last year, and yet the selling price cannot be lowered without sacrificing net
income for the plant.
120) Why is it possible that a raw material such as glue might be considered as an
indirect material for one
furniture manufacturer and as a direct material for another furniture manufacture?
121) A new employee in the accounting department is having difficulty understanding
two sets of accounting termsvariable and fixed costs as opposed to period and
product costs. He understands that variable costs change during an accounting
period while fixed costs do not. However, he explains that a period cost implies that
it is for a period of time and is, therefore, also fixed. Does his assumption imply that
all product costs are then variable?
Required:
As part of your responsibility to train new staff, explain the difference between these
terms.
122) The vice president of production has just completed the January meeting with all
production department heads. Everyone is upset that the production variances for
the month were unfavourable. They do not understand why everything was
unfavourable. January is typically the company’s lowest production month of the
year.
The company uses annual average unit costs for production evaluation purposes.
The average costs are based on the prior year’s actual performance with adjustments
for any predicted changes in the coming year. Both production and economic items
are considered in setting the averages for each new year.
Required:
Explain the problems with using average costs in evaluating production.
123) Explain the difference between an inventoriable cost and a period cost. What
pot
ent
ial
problems does an
inaccurate classification of product and period costs cause?
124) A manufacturing company contracts with the labour union to guarantee full
employment for all employees with at least 10 years seniority. The Company
expects to be working at capacity for the next 2 years (the life of the contract), so this
was seen as a bargaining concession without any cost to the company. On average,
an employee earns $30 per hour, including benefits. The work force consists of 800
employees, with seniority ranging from 1 year to 18 years.
Required:
Analyze the direct labour cost in term of variable costs, fixed costs, and the relevant
range.
1) TRUE
2) FALSE
3) FALSE
4) FALSE
5) TRUE
6) TRUE
7) FALSE
8) TRUE
9) FALSE
10) FALSE
11) TRUE
12) FALSE
13) TRUE
14) FALSE
15) TRUE
16) TRUE
17) FALSE
18) FALSE
19) FALSE
20) TRUE
21) TRUE
22) FALSE
23) TRUE
24) FALSE
25) FALSE
26) FALSE
27) TRUE
28) FALSE
29) FALSE
30) TRUE
31) TRUE
32) FALSE
33) TRUE
34) TRUE
35) FALSE
36) TRUE
37) FALSE
38) TRUE
39) TRUE
40) FALSE
41) TRUE
42) TRUE
43) FALSE
44) TRUE
45) TRUE
46) TRUE
47) C
48) E
49) E
50) E
51) B
52) A
53) A
54) E
55) D
56) B
57) D
58) D
59) C
60) C
61) A
62) B
63) E
64) E
65) D
66) B
67) E
68) C
69) C
70) D
71) E
72) B
73) B
74) A
75) C
76) C
77) E
78) C
79) D
80) B
81) D
82) A
83) A
84) C
85) B
86) B
87) B
88) D
89) D
90) A
91) E
92) C
93) E
94) C
95) A
96) D
97) D
98) E
99) B
100) B
101) C
102) E
103) E
104) Cost object # 1 includes categories 1, 5, 7, and 8.
Cost object # 2 includes categories 4, and 11.
Cost object # 3 includes categories 2, 3, 6, 9, and 10.
105) Item Cost Cost Nonmanu-
Tracing Allocation facturing
Carpenter wages X
Amortization – office building X
Glue for assembly X
Lathe department supervisor X
Lathe amortization X
Lathe maintenance X
Lathe operator wages X
Lumber X
Sales staff wages X
Metal brackets for drawers X
Washroom supplies X
106)
Cost Direct Indirect Fixed Variable
Cleaning
activities
X
X
Electronic
monitoring
X
X
Lab test charges
X
X
Meals for
patients
X
X
Medicine X X
Nurses’ salaries X X
Operating room
usage
X
X
Parking
maintenance
X
X
Security X X
107) a. Unit costs for January were:
($9,000,000 + $3,000,000 + $8,500,000) / 40,000 = $512.50 per unit
b. Unit costs should be higher in February if only 30,000 units are to be produced.
Indirect manufacturing costs most likely include both fixed and variable
components. Since fewer units are expected to be produced in February, total
fixed costs will be spread over fewer units. This will result in an increase in
total cost per unit since variable costs per unit will most likely not change with
the decreased production.
108)
Direct Indirect Fixed Variable
Assembly line labor wages X X
Plant manager’s wages X X
Depreciation on the
assembly line equipment X X
Component parts for the
product X X
Adhesive to hold the parts
together and is an X X
insignificant part of the
final cost of the product
109) 1 unit 40,000 units
Revenue ($120 + $10) $130 $5,200,000
Cost of goods sold
DM $15 $600,000
DL $20x(1-30%) 14 560,000
VMOH 10 400,000
FMOH ($6×40,000+$80,000)/40,000 8 47 320,000 1,880,000
Gross Profit $83 $3,320,000
Selling & Administration Costs
Sales Commissions (10% of Sales) $13 $520,000
Administration Salaries 5 18 200,000 720,000
Operating Income $65 $2,600,000
Recommendation: Accept the leasing proposal as it raises OI by $13 per unit or $520,000.
110) A cost driver is any factor that affects total costs. When a new engineering change has to be
implemented, obviously there will be down time for staff to learn the new work processes,
and for any physical changes required on the assembly line that may result in rearranging
the workload tasks (such as material handling changes). These costs would have to be
balanced against the expected savings by being able to utilize the production worker’s time
more efficiently. The costs of the engineer’s time would not be relevant.
A second cost driver would be the units of production. As the workers time utilization
becomes more efficient, production should increase, so total variable costs will increase.
Total fixed costs will not increase assuming no problems with the relevant range.The direct
manufacturing labour costs would increase in total, but as indicated above, we expect
decreased variable direct manufacturing labour cost per unit.
Another possible cost driver is the number of setups. To the extent that the number of
setups is increased by the engineering changes, then total costs will increase, and these
costs would have to be considered when contemplating the engineering changes. In this
situation, it appears that production must be increased, and that the plant manager is most
concerned with achieving this through reducing the direct labour required per unit, rather
than by reducing labour costs per unit. Therefore, the most likely cost driver in this
situation would be the number of units produced.
111)
Harris and Dobbins Law Firm
Income Statement
For the Month of June
Revenues $860,000
Operating Costs
Salaries and Wages $600,000
Fringe Benefits 90,000
Rent 100,000
Equipment Amortization 46,000
Office supplies and utilities 28,000 $864,000
Net Income <Loss> <$4,000>
112)
Ames Power Point Company
Income Statement
For the Month of October
Sales $28,000,000
Less: sales Discounts 265,000
Net Sales $27,735,000
Cost of Goods Sold
Beginning inventory $5,000,000
Purchases 19,000,000
Cost of Goods Available for sale $24,000,000
Ending inventory $ 4,000,000 $20,000,000
Gross Margin $7,735,000
Other costs
Supplies 1,000,000
Amortization 9,000
Office supplies and utilities 28,000
Salaries & benefits 1,500,000
Maintenance 45,000
Utilities 35,000 2,589,000
Operating Income <Loss> $5,146,000
113) ($15,000 x 2) — ($3,000 x 2) — $4,000 = $20,000
114) a. Eschliman Manufacturing Company
Cost of Goods Manufactured Schedule
for quarter ending September 30
Direct materials used $126,000
Direct manufacturing labour 160,000
Manufacturing overhead
Amortization of mfg. equip. $ 88,000
Indirect mfg. labour 62,000
Indirect materials 28,000
Miscellaneous plant overhead 45,000
Plant utilities 30,800
Property taxes on building 9,600 263,400
Manufacturing costs incurred $549,400
Add beginning work in process inventory 46,800
Total manufacturing costs $596,200
Less: ending work in process inventory 57,000
Cost of goods manufactured $539,200
b.
Eschliman Manufacturing Company
Cost of Goods Sold Schedule
for quarter ending September 30
Beginning finished goods inventory $180,000
Cost
of
good
s
manufactured 539,200
Cost of goods available for sale $719,200
Ending finished goods inventory 170,000
Cost of goods sold $549,200
115) a.
Britton Company
Cost of Goods Manufactured Schedule
For March
Direct materials:
Beginning inventory $ 4,400,000
Purchases of direct materials 9,000,000
Cost of direct materials available $13,400,000
Ending inventory 1,600,000
Direct materials used $11,800,000
Direct manufacturing labour 6,000,000
Manufacturing overhead:
Rent (60%) $2,400,000
Utilities (60%) 720,000
Indirect materials
($200,000 + $500,000 – $600,000) 100,000 3,220,000
Cost of goods manufactured $21,020,000
b.
Britton Company
Income Statement
For the Month of March
Sales $36,000,000
Cost of goods sold
Beginning inventory $24,000,000
Cost of goods manufactured 21,020,000
Cost of goods available for sale $45,020,000
Ending inventory 16,000,000 29,020,000
Gross margin $ 6,980,000
Other costs
Supplies
($420,000 + $150,000 – $180,000) $ 390,000
Selling and administrative salaries 4,000,000
Rent (40%) 1,600,000
Utilities (40%) 480,000
Advertising 700,000 7,170,000
Operating Income <Loss> $ (190,000)
c. Prime costs $11,800,000 + $6,000,000 = $17,800,000
Conversion costs $6,000,000 + $3,220,000 = $9,220,000
Indirect manufacturing costs = $3,220,000
116) a.
Farley Muffler, Inc.
Cost of Goods Manufactured Schedule
Direc
t
mate
rials $20,000
Direc
t
Man
ufact
urin
g
labo
ur 5,000
Indir
ect
man
ufact
urin
g
cost
Utilit
ies
$
1,000
S
uppli
es
1
,500
Amortization 3,500
Indirect manufacturing labour 2,000
Miscellaneous factory overhead 6,500 14,500
Manufacturing cost incurred $39,500
Add beginning work in process inventory 3,000
Total manufacturing costs $42,500
Less ending work in process inventory 0
Cost of goods manufactured $42,500
b.
Farley Muffler, Inc.
Income Statement
Sales $100,000
Cost of goods sold:
Beginning finished goods inventory $15,000
Cost of goods manufactured 42,500
Cost of goods available for sale $57,500
Ending finished goods inventory 0
Cost of goods sold 7,500
Gross margin $ 42,500
Other costs:
Office supplies $ 250
Office utilities 250
Sales salaries and wages 4,000
Administrative salaries and wages 3,000
Insurance on showroom 1,000 8,500
Operating income $ 34,000
117) a. Direct materials used $14,000 + $96,000 – $28,000 = $82,000
b. Beginning balance of finished goods inventory
$40,000 + $122,000 – $124,000 = $38,000
c. Current manufacturing costs $42,000 + $44,000 – $16,000 = $70,000
d. Ending balance of merchandise inventory
$82,000 + $420,000 – $446,000 = $56,000
118) a. $40,000 + $123,200 — $20,800 = $142,400
b. $142,400 + $32,000 + $24,000 + $1,600 — $8,000 = $192,000
c. $192,000 + $48,000 — $32,000 = $208,000
d. $142,400 + $32,000 = $174,400
e. $32,000 + $24,000 = $56,000
119) The key to the problem lies in recognizing the difference between variable and fixed costs,
and understanding the implication that declining volume has on average costs. Part of the
solution may be due to indirect materials, but one would assume this is a minor factor. The
major factor is that there are fewer units of widgets to absorb the fixed costs. On a per
widget basis, the plant is saving say, $1.50 per hour in labour costs, but each widget has to
absorb more of the fixed costs. If the $1.50 per hour component is not a significant part of
the cost, compared to the fixed cost per unit at that level of production, for example, if the
direct labour per widget is only 6 minutes, then the savings in variable cost per widget is
only $0.15. This isn’t much in savings when the fixed costs per unit have to increase. The
next point is that setting the sales price perhaps should not consider actual fixed cost
burden, but the plant could consider using a budgeted amount, and lower the sales price
some what in hopes that this would increase sales.
120) It is possible for a raw material such as glue to be considered as an indirect material
by one furniture manufacturer and as a direct material by another furniture
manufacturer. The decision is largely a choice by the manufacturer and depends on
a number of factors including the materiality of the cost in question, the cost of
gathering the information, and the design of the manufacturing process. If the
product in question has an insignificant cost, it might not be worth the trouble to
trace the cost of the glue to each piece of furniture, and the glue would be considered
indirect. If the cost of tracing the cost of the glue is high in relation to the benefits
received from tracing it, the glue would likely be considered as indirect material. If
the design of the manufacturing process easily permits all the glue to be traced to a
single type of furniture, then it would be easy for a company to consider that
material to be direct. Overall, the direct/indirect classification is decided on a
cost/benefit basis.
121) First, you should explain that all costs should be first classified as either variable or fixed.
This concept deals with cost behaviour and not with what the costs are associated in the
organization. Many decisions are made about costs because of the type of behaviour they
exhibit.
Second, a cost can be assigned to “why you are in business” activities (product costs) of the
organization or to “support” activities (period costs) of the organization. For a
manufacturing firm period costs are all costs which have no direct relationship to the
manufacturing process.
Period costs are always expenses during the accounting period while product costs are
inventoriable because they can be assigned to the products being produced.
122) One of the problems with average unit costs is that actual costs may never be average. The
probable shortcoming with the situation presented is that the costs included a fixed cost
element and with the production low the fixed costs were averaged using a denominator
that was smaller than the year’s average which caused the unit averages to increase.
123) Inventoriable costs are all costs of a product that are considered as assets in the
balance sheet when they are incurred and which become cost of goods sold only
when the product is sold. Period costs are treated as expenses of the accounting
period in which they are incurred. An inaccurate classification of inventoriable and
period costs could lead to violations of the matching principle, which states that costs
used in producing revenue should be matched on the income statement when the
revenue is recognized. In extreme cases, net income for a given period might be
significantly misstated if proper matching does not occur.
124)
Usually, we think of direct labour as a variable cost, since it increases in proportion to the increases in
output. However in this case, the manufacturer has converted a portion of the direct labour cost into a
fixed cost, since the union contract appears to require the company to pay full wages to all employees
with at least 10 years seniority, regardless of the level of production. The direct labour costs in excess of
this amount would still be a variable cost. The relevant range would be the number of employees with at
least 10 years seniority, times the wage for a regular work week. This will be the case until the contract
expires.
