Name: Test Bank for Managerial Accounting 11th Canadian Edition by Ray H Garrison, Alan Webb, Theresa Libby
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Chapter 02

Cost Terms, Concepts, and Classifications

Multiple Choice Questions

What would be the classification of corporate controller’s salary?
A.Manufacturing cost.
B. Product cost.
C. Administrative cost.
D. Selling cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-08 Non-manufacturing Costs

How should the cost of the fire insurance for a manufacturing plant be classified?
A.Prime cost.
B. Product cost.
C. Period cost.
D. Variable cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

How would the cost of rent for a manufacturing plant generally be classified?
A.A product cost but not a prime cost.
B. Neither a product nor prime cost.
C. A prime cost but not a product cost.
D. Both a prime cost and product cost.

For a lamp manufacturing company, the cost of the insurance on its vehicles that deliver lamps to customers is best described as a:
A.Prime cost.
B. Manufacturing overhead cost.
C. Period cost.
D. Differential cost of a lamp.

For a manufacturing company, which of the following is an example of a period cost rather than a product cost?
A.Depreciation of factory equipment.
B. Wages of salespersons.
C. Wages of machine operators.
D. Insurance on factory equipment.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

Which of the following would be considered a product cost for external financial reporting purposes?
A.Cost of a warehouse used to store finished goods.
B. Cost of guided public tours through the company’s facilities.
C. Cost of travel necessary to sell the manufactured product.
D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

Which of the following would NOT be treated as a product cost for external financial reporting purposes?
A.Depreciation on a factory building.
B. Salaries of factory workers.
C. Indirect labour in the factory.
D. Advertising expenses.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

What would be the classification of the transportation costs incurred by a manufacturing company to ship its product to its customers?
A.Product cost.
B. Manufacturing overhead.
C. Period cost.
D. Administrative cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

The advertising costs incurred by Pepsi to air its commercials during the hockey season can best be described as a:
A.Variable cost.
B. Fixed cost.
C. Prime cost.
D. Conversion cost.

Micro Computer Company has set up a toll-free telephone line for customer inquiries regarding computer hardware produced by the company. How would the cost of this toll-free line be classified?
A.Product cost.
B. Manufacturing overhead.
C. Direct labour.
D. Period cost.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

How would the wages of factory maintenance personnel usually be classified?
A.Direct labour and manufacturing overhead.
B. Indirect labour and manufacturing overhead.
C. Direct labour and period cost.
D. Indirect labour and period cost

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

Prime costs consist of:
A.Direct Labour and Manufacturing Overhead.
B. Direct Material and Direct Labour.
C. Direct Material and Manufacturing overhead.
D. Direct Material, Direct Labour and Manufacturing Overhead.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

What does manufacturing overhead cost consist of?
A.All manufacturing costs.
B. All manufacturing costs, EXCEPT direct materials and direct labour.
C. Indirect materials but NOT indirect labour.
D. Indirect labour but NOT indirect materials.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-06 Manufacturing Overhead
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

A brewery produces many variety of beer. If the cost object is a particular brand of beer the factory supervisor salary is classified a/an _____________ cost of the brand of beer and a _____________ cost of the entire division.
A.Direct; Common
B. Indirect; Common
C. Direct; Prime
D. Fixed; Period

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

Rossiter Company failed to record a credit sale at the end of the year, although the reduction in finished goods inventories was correctly recorded when the goods were shipped to the customer. Which one of the following statements is correct?
A.Accounts receivable was not affected, inventory was not affected, sales were understated, and cost of goods sold was understated.
B. Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated.
C. Accounts receivable was not affected, inventory was understated, sales were understated, and cost of goods sold was understated.
D. Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was not affected.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-17 Inventoriable Costs

What is the outcome if the cost of goods sold is greater than the cost of goods manufactured?
A.Work-in-process inventory has decreased during the period.
B. Finished goods inventory has increased during the period.
C. Total manufacturing costs must be greater than cost of goods manufactured.
D. Finished goods inventory has decreased during the period.

Last month, when 10,000 units of a product were manufactured, the cost per unit was $60. At this level of activity, variable costs were 50% of total unit costs. If 10,500 units are manufactured next month and cost behaviour patterns remain unchanged, how will costs be affected?
A.Total variable costs will remain unchanged.
B. Fixed costs will increase in total.
C. Variable cost per unit will increase.
D. Total cost per unit will decrease.

The average cost per unit will decrease as activity increases due to the presence of fixed costs. Refer to page 41 of text.

Which of the following statements regarding variable cost is true?
A.Variable cost increases on a per unit basis as the number of units produced increases.
B. Variable cost remains constant on a per unit basis as the number of units produced increases.
C. Variable cost remains the same in total as production increases.
D. Variable cost decreases on a per unit basis as the number of units produced increases.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost

Within the relevant range, what is the difference between variable costs and fixed costs?
A.Variable costs per unit fluctuate and fixed costs per unit remain constant.
B. Variable costs per unit are constant and fixed costs per unit fluctuate.
C. Total variable costs and total fixed costs are constant.
D. Total variable costs and total fixed costs fluctuate.

The Target store in your home town is one of many Target department stores across the province. Some of the costs associated with the store in your home town last month appear below:

Shoe Department Cost of Sales	$80,000
Other Department Salaries	62,000
Store Managers Salary	14,000
Shoe Department Sales Commissions	8,000
Store Utilities	13,000
Shoe Department Manager’s Salary	9,000
Store Lease Cost	11,000
Store Janitorial Costs	11,000
Other Store Costs	98,000

The Shoe Department is one of many departments in the home town store. The direct costs of the Shoe Department total:
A. $80,000
B. $88,000
C. $97,000
D. $108,000

80,000 + 8,000 + 9,000 = $97,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

Which of the following best defines an opportunity cost?
A.The difference in total costs from selecting one alternative instead of another.
B. The benefit forgone by selecting one alternative instead of another.
C. A cost that may be saved by NOT adopting an alternative.
D. A cost that may be shifted to the future with little or no effect on current operations.

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-27 Opportunity Cost

To what does the term differential cost refer?
A.A difference in cost that results from selecting one alternative instead of another.
B. The benefit forgone by selecting one alternative instead of another.
C. A cost that does not entail any dollar outlay, but which is relevant to the decision-making process.
D. A cost that continues to be incurred even though there is no activity.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-26 Differential Cost and Revenue

Which of the following costs is often important in decision making, but is omitted from conventional accounting records?
A.Fixed cost.
B. Sunk cost.
C. Opportunity cost.
D. Indirect cost.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-27 Opportunity Cost

When a decision is made among a number of alternatives, the benefit that is lost by choosing one alternative over another is called what?
A.Realized cost.
B. Opportunity cost.
C. Conversion cost.
D. Accrued cost.

What does conversion cost consist of?
A.Manufacturing overhead cost.
B. Direct materials and direct labour cost.
C. Direct labour cost.
D. Direct labour and manufacturing overhead cost.

Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

Prime cost consists of direct materials and what?
A.Direct labour.
B. Manufacturing overhead.
C. Indirect materials.
D. Cost of goods manufactured.

Which one of the following costs should NOT be considered a direct cost of serving a particular customer who orders a customized personal computer by phone directly from the manufacturer?
A.The cost of the hard disk drive installed in the computer.
B. The cost of shipping the computer to the customer.
C. The cost of leasing a machine on a monthly basis that automatically tests hard disk drives before they are installed in computers.
D. The cost of packaging the computer for shipment.

Which one of the following costs should NOT be considered an indirect cost of serving a particular customer at a Dairy Queen fast food outlet?
A.The cost of the hamburger patty in the burger the customer ordered.
B. The wages of the employee who takes the customer’s order.
C. The cost of heating and lighting the kitchen.
D. The salary of the outlet’s manager.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

Green Company’s costs for the month of August are as follows:

Direct materials used	$27,000
Direct labour	$34,000
Sales salaries	$14,000
Indirect labour	$10,000
Indirect materials	$15,000
General corporate administrative cost	$12,000
Taxes on manufacturing facility	$2,000
Rent on factory	$17,000

The beginning work-in-process inventory is $16,000 and the ending work-in-process inventory is $9,000. What is the cost of goods manufactured for the month?
A. $105,000.
B. $132,000.
C. $138,000.
D. $112,000.

DM + DL + MOH + WIP B.I. – WIP E.I.
27,000 + 34,000 + (10,000 + 15,000 + 2,000 + 17,000) + 16,000 – 9,000 = $112,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,700 and is paid at the beginning of the first year. Eighty percent of the premium applies to manufacturing operations and 20% applies to selling and administrative activities. What amounts should be considered product costs and period costs respectively for the first year of coverage?

	Product Costs	Period Costs
A)	$2,700	$0
B)	$2,160	$540
C)	$1,440	$360
D)	$720	$180

Option A
B.Option B
C. Option C
D. Option D

($2,700/3) * 80% and ($2,700/3) * 20%.

Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

You have the following data:

Cost of goods sold	$70
Direct labour	$20
Direct materials	$15
Cost of goods manufactured	$80
Work-in-process ending	$10
Finished goods ending	$15
Manufacturing overhead	$30

Which of the following represents the beginning work-in-process inventory?
A. $20.
B. $15.
C. $55.
D. $25.

CGM + EI – Manufacturing Costs = 80 + 10 – (15 + 20 + 30) = $25.

During the month of May, Bennett Manufacturing Company purchases $43,000 of raw materials. The manufacturing overhead totals $27,000 and the total manufacturing costs are $106,000. Assuming a beginning inventory of raw materials of $8,000 and an ending inventory of raw materials of $6,000, what must be the total for direct labour?
A.$34,000.
B. $38,000.
C. $36,000.
D. $45,000.

DM used = 8,000 + 43,000 – 6,000 = $45,000.
DL = 106,000 – 45,000 – 27,000 = $34,000.

You are given the following data for January:

Direct materials	$38,000
Direct labour	$24,000
Manufacturing overhead	$17,000
Beginning work in process inventory	$10,000
Ending work in process inventory	$11,000

Which of the following is the cost of goods manufactured?
A. $89,000.
B. $78,000.
C. $79,000.
D. $80,000.

38,000 + 24,000 + 17,000 + 10,000 – 11,000 = $78,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

During the month of June, Reardon Company incurs $17,000 of direct labour and $8,500 of manufacturing overhead, and purchases $15,000 of raw materials. Between the beginning and the end of the month, the raw-materials inventory increases by $2,000, the finished goods inventory increases by $1,500, and the work-in-process inventory decreases by $3,000. What is the cost of goods manufactured?
A.$38,500.
B. $40,500.
C. $41,500.
D. $43,500.

RM purchased	$15,000
LESS: Increase in RM inv.	2,000
RM used	$13,000
+ DL	17,000
+ MOH	8,500
= Total Man. Costs	$38,500
ADD: Decrease in WIP inv.	3,000
CGM	$41,500

Mueller Company reports the following data for the year just ended:

Raw materials used in production	$800,000
Direct labour	$700,000
Total overhead costs	$900,000
Ending work in process inventory	$400,000
Cost of goods manufactured	$2,500,000

What was the beginning work-in-process inventory?
A. $300,000.
B. $500,000.
C. $1,300,000.
D. $100,000.

C.G.M. + E.I. – Man. Costs
(2,500,000 + 400,000 – 800,000) – 700,000 – 900,000 = $500,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

Williams Company’s direct labour cost is 25% of its conversion cost. If the manufacturing overhead cost for the last period is $45,000 and the direct materials cost is $25,000, what is the direct labour cost?
A.$15,000.
B. $60,000.
C. $33,333.
D. $20,000.

Let x = CC (conversion costs)
CC = DL + OH
x =.25x + 45,000
x = 60,000 Therefore DL 60,000 *.25 = $15,000.

The Lyons Company’s cost of goods manufactured was $120,000 when its sales were $360,000 and its gross margin was $220,000. If the ending inventory of finished goods was $30,000, what was the beginning inventory of finished goods?
A.$20,000.
B. $50,000.
C. $110,000.
D. $150,000.

CGS = Sales – gross margin = $360,000 – $220,000 = 140,000
B.I. = CGS + E.I. – CGM
B.I. = 140,000 + 30,000 – 120,000 = $50,000.

The gross margin for Cushing Company for the first quarter of last year was $325,000 when sales were $700,000. The beginning inventory of finished goods was $60,000, and the ending inventory of finished goods was $85,000. What was the cost of goods manufactured for the first quarter?
A.$375,000.
B. $350,000.
C. $400,000.
D. $385,000.

CGM = CGS + EI – BI
= (700,000 – 325,000) + 85,000 – 60,000 = $400,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

Last month, a manufacturing company had the following operating results:

Beginning finished goods inventory	$74,000
Ending finished goods inventory	$73,000
Sales	$464,000
Gross margin	$52,000

What was the cost of goods manufactured for the month?
A. $413,000
B. $411,000
C. $412,000
D. $463,000

CGM = CGS + EI -BI
= (464,000 – 52,000) + 73,000 – 74,000 = $411,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

The following information was provided by Wilson Company for the year just ended:

Beginning finished goods inventory	$150,750
Ending finished goods inventory	$140,475
Sales	$475,000
Gross margin	$150,000

What was the cost of goods manufactured for the year?
A. $314,725.
B. $335,275.
C. $325,000.
D. $464,725.

CGM = CGS + EI – BI
(475,000 – 150,000) + 140,475 – 150,750 = $314,725.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

The following information was provided by Grand Company for the year just ended:

Decrease in finished goods inventory	$4,655
Sales	$500,000
Gross margin	$100,000

What was the cost of goods manufactured for the year?
A. $95,345.
B. $104,655.
C. $395,345.
D. $404,655.

CGM = CGS – decrease in FG inventory
CGM = (500,000 – 100,000) – 4,655 = $395,345.

The following inventory valuation errors were discovered by Knox Corporation’s new controller just after the annual financial statements were published at the end of Year 3.The year 3 ending inventory was understated by $17,000.
The year 2 ending inventory was understated by $61,000.
The year 1 ending inventory was overstated by $23,000.The net income for Knox in each of these years was:

	Year 3	Year 2	Year 1
Net income	$168,000	$254,000	$138,000

Assuming there were no income taxes, what was the adjusted net income in each year?

	Year 3	Year 2	Year 1
A)	$212,000	$170,000	$161,000
B)	$124,000	$338,000	$115,000
C)	$90,000	$338,000	$161,000
D)	$124,000	$170,000	$115,000

Option A
B.Option B
C. Option C
D. Option D

When BI is overstated Net Income is understated. When EI is overstated Net Income is overstated.

Year 1	NI = 138,000 – 23,000 = $115,000
Year 2	BI is overstated by 23,000, EI understated by 61,000. NI = 254,000 + 84,000 = $338,000
Year 3	BI is understated by 61,000, EI understated 17,000 NI = 168,000 – 61,000 + 17,000 = $124,000

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-17 Inventoriable Costs

Delta Merchandising, Inc., has provided the following information for the year just ended:

Net sales	$128,500
Beginning inventory	$24,000
Purchases	$80,000
Gross margin	$38,550

What was the ending inventory for the company at year-end?
A. $65,450.
B. $24,500.
C. $14,050.
D. $9,950.

EI = BI + Purchases – CGS
EI = 24,000 + 80,000 – (128,500 – 38,550) = $14,050.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

The beginning balance of the raw materials inventory account for May was $27,500. The ending balance for May was $28,750, and $128,900 of raw materials were used during the month. What was the cost of the materials purchased during the month?
A.$131,300.
B. $127,650.
C. $130,150.
D. $157,650.

RM purchased = RM used + EI – BI
= 128,900 + 28,750 – 27,500 = $130,150.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

Gabel Inc. is a merchandising company. Last month, the company’s merchandise purchases totalled $63,000. The company’s beginning merchandise inventory was $13,000, and its ending merchandise inventory was $15,000. What was the company’s cost of goods sold for the month?
A.$91,000.
B. $63,000.
C. $65,000.
D. $61,000.

CGS = BI + Purchases – EI = 13,000 + 63,000 – 15,000 = $61,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

Haack Inc. is a merchandising company. Last month, the company’s cost of goods sold was $84,000. The company’s beginning merchandise inventory was $20,000, and its ending merchandise inventory was $18,000. What was the total amount of the company’s merchandise purchases for the month?
A.$86,000.
B. $82,000.
C. $84,000.
D. $122,000.

Purchases = CGS + EI – BI = 84,000 + 18,000 – 20,000 = $82,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

During January, the cost of goods manufactured was $93,000. The beginning finished goods inventory was $16,000, and the ending finished goods inventory was $20,000. What was the cost of goods sold for the month?
A.$129,000.
B. $89,000.
C. $93,000.
D. $97,000.

CGS = BI + CGM – EI = 16,000 + 93,000 – 20,000 = $89,000.

Sally Smith is employed in the production of various electronic products, and she earns $8 per hour. She is paid time-and-a-half for work in excess of 40 hours per week. During a given week, she worked 45 hours and had no idle time. How much of her week’s wages would be charged to manufacturing overhead?
A.$60.
B. $20.
C. $40.
D. $0.

(45 – 40) hours = 5 hours overtime. MOH = 5 ´ 8 ´ 0.5 = $20.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-05 Direct Labour
Topic: 02-06 Manufacturing Overhead
Topic: 02-07 Classification of Manufacturing Labour Costs

During the first week of April, Gillian worked a total of 50 hours assembling products and had no idle time. Gillian is paid $15 per hour for regular time, and is paid time-and-a-half for all hours in excess of a 40-hour week. How much of Gillian’s wages for the week should be charged to direct labour?
A.$600.
B. $225.
C. $750.
D. $975.

50 hours * $15/hr. = $750.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-05 Direct Labour
Topic: 02-06 Manufacturing Overhead
Topic: 02-07 Classification of Manufacturing Labour Costs

Robert Smith earns $16 per hour assembling products. For each hour over 40 he works in a week he is paid time-and-a-half. During a given week, he worked 40 hours for which 3 hours were idle time. How much of his weekly wages would be charged to direct labour?
A.$640.
B. $592.
C. $688.
D. $48.

37 hrs. * $16/hr = $592.

The following data (in thousands of dollars) have been taken from the accounting records of Karling Corporation for the year just ended.

Sales	$990
Raw materials inventory, beginning	$40
Raw materials inventory, ending	$70
Purchases of raw materials	$120
Direct labour	$200
Manufacturing overhead	$230
Administrative expenses	$150
Selling expenses	$140
Work-in-process inventory, beginning	$70
Work-in-process inventory, ending	$50
Finished goods inventory, beginning	$120
Finished goods inventory, ending	$160

What was the cost (in thousands of dollars) of the raw materials used in production during the year?
A.$190.
B. $90.
C. $150.
D. $160.

Cost of RM used = RM BI + Purchases RM – RM EI = 40 + 120 – 70 = $90.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the cost of goods manufactured (finished) for the year (in thousands of dollars)?
A.$540.
B. $500.
C. $570.
D. $590.

CGM = Cost of RM used + DL + OH + WIP BI – WIP EI
= 90 + 200 + 230 + 70 – 50 = $540.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the cost of goods sold (in thousands of dollars) for the year?
A.$700.
B. $500.
C. $660.
D. $580.

CGS = BI + CGM – EI = 120 + 540 – 160 = $500.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the net income (in thousands of dollars) for the year?
A.$150.
B. $200.
C. $490.
D. $250.

NI = Sales – CGS – Admin. Expenses – Selling Expenses
= 990 – 500 – 150 – 140 = $200.

The following data (in thousands of dollars) have been taken from the accounting records of Karlana Corporation for the year just ended.

Sales	$910
Raw materials inventory, beginning	$80
Raw materials inventory, ending	$20
Purchases of raw materials	$100
Direct labour	$130
Manufacturing overhead	$200
Administrative expenses	$160
Selling expenses	$140
Work-in-process inventory, beginning	$40
Work-in-process inventory, ending	$10
Finished goods inventory, beginning	$130
Finished goods inventory, ending	$150

What was the cost of the raw materials used in production (in thousands of dollars) during the year?
A.$180.
B. $40.
C. $120.
D. $160.

RM used = RM BI + RM Purchases – RM EI = 80 + 100 – 20 = $160.

What was the cost of goods manufactured (finished) for the year (in thousands of dollars)?
A.$530.
B. $520.
C. $500.
D. $460.

CGM = DM used + DL + OH + BI WIP – EI WIP
= 160 + 130 + 200 + 40 – 10 = $520.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the cost of goods sold for the year (in thousands of dollars)?
A.$530.
B. $520.
C. $500.
D. $460.

CGS = BI + CGM – EI = 130 + 520 – 150 = $500.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the net income (in thousands of dollars) for the year?
A.$410.
B. $110.
C. $40.
D. $180.

NI = Sales – CGS – Admin. Expenses – Selling expenses
= 910 – (130 + 520 – 150) – 160 – 140 = $110.

The following data (in thousands of dollars) have been taken from the accounting records of Karlist Corporation for the just completed year.

Sales	$800
Raw materials inventory, beginning	$60
Raw materials inventory, ending	$70
Purchases of raw materials	$180
Direct labour	$100
Manufacturing overhead	$190
Administrative expenses	$110
Selling expenses	$150
Work-in-process inventory, beginning	$70
Work-in-process inventory, ending	$80
Finished goods inventory, beginning	$120
Finished goods inventory, ending	$160

What was the cost of the raw materials used in production (in thousands of dollars) during the year?
A.$240.
B. $190.
C. $170.
D. $250.

Cost of RM used = RM BI + RM Purchases – RM EI = 60 + 180 – 70 = $170.

What was the cost of goods manufactured (finished) for the year (in thousands of dollars)?
A.$450.
B. $460.
C. $530.
D. $540.

CGM = RM used + DL + OH + BI WIP – EI WIP
= 170 + 100 + 190 + 70 – 80 = $450.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the cost of goods sold (in thousands of dollars) for the year?
A.$610.
B. $410.
C. $490.
D. $570.

CGS = BI + CGM – EI = 120 + 450 – 160 = $410.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

What was the Gross Margin (in thousands of dollars) for the year?
A.$350.
B. $130.
C. $390.
D. $190.

GM = Sales – CGS = 800 – 410 = $390.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

The following data pertain to Harriman Company’s operations during July:

	July 1	July 31
Raw materials	0	$5,000
Work-in-process inventory	?	$4,000
Finished goods inventory	$12,000	?

Other data:
Cost of goods manufactured	$105,000
Raw materials used	$40,000
Manufacturing overhead costs	$20,000
Direct labour costs	$39,000
Gross Margin	$100,000
Sales	$210,000

What was the beginning work-in-process inventory?
A.$10,000.
B. $14,000.
C. $1,000.
D. $4,000.

BI WIP = CGM + EI WIP – RM used – DL – OH
= 105,000 + 4,000 – 40,000 – 39,000 – 20,000 = $10,000.

What was the ending finished goods inventory?
A.$17,000.
B. $12,000.
C. $7,000.
D. $2,000.

EI = BI + CGM – CGS
= 12,000 + 105,000 – (210,000 – 100,000) = $7,000.

Bergeron Inc. reported the following data for last year:

Work-in-process inventory, beginning	$100
Work-in-process inventory, ending	$150
Finished goods inventory, beginning	$180
Finished goods inventory, ending	$200
Direct labour cost	$300
Direct materials cost	$500
Manufacturing overhead cost	$400

Which of the following is the prime cost?
A.$900.
B. $800.
C. $1,200.
D. $700.

Prime cost = DM + DL = 500 + 300 = $800.

Which of the following is the conversion cost?
A.$700.
B. $800.
C. $900.
D. $1,200.

CC = DL + OH = 300 + 400 = $700.

Which of the following is the cost of goods manufactured?
A.$1,250.
B. $1,200.
C. $1,220.
D. $1,150.

CGM = DM + DL + OH + WIP BI – WIP EI
= 500 + 300 + 400 + 100 – 150 = $1,150.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

Geneva Steel Corporation produces large sheets of heavy gauge steel. The company showed the following amounts relating to its production for the year just completed:

Direct materials used in production	$110,000
Direct labour cost for the year	$55,000
Work in process, beginning	$22,000
Finished goods, beginning	$45,000
Cost of goods available for sale	$288,000
Cost of goods sold	$238,000
Work in process, ending	$16,000

What was the balance of the finished goods inventory at the end of the year?
A.$95,000.
B. $50,000.
C. $193,000.
D. $45,000.

EI = Cost of Goods Available for sale – Cost of Goods Sold
= 288,000 – 238,000 = $50,000.

What was the cost of goods manufactured for the year?
A.$171,000.
B. $160,000.
C. $243,000.
D. $244,000.

CGM = Cost of Goods Available for sale – Finished Goods B.I.
= 288,000 – 45,000 = $243,000.

What was the manufacturing overhead cost for the year?
A.$84,000.
B. $78,000.
C. $56,000.
D. $72,000.

Compute Total Manufacturing Costs = CGM + EI WIP – BI WIP
= 243,000 + 16,000 – 22,000 = $237,000
Then compute manufacturing overhead = Total Man. Costs – DM – DL
Manufacturing overhead = 237,000 – 110,000 – 55,000 = $72,000.

Boardman Company reported the following data for the month of January:

Inventories:	1/1	1/31
Raw materials	$32,000	$31,000
Work in process	$18,000	$12,000
Finished goods	$30,000	$35,000

Additional information:
Sales revenue	$210,000
Direct labour costs	$40,000
Manufacturing overhead costs	$70,000
Selling expenses	$25,000
Administrative expenses	$35,000

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