Financial-accounting QUESTION & ANSWERS

CHAPTER 1—INTRODUCTION TO COST ACCOUNTING MULTIPLE CHOICE 1. The business entity that converts purchased raw materials into finished goods by using labor, technology, and facilities is a: a. Manufacturer. b. Merchan ...

CHAPTER 1—INTRODUCTION TO COST ACCOUNTING MULTIPLE CHOICE 1. The business entity that converts purchased raw materials into finished goods by using labor, technology, and facilities is a: a. Manufacturer. b. Merchandiser. c. Service business. d. Not-for-profit service agency. ANS: A The business entity that converts purchased raw materials into finished goods by using labor, technology, and facilities is a manufacturer. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Analytic 2. The business entity that purchases finished goods for resale is a: a. Manufacturer. b. Merchandiser. c. Service business. d. For-profit service business. ANS: B The business entity that purchases finished goods for resale is a merchandiser. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Analytic 3. The type of merchandiser who purchases goods from the producer and sells to stores who sell to the consumer is a: a. Manufacturer. b. Retailer. c. Wholesaler. d. Service business. ANS: C The type of merchandiser that purchases goods from the producer and sells to the retailer is a wholesaler. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Analytic 4. Examples of service businesses include: a. Airlines, architects, and hair stylists. b. Department stores, poster shops, and wholesalers. c. Aircraft producers, home builders, and machine tool makers. d. None of these are correct. ANS: A Examples of service businesses include airlines, architects, and hair stylists. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Reflective 5. ISO 9000 is a set of international standards for: a. determining the selling price of a product. b. cost control. c. quality management. d. planning, ANS: C ISO 9000 is a set of international standards for quality management. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 6. Unit cost information is important for making all of the following marketing decisions except: a. Determining the selling price of a product. b. Bidding on contracts. c. Determining the amount of advertising needed to promote the product. d. Determining the amount of profit that each product earns. ANS: C Unit cost information is used in determining selling price, bidding on contracts and determining product profitability, but would not have a bearing on determining how much the product would need to be advertised. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3B - Strategic Marketing TOP: AACSB - Analytic 7. The process of establishing objectives or goals for the firm and determining the means by which they will be met is: a. controlling. b. analyzing profitability. c. planning. d. assigning responsibility. ANS: C The process of establishing goals and objectives for a firm is planning. Controlling, analyzing profitability and assigning responsibility are functions that take place after the planning process to determine whether or how successfully goals have been obtained. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 8. Control is the process of monitoring the company’s operations to determine whether the company’s objectives are being achieved. Effective control is achieved through all of the following except: a. periodically measuring and comparing company results. b. assigning responsibility for costs to employees responsible for those costs. c. constantly monitoring employees to ensure they do exactly as they are told. d. taking necessary corrective action when variances warrant doing so. ANS: C While periodically measuring and comparing company results, assigning responsibility for those results to employees and taking necessary corrective action are all part of control; it does not include constantly monitoring employees to make sure they are following directions. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 9. Aaron Smith is the supervisor of the Machining Department of Bennett Corporation. He has control over and is responsible for manufacturing costs traced to the department. The Machining Department is an example of a(n): a. cost center. b. inventory center. c. supervised work center. d. worker’s center. ANS: A The criteria for a cost center are 1) a reasonable basis on which manufacturing costs may be traced and 2) a person who has control over and is accountable for many of the costs charged to that center. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 10. Which of the following items of cost would be least likely to appear on a performance report based on responsibility accounting for the supervisor of an assembly line in a large manufacturing situation? a. Direct labor b. Indirect materials c. Selling expenses d. Repairs and maintenance ANS: C Selling expenses would be least likely to appear on a performance report, because the supervisor would not have responsibility for the sales function. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 11. Which of the following items of cost would be least likely to appear on a performance report based on responsibility accounting for the supervisor of an assembly line in a large manufacturing situation? a. Direct labor b. Supervisor's salary c. Materials d. Repairs and maintenance ANS: B A supervisor's salary would be least likely to appear on a performance report, because that person's salary is determined by the company and is not controllable by the supervisor. PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 12. Responsibility accounting would most likely hold a manager of a manufacturing unit responsible for: a. cost of raw materials. b. quantity of raw materials used. c. the number of units ordered. d. amount of taxes incurred. ANS: B In responsibility accounting the manager of a cost center is only responsible for those costs and activities that manager controls. A manufacturing manager would not likely be responsible for the cost of the materials (the purchasing manager would have that responsibility), the number of units ordered (that would be driven by demand) or the taxes incurred. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 13. Which of the following statements best describes a characteristic of a performance report prepared for use by a production line department head? a. The costs in the report should include only those controllable by the department head. b. The report should be stated in dollars rather than in physical units so the department head knows the financial magnitude of any variances. c. The report should include information on all costs chargeable to the department, regardless of their origin or control. d. It is more important that the report be precise than timely. ANS: A The performance report should include only those costs controllable by the department head. It should also be timely and should include production data as well as dollar amounts. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 14. Joshua Company prepares monthly performance reports for each department. The budgeted amounts of wages for the Finishing Department for the month of August and for the eight-month period ended August 31 were $12,000 and $100,000, respectively. Actual wages paid through July were $91,500, and wages for the month of August were $11,800. The month and year-to-date variances, respectively, for wages on the August performance report would be: a. $200 F; $8,500 F b. $200 F; $3,300 U c. $200 U; $3,300 U d. $200 U; $8,500 F ANS: B Calculation of monthly variance: Budgeted wages for August $12,000 Actual wages for August 11,800 Variance for August $ 200 F Calculation of year-to-date variance: Budgeted wages for the eight-month period ended August 31 $100,000 Actual wages for the eight-month period ended August 31 (91,500 + 11,800) 103,300 Variance for eight-month period ended August 31 $ 3,300 U PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 15. As a result of recent accounting scandals involving companies such as Enron and World Com, the Sarbanes-Oxley Act of 2002 was written to protect shareholders of public companies by improving a. management accounting. b. corporate governance. c. professional competence. d. the corporate legal process. ANS: B The Sarbanes-Oxley act was written primarily to improve the corporate governance of publicly held companies. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 4 - Business Applications TOP: AACSB - Ethics 16. Which of the following is not a key element of the Sarbanes Oxley Act to improve corporate governance? a. The establishment of the Public Company Accounting Oversight Board b. Requiring a company’s annual report to contain an internal control report that includes management’s opinion on the effectiveness of internal control c. Severe criminal penalties for retaliation against “whistleblowers” d. Requiring that the company’s performance reports are prepared in accordance with generally accepted accounting principles ANS: D The Sarbanes-Oxley Act does not require that companies prepare performance reports in accordance with generally accepted accounting principles. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 4 - Business Applications TOP: AACSB - Ethics 17. Cost accounting differs from financial accounting in that financial accounting: a. Is mostly concerned with external financial reporting. b. Is mostly concerned with individual departments of the company. c. Provides the additional information required for special reports to management. d. Puts more emphasis on future operations. ANS: A Items (b) through (d) are characteristics of cost accounting, whereas Item (a) is a feature of financial accounting. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective 18. Taylor Logan is an accountant with the Tanner Corporation. Taylor’s duties include preparing reports that focus on both historical and estimated data needed to conduct ongoing operations and do longrange planning. Taylor is a(n) a. certified financial planner. b. management accountant. c. financial accountant. d. auditor. ANS: B A management accountant prepares reports that focus on both historical and estimated data that are used to conduct ongoing operations and do long-range planning. Financial accountants prepare financial statements needed by external users to evaluate a business, while auditors conduct examinations on those financial statements. A certified financial planner is a consultant that helps individuals with financial planning, including investment advice. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 4 - Business Applications TOP: AACSB - Reflective 19. The following data were taken from Mansfield Merchandisers on January 31: Merchandise inventory, January 1 $ 90,000 Sales salaries 35,000 Merchandise inventory, January 31 65,000 Purchases 560,000 What was the Cost of goods sold in January? a. $585,000 b. $650,000 c. $620,000 d. $535,000 ANS: A Merchandise Inventory, January 1 $ 90,000 Plus Purchases 560,000 Merchandise Available for Sale $650,000 Less Merchandise Inventory, January 31 65,000 Cost of Goods Sold $585,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 20. Umberg Merchandise Company’s cost of goods sold last month was $1,350,000. the Merchandise Inventory at the beginning of the month was $250,000 and there was $325,000 of Merchandise Inventory at the end of the month. Umberg’s merchandise purchases were: a. $1,350,000 b. $1,275,000 c. $1,425,000 d. $1,675,000 ANS: C Merchandise purchases added to Merchandise Inventory at the beginning of the month results in the merchandise available for sale. At the end of the month, these goods either remain in Merchandise Inventory or are sold, which results in Cost of Goods Sold, so the total of ending Merchandise Inventory and Cost of Goods Sold is also the merchandise available for sale. Therefore, the equation can be rearranged to compute the merchandise purchases as follows: Cost of Goods Sold $1,350,000 Plus Ending Merchandise Inventory 325,000 Merchandise Available for Sale 1,675,000 Less Beginning Merchandise Inventory 250,000 Merchandise Purchases $1,425,000 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 21. Ashley Corp. had finished goods inventory of $50,000 and $60,000 at April 1 and April 30, respectively, and cost of goods manufactured of $175,000 in April. Cost of goods sold in April was: a. $165,000 b. $175,000 c. $185,000 d. $225,000 ANS: A Finished Goods Inventory, April 1 $ 50,000 Plus Cost of Goods Manufactured 175,000 Finished Goods Available for Sale 225,000 Finished Goods Inventory, April 30 60,000 Cost of Goods Sold $165,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 22. The balance in Kayser Manufacturing Company’s Finished Goods account at November 30 was $825,000. Its November cost of goods manufactured was $2,350,000 and its cost of goods sold in November was $2,455,000. What was the balance in Kayser’s Finished Goods at November 1? a. $435,000 b. $640,000 c. $710,000 d. $930,000 ANS: D Cost of goods manufactured added to Finished Goods at the beginning of the month results in the finished goods available for sale. At the end of the month, these goods either remain in Finished Goods or are sold, which results in Cost of Goods Sold, so the total of ending Finished Goods and Cost of Goods Sold is also the finished goods available for sale. Therefore, the equation can be rearranged to compute the beginning balance in Finished Goods as follows: Cost of Goods Sold $2,455,000 Plus Finished Goods Inventory, November 30 825,000 Finished Goods Available for Sale 3,280,000 Less Cost of Goods Manufactured 2,350,000 Finished Goods Inventory, November 1 $ 930,000 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 23. Inventory accounts for a manufacturer include all of the following except: a. Merchandise Inventory. b. Finished Goods. c. Work in Process. d. Materials. ANS: A Inventory accounts for a manufacturer include Materials, Work in Process, and Finished Goods. Merchandise Inventory is the inventory account for a merchandiser. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 24. For a manufacturer, the total cost of manufactured goods completed but still on hand is: a. Merchandise Inventory. b. Finished Goods. c. Work in Process. d. Materials. ANS: B Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are goods completed, but still on hand, while Work in Process are goods which have been started and are in various stages of production, but are not yet completed. Materials are items which have been purchased and on hand to be used in the manufacturing process, but have not yet been issued into production. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. For a manufacturer, manufacturing costs incurred to date for goods in various stages of production, but not yet completed is: a. Merchandise Inventory. b. Finished Goods. c. Work in Process. d. Materials. ANS: C Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are goods completed, but still on hand, while Work in Process are goods which have been started and are in various stages of production, but are not yet completed. Materials are items which have been purchased and on hand to be used in the manufacturing process, but have not yet been issued into production. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. For a manufacturer, the cost of all materials purchases and on hand to be used in the manufacturing process is: a. Merchandise Inventory. b. Finished Goods. c. Work in Process. d. Materials. ANS: D Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are goods completed, but still on hand, while Work in Process are goods which have been started and are in various stages of production, but are not yet completed. Materials are items which have been purchased and on hand to be used in the manufacturing process, but have not yet been issued into production. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. In the financial statements, Materials should be categorized as: a. Revenue. b. Expenses. c. Assets. d. Liabilities. ANS: C Materials are included in inventory, which is an asset on the balance sheet because it has a future benefit. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective 28. A(n) __________ requires estimating inventory balances during the year for interim financial statements and shutting down operations to count all inventory items at the end of the year. a. periodic inventory system b. inventory control account c. perpetual inventory system d. inventory cost method ANS: A A periodic inventory system requires a company to make estimates of inventory balances throughout the year, and a complete physical count of inventory at the end of the year. A perpetual inventory system provides a continuous record of purchases, issues and inventory balances. The inventory balances are verified with periodic counts of selected inventory items throughout the year. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 29. Witt Company, like most manufacturers, maintains a continuous record of purchases, materials issued into production and balances of all goods in stock, so that inventory valuation data is available at any time. This is an example of a(n) a. perpetual inventory system. b. inventory control account. c. periodic inventory system. d. inventory cost method. ANS: A A perpetual inventory system maintains a continuous record of purchases, issues and inventory balances. A periodic inventory system requires a physical count of all inventory at the end of the year and estimates of inventory balances throughout the year when preparing interim financial statements. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 30. Which of the following is most likely to be considered an indirect material in the manufacture of a sofa? a. Lumber b. Glue c. Fabric d. Foam rubber ANS: B While glue would be included in the finished product, its cost would be relatively insignificant, therefore, it would not be cost effective to trace its cost to specific products. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 31. The Macke Company’s payroll summary showed the following in November: Sales department salaries $10,000 Supervisor salaries 20,000 Assembly workers’ wages 25,000 Machine operators’ wages 35,000 Maintenance workers’ wages 15,000 Accounting department salaries 5,000 What is the amount that would be included in direct labor in November? a. $25,000 b. $60,000 c. $95,000 d. $120,000 ANS: B Assembly workers and machine operators would be considered direct labor. Assembly workers’ wages $25,000 Machine operators’ wages 35,000 Total direct labor $60,000 The supervisors and maintenance workers would be included in overhead, while the sales and accounting department salaries would be included in selling and administrative expense. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 32. The Macke Company’s payroll summary showed the following in November: Sales department salaries $10,000 Supervisor salaries 20,000 Assembly workers’ wages 25,000 Machine operators’ wages 35,000 Maintenance workers’ wages 15,000 Accounting department salaries 5,000 What is the amount that would be included in factory overhead in November? a. $20,000 b. $35,000 c. $95,000 d. $120,000 ANS: B The supervisors’ salaries and maintenance workers’ wages would be included in factory overhead. Supervisors’ salaries $20,000 Maintenance workers’ wages 15,000 Total direct labor $35,000 The wages of the assembly workers and machine operators would be included in direct labor, while the sales and accounting department salaries would be included in selling and administrative expense. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 33. Factory overhead includes: a. Indirect labor but not indirect materials. b. Indirect materials but not indirect labor. c. All manufacturing costs, except indirect materials and indirect labor. d. All manufacturing costs, except direct materials and direct labor. ANS: D Factory overhead includes all manufacturing costs except direct materials and direct labor. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 34. A typical factory overhead cost is: a. Freight out. b. Stationery and printing. c. Depreciation on machinery and equipment. d. Postage. ANS: C Depreciation on machinery and equipment is a factory overhead cost because it is a manufacturing cost that is not direct labor or direct material. The other three items are marketing or administrative expenses. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 35. Factory overhead would include: a. Wages of office clerk. b. Sales manager’s salary. c. Supervisor’s salary. d. Tax accountant’s salary. ANS: C The supervisor’s salary is considered indirect labor because the supervisor is required for the manufacturing process, but does not work directly on the units being manufactured. Indirect labor is included in factory overhead. The office clerk’s wages, sales manager’s salary and tax accountant’s salary are marketing or administrative costs. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 36. The term "prime cost" refers to: a. The sum of direct labor costs and all factory overhead costs. b. The sum of direct material costs and direct labor costs. c. All costs associated with manufacturing other than direct labor costs and direct material costs. d. Manufacturing costs incurred to produce units of output. ANS: B The term "prime cost" refers to the sum of direct materials costs and direct labor costs. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 37. The following data are from Burton Corporation, a manufacturer, for the month of September: Direct materials used $135,000 Supervisors’ salaries 6,000 Machine operators’ wages 200,000 Sales office rent and utilities 22,000 Machine depreciation 35,000 Secretary to the Chief Executive Officer salary 3,000 Factory insurance 15,000 Compute the prime costs. a. $344,000 b. $135,000 c. $335,000 d. $256,000 ANS: C Prime costs include direct materials and direct labor. Of the salaries and wages listed, only the wages of the machine operators would be considered direct labor as they are the only employees listed who would actually work on the products themselves. Direct materials used $135,000 Machine operators’ wages 200,000 Total prime costs $335,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 38. The term "conversion costs" refers to: a. The sum of direct labor costs and all factory overhead costs. b. The sum of direct material costs and direct labor costs. c. All costs associated with manufacturing other than direct labor costs. d. Direct labor costs incurred to produce units of output. ANS: A The term "conversion costs" refers to the sum of direct labor costs and all factory overhead costs. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 39. The following data are from Burton Corporation, a manufacturer, for the month of September: Direct materials used $135,000 Supervisors’ salaries 6,000 Machine operators’ wages 200,000 Sales office rent and utilities 22,000 Machine depreciation 35,000 Secretary to the Chief Executive Officer salary 3,000 Factory insurance 15,000 Compute the conversion costs. a. $335,000 b. $209,000 c. $281,000 d. $256,000 ANS: D Conversion costs include direct labor and factory overhead costs, including indirect labor. Of the salaries and wages listed, only the machine operators are considered direct labor as they are the only employees listed who would actually work on the products themselves. The supervisors are considered factory overhead because their efforts are essential to the manufacturing process, however they do not actually work on the products themselves. The sales office costs and the salary of the secretary would be marketing and administrative expenses as they do not contribute to the manufacturing process. Machine operators’ wages $200,000 Supervisors’ salaries 6,000 Machine depreciation 35,000 Factory insurance 15,000 Total conversion costs $256,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 40. Payroll is debited and Wages Payable is credited to: a. Pay the payroll taxes. b. Record the payroll. c. Pay the payroll. d. Distribute the payroll. ANS: B When the payroll is recorded, Payroll is debited and Wages Payable is credited. When payroll taxes are paid, the various liability accounts are debited and Cash is credited. When the payroll is paid, Wages Payable is debited and Cash is credited. When the payroll is distributed, Work in Process, Factory Overhead, and Selling and Administrative Expenses are debited and Payroll is credited. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 41. Which of the following is not a cost that is accumulated in Work in Process? a. Direct materials b. Administrative expense c. Direct labor d. Factory overhead ANS: B Administrative expense is not a manufacturing cost, so it would not be included in Work in Process. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 42. At a certain level of operations, per unit costs and selling price are as follows: manufacturing costs, $50; selling and administrative expenses, $10; selling price, $80. Given this information, the mark-on percentage to manufacturing cost used to determine selling price must have been: a. 40 percent. b. 60 percent. c. 33 percent. d. 25 percent. ANS: B Selling price - Manufacturing costs = Mark-on percentage Manufacturing costs $80 - $50 = 60% $50 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 43. Mountain Company produced 20,000 blankets in June to be sold during the holiday season. The manufacturing costs were: Direct materials $125,000 Direct labor 55,000 Factory overhead 60,000 Selling expense 25,000 Administrative expense 30,000 The cost per blanket is: a. $6.25. b. $9.00. c. $12.00. d. $14.75. ANS: C Direct materials $125,000 Direct labor 55,000 Factory overhead 60,000 Total manufacturing costs $240,000 $240,000 / 20,000 units = $12.00 cost per unit PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 44. Mountain Company produced 20,000 blankets in June to be sold during the holiday season. The manufacturing costs were: Direct materials $125,000 Direct labor 55,000 Factory overhead 60,000 Management has decided that the mark-on percentage necessary to cover the product’s share of selling and administrative expenses and to earn a satisfactory profit is 30%. The selling price per blanket should be: a. $12.00. b. $15.60. c. $23.60. d. $31.20. ANS: B Direct materials $125,000 Direct labor 55,000 Factory overhead 60,000 Total manufacturing costs $240,000 $240,000 / 20,000 units = $12.00 cost per unit $12.00 x 30% = $3.60 + $12.00 = $15.60 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 45. The statement of costs of goods manufactured shows: a. Office supplies used in accounting office. b. Deprecation of factory building. c. Salary of sales manager. d. Rent paid on finished goods warehouse. ANS: B The depreciation of the factory building is a cost necessary to manufacture goods. The office supplies, sales manager’s salary and warehouse rent are marketing and administrative costs and would not be included in the Statement of Cost of Goods Manufactured. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 46. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing Company are presented below: INVENTORIES Beginning Ending Materials $ 90 $ 85 Work in process 50 65 Finished goods 100 90 Other data: Direct materials used $365 Total manufacturing costs charged to production during the year (includes direct materials, direct labor, and factory overhead) 680 Cost of goods available for sale 765 Selling and general expenses 250 Assuming Stanley does not use indirect materials, the cost of materials purchased during the year amounted to: a. $455. b. $450. c. $365. d. $360. ANS: D Materials purchased added to Materials inventory at the beginning of the month results in the materials available for use. During the year, the materials are used or they remain in the Materials inventory at the end of the year, so the total of materials used and ending Materials inventory is also the total of the amount of materials available. Therefore, the equation can be rearranged to compute the materials purchases as follows: Direct materials used $365 Add ending inventory of materials 85 Materials available during the year $450 Less beginning inventory of materials 90 Purchases of materials during the year $360 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 47. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing Company are presented below: INVENTORIES Beginning Ending Materials $ 90 $ 85 Work in process 50 65 Finished goods 100 90 Other data: Direct materials used $365 Total manufacturing costs charged to production during the year (includes direct materials, direct labor, and factory overhead) 680 Cost of goods available for sale 765 Selling and general expenses 250 The cost of goods manufactured during the year was: a. $735. b. $710. c. $665. d. $705. ANS: C Beginning work in process inventory $ 50 Add total manufacturing costs during the year 680 Total $730 Less ending work in process inventory 65 Cost of goods manufactured during the year $665 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 48. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing Company are presented below: INVENTORIES Beginning Ending Materials $ 90 $ 85 Work in process 50 65 Finished goods 100 90 Other data: Direct materials used $365 Total manufacturing costs charged to production during the year (includes direct materials, direct labor, and factory overhead) 680 Cost of goods available for sale 765 Selling and general expenses 250 The cost of goods sold during the year was: a. $730. b. $775. c. $675. d. $765. ANS: C Beginning finished goods inventory $100 Add cost of goods manufactured during the year ($680 + $50 - $65) 665 Total cost of goods available for sale $765 Less ending finished goods inventory 90 Cost of goods sold during the year $675 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 49. Which of the following production operations would be most likely to employ a job order system of cost accounting? a. Candy manufacturing b. Crude oil refining c. Printing text books d. Flour Milling ANS: C Printing would be most likely to employ a job order system of cost accounting due to the number of custom jobs involved. The manufacture of candy, the vulcanizing of rubber, and the refining of crude oil would normally be a continuous process of producing like goods and would be accounted for under the process cost system. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 50. A law firm wanting to track the costs of serving different clients may use a: a. process cost system. b. job order cost system. c. cost control system. d. standard cost system. ANS: B Professional firms use job order cost systems to track the costs of serving different clients. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 51. When should process costing techniques be used in assigning costs to products? a. In situations where standard costing techniques should not be used b. If products manufactured are substantially identical c. When production is only partially completed during the accounting period d. If products are manufactured on the basis of each order received ANS: B Process costing techniques should be used in assigning costs to products if the product is composed of mass-produced units that are substantially identical. PTS: 1 DIF: Easy REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 52. An industry that would most likely use process costing procedures is: a. Beverage. b. Home Construction. c. Printing. d. Shipbuilding. ANS: A Beverage production usually consists of continuous output of homogeneous products for which process costing is used. The other three industries would utilize job order costing because each product or group of products is made to order. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 53. A standard cost system is one: a. that provides a separate record of cost for each special-order product. b. that uses predetermined costs to furnish a measurement that helps management make decisions regarding the efficiency of operations. c. that accumulates costs for each department or process in the factory. d. where costs are accumulated on a job cost sheet. ANS: B A standard cost system uses predetermined standard costs to furnish a measurement that helps management make decisions regarding the efficiency of operations. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 54. In job order costing, the basic document for accumulating the cost of each job is the: a. Job cost sheet. b. Requisition sheet. c. Purchase order. d. Invoice. ANS: A In job order costing, the basic document to accumulate the cost of each job is the job cost sheet. PTS: 1 DIF: Easy REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 55. Under a job order cost system of accounting, the entry to distribute payroll to the appropriate accounts would be: a. Debit-Payroll Credit-Wages Payable b. Debit-Work in Process Debit-Factory Overhead Debit-Selling and Administrative Expense Credit-Payroll c. Debit-Work in Process Debit-Finished Goods Debit-Cost of Goods Sold Credit-Payroll d. Debit-Work in Process Debit-Factory Overhead Debit-Selling and Administrative Expense Credit-Wages Payable ANS: B Payroll is credited when the amounts are distributed to the appropriate accounts. Those accounts include Work in Process for direct labor, Factory Overhead for indirect labor and Selling and Administrative Expense for salaries and wages incurred outside of the factory. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 56. Under a job order system of cost accounting, the dollar amount of the entry to transfer inventory from Work in Process to Finished Goods is the sum of the costs charged to all jobs: a. In process during the period. b. Completed and sold during the period. c. Completed during the period. d. Started in process during the period. ANS: C When jobs are completed during the period, Finished Goods is debited and Work in Process is credited for the cost of the completed jobs. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 57. Under a job order system of cost accounting, Cost of Goods Sold is debited and Finished Goods is credited for a: a. Transfer of materials to the factory. b. Shipment of completed goods to the customer. c. Transfer of completed production to the finished goods storeroom. d. Purchase of goods on account. ANS: B When completed goods are shipped to customers, Cost of Goods Sold is debited and Finished Goods is credited. PTS: 1 DIF: Easy REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 58. The Institute of Management Accountants (IMA) Statement of Professional Practice includes all of the following standards except: a. Confidentiality. b. Commitment. c. Integrity. d. Competence. ANS: B The four IMA Professional Standards are: Competence, Confidentiality, Integrity and Credibility. PTS: 1 DIF: Easy REF: Appendix OBJ: 2 NAT: IMA 4 - Business Applications TOP: AACSB - Ethics 59. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, performing professional duties in accordance with relevant laws, regulations and technical standards is a component of which standard? a. Competence b. Confidentiality c. Integrity d. Credibility ANS: A Performing technical duties in accordance with relevant laws, regulations and technical standards is a component of the competence standard. PTS: 1 DIF: Moderate REF: Appendix OBJ: 2 NAT: IMA 4 - Business Applications TOP: AACSB - Ethics 60. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice, under the Integrity Standard, each member has the responsibility to: a. Communicate information fairly and objectively. b. Keep information confidential. c. Mitigate actual conflicts of interest. d. Maintain an appropriate level of professional competence. ANS: C Under the Integrity Standard, IMA members have the responsibility to mitigate actual conflicts of interest and avoid apparent conflicts of interest. PTS: 1 DIF: Moderate REF: Appendix OBJ: 2 NAT: IMA 4 - Business Applications TOP: AACSB - Ethics 61. Tom Jones, a management accountant, was faced with an ethical conflict at the office. According to the Institute of Management Accountants’ Statement of Professional Practice, the first action Tom should pursue is to: a. follow his organization’s established policies on the resolution of such conflict. b. contact the local newspaper. c. contact the company’s audit committee. d. consult an attorney. ANS: A When faced with ethical issues, one should follow the organization’s established policies on the resolution of such conflict. If these policies do not resolve the ethical conflict, one should consider discussing the matter with one’s supervisor or, if it appears he or she is involved, other internal sources. It is not appropriate to contact parties outside the organization unless it is the authorities if one believes there is a violation of the law. PTS: 1 DIF: Moderate REF: Appendix OBJ: 2 NAT: IMA 4 - Business Applications TOP: AACSB - Ethics PROBLEM 1. Prepare a performance report showing both month and year-to-date data for Post Manufacturing’s Machining Department for February, 2011 using the following data: January February Budgeted Data: Machinists’ wages $6,200 $5,600 Supplies 3,200 3,000 Depreciation 2,000 2,000 Utilities 1,500 1,400 Actual Data: Machinists’ wages $6,120 $5,650 Supplies 3,300 3,180 Depreciation 2,000 2,000 Utilities 1,580 1,390 ANS: Post Manufacturing - Machining Department Performance Report For Period Ended February 28, 2011 Expense Budget Actual Variance February Year-toDate February Year-toDate February Year-toDate Machinists’ wages $ 5,600 $11,800 $ 5,650 $11,700 $ 50 U $ 100 F Supplies 3,000 6,200 3,180 6,480 180 U 280 U Depreciation 2,000 4,000 2,000 4,000 -- -- Utilities 1,400 2,900 1,390 2,970 10 F 70 U Total $12,000 $24,900 $12,220 $25,150 $ 220 U $ 250 U PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 2. The following data were taken from the general ledger of Data Corp., a retailer of computers and accessories: Merchandise Inventory, August 1 $ 323,000 Merchandise Inventory, August 31 296,000 Purchases 1,684,000 Compute the cost of goods sold for the month of August. ANS: Merchandise Inventory, August 1 $ 323,000 Plus Purchases 1,684,000 Merchandise Available for Sale 2,007,000 Less Merchandise Inventory, August 31 296,000 Cost of Goods Sold $1,711,000 PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. The following data were taken from the general ledger and other data of Spargus Manufacturing on May 31: Work in Process, May 1 $ 75,000 Finished Goods, May 1 82,000 Materials purchased in May 122,000 Cost of goods manufactured in May 455,000 Marketing and administrative costs in May 64,000 Finished Goods, May 31 78,000 Work in Process, May 31 94,000 Compute the cost of goods sold for Spargus Manufacturing, selecting the appropriate items from the list provided. ANS: Finished Goods Inventory, May 1 $ 82,000 Plus Cost of Goods Manufactured 455,000 Cost of Goods Available for Sale 537,000 Less Finished Goods Inventory, May 31 78,000 Cost of Goods Sold $459,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 4. The following data were taken from Middletown Merchandisers on July 31, for the first month of its fiscal year: Merchandise Inventory, July 31 $ 25,000 Purchases 735,000 Cost of Goods Sold 750,000 Compute the inventory at July 1. ANS: Cost of Goods Sold $750,000 Plus Merchandise Inventory, July 31 25,000 Equals Cost of Goods Available for Sale $775,000 Less Purchases 735,000 Equals Merchandise Inventory, July 1 $ 40,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. Campus Carriers Co. manufactures and sells backpacks to college students. Campus Carriers operates a factory in Small Town and two stores in College Town and University City. Classify the following costs incurred by Campus Carriers as Direct Materials, Direct Labor, Factory Overhead or Selling and Administrative Expense. a. Rent paid to lease the store in College Town. b. Canvas fabric. c. Wages paid to students distributing advertising fliers in University City. d. Sewing machine operator’s wages. e. Building depreciation on the factory building. f. Thread. g. The cost of transporting the backpacks from the factory in Small Town to the University City store. h. Depreciation of the racks and shelves at the College Town Store. i. Factory manager’s salary. j. Security guard at the factory. k. Store manager’s salary. l. Electricity to power sewing machines. m. Electricity to light the College Town store. ANS: a. Selling and administrative expense would include costs related to stores. b. Direct material - canvas would be used to make back packs. c. Selling and administrative expense would include advertising. d. Direct labor - sewing machine operators are “touch” labor. e. Factory overhead - depreciation is a factory expense that cannot be traced directly to the products. f. Factory overhead. While thread is included in the final product, the cost is insignificant and would be accounted for as an indirect cost. g. Selling and administrative expense. Transportation is incurred outside of the factory. h. Selling and administrative expense would include costs relating to the stores. i. Factory overhead - the factory manager’s salary is a factory cost that cannot be traced directly to products. j. Factory overhead - the security guard’s salary is a factory cost that cannot be traced directly to products. k. Selling and administrative expense would include all costs related to the stores. l. Factory overhead - electricity to run the machines is a factory cost that cannot be traced directly to products.. m. Selling and administrative expense would include all costs related to the stores. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 6. The following inventory data relate to the Reta Company: INVENTORIES Beginning Ending Finished goods $80,000 $100,000 Work in process 65,000 70,000 Direct materials 60,000 64,000 Revenues and costs for the period: Sales $740,000 Cost of goods available for sale 650,000 Total manufacturing costs 575,000 Factory overhead 154,000 Direct materials used 164,000 Selling and administrative expenses 51,000 Compute the following for the year: a. Direct materials purchased b. Direct labor costs incurred c. Cost of goods sold d. Gross profit ANS: (a) Direct materials used during the period $164,000 Add inventory of direct materials at the end of the period 64,000 Direct materials available during the period $228,000 Less inventory of direct materials at the beginning of the period 60,000 Direct materials purchased during the period $168,000 (b) Total manufacturing costs incurred during the period $575,000 Less: Direct materials used $164,000 Factory overhead incurred 154,000 318,000 Direct labor costs incurred during the period $257,000 (c) Cost of goods available for sale $650,000 Less finished goods inventory at the end of the period 100,000 Cost of goods sold during the period $550,000 (d) Sales $740,000 Cost of goods sold 550,000 Gross profit $190,000 PTS: 1 DIF: Hard REF: P. OBJ: 4,5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. The following inventory data relate to the Reta Company: INVENTORIES Beginning Ending Finished goods $80,000 $100,000 Work in process 65,000 70,000 Direct materials 60,000 64,000 Revenues and costs for the period: Sales $740,000 Cost of goods available for sale 650,000 Total manufacturing costs 575,000 Factory overhead 154,000 Direct materials used 164,000 Selling and administrative expenses 51,000 Prepare journal entries for the following, making any necessary computations: a. Purchase of materials on account b. Issuance of materials into production c. Transfer the cost of completed work to Finished Goods d. Record the sale of the goods on account and the related cost of goods sold. ANS: (a) Direct materials used during the period $164,000 Add inventory of direct materials at the end of the period 64,000 Direct materials available during the period $228,000 Less inventory of direct materials at the beginning of the period 60,000 Direct materials purchased during the period $168,000 Materials 168,000 Accounts Payable 168,000 (b) Work in Process 164,000 Materials 164,000 (c) Work in Process Inventory, beginning of the period $ 65,000 Plus Total Manufacturing Costs 575,000 $640,000 Less Work in Process Inventory, end of the period 70,000 Cost of Goods Manufactured $570,000 Finished Goods 570,000 Work in Process 570,000 (d) Finished Goods Inventory, beginning of the period $ 80,000 Plus Cost of Goods Manufactured 570,000 Cost of Goods Available for Sale $650,000 Less Finished Goods Inventory, end of the period 100,000 Cost of Goods Sold $550,000 Accounts Receivable 740,000 Sales 740,000 Cost of Goods Sold 550,000 Finished Goods 550,000 PTS: 1 DIF: Hard REF: P. OBJ: 4,5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. Following is a list of costs incurred by the Sitka Products Co. during the month of June: Direct materials used $12,000 Expired insurance $3,000 Indirect materials used 3,000 Utilities 800 Direct labor employed 20,000 Repairs 700 Indirect labor employed 4,500 Depreciation expense Selling expenses 6,000 --Machinery and equipment 1,200 Prepare the journal entries necessary to record the issuance of materials, the distribution of labor cost, the recording of factory overhead, and the entry transferring Factory Overhead to Work in Process. ANS: Work in Process (Direct Materials) 12,000 Factory Overhead (Indirect Materials) 3,000 Materials 15,000 Work in Process (Direct Labor) 20,000 Factory Overhead (Indirect Labor) 4,500 Payroll 24,500 Factory Overhead 5,700 Prepaid Insurance 3,000 Accounts Payable (Utilities) 800 Accounts Payable (Repairs) 700 Accumulated Depreciation (Machinery and Equipment) 1,200 Work in Process 13,200 Factory Overhead 13,200 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. The following data was taken from the general ledger and other records of Martinez Manufacturing Co. at July 31, the end of the first month of operations in the current fiscal year: Sales $50,000 Materials inventory (July 1) 15,000 Work in process inventory (July 1) 20,000 Finished goods inventory (July 1) 28,000 Materials purchased 21,000 Direct labor cost 12,500 Factory overhead (including $5,000 of indirect materials used and $2,500 of indirect labor cost) 11,500 Selling and administrative expense 8,000 Inventories at July 31: Materials 16,000 Work in process 18,000 Finished goods 30,000 a. Prepare a statement of cost of goods manufactured. b. Determine the cost of goods sold for the month. ANS: (a) Martinez Manufacturing Co. Statement of Cost of Goods Manufactured For the Month Ended July 31, 20-- Direct Materials: Inventory, July 1 $15,000 Purchases 21,000 Total cost of available materials $36,000 Less inventory, July 31 16,000 Cost of materials used $20,000 Less indirect materials used 5,000 Cost of direct materials used in production $15,000 Direct labor 12,500 Factory overhead: Indirect materials $ 5,000 Indirect labor 2,500 Other 4,000 Total factory overhead 11,500 Total manufacturing cost $39,000 Add work in process inventory, July 1 20,000 Total $59,000 Less work in process inventory, July 31 18,000 Cost of goods manufactured during the month $41,000 (b) Finished goods inventory, July 1 $28,000 Add cost of goods manufactured during July 41,000 Goods available for sale $69,000 Less finished goods inventory, July 31 30,000 Cost of goods sold $39,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. The following data was taken from the general ledger and other records of Marwick Manufacturing Co. at January31, the end of the first month of operations in the current fiscal year: Sales $650,000 Inventories at January 31: Materials inventory 20,000 Work in process inventory 32,000 Finished goods inventory 54,000 Inventories at January 1: Materials 25,000 Work in process 29,000 Finished goods 48,000 Materials purchased 154,000 Labor Costs: Assembly workers’ wages 185,000 Supervisors’ salaries 30,000 Sales personnel salaries 52,000 Depreciation: Factory building 73,000 Sales office 28,000 Indirect materials used 3,000 Factory utilities 67,000 a. Prepare a statement of cost of goods manufactured. b. Determine the cost of goods sold for the month. ANS: (a) Marwick Manufacturing Co. Statement of Cost of Goods Manufactured For the Month Ended January 31, 20-- Direct Materials: Inventory, January 1 $25,000 Purchases 154,000 Total cost of available materials $179,000 Less inventory, July 31 20,000 Cost of materials used $159,000 Less indirect materials used 3,000 Cost of direct materials used in production $156,000 Direct labor 185,000 Factory overhead: Indirect materials $ 3,000 Indirect labor (Supervisors) 30,000 Depreciation 73,000 Utilities 67,000 Total factory overhead 173,000 Total manufacturing cost $514,000 Add work in process inventory, January 1 29,000 Total $543,000 Less work in process inventory, January 31 32,000 Cost of goods manufactured during the month $511,000 (b) Finished goods inventory, January 1 $48,000 Add cost of goods manufactured during July 511,000 Goods available for sale $559,000 Less finished goods inventory, January 31 54,000 Cost of goods sold $505,000 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. Custom Cabinets Inc. manufactures goods on a job order basis. During the month of November, three jobs were started. (There was no work in process at the beginning of the month.) Jobs 401 and 402 were completed and sold for $14,500 and $19,000, respectively, during the month; Job 403 was still in process at the end of November. The following data are taken from the job cost sheets for each job. Factory overhead charges include a total of $900 of indirect materials and $600 of indirect labor. One work in process control account is used. Job 401 Job 402 Job 403 Direct materials $3,200 $3,800 $2,000 Direct labor 2,400 3,500 1,500 Factory overhead 1,250 2,000 850 Prepare a journal entry to record each of the following: a. Materials used b. Factory wages and salaries earned c. Factory Overhead transferred to Work in Process d. Jobs completed e. Jobs sold ANS: (a) Work in Process (3,200 + 3,800 + 2,000) 9,000 Factory Overhead 900 Materials 9,900 (b) Work in Process (2,400 + 3,500 + 1,500) 7,400 Factory Overhead 600 Payroll 8,000 (c) Work in Process (1,250 + 2,000 + 850) 4,100 Factory Overhead 4,100 (d) Finished Goods 16,150 Work in Process* 16,150 * Jobs completed: 401 (3,200 + 2,400 + 1,250) $ 6,850 402 (3,800 + 3,500 + 2,000) 9,300 Total $16,150 (e) Cost of Goods Sold 16,150 Finished Goods 16,150 Accounts Receivable (14,500 + 19,000) 33,500 Sales 33,500 PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 12. The Shawshank Manufacturing Co. uses a job order cost system of accounting. The following information was taken from the books of the company after all posting had been completed at the end of January: Jobs Completed Direct Materials Cost Direct Labor Cost Factory Overhead Units Completed 101 $1,800 $2,000 $1,000 200 102 1,235 1,250 890 150 104 900 850 350 100 a. Prepare the journal entries to allocate the costs of materials, labor, and factory overhead to each job and to transfer the costs of jobs completed to Finished Goods. b. Compute the total production cost of each job. c. Compute the unit cost of each job. d. Compute the selling price per unit for each job, assuming a mark-on percentage of 40 percent. ANS: (a) Work in Process--Job 101 1,800 Work in Process--Job 102 1,235 Work in Process--Job 104 900 Materials 3,935 Work in Process--Job 101 2,000 Work in Process--Job 102 1,250 Work in Process--Job 104 850 Payroll 4,100 Work in Process--Job 101 1,000 Work in Process--Job 102 890 Work in Process--Job 104 350 Factory Overhead 2,240 Finished Goods 10,275 Work in Process--Job 101 4,800 Work in Process--Job 102 3,375 Work in Process--Job 104 2,100 (b) Jobs Completed Direct Materials Cost Direct Labor Cost Factory Overhead Total Production Cost 101 $1,800 $2,000 $1,000 $4,800 102 1,235 1,250 890 3,375 104 900 850 350 2,100 Total $3,935 $4,100 $2,240 $10,275 (c) Unit Cost: Job 101 ($4,800 / 200) $24.00 Job 102 ($3,375 / 150) $22.50 Job 104 ($2,100 / 100) $21.00 (d) Selling Price Per Unit: Job 101 ($24.00  40%) + $24.00 $33.60 Job 102 ($22.50  40%) + $22.50 $31.50 Job 104 ($21.00  40%) + $21.00 $29.40 PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic CHAPTER 2—ACCOUNTING FOR MATERIALS MULTIPLE CHOICE 1. An effective cost control system should include: a. An established plan of objectives and goals to be achieved. b. Regular reports showing the difference between goals and actual performance. c. Specific assignment of duties and responsibilities. d. All of these are correct. ANS: D An effective cost control system should include an established plan of goals and objectives, reports comparing budgeted goals to actual performance, and assignment of specific duties and responsibilities to operating personnel. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 1C - Internal Controls TOP: AACSB - Analytic 2. To effectively control materials, a business must maintain: a. Limited access. b. Combination of duties. c. Safety stock. d. None of these are correct. ANS: A To control materials a business must maintain limited access, segregation of duties, and accuracy in recording. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 1C - Internal Controls TOP: AACSB - Analytic 3. Janet is the purchasing agent at Frameco Manufacturing. Her duties include vendor selection and ordering materials. Due to a recent economic downturn and resulting cut backs, Janet has been assigned the additional duty or preparing receiving reports after comparing the goods received to the purchase order. This is an example of: a. unlimited access to materials. b. independence of assigned functions. c. misappropriation of assets. d. a lack of segregation of duties. ANS: D Because Janet’s job as a purchasing agent involves preparing the purchase orders and she is also comparing items received to the purchase orders, there is a lack of segregation of duties. This increases the potential for the misappropriation of assets, but there is not enough information given to determine that a misappropriation has indeed occurred. PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 1C - Internal Controls TOP: AACSB - Reflective 4. Marley Company hired a consultant to help improve its operations. The consultant’s report stated that Marley’s inventory levels are excessive and cited several negative consequences to Marley as a result. Which of the following was not cited in the report? a. Possible other uses for working capital now tied up in inventory b. Production stoppages due to parts not being available c. Higher property taxes and insurance costs d. Large quantities of obsolete materials ANS: B It is important to maintain inventories of sufficient size and variety to meet production needs. However, if Marley’s inventories are excessive, it is likely that parts are available for production, but the excess inventory is resulting in higher costs related to holding those items such as property taxes and insurance and potential losses from obsolescence or deterioration. Funds invested in inventories could be used for other purposes. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Management TOP: AACSB - Reflective 5. The data used to calculate the order point include all of the following except: a. the costs of placing an order. b. the rate at which the material will be used. c. the estimated time interval between the placement and receipt of an order. d. the estimated minimum level of inventory needed to protect against stockouts. ANS: A Calculating an order point is based on usage, lead time and safety stock. The cost of placing an order is used in determining the economic order quantity. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Management TOP: AACSB - Reflective 6. Sully Company uses 3,000 yards of canvas each day to make tents. It usually takes ten days from the time Sully orders the material to when it is received. If Sully’s desired safety stock is 12,000 yards, what is Sully’s order point? a. 12,000 yards b. 21,000 yards c. 30,000 yards d. 42,000 yards ANS: D 3,000 (daily usage) x 10 (lead time) 30,000 Safety stock 12,000 Order point 42,000 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic 7. What is the objective of the economic order quantity (EOQ) model for inventory? a. To minimize order costs or carrying costs, whichever are higher b. To minimize order costs or carrying costs and maximize the rate of inventory turnover c. To minimize the total order costs and carrying costs over a period of time d. To order sufficient quantity to economically meet the next period's demand ANS: C If the demand for the product can be determined because it is predictable, the essence of any EOQ model for inventory is to minimize the total order costs and also minimize the total carrying costs. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 8. Order costs would include all of the following except: a. Receiving clerk’s wages. b. Storeroom keeper’s wages. c. Purchasing department’s telephone bill. d. Transportation in. ANS: B Costs related to the purchase and receipt of materials are considered order costs while costs related to the storage and maintenance of materials are considered storage costs. The storeroom keeper’s wages would be a storage cost. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic 9. Expected annual usage of a particular raw material is 1,200,000 units, and standard order size is 10,000 units. The invoice cost of each unit is $145, and the cost to place one purchase order is $105. The estimated annual order cost is: a. $12,000. b. $17,400. c. $12,600. d. $800,000. ANS: C Annual order cost = Number of orders  Per order cost = 1,200,000 units  $105 10,000 units = 120 orders  $105 = $12,600 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 10. Carrying costs would include all of the following except: a. Warehouse rent. b. Inspection employees’ wages. c. Losses due to obsolescence. d. Property taxes. ANS: B Costs related to the purchase and receipt of materials are considered order costs while costs related to the storage and maintenance of inventory are considered storage costs. Inspection would typically happen upon receipt of goods making this an order cost. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 11. The following data refer to various annual costs relating to the inventory of a single-product company that requires 10,000 units per year: Cost per unit Order cost $ .05 Transportation-in on purchases .18 Storage .16 Insurance .10 Total per year Interest that could have been earned on alternate investment of funds $800 What is the annual carrying cost per unit? a. $ .21 b. $ .29 c. $ .34 d. $ .44 ANS: C The carrying costs will consist of the per unit costs for storage, insurance, and interest on the inventory investment. Carrying costs: Storage $.16 Insurance .10 Interest = $800 .08 Units required 10,000 Carrying costs $.34 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 12. The following data pertains to Western Company’s materials inventory: Number of pounds required annually 16,000 Cost of placing an order $20 Annual carrying cost per pound of material $4 What is Western Company’s EOQ? a. 4,000 pounds b. 800 pounds c. 400 pounds d. 200 pounds ANS: C = 400 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic 13. Expected annual usage of a particular raw material is 180,000 units, and standard order size is 12,000 units. The invoice cost of each unit is $300, and the cost to place one purchase order is $80. Assuming the company does not maintain safety stock, the average inventory is: a. 10,000 units. b. 7,500 units. c. 15,000 units. d. 6,000 units. ANS: D Average inventory = 12,000 (standard-size order) 2 = 6,000 units PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 14. Gedye Company has correctly computed its economic order quantity at 500 units; however, management feels it would rather order in quantities of 600 units. How should Gedye's total annual order cost and total annual carrying cost for an order quantity of 600 units compare to the respective amounts for an order quantity of 500 units? a. Higher total order cost and lower total carrying cost b. Lower total order cost and higher total carrying cost c. Higher total order cost and higher total carrying cost d. Lower total order cost and lower total carrying cost ANS: B If orders were placed for 600 units instead of EOQ of 500 units, fewer purchase orders would have to be placed to acquire the total units required for production, thereby reducing the total order cost. However, due to the larger number of units ordered each time, the number of units stored would be greater and a higher total carrying cost would result. PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Reflective 15. The personnel involved in the physical control of materials includes all of the following except the: a. Purchasing agent. b. Receiving clerk. c. Cost accountant. d. Production department supervisor. ANS: C The cost accountant has the responsibility for the accounting records pertaining to inventory valuation but not for the physical materials. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 1C - Internal Controls TOP: AACSB - Reflective 16. The employee who is responsible for preparing purchase requisitions is most likely the: a. Storeroom keeper. b. Purchasing agent. c. Production supervisor. d. Receiving clerk. ANS: A The storeroom keeper is usually the employer responsible for preparing purchase requisitions when the stock is running low to notify the purchasing agent that the inventory needs to be replenished. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 17. Sam Jones works at Seeker, Inc. Sam’s duties include identifying where materials can be obtained most economically, placing orders and verifying invoices and approving them for payment. Sam is a(n): a. receiving clerk. b. accounts payable clerk. c. purchasing agent. d. production supervisor. ANS: C The duties described are those of a purchasing agent. The receiving clerk counts and identifies materials received and prepares a receiving report. The accounts payable clerk is responsible for issuing payment to vendors. The production supervisor is responsible for preparing materials requisitions for materials needed for production. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB Reflective 18. The form used to notify the purchasing agent that additional materials are needed is known as a: a. Purchase order. b. Vendor's invoice. c. Receiving report. d. Purchase requisition. ANS: D The storeroom keeper prepares a purchase requisition to notify the purchasing agent that additional materials are needed. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 19. The form prepared by the purchasing agent and sent to the vendor to obtain materials is known as a: a. Materials requisition. b. Purchase requisition. c. Purchase order. d. Vendor's invoice. ANS: C The purchase order is prepared by the purchasing agent and sent to the vendor to order materials. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 20. A receiving report would include all of the following information except: a. What the shipment contained. b. The purchase order number. c. The customer. d. The date the materials were received. ANS: C It is unlikely the receiving report would contain the customer name; however, a listing of what the shipment contained, the purchase order number and the date of the receipt would be necessary information used in matching the receiving report to the vendor’s invoice and the purchase order. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 21. Listed below are steps of purchasing and receiving materials: 1. The receiving clerk prepares a receiving report. 2. Purchase requisitions are prepared to notify the purchasing agent that additional materials are needed. 3. The purchase of merchandise is recorded by the accounting department. 4. The purchasing agent completes a purchase order. In which order would these events typically happen? a. 4, 2, 3, 1 b. 2, 4, 3, 1 c. 2, 4, 1, 3 d. 4, 2, 1, 3 ANS: C The storeroom keeper will prepare a purchase requisition to notify the purchasing agent that additional materials are needed. The purchasing agent will then complete a purchase order and send it to the vendor. When the goods are received, the receiving clerk will prepare a receiving report which is compared to the vendor’s invoice and the purchase order. At that time, the accounting department will record the purchase of the inventory items in the general ledger. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 22. The duties of the purchasing agent would include all of the following except: a. Placing purchase orders. b. Counting and identifying materials received. c. Compiling information that identifies vendors and prices. d. Verifying invoices and approving them for payment. ANS: B The receiving clerk is responsible for counting and identifying the materials received. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 23. The form that serves as authorization to withdraw materials from the storeroom is known as the: a. Materials requisition. b. Purchase order. c. Purchase requisition. d. Returned materials report. ANS: A The materials requisition is prepared by the production department supervisor or an assistant and is presented to the storeroom keeper as authorization for the withdrawal of materials. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 1C - Internal Controls TOP: AACSB - Analytic 24. If a company receives a larger quantity of goods than had been ordered and keeps the excess for future use, a(n)______________ is prepared to notify the vendor of the amount of increase to accounts payable in the invoice. a. credit memorandum b. return shipping order c. debit memorandum d. additional purchase order ANS: A A Debit or credit memorandum may be issued when the shipment of materials does not match the purchase order and the invoice. In this case, since more materials than ordered and billed were received, the company would issue a credit memorandum to increase accounts payable. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, the March 16 issue will consist of: a. 20 units @ $1.40 and 120 units @ $1.55. b. 100 units @ $1.40 and 40 units @ $1.55. c. 140 units @ $1.55. d. 100 units @ $1.55 and 40 units @ $1.40. ANS: A On a FIFO basis, 20 of the units issued on March 16 would have been assigned a cost of $1.40 per unit and the remaining 120 units issued on that date would have been assigned a cost of $1.55 per unit as follows: Number of Units Unit Price Units issued on February 8 Units issued on March 16 Beginning Balance 100 $1.40 80 20 Jan. 24 Purchase 300 $1.55 120 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, the September 6 issue will consist of: a. 10 units @ $1.40, 80 units @ $1.55 and 20 units @ $1.62. b. 50 units @ $1.40 and 60 units @ $1.55. c. 110 units @ $1.55. d. 50 units @ $1.55 and 60 units @ $1.62. ANS: D On a FIFO basis, 50 of the units issued on September 6 would have been assigned a cost of $1.55 per unit and the remaining 60 units issued on that date would have been assigned a cost of $1.62 per unit as follows: Number of Units Unit Price Units issued on Units issued on Units issued on Units issued Feb. 8 Mar. 16 Aug. 18 on Sep.6 Beginning Balance 100 $1.40 80 20 Jan. 24 Purchase 300 $1.55 120 130 50 Jun. 11 Purchase 150 $1.62 60 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, 200 units on hand on August 18 will consist of: a. 100 units @ $1.40, 80 units @ $1.55 and 20 units @ $1.62. b. 100 units @ $1.55 and 100 units @ $1.62. c. 150 units @ $1.62 and 50 units @ $1.55. d. 200 units @ $1.55. ANS: C On a FIFO basis, 50 of the units on hand at August 18 would have been assigned a cost of $1.55 per unit and the remaining 150 units on hand at that date would have been assigned a cost of $1.62 per unit as follows: Number of Units Unit Price Units issued on Feb. 8 Units issued on Mar. 16 Units issued on Aug. 18 Units in Inventory on Aug.18 Beginning Balance 100 $1.40 80 20 -- Jan. 24 Purchase 300 $1.55 120 130 50 Jun. 11 Purchase 150 $1.62 150 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 28. The inventory method which results in the prices paid for earliest purchases assigned to cost of goods sold is: a. First-in, first-out. b. Last-in, first-out. c. Last-in, last-out. d. Moving average. ANS: A First-in, first-out (FIFO) results in the oldest costs being assigned to cost of goods sold. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 29. The inventory method which results in the most recent costs being assigned to inventory on hand at the end of the period is: a. First-in, first-out. b. Last-in, first-out. c. Last-in, last-out. d. Moving average. ANS: A First-in, first-out (FIFO) results in the most recent costs being assigned to ending inventory because the oldest costs are assigned to issues first. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 30. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the March 16 issue will consist of: a. 20 units @ $1.40 and 120 units @ $1.55. b. 100 units @ $1.40 and 40 units @ $1.55. c. 140 units @ $1.55. d. 100 units @ $1.55 and 40 units @ $1.40. ANS: C On a LIFO basis, the 140 units issued on March 16 would have been assigned a cost of $1.55 per unit as follows: Number of Units Unit Price Units issued on February 8 Units issued on March 16 Beginning Balance 100 $1.40 Jan. 24 Purchase 300 $1.55 80 140 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 31. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the September 6 issue will consist of: a. 80 units @ $1.55, 20 units @ $1.62 and 10 units @ $1.40. b. 110 units @ $1.55. c. 50 units @1.55 and 60 units @ 1.62. d. 20 units @ $1.62 and 90 units @ $1.55. ANS: A On a LIFO basis, 20 of the units issued on September 6 would have been assigned a cost of $1.62 per unit, 80 of the units issued would have been assigned a cost of $1.55 per unit and the remaining 10 units issued on that date would have been assigned a cost of $1.40 per unit. Number of Units Unit Price Units issued on Feb. 8 Units issued on Mar. 16 Units issued on Aug. 18 Units issued on Sep.6 Beginning Balance 100 $1.40 10 Jan. 24 Purchase 300 $1.55 80 140 80 Jun. 11 Purchase 150 $1.62 130 20 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 32. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the 200 units in inventory at August 18 will consist of: a. 50 units @ $1.62 and 150 units @ $1.55. b. 100 units @ $1.40 and 100 units @ $1.55. c. 20 units @ $1.62, 80 units @ $1.55 and 100 units @ $1.40. d. 100 units @ $1.40, 60 units @ $1.55 and 40 units @ $1.62. ANS: C On a LIFO basis, 20 of the units in inventory at August 18 would have been assigned cost per unit of $1.62, 80 of the units on hand would have been assigned a cost per unit of $1.55 and the remaining 100 units in inventory on that date would have been assigned a unit cost of $1.40 as follows: Number of Units Unit Price Units issued on Feb. 8 Units issued on Mar. 16 Units issued on Aug. 18 Units in Inventory Aug. 18 Beginning Balance 100 $1.40 100 Jan. 24 Purchase 300 $1.55 80 140 80 Jun. 11 Purchase 150 $1.62 130 20 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 33. The inventory method which results in the most recent cost being assigned to cost of goods sold is: a. First-in, first-out. b. Last-in, first-out. c. Last-in, last-out. d. Moving average. ANS: B Last-in, first-out (LIFO) results in the most recent costs being assigned to cost of goods sold. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 34. The inventory method which results in the prices paid for the earliest purchases being assigned to inventory on hand at the end of the period is: a. First-in, first-out. b. Last-in, first-out. c. Last-in, last-out. d. Moving average. ANS: B Last-in, first-out (LIFO) results in the oldest costs being assigned to ending inventory because the most recent costs are assigned to issues first. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 35. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a moving average basis, the 140 units issued on March 16 will have a unit cost of: a. $1.5125. b. $1.475. c. $1.55. d. $1.4375. ANS: A On a moving average basis, the 140 units issued on March 16 would have a unit cost of $1.5125 as follows: Number of Units Unit Price Total Cost Beginning Balance 100 $1.40 $140.00 Jan. 24 Purchase 300 $1.55 465.00 400 $605.00 Average cost for both the February 8 and March 16 issue would be $1.5125 ($605 / 400 units). PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 36. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on hand, purchases, and requisitions of Raw Material A is given in the following table. Raw Material A Date Transaction Number of Units Unit Price Balance of Units Jan. 1 Beginning balance 100 $1.40 100 Jan. 24 Purchased 300 $1.55 400 Feb. 8 Issued 80 320 Mar. 16 Issued 140 180 Jun. 11 Purchased 150 $1.62 330 Aug. 18 Issued 130 200 Sep. 6 Issued 110 90 Oct. 15 Purchased 150 $1.70 240 Dec. 29 Issued 140 100 If a perpetual inventory record of Raw Material A is maintained on a moving average basis, the 330 items in inventory on June 11 will have a unit cost of: a. $1.51. b. $1.5233. c. $1.5614. d. $1.5125. ANS: C On a moving average basis, the 330 units in inventory on June 11 would be assigned a cost per unit of $1.5614 as follows: Number of Units Unit Price Total Cost Beginning Balance 100 $1.40 $140.00 Jan. 24 Purchase 300 $1.55 465.00 400 $605.00 605.00/400 = 1.5125 Feb. 8 Issue 80 $1.5125 121.00 Mar. 16 Issue 140 $1.5125 211.75 180 272.25 Jun. 11 Purchase 150 $1.62 243.00 330 $515.25 Average cost per unit for the June 11 inventory would be $1.5614 ($515.25 / 330 units). PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 37. In a period of rising prices, the use of which of the following cost flow methods would result in the lowest tax liability? a. FIFO b. LIFO c. Weighted average cost d. Moving average cost ANS: B Under the LIFO method, the most recent purchases, which were the most expensive, would be considered to be the goods sold. This would result in higher cost of goods sold, thus lower gross margins which in turn would result in lower income taxes. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 38. In a period of rising prices, the use of which of the following cost flow methods would result in the lowest cost of goods sold? a. FIFO b. LIFO c. Weighted average cost d. Moving average cost ANS: A Under the FIFO method, the earliest purchases, which were least the expensive, would be considered to be the goods sold. Thus, cost of goods sold would be lower. PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 39. When selecting a method of inventory costing, a company must consider all of the following except: a. federal and state income tax regulations. b. current economic conditions. c. the flow of materials. d. its rate of inventory turnover. ANS: C The flow of materials does not dictate the flow of costs. Companies must consider tax regulations and current economic conditions, including the rate of inflation, particularly as they relate to LIFO. In addition, companies that turn over inventory rapidly may not be as concerned as companies that hold inventory for longer periods of time as the impact of rising prices will not be as dramatic. PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 40. At the end of the period, the balance in the Materials account should represent a. the cost of materials purchased. b. the cost of materials on hand. c. the cost of materials issued into production. d. the cost of materials included in Work in Process and Finished Goods. ANS: B At the end of the period, the balance in the Materials account should represent the cost of materials on hand. Materials purchased increase the Materials account while materials that have been issued into production, which would be included in Work in Process, Finished Goods and Cost of Goods Sold, would have decreased the Materials account. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 41. The general ledger entry to record the purchase of materials is: a. Debit-Purchases Received Credit-Purchase Orders Outstanding b. Debit-Materials Credit-Purchase Orders Outstanding c. Debit-Purchases Received Credit-Accounts Payable d. Debit-Materials Credit-Accounts Payable ANS: D The Materials account is debited and Accounts Payable is credited when materials are purchased. Purchase orders are not recorded in the general ledger. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 42. The journal entry to record undamaged direct materials returned to the storeroom would be: a. Debit - Materials Credit - Finished Goods b. Debit - Factory Overhead Credit - Work in Process c. Debit - Materials Credit - Factory Overhead d. Debit - Materials Credit - Work in Process ANS: D The entry to record the return of direct materials to the storeroom is the reverse of the entry that is made when the materials are issued to production. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 43. If the amount of materials on hand at the end of the period is less than the control account balance, the control account balance should be decreased by the following entry: a. Debit - Work in Process Credit - Materials b. Debit - Materials Credit - Factory Overhead c. Debit - Materials Credit - Work in Process d. Debit - Factory Overhead Credit - Materials ANS: D If the amount of materials on hand per the physical count is less than the control account balance, the balance should be decreased by a debit to a factory overhead account (usually called Inventory Short and Over), because differences may be due to damage, theft or errors and usually cannot be easily identified with a specific job, and a credit to Materials. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 44. Inventory levels for firms using JIT inventory systems compared to firms not using JIT will be: a. Higher for both work in process and finished goods. b. Higher for work in process and finished goods but lower for raw materials. c. Lower for raw materials, work in process, and finished goods. d. Higher for finished goods but lower for raw materials and work in process. ANS: C Manufacturers using just-in-time inventory systems will maintain lower inventory levels for all three types of inventories. Materials are delivered in time to be placed in production. Work in Process inventories are minimized by eliminating inventory buffers between work cells and Finished Goods inventories are eliminated because items are produced as customers order them. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3A - Strategic Planning TOP: AACSB - Reflective 45. Just-in-time production techniques: a. Require inventory buffers between work centers. b. Were first utilized by U.S. manufacturers and later exported to Japan. c. Produce goods for inventory with the hope that demand for these goods will then be created. d. Require a high degree of cooperation and coordination between supplier and manufacturer. ANS: D A just-in-time inventory system is a “pull” inventory system ultimately driven by customer demand so goods are not produced in the hope of selling them. In addition, inventory buffers are minimized as production on units in one manufacturing cell is started only when the subsequent operation requests them. For a just-in-time inventory system to be effective, suppliers must be in close proximity to customers to enable the delivery of raw materials to coincide with production's need for them. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3A - Strategic Planning TOP: AACSB - Reflective 46. Harrison Industries produces 4,000 lunch boxes each day. The average number of units in work in process is 12,000, having an average cost of $60,000. The annual carrying costs relating to inventory are 10%. Consultants have determined that the work in process could be reduced by as much as a third by rearranging the factory floor. What is the current throughput time? a. Eight hours b. One day c. Two days d. Three days ANS: D Throughput is the amount of time it takes a unit to get through the system. Units in work in process = 12,000 = 3 days. Daily production 4,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic 47. Harrison Industries produces 4,000 lunch boxes each day. The average number of units in work in process is 12,000, having an average cost of $60,000. The annual carrying costs related to inventory are 10%. Consultants have determined that the work in process could be reduced by as much as a third by rearranging the factory floor. What would the throughput time be if Harrison implements the recommended changes? a. Twelve hours b. One day c. Two days d. Three days ANS: C Throughput is the amount of time it takes a unit to get through the system. Units in work in process = 12,000 = 3 days x 1/3 = 1 day reduction Daily production 4,000 Three days less one day = two days PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic 48. Harrison Industries produces 4,000 lunch boxes each day. The average number of units in work in process is 12,000, having an average cost of $60,000. The annual carrying costs related to inventory are 10%. Consultants have determined that the work in process could be reduced by as much as a third by rearranging the factory floor. What would the reduction in annual carrying costs be if Harrison is able to implement the recommended changes? a. $2,000 b. $1,500 c. $6,000 d. $4,000 ANS: A Carrying cost = Average work in process inventory x carrying cost percentage Existing situation - $60,000 x 10% = $6,000 Inventory reduction $60,000 x 1/3 = $20,000 reduction New average inventory = $60,000 - $20,000 = $40,000 x 10% = $4,000 $6,000 - $4,000 = $2,000 reduction PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic 49. The accounting system used with JIT manufacturing is called: a. Backflush costing. b. The push system. c. Perpetual inventory costing. d. First-in, first-out. ANS: A The accounting system used with JIT is called backflush costing. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 50. In a backflush accounting system, a single account is used for the following: a. Work in process and finished goods inventories. b. Finished goods inventories and cost of goods sold. c. Factory overhead and raw materials. d. Raw materials and work in process inventories. ANS: D In a backflush accounting system, a single account, Raw and In Process is used because in just-in-time or JIT manufacturing, materials are delivered directly into production. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 51. Under a backflush accounting system, the following entry is made when products are completed: a. Debit-Finished Goods Credit-Work In Process b. Debit-Cost of Goods Sold Credit-Raw and In Process Credit-Conversion Costs c. Debit-Finished Goods Credit-Raw and In Process Credit-Conversion Costs d. Debit-Cost of Goods Sold Credit-Finished Goods ANS: C Finished goods are debited when goods are completed under backflush accounting, similar to other accounting systems. However, work in process is not credited, as that account does not exist under backflush accounting. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 52. All of the following methods may be used to account for the revenue from scrap sales except: a. Credit Factory Overhead, if the scrap cannot be identified with a specific job. b. Credit Materials, if the scrap would have been able to be recycled. c. Credit Work in Process, if the scrap is identified with a specific job. d. Credit Scrap Revenue, which is included in the “Other Income” section of the income statement. ANS: B Scrap is a by-product of production. It would not be appropriate to credit materials because materials would have been credited when the materials were put into production. Depending on the circumstances, it would be appropriate to credit Factory Overhead, Work in Process or Scrap Revenue. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 53. Rowe Co.'s Job 401 for the manufacture of 2,200 wagons was completed during August at the unit costs presented below. Final inspection of Job 401 disclosed 200 wagons coats that were sold to a jobber for $6,000. Direct materials $24 Direct labor 18 Factory overhead 14 $56 Assume that the spoilage loss is charged to all production during August. What would be the journal entry to record the spoilage? a. Factory Overhead 11,200 Work in Process 11,200 b. Spoiled Goods Inventory 6,000 Work in Process 6,000 c. Spoiled Goods Inventory 6,000 Factory Overhead 5,200 Work in Process 11,200 d. Spoiled Goods Inventory 11,200 Factory Overhead 11,200 ANS: C When the spoilage loss is charged to all of production, the market value of the spoiled goods is charged to Spoiled Goods Inventory, but the cost of the job in work in process is reduced by the entire cost of the spoiled items. The difference is a loss, which is charged to Factory Overhead. Cost of spoiled items (200 x $56) $11,200 Market value of spoiled units 6,000 Amount charged to Factory Overhead $ 5,200 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 54. Rowe Co.'s Job 401 for the manufacture of 2,200 wagons was completed during August at the unit costs presented below. Final inspection of Job 401 disclosed 200 spoiled wagons that were sold to a jobber for $6,000. Direct materials $24 Direct labor 18 Factory overhead 14 $56 Assume that the spoilage loss is attributable to the exacting specifications of Job 401 and is charged to this specific job. What would be the journal entry to record the spoilage? a. Factory Overhead 6,000 Work in Process 6,000 b. Spoiled Goods Inventory 6,000 Work in Process 6,000 c. Spoiled Goods Inventory 6,000 Factory Overhead 5,200 Work in Process 11,200 d. Spoiled Goods Inventory 6,000 Factory Overhead 6,000 ANS: B When the spoilage loss is charged to the specific job on which the spoilage occurred, the market value of the spoilage is charged to Spoiled Goods Inventory and the cost of the job in work in process is reduced by the same amount. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 55. Rowe Co.'s Job 401 for the manufacture of 2,200 wagons was completed during August at the unit costs presented below. Final inspection of Job 401 disclosed 200 spoiled wagons that were sold to a jobber for $6,000. Direct materials $24 Direct labor 18 Factory overhead 14 $56 Assume that spoilage loss is attributable to the exacting specifications of Job 401 and is charged to this specific job. What would be the unit cost of the good wagons produced on Job 401? a. $56.00 b. $58.60 c. $53.00 d. $48.18 ANS: B When the spoilage loss is charged to the specific job on which the spoilage occurred, the cost of producing the good units includes the cost of producing all units less the amount received for the spoilage: (2,200 x $56) - $6,000 = $58.60 2,000 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 56. During March, Hart Company incurred the following costs on Job 122 for the manufacture of 200 motors: Original cost accumulation: Direct materials $2,600 Direct labor 900 Factory overhead 1,350 $4,850 Direct costs of reworking 10 units: Direct materials $ 100 Direct labor 180 Factory overhead 270 $ 550 Assume the rework costs are to be spread over all jobs that go through the production cycle. What is the journal entry needed to record the rework costs? a. Work in Process 550 Materials 100 Payroll 180 Factory Overhead 270 b. Materials 100 Payroll 180 Factory Overhead 270 Work in Process 550 c. Factory Overhead 550 Materials 100 Payroll 180 Factory Overhead 270 d. Spoiled Goods Inventory 550 Work in Process 550 ANS: C When the costs of correcting defective work is to be spread over all jobs, the material, labor and factory overhead costs are charged to Factory Overhead. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 57. During March, Hart Company incurred the following costs on Job 122 for the manufacture of 200 motors: Original cost accumulation: Direct materials $2,600 Direct labor 900 Factory overhead 1,350 $4,850 Direct costs of reworking 10 units: Direct materials $ 100 Direct labor 180 Factory overhead 270 $ 550 If the defects resulted from the exacting specifications of the order, what is the journal entry needed to record the rework costs? a. Work in Process 550 Materials 100 Payroll 180 Factory Overhead 270 b. Materials 100 Payroll 180 Factory Overhead 270 Work in Process 550 c. Factory Overhead 550 Materials 100 Payroll 180 Factory Overhead 270 d. Spoiled Goods Inventory 550 Work in Process 550 ANS: A When the costs of correcting defective work is to due to the exacting specifications of the order, the material, labor and factory overhead costs are charged to that specific job in Work in Process. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 58. During March, Hart Company incurred the following costs on Job 122 for the manufacture of 200 motors: Original cost accumulation: Direct materials $2,600 Direct labor 900 Factory overhead 1,350 $4,850 Direct costs of reworking 10 units: Direct materials $ 100 Direct labor 180 Factory overhead 270 $ 550 The rework costs were attributable to the exacting specifications of Job 122, and the full rework costs were charged to this specific job. What is the cost per finished unit of Job 122? a. $25.00 b. $23.50 c. $27.00 d. $24.00 ANS: C Original cost $4,850 Rework materials 100 Rework labor 180 Rework overhead 270 Total cost $5,400 Unit cost ($5,400/200) $27 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic PROBLEM 1. Xander Company anticipates that usage of Component T will be 100 units daily, which equates to around 25,000 for the year. The material is expected to cost $5 per unit. Once an order is placed with its vendor, it takes five days to receive the goods, and the cost of placing each order is $50. As a result, Xander keeps 1,000 units on hand to avoid stockouts. The carrying cost associated with each unit is $10. a. Compute the order point. b. Determine the most economical order quantity. ANS: (a) Order point = Expected usage during lead time + Safety stock = (100 units  5 days) + 1,000 = 1,500 units (b) PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 2. The Reddog Company predicts that 3,200 units of material will be used during the year. The expected daily usage is 15 units, there is an expected lead time of 10 days, and there is a safety stock of 200 units. The material is expected to cost $4 per unit. It is estimated that it will cost $25 to place each order. The annual carrying cost is $1 per unit. a. Compute the order point. b. Determine the most economical order quantity by use of the formula. c. Compute the total cost of ordering and carrying at the EOQ point. ANS: (a) Order point = Expected usage during lead time + Safety stock = (15 units  10 days) + 200 = 350 units (b) (c) Annual ordering cost = Number of orders  Cost per order = 3,200 Annual usage  $25 400 EOQ = 8  $25 = $200 Annual carrying cost = Average inventory  Carrying cost per unit Average inventory = (1/2  EOQ) + Safety Stock = (1/2  400) + 200 = 400 Annual carrying cost = 400  $1.00 = $400 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic 3. The materials account of the Herbert Company reflected the following changes during August: Balance, August 1 18 units @ $200 Received, August 2 6 units @ $210 Issued, August 8 8 units Received, August 15 10 units @ $222 Issued, August 27 15 units Assuming that Herbert Company maintains perpetual inventory records, calculate the cost of the ending inventory at August 31 and the cost of the units issued in August using the FIFO method. ANS: Received Issued Balance Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount 8/1 18 200 3,600 8/2 6 210 1,260 18 200 6 210 4,860 8/8 8 200 1,600 10 200 6 210 3,260 8/15 10 222 2,220 10 200 6 210 10 222 5,480 8/27 10 200 2,000 5 210 1,050 1 210 210 10 222 2,220 Ending Inventory: 11 units having a total cost of $2,430 (1 unit x $210) + (10 units x $222) Cost of Units Issued: 23 units having a total cost of $4,650 (1,600 + 2,000 + 1,050) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 4. The materials account of the Herbert Company reflected the following changes during August: Balance, August 1 18 units @ $200 Received, August 2 6 units @ $210 Issued, August 8 8 units Received, August 15 10 units @ $222 Issued, August 27 15 units Assuming that Herbert Company maintains perpetual inventory records, calculate the cost of the ending inventory at August 31 and the cost of the units issued in August using the LIFO method. ANS: Received Issued Balance Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount 8/1 18 200 3,600 8/2 6 210 1,260 18 200 6 210 4,860 8/8 2 200 400 6 210 1,260 16 200 3,200 8/15 10 222 2,220 16 200 10 222 5,420 8/27 5 200 1,000 10 222 2,220 11 200 2,200 Ending Inventory: 11 units having a total cost of $2,200 (11 x $200) Cost of Units Issued: 23 units having a total cost of $4,880 (400 + 1,260 + 1,000 + 2,220) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. The materials account of the Herbert Company reflected the following changes during August: Balance, August 1 18 units @ $200 Received, August 2 6 units @ $210 Issued, August 8 8 units Received, August 15 10 units @ $222 Issued, August 27 15 units Assuming that Herbert Company maintains perpetual inventory records, calculate the cost of the ending inventory at August 31 and the cost of the units issued in August using the moving average method. ANS: Received Issued Balance Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount 8/1 18 200.00 3,600 8/2 6 210.00 1,260 24 202.50 4,860 8/8 8 202.50 1,620 16 202.50 3,240 8/15 10 222.00 2,220 26 210.00 5,460 8/27 15 210.00 3,150 11 210.00 2,310 Ending Inventory: 11 units having a total cost of $2,310 Cost of Units Issued: 23 units having a total cost of $4,770 (1,620 + 3,150) Unit cost calculations: 4,860 / 24 = 202.50 5,460 / 26 = 210.00 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. The materials account of the Flynn Company reflected the following changes during May: Balance, May 1 500 units @ $10 Received, May 5 300 units @ $12 Issued, May 10 400 units Received, May 15 200 units @ $15 Issued, May 25 300 units Assuming that Flynn Company maintains perpetual inventory records, calculate the ending inventory at May 31 and the cost of the units issued in May using each of the following methods: (a) First in, first out (FIFO) (b) Last in, first out (LIFO) (c) Moving average ANS: (a) FIFO: Received Issued Balance Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount 5/1 500 10 5,000 5/5 300 12 3,600 500 10 300 12 8,600 5/10 400 10 4,000 100 10 300 12 4,600 5/15 200 15 3,000 100 10 300 12 200 15 7,600 5/25 100 10 1,000 200 12 2,400 100 12 200 15 4,200 Ending Inventory: 300 units having a total cost of $4,200 (100 units x $12) + (15 units x $15) Cost of Units Issued: 700 units having a total cost of $7,400 (4,000 + 1,000 + 2,400) (b) LIFO: Received Issued Balance Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount 5/1 500 10 5,000 5/5 300 12 3,600 500 10 300 12 8,600 5/10 100 10 1,000 300 12 3,600 400 10 4,000 5/15 200 15 3,000 400 10 200 15 7,000 5/25 100 10 1,000 200 15 3,000 300 10 3,000 Ending Inventory: 300 units having a total cost of $3,000 (300 x $10) Cost of Units Issued: 700 units having a total cost of $8,600 (1,000 + 3,600 + 1,000 + 3,000) (b) Moving Average: Received Issued Balance Date Quantity Unit Price Amount Quantity Unit Price Amount Quantity Unit Price Amount 5/1 500 10 5,000 5/5 300 12 3,600 800 10.75 8,600 5/10 400 10.75 4,300 400 10.75 4,300 5/15 200 15 3,000 600 12.17 7,300 5/25 300 12.17 3,650 300 12.17 3,650 Ending Inventory: 300 units having a total cost of $3,650 Cost of Units Issued: 700 units having a total cost of $7,950 (4,300 + 3,650) Unit cost calculations: 8,600 / 800 = 10.75 7,300 / 600 = 12.16667 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. The following accounts are maintained by the Sprague Manufacturing Company in its general ledger: Materials, Work in Process, Factory Overhead, and Accounts Payable. The materials account had a debit balance of $40,000 on November 1. A summary of material transactions for November shows: (1) Materials purchased on account, $62,000 (2) Direct materials issued, $58,500 (3) Direct materials returned to storeroom, $1,200 (4) Indirect materials issued, $3,600 (5) Indirect materials returned to storeroom, $550 (6) Materials on hand were $200 less than the stores ledger balance a. Prepare journal entries to record the materials transactions. b. Post the journal entries to T-accounts. c. What is the balance of the materials account on November 30? ANS: (a) (1) Materials 62,000 Accounts Payable 62,000 (2) Work in Process 58,500 Materials 58,500 (3) Materials 1,200 Work in Process 1,200 (4) Factory Overhead 3,600 Materials 3,600 (5) Materials 550 Factory Overhead 550 (6) Factory Overhead 200 Materials 200 (b) Materials Accounts Payable Bal. 40,000 | (2) 58,500 | (1) 62,000 (1) 62,000 | (4) 3,600 (3) 1,200 | (6) 200 (5) 550 | 103,750 | 62,300 Work in Process Factory Overhead (2) 58,500 | (3) 1,200 (4) 3,600 | (5) 550 (6) 200 | (c) The balance of the materials account = $103,750 - $62,300 = $ 41,450 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. The following decisions and transactions were made for the Sanders Company in May: May 1 The production manager informed the storeroom keeper that the forecasted usage of Component X is 3,000 units. There are 1,500 units on hand, each having a unit cost of $20. The company maintains a minimum stock of 1,000 units. The storeroom keeper notifies the purchasing agent that the company will need 2,500 units of X to meet May’s production needs and maintain a minimum inventory of 1,200 units. May 3 The purchasing agent checks with a number of vendors and orders 2,500 units of Component X. Unfortunately, the price has gone up to $25. May 7 The shipment of Component X is received and inspected. The units are in good condition and the company received the number of units it ordered. May 9 The invoice covering Component X is received from the vendor and approved for payment. May 21 The May 9 invoice is paid in full. May 31 During the month, 2,950 units of Component X are issued to production. The company uses FIFO costing and a job order cost system. May 31 An inventory of the storeroom is taken at the end of the day and there are 1,040 units of Component X on hand. (a) Prepare a table to answer the following questions: (1) What forms, if any, were used? (2) What entry, if any, was recorded? (b) Calculate the balance in the Materials account at May 31. ANS: Date Form Account Debit Credit May 1 Purchase requisition No entry May 3 Purchase order No entry May 7 Receiving report No entry May 9 None Materials 62,500 Accounts Payable 62,500 May 21 Approved voucher Accounts Payable * 62,500 Cash 62,500 May 31 Materials requisition Work in Process ** 66,250 Materials 66,250 May 31 Inventory report Factory Overhead *** 250 Materials 250 * 2,500 units x $25 = $62,500 ** FIFO Basis: Beginning Inventory 1,500 units @ $20 30,000 Received 2,500 units @ $25 62,500 Total available 4,000 units 92,500 Issued (2,950 units) (1,500) units @ $20 (30,000) (1,450) units @ $25 (36,250) Per perpetual records @ May 311,050 units @ $25 26,250 Per physical inventory @ May 31 1,040 Inventory adjustment needed 10 units@ $25 ** (1,500 x $20) + (1,450 x $25) = $66,250 *** 10 x $25 = $250 (b) Units in inventory at May 31 = 1,040 units @ $25 = $26,000 per above PTS: 1 DIF: Hard REF: P. OBJ: 2, 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. The Outdoor Manufacturing Company produces sporting equipment. The company maintains a single raw materials inventory account for both direct and indirect materials. The following information came from the factory ledger accounts for December: Raw Materials, December 1 $ 45,500 Work in Process, December 1 125,000 Finished Goods, December 1 175,000 Raw materials purchases (during December) 623,000 Direct labor 435,000 Repairs and maintenance 37,200 Indirect materials 16,700 Utilities 63,200 Indirect labor 38,200 Supervisors' salaries 18,300 Raw Materials, December 31 43,600 Work in Process, December 31 135,000 Finished Goods, December 31 150,000 Compute the cost of direct materials used during the month of December. ANS: Raw materials inventory, December 1 $ 45,500 Raw materials purchases 623,000 Total materials available $668,500 Less: Raw materials inventory, December 31 43,600 Raw materials used $624,900 Less: Indirect materials used 16,700 Direct materials used $608,200 Instructor Note: This question relates concepts from chapter 2 to those learned in chapter 1. PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. Hawkins Company, which uses backflush costing, had the following transactions during the month of June: (a) Purchased raw materials on account, $350,000. (b) Requisitioned raw materials to production, $330,000. (c) Distributed direct labor costs, $52,300. (d) Manufacturing overhead incurred, $107,000. (Use Various Credits for the account in the credit part of the entry.) Prepare journal entries to record the above transactions. ANS: (a) Raw and In-Process 350,000 Accounts Payable 350,000 (b) No entry (c) Conversion Costs 52,300 Payroll 52,300 (d) Conversion Costs 107,000 Various Credits 107,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. Gilday Furniture Inc. produces custom furniture. Wood chips are an inevitable by-product of the cutting process, and are considered scrap. Gilday is unable to use this scrap; however, the company has an agreement to sell the scrap at market prices to a local company that processes the wood chips to make industrial fillers. Record the entries required for scrap under each of the following conditions: (a) The revenue received for scrap is to be treated as other income. The market value of wood chips is stable and is currently $200 per ton. The company has seven tons on hand. (b) The revenue received for scrap is to be treated as a reduction in manufacturing cost, but cannot be identified with a specific job. A firm price is not determinable for the scrap until it is sold. It is eventually sold for cash of $800. (c) The revenue received for scrap is to be treated as a reduction in manufacturing cost, and five tons of scrap are related to a special job where the company made numerous round tables. The market value of wood chips is stable and is currently $200 per ton. ANS: (a) Scrap Materials 1,400 Scrap Revenue 1,400 Cash (or Accounts Receivable) 1,400 Scrap Materials 1,400 (b) Cash (or Accounts Receivable) 800 Factory Overhead 800 (c) Scrap Materials 1,000 Work in Process 1,000 Cash (or Accounts Receivable) 1,000 Scrap Materials 1,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 12. The Reardon Company manufactures novelty toys. In June, 400 of these toys were completed on Job Order No. 2525. On final inspection, 20 toys were rejected and transferred to the spoiled goods inventory to be sold at $2 each. Costs recorded on Job Order No. 2525 follow: Direct materials $1,600 Direct labor 1,400 Factory overhead 800 Prepare the journal entries to record the following: a. Charges for materials, labor, and factory overhead for Job Order No. 2525 b. Cost of the spoiled work, the transfer of the cost of the good toys to Finished Goods, and the sale of the imperfect toys, if the loss on spoilage is charged to all jobs worked on during the period c. Cost of the spoiled work, the transfer of the cost of the good toys to Finished Goods, and the sale of the imperfect toys, if the loss on spoilage is to be charged to Job Order No. 2525 only. (Round the new unit cost to the nearest whole cent, and assume part b, above, has not occurred.) ANS: (a) Work in Process ($3,800/400 = $9.50) 3,800 Materials 1,600 Payroll (direct labor) 1,400 Factory Overhead 800 (b) Spoiled Goods (20  $2) 40 Factory Overhead 150 Work in Process (20  $9.50) 190 Finished Goods (380  $9.50) 3,610 Work in Process 3,610 Cash 40 Spoiled Goods 40 (c) Spoiled Goods 40 Work in Process 40 Finished Goods (380  $9.90*) 3,762 Work in Process 3,762 Cash 40 Spoiled Goods 40 * $3,800 - $40 = $9.895 rounded 380 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 13. Kami company manufactures engine components. During the previous month, the Company manufactured 12,000 units of Component XRB for Job 3524 and incurred the following unit costs: Direct materials $32.00 Direct labor 9.00 Factory overhead 6.00 When the units were tested after production, 300 units did not meet specifications and needed further polishing work. The unit cost of correcting the defects was: Direct labor 3.00 Factory overhead 2.00 a. Prepare the journal entries to record the cost to correct the defective work under each of the following scenarios: 1. If the cost of correcting the defective work is spread over all jobs that go through the production cycle 2. If the defects resulted from the exacting specifications of Job 3524 b. Under Scenario 2 above, calculate the cost per unit of Job 3524. ANS: (a.) (1.) Factory Overhead (($3.00 + 2.00) x 300) 1,500 Payroll (direct labor) ($3.00 x 300) 900 Factory Overhead ($2.00 x 300) 600 (2.) Work in Process (Job 3524) 1,500 Payroll 900 Factory Overhead 600 (b.) Number of units produced 12,000 Original cost per unit ($32.00 + 9.00 + 6.00) $ 47.00 Total original cost $564,000 Plus cost of correcting defective work 1,500 Total cost of Job 3524 $565,500 Cost per unit of Job 3524 ($565,500 / 12,000) $ 47.125 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic CHAPTER 3—ACCOUNTING FOR LABOR MULTIPLE CHOICE 1. At a plant where car doors were manufactured, all of the following would be classified as direct labor except: a. Machinists. b. Assembly workers. c. Maintenance personnel. d. Painters. ANS: C Maintenance workers, while integral to the manufacturing process as they keep the machinery maintained, are not direct laborers because they do not actually add value to the product. Machinists, assembly workers and painters would all add value to the manufacture of a car door. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 2. All of the following personnel would be classified as indirect labor except the: a. machinist. b. supervisor. c. fork lift driver. d. plant janitor. ANS: A The machinist would most likely be a direct laborer. The supervisor, fork lift driver and plant janitor, while part of the manufacturing process, do not add value to the goods being produced. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 3. All of the following are characteristics of hourly wage plans except: a. They provide no extra recognition for doing more than the minimum required. b. They are easy to apply. c. They establish a definite rate per hour for each employee. d. They encourage employees to sacrifice quality in order to maximize earnings. ANS: D Hourly wage plans pay a fixed rate per hour, so they are easy to apply, but they do not provide any incentive to do more than what is required, nor do they encourage employees to work so fast as to sacrifice quality. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 4. A wage plan based solely on an employee's quantity of production is known as a(n): a. Modified wage plan. b. Hourly-rate plan. c. Incentive wage plan. d. Piece-rate plan. ANS: D A piece-rate plan bases an employee's earnings strictly on the number of units produced. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. Wage plans that encourage employees to work harder and earn more by producing a high level of output are known as: a. Modified wage plans. b. Salary wage plans. c. Piece-rate plans. d. Hourly-rate plans. ANS: C Piece-rate plans encourage employees to work harder and earn more by producing more or by meeting and exceeding quotas. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. Under a modified wage plan, an employee earns $.75 for each finished unit and is guaranteed $10 per hour as a minimum wage. If the daily quota is 100 units, on a particular day when an employee completes 85 units and works 8 hours, the amount of the make-up guarantee will be: a. $80.00 b. $72.25 c. $16.25 d. $5.00 ANS: C Make-up guarantee = ($10  8 hours) - ($.75  85 pieces) = $16.25 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. Under a modified wage plan, Jim Phillips works an eight-hour day and earns $.50 for each finished unit he produces in excess of 200 units. However, he is guaranteed $12.50 per hour as a minimum wage. His production this week was a follows: Monday 220 units Tuesday 180 units Wednesday 200 units Thursday 200 units Friday 190 units How much was the make-up guarantee paid to Jim this week? a. $10 b. $5 c. $15 d. $12.50 ANS: C The make-up guarantee is $15 as follows: Hours Worked Pieces Finished Earnings @ $12.50/hr Earnings @ $.50/unit Make-up Guarantee Payroll Earnings Monday 8 220 $100 $110 $110 Tuesday 8 180 100 90 $10 100 Wednesday 8 200 100 100 100 Thursday 8 200 100 100 100 Friday 8 190 100 95 5 100 $500 $495 $15 $510 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. Under a modified wage plan, Jim Phillips works an eight-hour day and earns $.50 for each finished unit he produces in excess of 200 units. However, he is guaranteed $12.50 per hour as a minimum wage. His production this week was a follows: Monday 220 units Tuesday 180 units Wednesday 200 units Thursday 200 units Friday 190 units What were Jim’s total earnings this week? a. $500 b. $510 c. $495 d. $515 ANS: B Jim’s total earnings were $510 as follows: Hours Worked Pieces Finished Earnings @ $12.50/hr Earnings @ $.50/unit Make-up Guarantee Payroll Earnings Monday 8 220 $100 $110 $110 Tuesday 8 180 100 90 $10 100 Wednesday 8 200 100 100 100 Thursday 8 200 100 100 100 Friday 8 190 100 95 5 100 $500 $495 $15 $510 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Under a modified wage plan, an employee working an eight-hour day earns $.40 for each finished unit and is guaranteed $20 per hour as a minimum wage. At what level should the daily quota be set? a. 160 units b. 400 units c. 500 units d. 640 units ANS: B Daily wage = $20 x 8 hours = $160. Units made in a day to reach $160 at a rate of $.40 = $160 / $.40 = 400 units PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 10. Idle time should be treated as follows: a. It should be recorded along with the reason for it, and charged to Factory Overhead. b. It should be charged to the job from which the employee took a break. c. It should be documented and the employee should not be paid for that time. d. It should be allocated to the various manufacturing departments and the supervisors should decide how to handle it. ANS: A Idle time should be recorded and charged to Factory Overhead as it does not add value to any specific jobs. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. The file for each factory employee that shows the time the employee spent on each job, as well as time spent as indirect labor is the: a. labor time record. b. payroll record. c. employee’s earnings record. d. labor cost summary. ANS: A Each factory employee’s time will be summarized on a labor time record. The labor cost summary reports the total payroll distribution. The payroll record and employee’s earnings record relate to the payment of payroll rather than the timekeeping function. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 12. The departmental responsibilities of the payroll function include all of the following except: a. Reviewing the labor hours on the time record for accuracy. b. Summarizing the period’s payroll data. c. Keeping a record of earnings for each employee. d. Computing deductions and withholdings for each employee. ANS: A Items (b), (c), and (d) are the responsibilities of the payroll function, whereas item (a) is the responsibility of the production supervisor. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 13. The file that serves as a basis for reporting payroll information to governmental agencies and preparing Form W-2 is the: a. labor time record. b. payroll record. c. employee’s earnings record. d. labor cost summary. ANS: C The employee’s earnings record is a cumulative record of employee earnings needed to calculate payroll taxes. It also serves as the basis for reporting salary and wage information to government agencies. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 14. An analysis of total labor costs into work in process and factory overhead components is recorded on a(n): a. Labor cost summary. b. Payroll record. c. Individual production report. d. Employee earnings record. ANS: A An analysis of labor costs into their work in process and factory overhead components is recorded on a labor cost summary. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 15. An employee regularly earns $12 per hour for an 8-hour day with time-and-a-half for overtime hours. Assuming that the employee works a 10-hour day, the amount of overtime premium is: a. $36. b. $18. c. $12. d. $6. ANS: C Overtime premium = 2 hours  $6 = $12 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 16. If the amount of overtime premium is to be charged to all jobs worked on during the period as a result of random scheduling of jobs, the debit will be to: a. Factory Overhead. b. Payroll. c. Work in Process. d. Accrued Payroll. ANS: A By charging the overtime premium to factory overhead, all jobs worked on during the period share the cost. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 17. David Andrews works at the Neal Company where he makes $12 per hour with “time-and-a-half” for overtime. For the week ended January 8, David worked 45 hours as follows: Job 417 34 hours Job 532 11 hours Assuming the overtime was due to priority scheduling for Job 532, how much will be charged to Job 532? a. $147 b. $132 c. $198 d. $162 ANS: D Regular wages 11 hrs. x $12 $132 Overtime premium 5 hrs. x $ 6 30 $162 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 18. The Dehl Company payroll for the first week in January was $12,000. The amount of income tax withheld was 12 percent and the FICA, state unemployment, and federal unemployment tax rates were 8 percent, 5 percent, and 1 percent, respectively. The amount of the employees' withholding taxes are: a. $1,680. b. $2,400. c. $1,440. d. $3,120. ANS: B Employees' withheld taxes = (12% + 8%) $12,000 = $2,400. The state and federal unemployment taxes are the employer’s responsibility, as is the FICA employer’s portion. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 19. The payroll summary for EVB Inc. for the period August 3 - 10 is as follows: Factory Employees Sales and Admin. Employees Total Gross Earnings $80,000 $25,000 $105,000 Withholding and deductions: FICA 6,400 2,000 8,400 Income taxes 10,600 5,000 15,600 Union dues 400 - 400 Total 17,400 7,000 24,400 Net earnings $62,600 $18,000 $80,600 The entry to record payroll would be: a. Payroll 105,000 FICA Payable 8,400 Employees Income Tax Payable 15,600 Union Dues Payable 400 Wages Payable 80,600 b. Work in Process 80,000 Factory Overhead 25,000 Payroll 105,000 c. Factory Overhead 80,000 Selling and Administrative Expense 25,000 FICA Payable 8,400 Employees Income Tax Payable 15,600 Union Dues Payable 400 Wages Payable 80,600 d. Payroll 105,000 Wages Payable 105,000 ANS: A The entry to record the payroll would be: Payroll 105,000 FICA Payable 8,400 Employees Income Tax Payable 15,600 Union Dues Payable 400 Cash 80,600 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 20. The payroll summary for EVB Inc. for the period August 3 - 10 is as follows: Factory Employees Sales and Admin. Employees Total Gross Earnings $80,000 $25,000 $105,000 Withholding and deductions: FICA 6,400 2,000 8,400 Income taxes 10,600 5,000 15,600 Union dues 400 - 400 Total 17,400 7,000 24,400 Net earnings $62,600 $18,000 $80,600 The entry to record the payment of earnings to the employees would include: a. A debit to payroll for $105,000. b. A credit to wages payable for $80,600. c. A debit to wages payable for $80,600. d. A credit to cash of $105,000. ANS: C The entry to record the payment of earnings to the employees would be: Wages Payable 80,600 Cash 80,600 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 21. Joel Williams works at Allentown Company where he assembles components for small appliances and earns $16 per hour with “time-an-a-half” for overtime. During the week ended July 25, Joel worked 43 hours as follows: Job XBRL 20.5 hours Job FASB 14.5 hours Idle time due to power outage 2.0 hours Machine maintenance 6.0 hours The amount of Joel’s wages that will be charged to the Work in Process account, assuming that the overtime worked was due to a rush order on the FASB job is: a. $560 b. $608 c. $584 d. $680 ANS: C Job XBRL 20.5 hrs. x $16 $328 Job FASB 14.5 hrs. x $16 232 Overtime premium 3.0 hrs. x $ 8 24 Total $584 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 22. Joel Williams works at Allentown Company where he assembles components for small appliances and earns $16 per hour with “time-an-a-half” for overtime. During the week ended July 25, Joel worked 43 hours as follows: Job XBRL 20.5 hours Job FASB 14.5 hours Idle time due to power outage 2.0 hours Machine maintenance 6.0 hours The amount of Joel’s wages that will be charged to Factory Overhead assuming the overtime is due to the random scheduling of jobs is: a. $120 b. $152 c. $40 d. $128 ANS: B Idle time 2 hrs. x $16 $ 32 Machine maintenance 6 hrs. x $16 96 Overtime premium 3 hrs. x $ 8 24 Total $152 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 23. Daktari Enterprises’ Schedule of Earnings and Payroll Taxes for April is as follows: Gross FICA FUTA SUTA Total Earnings 8% 1% 4% Taxes Non-Factory Employees: Sales $ 10,000 $ 800 $ 100 $ 400 $ 1,300 Administrative 7,000 560 70 280 910 17,000 1,360 170 680 2,210 Factory Employees: Direct Labor: Regular 80,000 6,400 800 3,200 10,400 Overtime Premium 5,000 400 50 200 650 Indirect Labor 30,000 2,400 300 1,200 3,900 115,000 9,200 1,150 4,600 14,950 Total $132,000 $10,560 $1,320 $5,280 $17,160 Assuming overtime was the result of random scheduling of jobs, the entry to distribute payroll would include: a. A debit to Payroll for $132,000. b. A credit to Wages Payable for $114,800. c. A debit to Factory Overhead for $35,000. d. A debit to Work in Process for $85,000 ANS: C The entry to distribute payroll would be: Work in Process 80,000 Factory Overhead 35,000 Sales Salaries 10,000 Administrative Salaries 7,000 Payroll 132,000 If overtime is the result of random scheduling of jobs, the overtime premium is charged to Factory Overhead along with Indirect Labor (5,000 + 30,000). PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 24. The Dehl Company payroll for the first week in January was $12,000. The amount of income tax withheld was 12 percent and the FICA, state unemployment, and federal unemployment tax rates were 8 percent, 5 percent, and 1 percent, respectively. The amount of the employer's payroll taxes are: a. $3,120. b. $1,440. c. $ 720. d. $1,680. ANS: D Employer's payroll taxes = (8% + 5% + 1%) $12,000 = $1,680. Income tax withheld is the responsibility of the employee, as is the employees’ portion of FICA. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. Daktari Enterprises’ Schedule of Earnings and Payroll Taxes for April is as follows: Gross FICA FUTA SUTA Total Earnings 8% 1% 4% Taxes Non-Factory Employees: Sales $ 10,000 $ 800 $ 100 $ 400 $ 1,300 Administrative 7,000 560 70 280 910 17,000 1,360 170 680 2,210 Factory Employees: Direct Labor: Regular 80,000 6,400 800 3,200 10,400 Overtime Premium 5,000 400 50 200 650 Indirect Labor 30,000 2,400 300 1,200 3,900 115,000 9,200 1,150 4,600 14,950 Total $132,000 $10,560 $1,320 $5,280 $17,160 Assuming overhead is a result of the random scheduling of jobs, the entry to record and distribute the employer’s payroll taxes would include: a. A debit to Factory Overhead for 14,950. b. A debit to FICA Expense of $10,560. c. A credit to Payroll of $132,000. d. A debit to Work in Process for $11,050. ANS: A The entry to record and distribute payroll taxes would be: Factory Overhead 14,950 Payroll Tax Expense - Sales Salaries 1,300 Payroll Tax Expense - Administrative Salaries 910 FICA Tax Payable 10,560 Federal Unemployment Tax Payable 1,320 State Unemployment Tax Payable 5,280 Generally, payroll taxes on direct labor wages are charged to Factory Overhead for the purpose of convenience. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. Of the following taxes, the only one that the employer pays in entirety is: a. State income tax. b. State unemployment tax. c. FICA tax. d. Federal income tax. ANS: B Items (a) and (d) are paid only by the wage earner, Item (c) is paid by both employer and employee, whereas state unemployment taxes are paid only by the employer. PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. The payroll for the week ended January 8 is $15,000 with 15 percent withheld for employee income taxes and 8 percent for FICA taxes. The total amount of taxes to be remitted by the employer for this payroll would be: a. $2,250. b. $1,200. c. $3,450. d. $4,650. ANS: D The taxes remitted would be: Employees' income taxes $2,250 Employee FICA 1,200 Employer FICA 1,200 Total $4,650 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 28. An accrued expense such as Wages Payable can best be described as an amount: a. Paid and not currently matched with earnings. b. Not paid and not currently matched with earnings. c. Not paid and currently matched with earnings. d. Paid and currently matched with earnings. ANS: C An accrued expense is best described as an unpaid expense that has been incurred in a period in which earnings from the expense have been realized. Therefore, the expense incurred but not paid should be matched to the earnings of the same period. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 29. Toshlin issues financial statements June 30th. If payroll was $30,000 through June 30th and wages were to be paid on July 5, what is the correct journal entry on June 30th? Assume FIT = 15%, FICA = 8%, SUTA = 6%, FUTA = 1%, a. No entry is required. b. Payroll 30,000 Wages Payable 30,000 c. Payroll 30,000 Federal Income Tax 4,500 FICA Taxes Payable 2,400 Wages Payable 23,100 d. Payroll 30,000 Federal Income Tax 4,500 FICA Taxes Payable 2,400 SUTA 1,800 FUTA 300 Wages Payable 21,000 ANS: B When the financial statement date does not match the payroll period, an accrual must be made. Employer taxes would also be recorded on June 30th. The employees’ taxes are not reported because they do not affect the financial statements total liabilities or income. The company would however, have to prepare an entry to record the accrual for the employer’s portion of payroll taxes. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 30. Harmony Company has accrued payroll costs of $50,000 for the period May 28 - 31 as follows: Administrative salaries $ 5,000 Sales salaries 5,000 Direct labor 30,000 Indirect labor 10,000 $50,000 Other Information: (a) The FICA rate is 8% of the first $100,000 of wages. None of the employees has reached this maximum. (b) The company is responsible for state and federal unemployment taxes on the first $8,000 of wages. All of the employees have previously reached this maximum. (c) Payroll taxes are spread over all jobs. What entry would be necessary to accrue payroll taxes for the period of May 28 - 31? a. Factory Overhead 4,000 FICA Tax Payable 4,000 b. Payroll Tax Expense - Sales 400 Payroll Tax Expense - Administrative 400 Work in Process 3,200 FICA Tax Payable 4,000 c. Payroll Tax Expense 4,000 FICA Tax Payable 4,000 d. Payroll Tax Expense - Sales 400 Payroll Tax Expense - Administrative 400 Factory Overhead 3,200 FICA Tax Payable 4,000 ANS: D Payroll tax expense - sales 5,000 x 8% = 400 Payroll tax expense - administrative 5,000 x 8% = 400 Factory overhead (30,000 + 10,000) x 8% = 3,200 The FICA of all factory employees would be charged to Factory Overhead as benefits are to be spread to all jobs. If the benefits were to be charged to specific jobs, then a debit of $2,400 would be made to Work in Process for the direct labor portion. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 31. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April 30 fell on Thursday. Payroll costs for the week ended May 1 follow: Non Factory: Sales $ 5,000 Administrative 10,000 $15,000 Factory: Direct labor $25,000 Overtime premium 2,500 Indirect labor 15,000 $42,500 $57,500 Excluding payroll taxes, what amount should be accrued to the payroll account for the period ended April 30? a. $57,500 b. $46,000 c. $42,500 d. $34,000 ANS: B If April 30 is Thursday, four days of the payroll fall in April and one in May. $57,500 / 5 days = $11,500 per day x 4 days = $46,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 32. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April 30 fell on Thursday. Payroll costs for the week ended May 1 follow: Non Factory: Sales $ 5,000 Administrative 10,000 $15,000 Factory: Direct labor $25,000 Overtime premium 2,500 Indirect labor 15,000 $42,500 $57,500 Excluding payroll taxes, how much of the accrued payroll at April 30 should be charged to Factory Overhead? a. $17,500 b. $26,000 c. $14,000 d. $34,000 ANS: C If April 30 is Thursday, four days of the payroll fall in April and one in May. Indirect labor $15,000 Overtime premium 2,500 Total payroll relating to factory overhead $17,500 $17,500 / 5 days = $3,500 per day x 4 days = $14,000 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 33. The entry made in November to reverse the entry that was made to accrue October payroll would be: a. Debit - Wages Payable Credit - Cash b. Debit - Wages Payable Credit - Payroll c. Debit - Factory Overhead Credit - Payroll d. Debit - Payroll Credit - Wages Payable ANS: B The entry to accrue payroll is: Debit - Payroll Credit - Wages Payable This entry is reversed in the following month. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 34. Which of the following items relating to direct labor employees might be charged to specific jobs in work in process rather than factory overhead? a. Make-up guarantee b. Idle time c. Shift premiums d. Fringe benefits ANS: D In some cases, workers’ fringe benefits, including holiday pay, are charged to jobs with the workers’ wages. However, many companies charge benefits to Factory Overhead as it is not cost effective to charge the benefits to jobs. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 35. Jay Vato works at Batwing Industries from midnight until 8:00 AM. His normal wage rate is $17 per hour, while Ben Phillips, who does the same job from 8:00 AM until 4:00 PM makes $15 per hour. Since Ben and Jay have the same seniority within the plant, the difference in pay is due to a(n): a. overtime premium. b. production bonus c. make-up guarantee. d. shift premium. ANS: D Employers who run shifts other than day shifts often pay shift premiums for those shifts which are designed to attract workers to the less desirable shifts. Shift premiums compensate employees on the “swing” or “graveyard” shifts for the lifestyle adjustments necessary to work those shifts, even though productivity is usually not as high as that of the workers on normal day shifts. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 36. Features of a 401(k) plan include all of the following except: a. Pension benefits are based on past earnings and length of service with the company. b. The employer may match a certain portion of the employee’s investment. c. Taxes are deferred on wages invested in the plan. d. Investments may be made in company stock, mutual funds or other investment vehicles. ANS: A A 401(k) plan is a defined contribution plan which means that the plan specifies the amount of contributions that can be made to the plan by the employee and employer, but the amount of benefits is tied to the amounts contributed and performance of the investments. Option (a.) above is a characteristic of a defined benefit plan. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B- Cost Management TOP: AACSB - Reflective 37. John Elton, who is classified as direct labor, earns $1,000 per week and is entitled to four weeks of vacation and 10 holidays each year. How much should be accrued for his vacation each week? a. $76.92 b. $80.00 c. $83.33 d. $40.00 ANS: C Total vacation pay per year = $1,000 x 4 weeks = $4,000 Weeks over which vacation is earned = 52 - 4 = 48 $4,000 / 48 weeks = $83.33 per week PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 38. John Elton, who is classified as direct labor, earns $1,000 per week and is entitled to four weeks of vacation and 10 holidays each year. How much should be accrued for his holiday pay each week? a. $38.46 b. $40.00 c. $46.67 d. $130.00 ANS: C Daily pay = $1,000 / 5 = $200 Annual holiday pay = $200 x 10 = $2,000 Weeks over which holiday pay is earned = 52 - 4 = 48 $2,000 / 48 weeks = $46.67 per week PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 39. A factory worker earns $500 per week and will receive a $2,000 bonus at year-end, a 2-week paid vacation, and 5 paid holidays. The combined amount of the accruals for bonus, vacation, and holiday pay in the weekly payroll would be: a. $20.00. b. $70.00. c. $40.00. d. None of the above. ANS: B Bonus: $2,000 / 50 weeks = $40 per week Vacation pay: $500 x 2 weeks = $1,000 / 50 weeks = $20 per week Holiday pay: $500 / 5 days = $100 per day  5 = $500 / 50 weeks = $10 per week Total accrual = $40 + $20 + $10 = $70 Note that the fringe benefits will be earned over the 50 weeks worked since the worker has 2 weeks vacation. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic PROBLEM 1. Management of the Von Machine Company requests that you calculate the effect of two different wage payment plans upon employee earnings and also on the unit labor cost of Product A. The following information is available: (1) The hourly rate is $9.00. (2) The labor rate per piece of Part X, if the employee is paid on a piece-rate basis, is $.30. Ten pieces of Part X are required for one unit of Product A. The plant works a 6-day week and an 8- hour day, totaling 48 hours per week. No overtime premium pay is to be considered in your analysis. During a selected week, the following pieces of Part X were produced: Day Part X Quantities Produced 1 150 2 200 3 240 4 180 5 300 6 200 An agreement with the union requires a minimum rate of $6.50 per clock hour be paid to employees. a. Calculate the labor cost each day of the week for an employee under: (1) the hourly-rate plan. (2) the piece-rate plan. b. If the company could anticipate a steady production level of 250 units of Part X each day, which plan would you recommend to the company’s management? Why? ANS: (a) (1) Hourly-Rate Plan: 8 (hours per day)  $9 = $72 per day (2) Piece-Rate Plan: Day Earned Legal Min.* Amount Paid 1 150  $.3 $45.00 $52 $52 2 200  .3 60.00 52 60 3 240  .3 72.00 52 72 4 180  .3 54.00 52 54 5 300  .3 90.00 52 90 6 200  .3 60.00 52 60 *8 (hours per day)  $6.50 = $52 per day. (b) If the company were to produce 250 units of Part X each day, the hourly rate would result in a cost of $.288 per unit ($72 / 250), while the piece rate would cost $.30 for each unit produced. The hourly rate should be recommended because of the lower cost per unit. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. Becky Graham earns $15 per hour for up to 300 units of production per eight-hour day. If she produces more than 300 pieces per day, she will receive an additional piece rate of $.40 per unit. A summary of her work week follows: Hours Worked Pieces Finished Monday 8 350 Tuesday 8 280 Wednesday 8 320 Thursday 8 290 Friday 8 300 (a) Determine Graham’s earnings for each day and for the week. (b) Prepare the journal entry to distribute the payroll for the week. ANS: (a) Graham’s earnings are calculated as follows: Hours Worked Pieces Finished Earnings @ $15.00/hr Earnings @ $.40/unit Make-up Guarantee Payroll Earnings Monday 8 350 $120 $140 $140 Tuesday 8 280 120 112 $ 8 120 Wednesday 8 320 120 128 128 Thursday 8 290 120 116 4 120 Friday 8 300 120 120 120 $600 $616 $12 $628 (b) Work in Process 616 Factory Overhead 12 Payroll 628 PTS: 1 DIF: Moderate REF: P. OBJ: 1, 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. Payroll records for selected employees of Tomco Industries for the forty-sixth week of the year are as follows: Employee Classification Salary or wage based on 40 hour week Hours Worked Income Tax Withheld Gross Wages through 45th week R. Shuey President $3,000 40 $600 $135,000 K. Dye Sales Manager 2,500 40 500 98,000 J. Rudnick Direct Labor 800 42 100 4,500 L. Guzzino Direct Labor 600 46 150 28,000 A. Busse Indirect Labor 400 44 80 7,800 Employees are paid time-and-a-half for overtime. Employer payroll tax rates are as follows: FICA: 8% of first $100,000 of salary or wages FUTA: 1% of first $8,000 of salary or wages SUTA: 4% of first $8,000 of salary or wages Calculate: (a) Total gross payroll for the selected employees. (b) Total employer payroll taxes for the selected employees. ANS: (a) Employee Regular Wages or Salary Overtime Premium Total Computations Shuey $3,000 $3,000 Dye 2,500 2,500 Rudnick 840 20 860 800/40=20; 42x20=840; 2x10=20 Guzzino 690 45 735 600/40=15; 46x15=690; 6x7.50=45 Busse 440 20 460 400/40=10; 44x10=440; 4x5=20 Total $7,555 (b) Employee Cumulative Earnings Week 45 Earnings Week 46 Cumulative Earnings Week 46 FICA FUTA SUTA Total Shuey $135,000 $3,000 $138,000 $ - $ - $ - $ - Dye 98,000 2,500 100,500 160.00 - - 160.00 Rudnick 4,500 860 5,360 68.80 8.60 34.40 111.80 Guzzino 28,000 735 28,735 58.80 - - 58.80 Busse 7,800 460 8,260 36.80 2.00 8.00 46.80 Total $324.40 $10.60 $42.40 $377.40 Computations: Shuey has already exceeded the FICA limit of $100,000 and the unemployment tax limit of $8,000, so the company does not have any payroll tax expense. Dye has already exceeded the unemployment tax limit of $8,000. This week’s payroll pushes his cumulative earnings above $100,000, but the portion between $98,000 and $100,000 or $2,000 is subject to the 8% FICA tax of $160.00. Rudnick has not hit either limit as yet, so his total earnings for the week of $860 are subject to all taxes. FICA - $860 x 8% = $68.80; FUTA - $860 x 1% = $8.60; SUTA $860 x 4% = $34.40. Guzzino has exceeded the $8,000 limit for unemployment taxes, but his earnings are subject to FICA taxes - $735 x 8% = $58.80. Busse’s earnings are subject to FICA ($460 x 8% = $36.80), but only $200 of his earnings are subject to the unemployment taxes ($8,000 limit - $7,800). FUTA - $200 x 1% = $2.00; SUTA - $200 x 4% = $8. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 4. Jerrod Sampson is paid $10 an hour for 40 hours a week, with time-and-a-half for overtime and double-time for Sundays and holidays. Overtime premium is charged to Factory Overhead. Using the labor-time record below: a. Compute Jerrod’s total earnings for the week. b. Present the journal entry to distribute Jerrod’s total earnings. SUTA = 4%, FUTA = 1%, FICA = 8%, FIT = 10% Sun Mon Tues Wed Thur Fri Sat Total F28 4 4 4 4 4 4 4 28 M14 3 2 5 6 16 Idle 1 1 4 6 Total 4 8 7 9 8 10 4 50 ANS: a. $570 Regular Pay $500 (50 hours x $10) Premium $ 70 (4 hours x $10) + (6 hours x $5) b. Work in Process* 440 Factory Overhead** 130 Payroll 570 * Work in Process: (28 hours x $10 ) + (16 hours x $10 ) = $440 ** Factory Overhead: (6 hours x $10) + $70 overtime premium = $130 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. The Wagner Company’s Schedule of Earnings and Payroll Taxes for May is summarized as follows: Gross FICA FUTA SUTA Total Earnings 8% 1% 4% Taxes Non-Factory Employees: Sales $ 8,000 $ 640 $ 80 $ 320 $1,040 Administrative 9,000 720 90 360 1,170 17,000 1,360 170 680 2,210 Factory Employees: Direct Labor: Regular 32,000 2,560 320 1,280 4,160 Overtime Premium 5,000 400 50 200 650 Idle time 3,000 240 30 120 390 Indirect Labor 18,000 1,440 180 720 2,340 58,000 4,640 580 2,320 7,540 Total $75,000 $6,000 $750 $3,000 $9,750 (a) Prepare the journal entry to distribute payroll under each of the following scenarios: (1) Overtime resulted from priority scheduling of Job 3bX for which the company received a rush order. (2) Overtime resulted from random scheduling of jobs. (b) Prepare the journal entry to record and distribute the employer’s payroll taxes. ANS: (a) (1) Sales Salaries 8,000 Administrative Salaries 9,000 Work in Process (32,000 + 5,000) 37,000 Factory Overhead (18,000 + 3,000) 21,000 Payroll 75,000 Since the overtime resulted from a rush order, the overtime premium would be charged to the job (Work in Process). Idle time is charged to Factory Overhead as it can not be allocated to any one job. (2) Sales Salaries 8,000 Administrative Salaries 9,000 Work in Process 32,000 Factory Overhead (18,000 + 3,000 + 5,000) 26,000 Payroll 75,000 Since overtime was the result of random scheduling of jobs, the overtime premium would be charged to Factory Overhead. (b) Factory Overhead 7,540 Payroll Tax Expense - Sales Salaries 1,040 Payroll Tax Expense - Admin. Salaries 1,170 FICA Tax Payable 6,000 Federal Unemployment Tax Payable 750 State Unemployment Tax Payable 3,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. The following payroll summary is prepared for the Sothern Manufacturing Company for the week ending March 29: Direct labor: Job No. 200 $10,300 Job No. 201 7,000 Job No. 202 6,500 Total direct labor $23,800 Indirect labor 6,200 Total gross payroll $30,000 Payroll taxes and insurance are to be computed as follows: Employee's Share Employer's Share Federal income tax withheld $4,300 State unemployment tax 5.0% Federal unemployment tax 1.0% FICA tax 8.0% 8.0% Disability insurance .5% .25% Workmen's compensation insurance 2.0% Prepare the general journal entries to: a. Record the payroll. b. Pay the payroll. c. Distribute the payroll to the appropriate accounts. d. Record the employer's share of payroll tax expense. (All of the employees work in the factory.) ANS: (a) Payroll 30,000 FICA Tax Payable (30,000 x 8%) 2,400 Federal Income Tax Withheld 4,300 Disability Insurance Withheld (30,000 x .5%) 150 Wages Payable (30,000 - 2,400 - 4,300 - 150) 23,150 To record payroll. (b) Wages Payable 23,150 Cash 23,150 (c) Work in Process 23,800 Factory Overhead (Indirect Labor) 6,200 Payroll 30,000 To distribute payroll. (d) Factory Overhead 4,875 FICA Tax Payable (30,000 x 8%) 2,400 Disability Insurance Withheld (30,000 x .25%) 75 State Unemployment Tax Payable (30,000 x 5%) 1,500 Federal Unemployment Tax Payable (30,000 x 1%) 300 Workmen's Compensation Insurance Payable (30,000 x 2%) 600 To record employer's share of payroll associated costs. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. Tyler Jacob is paid $15 per hour for a 40-hour work week with time-and-a-half for overtime, which is not charged to specific jobs. For the week of March 4 - 10, Tyler’s labor time record was as follows: Mon Tues Wed Thur Fri Sat Total Job B280 8 5 6 10 10 2 41 Machine maintenance 4 2 1 7 Total 8 9 8 10 10 3 48 Other Information: Tyler’s year-to-date wages as of March 3 were $7,500. He contributes $20 weekly for his health insurance premiums. Current tax rates in effect are: FIT withholding rate - 10%; FICA - 8% on the first $100,000 of wages; SUTA - 4% on the first $8,000 of wages; and FUTA - 1% on the first $8,000 of wages. (a) Calculate Tyler’s gross and net pay. (b) Prepare the journal entries necessary to (1) Record Tyler’s payroll (2) Pay Tyler’s payroll (3) Distribute Tyler’s payroll to the appropriate accounts (c) Calculate the employer’s payroll taxes and prepare the journal entry to record them employer’s portion of payroll taxes ANS: (a) Gross pay: 48 hours x $15.00/hr. $720.00 8 hours x $ 7.50/hr. (15.00/.5) 60.00 Total gross pay $780.00 Deductions: FIT Withholding $780 x 10% $ 78.00 FICA - Employee portion $780 x 8% 62.40 Health insurance premium 20.00 Total deductions $160.40 Net Pay $619.60 (b) Payroll 780.00 Employees’ Income Tax Payable 78.00 FICA Tax Payable 62.40 Health Insurance Premium Payable 20.00 Wages Payable 619.60 To record payroll Work in Process (41 hrs. x $15) 615.00 Factory Overhead (7 hrs. x $15) + $60 (Overtime) 165.00 Payroll 780.00 To distribute payroll Wages Payable 619.60 Cash 619.60 To record payment of payroll (c) Year-to-date payroll, March 3 $7,500 Earnings March 4 - 10 780 Year-to-date payroll, March 10 $8,280 Subject to FUTA and SUTA 8,000 Not subject to FUTA and SUTA $ 280 Amount of earnings March 4 - 10 subject to unemployment taxes = $780 - 280 = $500 Employer’s payroll taxes: FICA (per above) $62.40 SUTA ($500 x 4%) 20.00 FUTA ($500 x 1%) 5.00 Factory Overhead 87.40 FICA Tax Payable 62.40 State Unemployment Tax Payable 20.00 Federal Unemployment Tax Payable 5.00 To record employer’s payroll taxes PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. The Tidle Manufacturing Company uses a job order cost system. Factory wages are paid on a straight hourly basis with indirect labor getting $8.50 an hour and direct labor getting $10.00 an hour. During the week of January 7, the following hours were worked: Direct Indirect Cutting Department 2,200 250 Splicing Department 2,400 200 Sanding Department 1,850 125 Joining Department 4,250 325 Salaries and wages are paid weekly, with administrative salaries totaling $16,500 and salesperson's salaries totaling $12,200. The following deductions are to be considered: FICA tax 8.0% Federal income tax 12.0% State income tax 2.0% Federal unemployment tax 1.0% State unemployment tax 5.0% Prepare journal entries to record: a. The payroll. b. The payment of the payroll. c. The payroll distribution. d. The employer's payroll tax expense. ANS: (a) Payroll* 143,350.00 FICA Tax Payable ($143,350 x 8% ) 11,468.00 Federal Income Tax Withheld ($143,350 x 12%) 17,202.00 State Income Tax Payable ($143,350 x 2% ) 2,867.00 Salaries and Wages Payable 111,813.00 To record payroll. *(10,700 x $10) + (900 x $8.50) + $16,500 + $12,200 (b) Salaries and Wages Payable 111,813.00 Cash 111,813.00 To pay payroll. (c) Work in Process (10,700 x $10 ) 107,000.00 Factory Overhead (900 x $8.50) 7,650.00 Administrative Salaries 16,500.00 Sales Salaries 12,200.00 Payroll 143,350.00 To distribute payroll. (d) Factory Overhead* 16,051.00 Payroll Tax Expense**-- Sales and Administrative Salaries 4,018.00 FICA Tax Payable ($143,350 x 8%) 11,468.00 Federal Unemployment Tax Payable ($143,350 x 1%) 1,433.50 State Unemployment Tax Payable ($143,350 x 5%) 7,167.50 To record employer's share of payroll taxes. *($107,000 + $7,650) x (8% + 1% + 5%) = $16,051 **($16,500 + $12,200) x (8% + 1% + 5%) = $4,018 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Ken Astor is a factory worker at Flox Co. earning $27.00 per hour. Astor is eligible for five paid holidays and six weeks vacation and is paid “time-and-a-half” for overtime. Astor’s earnings so far this year are $45,000. Tax rates are as follows: Employee income tax 15% on all earnings FICA 8% on first $100,000 of earnings FUTA 1% on first $8,000 of earnings SUTA 4% on first $8,000 of earnings Assuming Ken worked 46 hours this week, calculate the total expense to Flox Co for this weeks, wages, payroll taxes and fringe benefits. ANS: Wages: Total Regular wages $27 x 46 hr. $1,242.00 Overtime premium $13.50 x 6 hr. 81.00 $1,323.00 Employer payroll tax * FICA $1,323 x 8% 105.84 Fringe benefits ** Vacation $27 x 40 hours = 1,080 x 6 = 6,480/46 = 140.87 Holiday 5 days paid = 1,080/46 23.48 $1,593.19 * Astor has already exceed the unemployment tax limits. ** Since Astor has 6 weeks of vacation, he is earning his benefits over the 46 weeks he works. PTS: 1 DIF: Hard REF: P. OBJ: 3, 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. Tacy Company’s Schedule of Earnings and Payroll taxes for the period ended March 28 - 31 to be paid April 5 follow: Gross Total payroll Wages FICA SUTA FUTA taxes Non-factory: Sales $ 7,500 $ 600 $ 240 $ 60 $ 900 Administrative 4,000 320 112 28 460 11,500 920 352 88 1,360 Factory: Direct labor 52,000 4,160 2,080 520 6,760 Overtime premium 4,500 360 180 45 585 Indirect labor 10,000 800 400 100 1,300 66,500 5,320 2,660 665 8,645 $78,000 $6,240 $3,012 $753 $10,005 Prepare the journal entries to: (a) Accrue the payroll in the appropriate period (b) Distribute the accrued payroll in the appropriate period (c) Recognize related accrued employer’s payroll taxes in the appropriate period assuming payroll taxes are spread over all jobs produced. ANS: The following journal entries would be recorded in March (a) Payroll 78,000 Wages Payable 78,000 To accrue payroll for the period Mar. 28 - 31 (b) Work in Process 52,000 Factory Overhead (10,000 + 4,500) 14,500 Sales Salaries 7,500 Administrative Salaries 4,000 Payroll 78,000 To distribute payroll for period Mar. 28 - 31 (c) Factory Overhead 8,645 Payroll Tax Expense - Sales Salaries 900 Payroll Tax Expense - Administrative Salaries 460 FICA Tax Payable 6,240 State Unemployment Tax Payable 3,012 Federal Unemployment Tax Payable 753 To recognize employer’s payroll taxes for the period Mar. 28 - 31. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. A direct laborer in a factory earns $1,000 each week. In addition, she will receive a $2,500 bonus at year end, a two-week paid vacation, and seven paid holidays. Prepare the entry to distribute her wages and the costs and liabilities related to bonus, vacation, and holiday pay. (Round all amounts to two decimal places.) ANS: Work in Process $1,000 Factory Overhead (bonus) 50 Factory Overhead (vacation) 40 Factory Overhead (holiday pay) 28 Payroll 1,000 Bonus Liability* 50 Vacation Pay Liability** 40 Holiday Pay Liability*** 28 * Bonus: $2,500 / 50 weeks = $50 per week ** Vacation: $1,000 x 2 weeks = $2,000 / 50 = $40 per week *** Holiday pay: $1,000 / 5 days = $200 per day  7 = $1,400 $1,400 / 50 weeks = $28 per week PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic CHAPTER 4—ACCOUNTING FOR FACTORY OVERHEAD MULTIPLE CHOICE 1. Factory overhead includes: a. Indirect labor but not indirect materials. b. All manufacturing costs except direct materials and direct labor. c. All manufacturing costs. d. Indirect materials but not indirect labor. ANS: B Factory overhead includes all manufacturing costs, except direct materials and direct labor. Because of the variety and number of items that can be classified as factory overhead, this "except" definition is often used to define and classify factory overhead costs and expenses. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. Which of the following costs would be included in factory overhead in the manufacture of a student’s desk? a. The wages of the operator of the machine that bends the metal legs of the desk into shape. b. The wages of the forklift operator who moves finished desks to the finished goods warehouse. c. The cost of the plastic used to form the writing surface. d. The wages of the worker who assembles the components. ANS: B The plastic used to form the writing surface of the desk is a direct material as it can be traced directly to the finished product. The wages of the machine operator and the assembly worker are direct labor costs as they add value to the product. The wages of the forklift operator would be classified as indirect labor as s/he does not actually work on the products themselves. Indirect labor is included in factory overhead. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 3. Which of the following costs would not be included in factory overhead in the manufacture of a student’s desk? a. The oil used to maintain the machinery. b. The salary of the supervisor of the Assembly department. c. The metal used to form the legs of the desk. d. The wages of personnel who perform inspections of incoming materials. ANS: C The metal used to form the legs of the desk would be a direct material, and therefore would not be included as factory overhead. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 4. Costs that vary in proportion to direct volume changes are: a. variable costs. b. factory overhead costs. c. semi-variable costs. d. personnel costs. ANS: A Costs that vary in proportion to changes in volume are variable costs. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. The following cost is an example of a variable factory overhead cost: a. Plant utilities. b. Material handling costs. c. Salary of the plant manager. d. Factory supplies. ANS: D The cost of factory supplies is considered variable because the cost moves in proportion with production volumes. The salary of the plant manager is a fixed cost as it remains constant despite changes in plant volumes. Plant utilities are a Type B semi-variable cost because this cost includes both fixed and variable components. The material handling costs are a Type A semi-variable, or stepvariable, cost because the cost remains constant over a range of production then abruptly changes. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 6. Variable overhead costs include all of the following except: a. Electricity to power machinery. b. Factory supplies. c. Rental of factory building. d. Small tools. ANS: C The rent paid for the factory would not vary with production levels. The costs of electricity, indirect materials and small tools would increase as production levels increased. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 7. Fixed factory overhead costs include: a. Property taxes. b. Plant manager’s salary. c. Factory insurance. d. All of the these are correct. ANS: D Fixed factory overhead costs include factory property taxes, plant manager’s salary, insurance on factory and equipment. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 8. Fixed overhead cost includes all of the following except: a. Electricity to heat and light the factory. b. Depreciation on machinery computed based on the units of production basis. c. The plant manager’s salary. d. The salary of the security guard at the front door. ANS: B Depreciation calculated based on the number of hours the equipment is used is a variable cost. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 9. Factory overhead: a. Can be a variable cost or a fixed cost. b. Is a prime cost. c. Can only be a fixed cost. d. Includes all factory labor. ANS: A Factory overhead includes variable costs, such as indirect materials and power expenses, and fixed costs, such as depreciation, property taxes, and insurance. Prime costs include direct labor and direct materials. All factory labor is incorrect because this would also include direct labor. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 10. Costs that change in relation to volume changes, but not in direct proportion to those changes, are known as: a. Variable costs. b. Semivariable costs. c. Fixed costs. d. Curvilinear costs. ANS: B One type of semivariable costs change in total as volume changes, but not in direct proportion to such changes. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. Consider the following costs: I. The cost of electricity which is used to power machinery and light the plant. II. Depreciation on the building which houses both the factory and the sales office. Which of the following statements is true? a. Only statement I is an example of a semivariable cost. b. Only statement II is an example of a semivariable cost. c. Both statements I and I are examples of semivariable costs. d. Neither statement I nor II is an example of a semivariable cost. ANS: A The electricity cost has both fixed and variable components, making it a semivariable cost. The building depreciation is a fixed cost which has both manufacturing and selling cost components. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 12. Which of the following statements about semivariable costs is not true? a. They first have to be broken down into their fixed and variable components before they can be used to predict costs at different levels of volume. b. They are sometimes called mixed costs. c. They vary in direct proportion to volume changes. d. They may remain constant over a range of production, then abruptly change. ANS: C Variable costs vary in direct proportion to volume changes. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 13. Methods for separating semivariable costs into their fixed and variable components include all of the following except the: a. High-low method. b. Allocation method. c. Scattergraph method. d. Observation method. ANS: B The high-low, scattergraph and observation methods are all methods used to separate semivariable costs into their fixed and variable components. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 14. The method of analyzing the behavior of semivariable costs that relies heavily on the ability of an observer to detect a pattern of cost behavior by reviewing past cost and volume data is the: a. High-low method. b. Method of least squares. c. Scattergraph method. d. Observation method. ANS: D The observation method, also called the account analysis method, is the method of analyzing the behavior of semivariable costs that relies heavily on the ability of an observer to detect a pattern of cost behavior by reviewing past cost and volume data. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 15. The method of analyzing cost behavior that uses two data points to first determine the variable cost per unit and then the total fixed cost is the: a. Method of least squares. b. Scattergraph method. c. High-low method. d. Observation method. ANS: C The high-low method analyzes cost behavior by using two data points to first determine the variable cost per unit and then the total fixed cost. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 16. Nutt Industries electricity costs and machine hours over a six-month period follow: Machine Hours Electricity Cost January 2,000 $4,800 February 2,500 5,200 March 3,000 5,400 April 2,400 5,000 May 2,800 5,600 June 2,200 5,000 Using the high-low method, what is the estimated electricity cost per machine hour? a. $.60 b. $1.67 c. $1.00 d. $.80 ANS: A Variable cost: Machine Hours Electricity Costs High volume 3,000 $5,400 Low volume 2,000 4,800 Difference 1,000 $ 600 Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 17. Nutt Industries electricity costs and machine hours over a six-month period follow: Machine Hours Electricity Cost January 2,000 $4,800 February 2,500 5,200 March 3,000 5,400 April 2,400 5,000 May 2,800 5,600 June 2,200 5,000 Using the high-low method, what is the formula that can be used to estimate electricity costs at different levels of volume? a. Electricity costs = $2,800 + ($1.00 x number of machine hours) b. Electricity costs = $2,600 + ($1.00 x number of machine hours) c. Electricity costs = $400 + ($1.67 x number of machine hours) d. Electricity costs = $3,600 + ($.60 x number of machine hours) ANS: D Variable cost: Machine Hours Electricity Costs High volume 3,000 $5,400 Low volume 2,000 4,800 Difference 1,000 $ 600 Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour Fixed cost: 2,000 Hours 3,000 Hours Cost $4,800 $5,400 Variable @ $.60/hour 1,200 1,800 Difference $3,600 $3,600 Electricity costs = $3,600 + ($.60 x number of machine hours) PTS: 1 DIF: Hard REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 18. After the observations of cost and production data are plotted on graph paper, a line is drawn by visual inspection representing the trend shown by most of the data points using the: a. Observation method. b. High-low method. c. Method of least squares. d. Scattergraph method. ANS: D Using the scattergraph method, the observations of cost and production data are plotted on graph paper, and then a line is drawn by visual inspection representing the trend of most of the data points. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 19. A major disadvantage of the scattergraph method of analyzing cost behavior is: a. It bases its solution on only two observations. b. It results in its analyzed cost being treated as either fixed or variable, based on which type of behavior it more closely resembles. c. Two persons could draw different lines through the data points. d. It enables non-representative points, called outliers, to be identified. ANS: C (a) is a disadvantage of the high-low method. (b) is a disadvantage of the observation method. (d) is an advantage of the scattergraph method. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 20. Victoria is a budget analyst at Young Industries. She used the least squares regression method to separate the plant’s monthly utilities cost into its fixed and variable components. The results were as follows: Y = 3,250 + .054 X X = the number of units produced R 2 = .892 Which of the following statements is not true about Victoria’s cost model? a. Y represents the total semi-variable cost. b. The total monthly fixed utilities costs are $3,250. c. X is referred to as the dependent variable. d. The equation Y = 3,250 + .054 X would be represented as a straight line on a graph. ANS: C X is referred to as the independent variable. Y is the dependent variable because its value depends on X. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 21. Victoria is a budget analyst at Young Industries. She used the least squares regression method to separate the plant’s monthly utilities cost into its fixed and variable components. The results were as follows: Y = 3,250 + .054 X X = the number of units produced R 2 = .892 How should Victoria interpret the R2 of .892? a. The equation is a better predictor of fixed costs than of variable costs 89.2% of the time. b. The equation will accurately predict utility costs 89.2% of the time. c. Fixed costs make up 89.2% of the total semi-variable cost in any given month. d. The number of units produced explains 89.2% of the variation in the plant utilities cost. ANS: D R 2 refers to how much of the variability in the dependent variable, in this case the utilities cost, is explained by changes in the dependent variable, which is the number of units produced. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 22. Flexible budgeting is a reporting system wherein the: a. Budget shows estimated costs at different levels of production volume. b. Budget standards may be adjusted at will. c. Reporting dates vary according to the levels of activity reported upon. d. Statements included in the budget report vary from period to period. ANS: A Flexible budgeting separates costs into fixed and variable elements and shows estimated costs at different levels of production volume. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2A- Budget Preparation TOP: AACSB - Analytic 23. Stanforth Company’s flexible budget for 50,000 units shows $100,000 and $150,000 in variable and fixed costs, respectively. At 60,000 units, the flexible budget would show: a. Variable costs of $150,000 and fixed costs of $150,000. b. Variable costs of $120,000 and fixed costs of $180,000. c. Variable costs of $100,000 and fixed costs of $180,000. d. Variable costs of $120,000 and fixed costs of $150,000. ANS: D Variable costs per unit = $100,000/50,000 = $2 per unit. 60,000 units x $2 = $120,000. Fixed costs of $150,000 remain constant. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 24. Venus Company has developed the following flexible budget formula for annual indirect labor cost: Total annual cost = $12,000 + $.25 / unit Operating budgets for the current month are based on 5,000 units. Indirect labor costs included in this monthly planning budget are: a. $13,250. b. $1,250. c. $3,200. d. $2,250. ANS: D Indirect labor cost for month: Fixed costs ($12,000 / 12) $1,000 Variable costs (5,000 units  $.25) 1,250 Total $2,250 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 25. Victoria is a budget analyst at Young Industries. She used the least squares regression method to separate the plant’s monthly utilities cost into its fixed and variable components. The results were as follows: Y = 3,250 + .054 X X = the number of units produced R 2 = .892 Based on these results, the December budget for plant utilities cost if Young Industries plans to produce 100,000 units in that month would be: a. $5,400 b. $8,650 c. $3,250 d. $8,920 ANS: B If the plant plans to produce 100,000 units: Y = 3,250 + .054 (100,000) Y = 3,250 + 5,400 Y = 8,650 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 26. When preparing a flexible budget for factory overhead costs, what will occur to fixed costs (on a perunit basis) as production increases? a. Fixed costs per unit will increase. b. Fixed costs are not considered in flexible budgeting. c. Fixed costs per unit will decrease. d. Fixed costs per unit will remain unchanged. ANS: C As production increases, the fixed cost per unit decreases because the total fixed cost is spread over a larger number of units. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 27. If a company uses a factory overhead ledger, at the end of the month, an accountant should: a. close the accounts in the factory overhead ledger to Work in Process. b. total the accounts in the factory overhead ledger and compare the total to the balance in the Factory Overhead control account. c. prepare a schedule of fixed costs. d. All of the above are true. ANS: B At the end of the month, the accounts in the factory overhead ledger should be added up and the total compared to the balance in the Factory Overhead control account. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 28. Which of the following statements is true? I. An expense-type factory overhead analysis spreadsheet makes it possible to distribute expenses on a departmental basis as they are incurred. II. A department-type factory overhead analysis worksheet makes it possible to distribute expenses on a departmental basis as they are incurred. a. I only b. II only c. Both I and II d. Neither I nor II ANS: C Both the expense-type and the department-type factory overhead analysis spreadsheets make it possible to distribute expenses on a departmental basis as they are incurred because they contain the same information. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 29. The most appropriate basis for allocating the factory building rent to specific departments would be the: a. Number of machines in each department. b. Number of employees in each department. c. Square footage of each department. d. Amount of time the plant manager spends in the department. ANS: C Factory rent should be allocated to departments based on the amount of space each department occupies within the factory. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 30. The report that is prepared after the posting is completed at the end of the accounting period that shows the items of expense by department and in total, and is used to prove the balance of the Factory Overhead Control account is the: a. Schedule of Fixed Cost. b. Summary of Factory Overhead. c. Flexible Budget. d. Subsidiary Ledger. ANS: B The Summary of Factory Overhead shows the items of expense by department and in total and is used to prove the balance of the Factory Overhead Control account. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 31. Which of the following is most likely to be considered a service department in a manufacturing plant? a. Assembly b. Maintenance c. Finishing d. Fabrication ANS: B A maintenance department is a service provided to direct production departments, such as those listed in answers a, c, and d. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 32. In a factory, all of the following would be considered service departments except: a. Inspection and Packing b. Assembly c. Power d. Human Resources ANS: B Inspection and Packing, Power and Human Resources all represent service departments. Assembly is a production department. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 33. Which of the following statements about service departments and their costs is not true? a. Service departments rarely provide services to other service departments. b. Some service departments may be able to precisely measure the services it provides to other departments. c. Service department costs should be included in total product costs. d. Allocation of service department costs should be made on an equitable basis. ANS: A It is common for service departments such as Plant Maintenance, Human Resources or Power to provide services to other service departments. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 34. The number of workers in the departments served would most likely be the basis for distributing the cost of which service department? a. Human Resources b. Tool Room c. Building Maintenance d. Machine Shop ANS: A The number of workers in the departments served would be an appropriate basis to distribute the costs of the Human Resource Department to other departments. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 35. Kilowatt hours would be an appropriate basis for distributing the cost of which of the following service departments to production departments? a. Power b. Machine Maintenance c. Human Resources d. Building Maintenance ANS: A Kilowatt hours is a measure of the power used, so this would be an appropriate basis with which to distribute the costs of the Power Department. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 36. The method of distributing service department costs to production departments which makes no attempt to determine the extent to which one service department renders its services to another department is the: a. Direct distribution method. b. Sequential distribution method. c. Service department distribution method. d. Algebraic distribution method. ANS: A The direct distribution method distributes service department costs to production departments without regard to any services the service departments render to each other. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 37. The method of distributing service department costs to production departments which distributes service department costs regressively to other service departments, and then to production departments is the: a. Direct distribution method. b. Sequential distribution method. c. Service department distribution method. d. Algebraic distribution method. ANS: B The sequential distribution method distributes service department costs regressively to other service departments and then to production departments. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 38. The method of distributing service department costs to production departments that takes into consideration that service departments not only may provide service to but also may receive service from other service departments is the: a. direct distribution method. b. sequential distribution method. c. service department distribution method. d. algebraic distribution method. ANS: D The method of distributing service department costs that takes into account the services that service departments both provide to and receive from other service departments is the algebraic method. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 39. The preferred sequence for distributing the cost of service departments to production departments when using the sequential distribution method is: a. to distribute the cost of the service department with the largest total overhead cost first. b. to always distribute the cost of the Human Resources Department first. c. to distribute the costs of the service departments to the production department having the largest amount of overhead cost first. d. to distribute the costs of the service department that services the greatest number of departments first. ANS: D The preferred sequence for distributing the cost of service departments when using the sequential distribution method is to distribute the cost of the service department that services the greatest number of departments first. If there is uncertainty as to which department’s costs should be distributed to the other service departments first, then the service department with the largest total overhead cost should be distributed first. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 40. The Lucas Manufacturing Company has two production departments (fabrication and assembly) and three service departments (general factory administration, factory maintenance, and factory cafeteria). A summary of costs and other data for each department, prior to allocation of service department costs for the year ended June 30, appears below: The costs of the general factory administration department, factory maintenance department, and factory cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number of employees, respectively. Fabrication Assembly General Factory Admin. Factory Maint. Factory Cafeteria Direct labor costs: $1,950,000 $2,050,000 Direct material costs: $3,130,000 $ 950,000 Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000 Direct labor hours: 237,690 387,810 Number of employees: 160 128 20 42 25 Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800 Assuming that Lucas elects to distribute service department costs to production departments using the direct distribution method, the amount of general factory administration department costs that would be allocated to the assembly department would be (round all final calculations to the nearest dollar): a. $30,400. b. $25,650. c. $0. d. $49,600. ANS: D General Factory Administration allocates its costs based on direct labor hours. General Factory Administration Costs Direct labor hours: Fabrication 237,690 Assembly 387,810 Total 625,500 Allocation to Assembly Department: 387,810 / 625,500  $80,000 = $49,600 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 41. The Lucas Manufacturing Company has two production departments (fabrication and assembly) and three service departments (general factory administration, factory maintenance, and factory cafeteria). A summary of costs and other data for each department, prior to allocation of service department costs for the year ended June 30, appears below. The costs of the general factory administration department, factory maintenance department, and factory cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number of employees, respectively. Fabrication Assembly General Factory Admin. Factory Maint. Factory Cafeteria Direct labor costs: $1,950,000 $2,050,000 Direct material costs: $3,130,000 $ 950,000 Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000 Direct labor hours: 237,690 387,810 Number of employees: 160 128 20 42 25 Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800 Assuming that Lucas elects to distribute service department costs to production departments using the direct distribution method, the amount of factory maintenance department costs that would be allocated to the fabrication department would be (round all final calculations to the nearest dollar): a. $22,804. b. $15,000. c. $27,000. d. $14,674. ANS: C Factory Maintenance allocates its total costs based on square footage. Factory Maintenance Costs Square Footage of: Fabrication 20,000 Assembly 30,000 Total 50,000 Allocation to Fabrication Department: 20,000 / 50,000  $67,500 = $27,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 42. The Jason Manufacturing Company has two production departments (millwright and assembly) and three service departments (general factory administration, factory maintenance, and factory development). A summary of costs and other data for each department, prior to allocation of service department costs for the year ended March 30, appears below. The costs of the general factory administration department, factory maintenance department, and factory development department are allocated on the basis of direct labor hours, square footage occupied, and number of employees, respectively. Millwright Assembly General Factory Admin. Factory Maint. Factory Devel. Direct labor costs: $1,950,000 $2,050,000 Direct material costs: $3,130,000 $ 950,000 Factory overhead costs: $1,975,000 $2,510,000 $95,000 $87,000 $65,000 Direct labor hours: 235,980 376,180 Number of employees: 210 255 51 84 30 Sq. footage occupied: 10,000 40,000 2,500 2,300 5,200 Assuming that Jason elects to use the sequential method to distribute service department costs (starting with factory development), what would be the amount of factory development that would be allocated to the factory maintenance department? a. $ 9,100. b. $ 4,350. c. $29,640. d. $0. ANS: A Factory Development allocates its costs based on the number of employees. Factory Development Costs Number of Employees: Millwright 210 Assembly 255 General Factory Adm. 51 Factory Maintenance 84 Total 600 Allocation to Factory Maintenance Department: 84 / 600  $65,000 = $9,100 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 43. The Lucas Manufacturing Company has two production departments (fabrication and assembly) and three service departments (general factory administration, factory maintenance, and factory cafeteria). A summary of costs and other data for each department, prior to allocation of service department costs for the year ended June 30, appears below: The costs of the general factory administration department, factory maintenance department, and factory cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number of employees, respectively. Fabrication Assembly General Factory Admin. Factory Maint. Factory Cafeteria Direct labor costs: $1,950,000 $2,050,000 Direct material costs: $3,130,000 $ 950,000 Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000 Direct labor hours: 237,690 387,810 Number of employees: 160 128 20 42 25 Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800 Assuming that Lucas elects to use the sequential method to distribute service department costs (starting with the factory cafeteria), what would be the amount of factory cafeteria costs that would be allocated to the factory maintenance department? a. $3,314 b. $6,960 c. $5,800 d. $0 ANS: B Factory Cafeteria allocates its costs based on the number of employees. Factory Cafeteria Costs Number of Employees: Fabrication 160 Assembly 128 General Factory Adm. 20 Factory Maintenance 42 Total 350 Allocation to Factory Maintenance Department: 42 / 350  $58,000 = $6,960 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 44. Once the amounts of the service department allocations have been determined, a journal entry should be prepared to record the distributions, the result of which is: a. debit balances in the Factory Overhead accounts of the production departments for which the total agrees to the total amount of factory overhead incurred. b. credit balances in the Factory Overhead accounts of the production departments for which the total agrees to the total amount of factory overhead incurred. c. debit balances in the Factory Overhead accounts of the service departments for which the total agrees to the total amount of factory overhead incurred. d. credit balances in the Factory Overhead accounts of the service departments for which the total agrees to the total amount of factory overhead incurred. ANS: A Once the allocations have been determined, journal entries are made to either close the Factory Overhead control account or the Factory Overhead accounts for the service departments to Factory Overhead accounts for each of the production departments. This enables the application of factory overhead to Work in Process using predetermined rates for each department. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 45. A predetermined factory overhead rate is computed by dividing a. Actual overhead cost by actual activity. b. Actual overhead cost by budgeted activity. c. Budgeted overhead by actual activity. d. Budgeted overhead by budgeted activity. ANS: D Overhead needs to be allocated through a period of time. Actual costs and activity per period are not known until the period is done. PTS: 1 DIF: Easy REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 46. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production. The budgeted direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and $800,000, respectively. Actual direct labor cost and factory overhead were $1,100,000 and $825,000, respectively. What was Meger’s predetermined factory overhead rate? a. 80% b. 125% c. 75% d. 133% ANS: A Predetermined factory overhead rate = Budgeted factory overhead Budgeted direct labor cost $800,000/$1,000,000 = 80% PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 47. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production. The budgeted direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and $800,000, respectively. During the year, the company started and completed Job 352A, which had direct material and labor costs of $32,000 and $45,000, respectively. What was the cost of Job 352A? a. $77,000 b. $81,000 c. $102,600 d. $113,000 ANS: D Predetermined factory overhead rate = Budgeted factory overhead Budgeted direct labor cost $800,000/$1,000,000 = 80% Direct material $ 32,000 Direct labor 45,000 Applied factory overhead - $45,000 x 80% 36,000 Total job cost $113,000 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 48. The Owens Company uses the direct labor hour method of applying factory overhead to production. The budgeted factory overhead last year was $200,000, and there were 40,000 machine hours and 50,000 direct labor hours budgeted. Job 84 was started and completed during the period. Direct materials costing $900 were incurred. Twenty-five direct labor hours were worked at a cost of $350, and 40 machine hours were incurred. What is the amount of factory overhead applied to Job 84? a. $200 b. $100 c. $160 d. $125 ANS: B Predetermined overhead rate = Budgeted factory overhead Budgeted direct labor hours $200,000/ 50,000 hours = $4/ direct labor hour x 25 hours = $100 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 49. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a budgeted volume of 60,000 direct labor hours. During the period, Mason started and completed Job B25, which incurred 200 labor hours at a cost of $2,200, and $5,000 of direct materials. What was the cost of Job B25? a. $7,400 b. $8,000 c. $7,250 d. $13,800 ANS: B Predetermined overhead rate = Budgeted factory overhead Budgeted direct labor hours $240,000/ 60,000 hours = $4/ direct labor hour Direct material $5,000 Direct labor 2,200 Applied factory overhead - 200 hours x $4 800 Total job cost $8,000 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 50. Which of the following statements about using the direct labor hour method of applying factory overhead to production is false? a. It may not be as accurate as the direct labor cost method if factory overhead primarily consists of items more closely tied to employee wages, such as benefits. b. The application base could be substantially smaller than when direct labor cost is used. c. It is the most appropriate method for a highly automated department. d. The amount of factory overhead applied is not affected by the mix of labor rates. ANS: C It would be more appropriate to use the machine hour method of applying factory overhead in a highly automated environment. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 51. When a manufacturing company has a highly automated manufacturing plant, what is probably the most appropriate basis of applying factory overhead costs to work in process? a. Machine hours b. Cost of materials used c. Direct labor hours d. Direct labor dollars ANS: A In a highly automated plant, the actual factory costs assigned to products through a predetermined rate would be more accurately allocated by a machine-hour application method. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B- Cost Management TOP: AACSB - Reflective 52. The Owens Company uses the machine hour method of applying factory overhead to production. The budgeted factory overhead last year was $200,000, and there were 40,000 machine hours budgeted. Job 84 was started and completed during the period. Direct materials costing $900 were incurred. Twenty-five direct labor hours were worked at a cost of $350, and 40 machine hours were incurred. What was the cost of Job 84? a. $1,450 b. $1,375 c. $1,250 d. $1,290 ANS: A Predetermined overhead rate = Budgeted factory overhead Budgeted machine hours $200,000/ 40,000 hours = $5/ machine hour Direct material $ 900 Direct labor 350 Applied factory overhead - 40 hours x $5 200 Total job cost $1,450 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 53. Activity-based costing considers non-volume-related activities that create costs such as: a. Direct labor usage. b. Machine operations. c. Consumption of indirect materials and energy usage. d. Machine setups and product design changes. ANS: D (D) Activity-based costing considers non-volume related activities that create costs such as machine setups and product design changes. PTS: 1 DIF: Easy REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 54. To successfully employ an ABC system, a company must first identify: a. Non-volume related activities in the factory that create costs. b. Cost drivers. c. Cost pools. d. Overhead allocation rates. ANS: A To successfully employ an activity-based costing system, a company must first identify non-volume related activities in the factory that create costs. Once these have been identified, cost drivers and cost pools can be identified in order to calculate overhead calculation rates. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 55. A cost driver is: a. An overhead or activity rate. b. A basis used to allocate each of the activity cost pools. c. The estimated cost of each activity pool. d. Used only to allocate non-volume-related costs. ANS: B A cost driver is a basis used to allocate each of the activity cost pools. PTS: 1 DIF: Easy REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 56. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a budgeted volume of 60,000 direct labor hours. At the end of the period, the factory overhead control account for Department A had a debit balance of $260,000; actual direct labor hours were 63,000. What was the under- or over applied factory overhead for the period? a. $12,000 overapplied b. $ 8,000 overapplied c. $ 8,000 underapplied d. $12,000 underapplied ANS: C Predetermined rate: $240,000/60,000 (DLH) = $4.00 Actually applied: 63,000 (DLH)  $4.00 = $252,000 Applied factory overhead $252,000 Actual factory overhead 260,000 Underapplied overhead $ (8,000) PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B- Cost Management TOP: AACSB - Analytic 57. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production. The budgeted direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and $800,000, respectively. Actual direct labor cost and factory overhead were $1,100,000 and $825,000, respectively. What is the amount of under- or overapplied factory overhead? a. $25,000 overapplied b. $55,000 overapplied c. $80,000 overapplied d. $50,000 underapplied ANS: B Predetermined factory overhead rate = Budgeted factory overhead Budgeted direct labor cost $800,000/$1,000,000 = 80% Applied factory overhead = $1,100,000 x 80% $880,000 Actual factory overhead incurred 825,000 Overapplied factory overhead $ 55,000 PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 58. The Owens Company uses the machine hour method of applying factory overhead to production. The budgeted factory overhead last year was $200,000, and there were 40,000 machine hours budgeted. Actual machine hours incurred during the period were 38,000, and actual factory overhead was $215,000. What was the amount of under- or overapplied factory overhead? a. $10,000 underapplied b. $15,000 underapplied c. $25,000 underapplied d. $10,000 overapplied ANS: C Predetermined overhead rate = Budgeted factory overhead Budgeted machine hours $200,000/ 40,000 hours = $5/ machine hour Applied factory overhead = 38,000 x $5 $190,000 Actual factory overhead incurred 215,000 Underapplied factory overhead $(25,000) PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 59. Overapplied overhead will always result when a predetermined factory overhead rate is employed and: a. Overhead incurred is more than overhead applied. b. Overhead incurred is less than overhead applied. c. Production is greater than sales. d. Actual overhead costs are more than expected. ANS: B Whenever the overhead incurred (charges to factory overhead) is less than the overhead credited to factory overhead through the application rate, the result will be overapplied overhead. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 60. Spencer Company had overapplied factory overhead of $5,000 last year. Which of the following statements is not true? a. A higher level of production may have been achieved than budgeted for. b. The Work in Process account was overcharged for the costs of factory overhead incurred during the period. c. The actual factory overhead expenses may have been less than budgeted for the operating level achieved. d. Assuming the amount is not material enough to distort net income, Cost of Goods Sold should be increased by this amount. ANS: D If factory overhead is overapplied, Work in Process was overcharged for the costs of Factory Overhead incurred during the period. This may have been due to higher production levels or lower than budgeted expenses. Overcharging Work in Process for overhead results in higher total product costs; therefor, Cost of Goods sold should be decreased to offset those higher costs. PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 61. If over- or underapplied factory overhead would materially distort net income if the entire amount was charged to Cost of Goods Sold, it should be: a. Carried forward in the overhead control account from year to year. b. Eliminated by changing the predetermined factory overhead rate in subsequent years. c. Apportioned among the work in process inventory, the finished goods inventory, and the cost of goods sold. d. Treated as a special gain or loss occurring during the year. ANS: C When the amount of over- or underapplied overhead would distort net income if the entire amount was charged to Cost of Goods Sold, it should be allocated to work in process, finished goods, and costs of goods sold exclusively. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 62. Cooper Company had overapplied factory overhead of $2,000 last year. Assuming the amount was considered small enough not to materially distort net income, the entries needed to close factory overhead are: a. Factory Overhead 2,000 Applied Factory Overhead 2,000 Applied Factory Overhead 2,000 Cost of Goods Sold 2,000 b. Factory Overhead 2,000 Under- and Overapplied Factory Overhead 2,000 Cost of Goods Sold 2,000 Under- and Overapplied Factory Overhead 2,000 c. Factory Overhead 2,000 Under- and Overapplied Factory Overhead 2,000 Under- and Overapplied Factory Overhead 2,000 Cost of Goods Sold 2,000 d. Factory Overhead 2,000 Applied Factory Overhead 2,000 Applied Factory Overhead 2,000 Cost of Goods Sold 2,000 ANS: C After closing the Applied Factory Overhead account into the Factory Overhead Account, the Factory Overhead Account will have a credit balance of $2,000. A debit for $2,000 will be needed to close the Factory Overhead Account into the Under- and Overapplied Factory Overhead Account, which will be credited for $2,000. A debit of $2,000 will then be needed to close the Under- and Overapplied Factory Overhead account to Cost of Goods Sold, which will be credited for $2,000. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 63. The entry to apply factory overhead to jobs includes: a. a debit to Applied Factory Overhead. b. a debit to Work in Process. c. a credit to Work in Process. d. a debit to Cost of Goods Sold. ANS: B The entry to apply factory overhead to jobs is: Debit - Work in Process Credit - Applied Factory Overhead PTS: 1 DIF: Easy REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic PROBLEM 1. Kater Company manufactures shelving units. The company receives pre-cut wood, drills holes in the wood so that movable shelves may be installed, then assembles and paint the units. Classify each of the following items of factory overhead as either fixed or variable cost. a. Janitorial service (an outside service, not company employees) b. Supervisor of the Drilling Department c. Oil used to lubricate drill press machines d. Propane for forklift trucks used to move the material from the Drilling Department to the Assembly Department e. Natural gas used to heat the plant f. Security guard g. Drill bits used in the drilling department h. Insurance on factory building i. Electricity to power drill press machines j. Rent of factory building ANS: a. Fixed. A janitorial service is most likely hired for a nightly cleaning, regardless of production volume. b. Fixed. The cost of supervisors is likely to remain constant unless production volumes increase significantly. c. Variable. The higher the production volume, the more the presses will run and more oil will be required to lubricate them. d. Variable. The higher the production volume, the more the forklifts will be needed to move materials to the Assembly Department. e. Fixed. Heating costs will not vary in proportion to production volumes. f. Fixed. Increased production volumes will not necessitate additional security, which is dictated more by plant size, location and type of business. g. Variable. Drill bits wear out as they are being used. Increased production volumes will call for an increased number of drill bits. h. Fixed. Insurance premium based on value of building, not on production volumes. i. Variable. Increased production volumes will necessitate increased electricity usage. j. Fixed. Building rental determined by contract, not production volumes. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 2. Santorini Ltd. has accumulated the following data over a six-month period: Indirect Labor Hours Indirect Labor Cost January 500 $ 9,500 February 400 9,000 March 600 10,000 April 800 12,000 May 700 11,000 June 650 10,500 Determine the formula that could be used to determine Santorini’s indirect labor cost at various levels of production using the high-low method. ANS: Variable cost: Labor Hours Labor Costs High volume 800 $12,000 Low volume 400 9,000 Difference 400 $ 3,000 Variable cost per labor hour = $3,000 / 400 hours = $7.50/labor hour Fixed cost: 400 Hours 800 Hours Cost $9,000 $12,000 Variable @ $7.50/hour 3,000 6,000 Difference $6,000 $ 6,000 Santorini’s cost formula: Indirect labor costs = $6,000 + ($7.50 x number of indirect labor hours) PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. The following are the results of the least squares regression method which was run to separate the fixed and variable components of the Zulli Corporation’s monthly factory utility costs using the number of products produced: y = 49,222.2992 + 5.09 x R 2 = .97765 a) Assume Zulli budgets production of 5,400 units in June, what should budgeted utility costs be? b) Explain what R2 means. Is this equation a good predictor of utility costs? ANS: a) Budgeted utility costs at 5,400 units of production (rounded to the nearest dollar): y = 49,222 + 5.09 (5,400) y = 49,222 + 27,486 y = 76,708 b) R2 = .97765 means that 97.8% of the variation in the utility cost is explained by the variation in the number of units produced. This is very high and it is an indication that units of production are a good variable to use in explaining changes in utilities cost. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 4. Domino Bakery has the following budget at 1,000,000 dozen donuts baked: Direct materials $300,000 Direct labor 250,000 Variable factory overhead 200,000 Fixed factory overhead 180,000 $930,000 (1) Compute the cost per dozen donuts at 1,000,000 dozen. (2) Develop the budget for 1,200,000 dozen donuts. (3) Compute the cost per dozen donuts at 1,200,000 dozen. (4) Explain why the difference in the cost per dozen occurs at the different levels of volume. ANS: (1) Cost per dozen = $930,000/1,000,000 dozen = $.93/dozen donuts (2) Cost per dozen Budget @ 1,200,000 dozen Direct materials 300,000/1,000,000 = .30/dozen $ 360,000 Direct labor 250,000/1,000,000 = .25/dozen 300,000 Variable factory overhead 200,000/1,000,000 = .20/dozen 240,000 Fixed factory overhead 180,000 $1,080,000 (3) Cost per dozen = $1,080,000/1,200,000 dozen = $.90/dozen donuts (4) The cost per dozen decreases as volume increases because fixed costs are spread over a larger number of units. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 5. Dean Corporation has two service departments, Power and Maintenance, and two production departments, Painting and Polishing. The following data have been estimated for next year’s operations: Department: Direct Charges Kilowatt Hours Used Square Footage Power $450,000 20,000 10,000 Maintenance 120,000 50,000 5,000 Painting 235,000 100,000 30,000 Polishing 265,000 150,000 20,000 Requirements: (1) a) For which service department would you use kilowatt hours to allocate service costs. b) For which service department would you use square footage to allocate service costs. (2) Distribute the service department costs using the direct distribution method. (3) Prepare the journal entries to distribute the costs of the service departments to the production departments given the results of your calculations. ANS: (1) It would be more appropriate to distribute Power department costs using kilowatt hours and distribute maintenance costs using square footage. (2) Direct Distribution Method: Power Maintenance Painting Polishing Total Total direct charges 450,000 120,000 235,000 265,000 1,070,000 Power distribution (kilowatt hrs.) Painting 100,000 x $1.80* Polishing 150,000 x 1.80 180,000 270,000 Maintenance distribution (sq. ft.) Painting 30,000 x $2.40** Polishing 20,000 x 2.40 72,000 _______ 48,000 487,000 583,000 1,070,000 * $450,000/(100,000 + 150,000) labor hours = $1.80/kilowatt hour ** $120,000/(30,000 + 20,000) square feet = $2.40/square foot (3) Factory Overhead - Painting 180,000 Factory Overhead - Polishing 270,000 Factory Overhead - Power 450,000 Factory Overhead - Painting 72,000 Factory Overhead - Polishing 48,000 Factory Overhead - Maintenance 120,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. Dean Corporation has two service departments, Power and Maintenance, and two production departments, Painting and Polishing. The following data have been estimated for next year’s operations: Department: Direct Charges Kilowatt Hours Used Square Footage Power $450,000 20,000 10,000 Maintenance 120,000 50,000 5,000 Painting 235,000 100,000 30,000 Polishing 265,000 150,000 20,000 Requirements: (1) Distribute the service department costs using the sequential distribution method. Distribute the Power Department first. (2) Prepare the journal entries to distribute the costs of the service departments to the production departments given the results of your calculations. ANS: (1) Sequential Distribution Method: Power Maintenance Painting Polishing Total Total direct charges 450,000 120,000 235,000 265,000 1,070,000 Power distribution (kilowatt hrs.) Maintenance 50,000 x $1.80* Painting 100,000 x $1.80 Polishing 150,000 x 1.80 75,000 195,000 150,000 225,000 Maintenance distribution (sq. ft.) Painting 30,000 x $3.90** Polishing 20,000 x 3.90 117,000 _______ 78,000 502,000 568,000 1,070,000 * $450,000/(50,000 + 100,000 + 150,000) labor hours = $1.50/kilowatt hour ** $195,000/(30,000 + 20,000) square feet = $3.90/square foot (2) Factory Overhead - Painting 150,000 Factory Overhead - Polishing 225,000 Factory Overhead - Maintenance 75,000 Factory Overhead - Power 450,000 Factory Overhead - Painting 117,000 Factory Overhead - Polishing 78,000 Factory Overhead - Maintenance 195,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. Perry Company has two service departments, Maintenance and Human Resources, and two production departments, Machining and Assembly. The following data have been estimated for next year’s operations: Department: Direct Charges Square Footage Labor Hours Human Resources $135,000 -- -- Maintenance 100,000 -- 5,000 Machining 275,000 2,000 20,000 Assembly 225,000 3,000 25,000 The Human Resources Department services all departments. Requirements: (1) Distribute the service department costs using the direct distribution method. (2) Distribute the service department costs using the sequential distribution method with the department servicing the greatest number of other departments being distributed first. (3) Using the results from the direct distribution method, calculate the predetermined factory overhead rate for the machining department using labor hours as the basis. ANS: (1) Direct Distribution Method: Human Resources Maintenance Machining Assembly Total Total direct charges 135,000 100,000 275,000 225,000 735,000 Human resources distribution (labor hrs.) Machining 20,000 x $3.00* Assembly 25,000 x 3.00 60,000 75,000 Maintenance distribution (sq. ft.) Machining 2,000 x $20.00** Assembly 3,000 x 20.00 40,000 _______ 60,000 375,000 360,000 735,000 * $135,000/(20,000 + 25,000) labor hours = $3.00/labor hour ** $100,000/(2,000 + 3,000) square feet = $20.00/square foot (2) Sequential Distribution Method Human Resources Maintenance Machining Assembly Total Total direct charges 135,000 100,000 275,000 225,000 735,000 Human resources distribution (labor hrs.) Maintenance 5,000 x $2.70* Machining 20,000 x 2.70 Assembly 25,000 x 2.70 13,500 113,500 54,000 67,500 Maintenance distribution (sq. ft.) Machining 2,000 x $22.70** Assembly 3,000 x 22.70 45,400 _______ 68,100 374,400 360,600 735,000 * $135,000/(5,000 + 20,000 + 25,000) labor hours = $2.70/labor hour ** $113,500/(2,000 + 3,000) square feet = $22.70/square foot (3) $375,000/20,000 = $18.75/labor hour Note to instructor: To reduce the difficulty of the problem, assign requirements 1 and 3 only, or requirement 2 only. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. You have been hired by Thompson Waterfall Manufacturing. Your first task is examine different distribution methods for applying factory overhead to the various production orders that are processed during a year. The following information was taken from the annual budget: Direct labor hours 80,000 Machine hours 160,000 Manufacturing costs: Direct labor $400,000 Direct materials 190,000 Indirect labor 65,000 Electric power 46,000 Payroll taxes 12,800 Machine maintenance and repair 10,200 Factory supplies 17,000 Factory heat and light 15,000 Depreciation, taxes, and insurance: Factory buildings 124,000 Machinery 310,000 $1,190,000 a. Determine the following factory overhead application rates under each of the following methods: (1) Direct labor cost (2) Direct labor hours (3) Machine hours b. Prepare a schedule showing the prime cost and total cost of Order 329 with the factory overhead costs applied on each of the three bases; Job Cost Sheet 329 shows the following: raw materials, $6,200; direct labor, 6,000 hours and $29,000; machine hours, 2,800. ANS: (a) Factory overhead costs: Indirect labor $ 65,000 Electric power 46,000 Payroll taxes 12,800 Machine maintenance and repair 10,200 Factory supplies 17,000 Factory heat and light 15,000 Depreciation, taxes, and insurance: Factory buildings 124,000 Machinery 310,000 $600,000 (1) Direct labor cost: $600,000/$400,000 = 150% (2) Direct labor hours: $600,000/80,000 = $7.50/hour (3) Machine hours: $600,000/160,000 = $3.75/hour (b) ORDER 329 Direct Labor Cost Direct Labor Hours Machine Hours Raw materials $ 6,200 $ 6,200 $ 6,200 Direct labor 29,000 29,000 29,000 Factory overhead: 150%  $29,000 43,500 6,000 hours  $7.50 45,000 2,800 hours  $3.75 10,500 $78,700 $80,200 $45,700 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Factory overhead for the Praeger Company has been estimated as follows: Fixed overhead $122,500 Variable overhead $90,000 Budgeted direct labor hours 42,500 Production for the month was 90 percent of the budget, and actual factory overhead totaled $175,000. Calculate: a. The predetermined factory overhead rate. b. The under- or overapplied factory overhead. ANS: (a) Predetermined overhead rate = $122,500 + $90,000 = $5.00 42,500 DLH DLH (b) Applied overhead (38,250 hrs*  $5.00/DL hr) $191,250 Actual overhead 175,000 Overapplied factory overhead $ 16,250 * 42,500 budgeted hours x 90% actual production level = 38,250 hours PTS: 1 DIF: Moderate REF: P. OBJ: 6, 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. The controller has asked you to examine different distribution methods for applying factory overhead to the various production orders that are processed during a year. The following information was taken from the annual budget: Direct labor hours 84,000 Machine hours 120,000 Manufacturing costs: Direct labor $525,000 Direct materials 180,000 Indirect labor 75,000 Electric power 48,000 Payroll taxes 12,600 Machine maintenance and repair 9,200 Factory supplies 16,000 Factory heat and light 14,000 Depreciation, taxes, and insurance: Factory buildings 135,000 Machinery 320,200 $1,335,000 Actual results for the year follow: Direct labor hours 85,000 Machine hours 110,000 Manufacturing costs: Direct labor $ 540,000 Direct material 200,000 Factory overhead 625,000 $1,365,000 a. Determine the following factory overhead application rates under each of the following methods: (1) Direct labor cost (2) Direct labor hours (3) Machine hours b. Determine the under- or overapplied factory overhead under each of the following methods: (1) Direct labor cost (2) Direct labor hours (3) Machine hours ANS: (a) Factory overhead costs: Indirect labor $ 75,000 Electric power 48,000 Payroll taxes 12,600 Machine maintenance and repair 9,200 Factory supplies 16,000 Factory heat and light 14,000 Depreciation, taxes, and insurance: Factory buildings 135,000 Machinery 320,200 $630,000 Predetermined factory overhead rates: (1) Direct labor cost: $630,000/$525,000 = 120% (2) Direct labor hours: $630,000/84,000 hours = $7.50/hour (3) Machine hours: $630,000/120,000 hours = $5.25/hour (b) Applied factory overhead: (1) Direct labor cost: $540,000 x 120% = $648,000 (2) Direct labor hours: 85,000 hours x $7.50/hour = $637,500 (3) Machine hours: 110,000 hours x $5.25/hour = $577,500 Under- or overapplied factory overhead: Direct labor cost Direct labor hours Machine hours Applied factory overhead $648,000 $637,500 $577,500 Actual factory overhead 625,000 625,000 625,000 Over-(Under)applied factory overhead $ 23,000 $ 12,500 $(47,500) PTS: 1 DIF: Hard REF: P. OBJ: 6, 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. Jarcly Manufacturing Company uses activity-based costing. The factory overhead budget for the coming period is $1,053,000, consisting of the following: Cost Pool Budgeted Amount Supervision $ 320,000 Machine usage 420,000 Machine setups 187,000 Design changes 126,000 Totals $1,053,000 The potential allocation bases and their estimated amounts were as follows: Allocation Base Budgeted Amount Number of design changes 35 Number of setups 110 Machine hours 6,000 Direct labor hours 10,000 a. Determine the overhead rate for each cost pool, using the most appropriate allocation base for each pool. b. Job 80130 required $45,000 for direct materials, $20,000 for direct labor, 2,000 direct labor hours, 800 machine hours, five setups, and four design changes. Determine the cost of Job 80130. ANS: (a) Supervision: $320,000 / 10,000 = $32 -- direct labor hour Machine usage: $420,000 / 6,000 = $70 -- machine hour Machine setups: $187,000 / 110 = $1,700 -- setup Design changes: $126,000 / 35 = $3,600 -- design change (b) Direct materials $ 45,000 Direct labor 20,000 Supervision ($32  2,000) 64,000 Machine usage (800  70) 56,000 Machine setups (5  1,700) 8,500 Design changes (4  3,600) 14,400 Total $207,900 PTS: 1 DIF: Hard REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 12. Estimates made for a production department of the Automate Company for the month of October show: Budgeted factory overhead for hours worked $17,360 Estimated direct labor hours 3,100 Factory overhead is applied on the basis of direct labor hours. On October 31, the records show these actual figures: Actual overhead incurred $18,625 Direct labor hours worked 3,425 Prepare the entry or entries to 1) apply factory overhead to production; 2) record actual factory overhead incurred assuming all items were purchased from vendors; 3) close out the two factory overhead account balances to set up the overapplied or underapplied factory overhead; and 4) to close the balance in under- or overapplied factory overhead to Cost of Goods Sold. ANS: Work in Process 19,180 Applied Factory Overhead 19,180 Factory Overhead 18,625 Accounts Payable 18,625 Applied Factory Overhead 19,180 Factory Overhead 19,180 Factory Overhead 555 Under- and Overapplied Factory Overhead 555 Under- and Overapplied Factory Overhead 555 Cost of Goods Sold 555 PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic CHAPTER 5—PROCESS COST ACCOUNTING--GENERAL PROCEDURES MULTIPLE CHOICE 1. A cost center in a process cost system is a: a. Unit to which costs are accumulated. b. Job. c. Specific product. d. Employee. ANS: A A cost center is a unit to which costs are accumulated. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Center TOP: AACSB - Analytic 2. Which of the following firms is least likely to use process costing? a. A yogurt manufacturer. b. A refiner of petroleum products. c. A computer manufacturer. d. A manufacturer of concrete products. ANS: C Makers of computers use job costing due to diversified product lines. The other firms produce homogeneous products in continuous production. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 3. Process costing techniques should be used in assigning costs to products: a. If the product is manufactured on the basis of each order received. b. In all manufacturing situations. c. When production is only partially completed during the accounting period. d. If the product is composed of mass-produced homogeneous units. ANS: D Process costing techniques should be used in assigning costs to products if the product is composed of mass-produced homogeneous units. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 4. Which of the following characteristics applies to process costing? a. Differentiated products are provided on a special order basis. b. Cost are accumulated by department. c. Cost are accumulated by jobs. d. Direct labor workers must keep detailed records as to the jobs on which they worked. ANS: B In a process costing system, costs may be accumulated by department, not by job; therefore requiring more detailed labor records. Job costing would be used for special order items. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 5. Characteristics that job order costing and process costing have in common include all of the following except: a. The use of predetermined factory overhead rates. b. Each can be used by service firms. c. The costs of materials and labor are charged to the departments where they are incurred. d. The primary objective is to complete a unit cost for products. ANS: C Charging the costs of material and labor to the departments in which they are incurred is a characteristic of process costing. In job order costing, these costs are charged directly to jobs. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 6. A true process costing system could make use of each of the following except: a. Predetermined factory overhead rates. b. Individual jobs. c. Cost centers. d. General ledger control accounts. ANS: B A true process costing system would not make use of individual jobs. Both process and job order cost accounting systems can use predetermined factory overhead rates, cost centers, and responsibility accounting. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 7. All of the following could be included in the cost of a product located in the final production department of a multi-step process except: a. The costs of materials, labor and overhead identifiable with that department. b. Marketing and distribution costs. c. The costs of service departments that have been allocated to production departments. d. The costs of prior production departments. ANS: B Marketing and distribution costs are not product costs. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 8. Daniel LLC incurred cost of $43,000 for material, $26,000 for labor, and $23,000 for factory overhead. There was no beginning or ending work in process. 5,000 units were completed and transferred out. The unit cost for labor is: a. $ 8.60 b. $ 5.20 c. $ 18.40 d. $ 4.60 ANS: B Labor unit cost: $26,000 / 5,000 = 5.20 PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Daniel LLC incurred cost of $43,000 for material, $26,000 for labor, and $23,000 for factory overhead. There was no beginning or ending work in process. 5,000 units were completed and transferred out. The cost per unit is: a. $ 8.60 b. $ 5.20 c. $ 18.40 d. $ 4.60 ANS: C Material $43,000 Labor 26,000 Factory overhead 23,000 Total costs $92,000 Divided by the number of units 5,000 Cost per unit $18.40 PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. Using the average cost method of process costing, the computation of manufacturing cost per equivalent unit considers: a. Current costs only. b. Current costs plus cost of beginning work in process inventory. c. Current costs plus cost of ending work in process inventory. d. Current costs less cost of beginning work in process inventory. ANS: B The average cost method of process costing considers current cost plus cost of beginning work in process inventory. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 11. The number of whole units that could have been completed during a period, using the production costs incurred during that period is called: a. Standard production. b. Equivalent production. c. Total units. d. Manufactured units. ANS: B The number of whole units that could have been completed during a period, using the production costs incurred during that period is called equivalent production. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 12. A characteristic of a process cost accounting system is: a. Costs are accumulated by order. b. Work in process inventory is restated in terms of equivalent production. c. It is used by a company manufacturing custom machinery. d. None of these is correct. ANS: B With a process costing system, work in process inventory is restated in terms of equivalent production, which represents the number of whole units that could have been completed during the period. Costs are accumulated by order in a job order cost system, which would be used, for example, by a company manufacturing custom machinery. Standard costs can be used with job order or process systems. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 13. All of the following are characteristics of a production report except: a. It includes the number of units completed during the period. b. It includes the costs incurred by the department during the period. c. It includes the number of units in ending work-in-process and the estimated stage of completion. d. The department manager completes the report on a monthly basis. ANS: B The production report is prepared by the department manager monthly and contains information about the number of units completed and on hand. It does not contain information about department costs. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 14. The cost of an equivalent unit is equal to: a. A unit of work in process inventory. b. The amount of cost necessary to start a unit of production into work in process. c. The cost necessary to complete one unit of production. d. A unit of work in process inventory. ANS: C An equivalent unit of cost is equal to the amount of cost necessary to complete one unit of production. An equivalent of material or conversion cost is the amount of these elements that is required to complete one unit of a manufactured product. For example, if 10 units are 50 percent completed, in terms of equivalency, they are equivalent to 5 units 100 percent completed. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 15. The production report for Phillips Industries, which had no beginning inventory at the beginning of the month, included the following information for September: Number of Units Completion Units started in production 81,000 Units transferred to finished goods 72,000 If the equivalent units for September’s production were 77,400, how many units were in process at the end of the month, and how complete were they? a. 9,000; 30% b. 9,000; 60% c. 3,000; 90% d. 6,000; 90% ANS: B Units started in production 81,000 Less: Units transferred to finished goods 72,000 Ending units in process 9,000 If Phillips started 81,000 units during the month, and transferred 72,000 to finished goods, 9,000 units would be left in ending inventory. Further, if equivalent units of production are equal to 77,400, the equivalent units of ending Work in Process would be 5,400 (77,400 - 72,000). 5,400 / 9,000 = 60% The units in ending Work in Process are 60% complete. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 16. If there is no beginning work in process inventory and the ending work in process inventory is 90 percent complete, the number of equivalent units would be: a. The same as the units placed in process. b. The same as the units completed. c. Less than the units placed in process. d. Less than the units completed. ANS: C Proof: Units In process, beginning of period None Placed in process 10,000 Completed and transferred 9,000 Work in process, end of period 1,000 Stage of completion 90% Equivalent production: Completed during period 9,000 Equivalent units of work in process, end of period (1,000 units, 90% completed) 900 Total equivalent production 9,900 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 17. An error was made in the computation of the stage of completion of the current year's ending work in process inventory. The error resulted in assigning a lower stage of completion to each component of the inventory than actually was the case. What is the resultant effect of this error upon: (1) The computation of equivalent units in total? (2) The computation of costs per equivalent unit? (3) Costs assigned to cost of goods completed for the period? (1) (2) (3) a. Understate Overstate Overstate b. Understate Understate Overstate c. Overstate Understate Understate d. Overstate Overstate Understate ANS: A Proof: Actual As computed incorrectly Equivalent units in ending work in process 2,000 1,000 Equivalent units in goods completed 20,000 20,000 Total equivalent units 22,000 21,000 (u) Production cost $462,000 $462,000 Unit cost (Production cost / Total equivalent units) $ 21.00 $ 22.00 (o) Cost of goods completed: 20,000 units  $21 unit cost $420,000 20,000 units  $22 unit cost $440,000 (o) PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 18. Which of the following is not a duty of the cost accountant in a process cost system? a. Estimating the stage of completion of in-process units at the end of the month. b. Collecting the periodic production costs. c. Preparing the journal entries to record the factory operations. d. Computing the amount of equivalent units. ANS: A The production supervisor prepares the production report which contains estimates of the stage of completion of ending work in process. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 19. The cost of production summary for Maha Industries follows: Maha Industries Cost of Production Summary For the Month Ended May 31, 20-- Cost of production for month: Materials $ 8,000 Labor 4,000 Factory overhead 3,000 Total costs to be accounted for $15,000 Unit output for month: Finished and transferred to Finished goods during month 3,500 Equivalent units of work in process, end of month (2,000 units, 25% completed) 500 Total equivalent production 4,000 Unit cost for month: Materials ($8,000 / 4,000) $2.00 Labor ($4,000 / 4,000) 1.00 Factory overhead ($3,000 / 4,000) .75 Total $3.75 Inventory costs: Cost of goods finished and transferred to Finished goods during month: (3,500  $3.75) $13,125 Cost of work in process, end of month: Materials (2,000  .25  $2.00) $1,000 Labor (2,000  .25  $1.00) 500 Factory overhead (1,000  .25  $.75) 375 1,875 Total production costs accounted for $15,000 What is the journal entry to record materials issued into production? a. Finished goods 8,000 Materials 8,000 b. Work-in-process 8,000 Materials 8,000 c. Work-in-process 1,000 Materials 1,000 d. Materials 8,000 Accounts payable 8,000 ANS: B The entry to record materials issued into production is: Work-in-process 8,000 Materials 8,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 20. The cost of production summary for Maha Industries follows: Maha Industries Cost of Production Summary For the Month Ended May 31, 20-- Cost of production for month: Materials $ 8,000 Labor 4,000 Factory overhead 3,000 Total costs to be accounted for $15,000 Unit output for month: Finished and transferred to Finished goods during month 3,500 Equivalent units of work in process, end of month (2,000 units, 25% completed) 500 Total equivalent production 4,000 Unit cost for month: Materials ($8,000 / 4,000) $2.00 Labor ($4,000 / 4,000) 1.00 Factory overhead ($3,000 / 4,000) .75 Total $3.75 Inventory costs: Cost of goods finished and transferred to Finished goods during month: (3,500  $3.75) $13,125 Cost of work in process, end of month: Materials (2,000  .25  $2.00) $1,000 Labor (2,000  .25  $1.00) 500 Factory overhead (1,000  .25  $.75) 375 1,875 Total production costs accounted for $15,000 What is the journal entry to record the distribution of labor to production? a. Finished goods 4,000 Payroll 4,000 b. Work in process 4,000 Overhead 4,000 c. Work in process 4,000 Payroll 4,000 d. Payroll 4,000 Accrued payroll 4,000 ANS: C The entry to record the distribution of labor to production is: Work in process 4,000 Payroll 4,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 21. The cost of production summary for Maha Industries follows: Maha Industries Cost of Production Summary For the Month Ended May 31, 20-- Cost of production for month: Materials $ 8,000 Labor 4,000 Factory overhead 3,000 Total costs to be accounted for $15,000 Unit output for month: Finished and transferred to Finished goods during month 3,500 Equivalent units of work in process, end of month (2,000 units, 25% completed) 500 Total equivalent production 4,000 Unit cost for month: Materials ($8,000 / 4,000) $2.00 Labor ($4,000 / 4,000) 1.00 Factory overhead ($3,000 / 4,000) .75 Total $3.75 Inventory costs: Cost of goods finished and transferred to Finished goods during month: (3,500  $3.75) $13,125 Cost of work in process, end of month: Materials (2,000  .25  $2.00) $1,000 Labor (2,000  .25  $1.00) 500 Factory overhead (1,000  .25  $.75) 375 1,875 Total production costs accounted for $15,000 What is the journal entry to record factory overhead applied to production? a. Work in process 3,000 Factory overhead 3,000 b. Factory overhead 3,000 Various accounts 3,000 c. Work-in-process 375 Factory overhead 375 d. Factory overhead 375 Work in process 375 ANS: A The entry to record factory overhead applied to production is: Work in process 3,000 Factory overhead 3,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 22. The cost of production summary for Maha Industries follows: Maha Industries Cost of Production Summary For the Month Ended May 31, 20-- Cost of production for month: Materials $ 8,000 Labor 4,000 Factory overhead 3,000 Total costs to be accounted for $15,000 Unit output for month: Finished and transferred to Finished goods during month 3,500 Equivalent units of work in process, end of month (2,000 units, 25% completed) 500 Total equivalent production 4,000 Unit cost for month: Materials ($8,000 / 4,000) $2.00 Labor ($4,000 / 4,000) 1.00 Factory overhead ($3,000 / 4,000) .75 Total $3.75 Inventory costs: Cost of goods finished and transferred to Finished goods during month: (3,500  $3.75) $13,125 Cost of work in process, end of month: Materials (2,000  .25  $2.00) $1,000 Labor (2,000  .25  $1.00) 500 Factory overhead (1,000  .25  $.75) 375 1,875 Total production costs accounted for $15,000 What is the journal entry to record completed production and transfer to the warehouse? a. Work in process 13,125 Finished goods 13,125 b. Finished goods 1,875 Work in process 1,875 c. Finished goods 3,000 Factory overhead 3,000 d. Finished goods 13,125 Work in process 13,125 ANS: D The entry to completed production and transfer to the warehouse is: Finished goods 13,125 Work in process 13,125 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 23. In a given process costing system, the equivalent units of production are computed using the average cost method. The percentage of completion for the current period only is included in the calculation of the: Beginning Work in Process Inventory Ending Work in Process Inventory a. No No b. No Yes c. Yes No d. Yes Yes ANS: B In computing equivalent units of production, the percentage of completion of the current period is used only in the calculation of the ending work in process inventory. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 24. Lily Corporation uses process costing to calculate the cost of manufacturing pool systems. Beginning work in process included 7,000 units 50 percent complete. During the month 15,000 units were completed, 1,400 units remain in work in process at 80 percent complete. Using the average cost method, the equivalent units are: a. 14,000 b. 18,720 c. 16,120 d. 19,900 ANS: C Units output for the month: Finished during month 15,000 Equivalent units of work in process, end of month (1,400 x 80% completed) 1,120 16,120 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. Norma Company had 10,000 units in work in process at January 1 that were 50 percent complete. During January, 25,000 units were completed. At January 31, 6,000 units remained in work in process that were 75 percent complete. Using the average cost method, the equivalent units for January were: a. 31,000. b. 29,500. c. 35,000. d. 36,000. ANS: B Unit output for month: Finished during month 25,000 Equivalent units of work in process, end of month (6,000 units, 75% completed) 4,500 29,500 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. The records of Andrews Company reflect the following data: Work in process, beginning of the month - 4,500 units; 1 / 3 completed at a cost of $2,400 for materials, $825 for labor, and $3,000 for overhead. Production costs for the month - materials - $20,695; labor - $13,050; overhead - $41,500 Units completed and transferred to finished goods - 35,000 Work in process, end of month - 3,000 units; 3 / 4 completed Compute the equivalent units of production. a. 32,750 b. 37,250 c. 38,000 d. 36,500 ANS: B Units completed and transferred to finished goods (35,000 x 100%) 35,000 Ending in process (3,000 x 3 / 4) 2,250 Equivalent units of production 37,250 PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. The beginning work in process inventory is 60 percent complete, and the ending work in process inventory is 45 percent complete. The dollar amount of the production cost included in the ending work in process inventory (using the average cost method) is determined by multiplying the average unit costs by what percentage of the total units in the ending work in process inventory? a. 100 percent b. 60 percent c. 55 percent d. 45 percent ANS: D The dollar amount of production cost included in the ending work in process inventory is determined by multiplying the average unit costs by the percentage of completion of the ending work in process inventory (45 percent). PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 28. The Kluesner Company started the month of June with 3,000 units in process which were 60% completed. The company started 25,000 units during June, and at the end of the month had 2,500 units on hand which were 40% completed. The number of units transferred to finished goods during June was: a. 25,000 b. 28,500 c. 24,500 d. 25,500 ANS: D Beginning units in process 3,000 Plus: Units started in production 25,000 Total units to account for 28,000 Less: Units transferred to finished goods ??? Ending units in process 2,500 If Kluesner started the month with 3,000 units in process and started 25,000 more, there are 28,000 units to account for. Those units were either completed and transferred to finished goods during the month or still in process at the end of the month. The number of units transferred would have been 25,500 (28,000 - 2,500). PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 29. The production report for Marck Company included the following information for August: Number of Units Completion Units started in production 44,500 Units transferred to finished goods 46,200 Ending units in process 2,700 70% How many units were in process at the beginning of the month? a. 1,700 b. 1,000 c. 4,400 d. 5,400 ANS: C Beginning units in process ??? Plus: Units started in production 44,500 Total units to account for 48,900 Less: Units transferred to finished goods 46,200 Ending units in process 2,700 If Marck transferred 46,200 units to finished goods during the month and had 2,700 units in process at the end of the month, there were 48,900 units to account for during the month (46,200 + 2,700). If Marck started 44,500 units during the month, it must have had 4,400 in beginning in process (48,900 - 44,500). PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 30. The production report for Matthews, Inc. included the following information for May: Number of Units Completion Beginning units in process 7,800 20% Units transferred to finished goods 45,300 Ending units in process 5,600 40% How many units were started during the period? a. 43,100 b. 58,700 c. 47,500 d. 50,900 ANS: A Beginning units in process 7,800 Plus: Units started in production ??? Total units to account for 50,900 Less: Units transferred to finished goods 45,300 Ending units in process 5,600 If Matthews transferred 45,300 units to finished goods during the month and had 5,600 units in process at the end of the month, there were 50,900 units to account for during the month (45,300 + 5,600). If Matthews started the month with 7,800 units in process, it must have started 43,100 (50,900 - 7,800). PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 31. Michael Company had 2,000 units in work in process at January 1 that were 80 percent complete. During January, 15,000 units were completed. At January 31, 4,000 units remained in work in process that were 40 percent complete. Using the average cost method, how many units were started during January? a. 21,000 b. 18,200 c. 17,000 d. 19,000 ANS: C Units in beginning work-in-process 2,000 Units started during month ??? Total units worked on during month 19,000 Units completed during month 15,000 Units in ending work-in-process 4,000 Ending work-in-process and units completed during the month total 19,000 units. 19,000 units less 2,000 units equal 17,000 units. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 32. The records of Andrews Company reflect the following data: Work in process, beginning of the month - 4,500 units; 1 / 3 completed at a cost of $2,400 for materials, $825 for labor, and $5,000 for overhead. Production costs for the month - materials - $20,695; labor - $13,050; overhead - $41,500 Units completed and transferred to finished goods - 35,000 Work in process, end of month - 3,000 units; 3 / 4 completed What is the unit cost for material? a. $.66 b. $.59 c. $.56 d. $.62 ANS: D Cost of material in beginning work in process $ 2,400 Material costs for the current month 20,695 Total material costs $23,095 Units completed and transferred to finished goods (35,000 x 100%) 35,000 Ending in process (3,000 x 3 / 4) 2,250 Equivalent units of production 37,250 Unit cost of material = $23,095 / 37,250 = $.62 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 33. The records of Andrews Company reflect the following data: Work in process, beginning of the month - 4,500 units; 1 / 3 completed at a cost of $2,400 for materials, $825 for labor, and $5,000 for overhead. Production costs for the month - materials - $20,695; labor - $13,050; overhead - $41,500 Units completed and transferred to finished goods - 35,000 Work in process, end of month - 3,000 units; 3 / 4 completed What is the cost per equivalent unit? a. $2.24 b. $2.02 c. $2.38 d. $2.15 ANS: A Cost of beginning work in process: Material $ 2,400 Labor 825 Factory Overhead 5,000 $ 8,225 Production costs for the current month: Material $20,695 Labor 13,050 Factory Overhead 41,500 75,245 $83,470 Units completed and transferred to finished goods (35,000 x 100%) 35,000 Ending in process (3,000 x 3 / 4) 2,250 Equivalent units of production 37,250 Cost per equivalent unit = $83,470 / 37,250 = $2.24 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 34. Information concerning the materials used in the Mixing Department in October is as follows: Units Materials Costs Work in Process, October 1 11,700 $ 4,100 Units started during October 43,300 22,900 Units completed and transferred to next department during October 45,000 Work in Process, October 31 10,000 If the ending work-in-process inventory is 50% complete, using the average cost method, what was the materials cost in Work in Process at October 31? a. $2,644 b. $2,700 c. $4,330 d. $4,811 ANS: B (B) Units in Work in Process, October 31: Units in process, October 31 10,000 Percentage of completion 50% Equivalent units in process 5,000 Total materials cost = Units completed plus ending inventory ($4,100 + $22,900) = $27,000 = $.54 per unit (45,000 + 5,000) 50,000 Materials cost for Work in Process, October 31: 5,000 units  $.54 = $2,700 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 35. Information for the month of January concerning Department A, the first stage of Cando Corporation's production cycle, follows: Materials Conversion Beginning work in process $17,200 $16,400 Current costs 50,000 34,000 Total costs $67,200 $50,400 Equivalent units using average cost method 112,000 112,000 Average unit costs $ 0.60 $ 0.45 Goods completed 100,000 units Ending work in process 24,000 units The ending work in process is 50 percent complete. How would the total costs accounted for be distributed using the average cost method? Goods Completed Ending Work in Process a. $105,000 $12,600 b. $ 67,200 $14,400 c. $ 67,200 $50,400 d. $105,000 $14,400 ANS: A Cost of the completed goods: Materials (100,000  $.60) $ 60,000 Conversion costs (100,000  $.45) 45,000 Total cost of completed goods $105,000 Cost of ending work in process: Materials (24,000 x 50%  $.60) $ 7,200 Conversion costs (24,000 units  50%  $.45) 5,400 Total cost of ending work in process $ 12,600 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 36. Howell Company uses the average cost method of process costing. Howell had 1,000 units in beginning work-in-process which were 75% complete. Costs associated with this inventory were $3,200. When calculating the cost per equivalent unit for the month of June, Howell’s controller should: a. Not consider the $3,200 as those costs were incurred in a prior period. b. Calculate the cost to complete the 1,000 items in beginning work-in-process separately. c. Include the $3,200 with the current month’s cost to arrive at total cost for production to date. d. Include the equivalent units to complete the beginning work-in-process inventory to arrive at the equivalent units for the period. ANS: C When using the average cost method, the costs associated with the beginning work-in-process inventory should be added to the current month’s cost to arrive at the total cost of production to date. This amount is then divided by the equivalent production for the month. The equivalent production is amount of units completed added to the equivalent units of ending inventory (units in ending work-inprocess x the stage of completion). PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 37. Information concerning the materials used in the Mixing Department in October is as follows: Units Materials Costs Work in Process, October 1 11,700 $ 4,100 Units started during October 43,300 22,900 Units completed and transferred to next department during October 45,000 If the ending work-in-process inventory is 50% complete, using the average cost method, what was the materials cost in Work in Process at October 31? a. $2,644 b. $2,700 c. $4,330 d. $4,811 ANS: B (B) Units in Work in Process, October 31: In process, October 1 11,700 Started during October 43,300 Total units to account for 55,000 Units transferred 45,000 Units in process, October 31 10,000 Percentage of completion 50% Equivalent units in process 5,000 Total materials cost = Units completed plus ending inventory ($4,100 + $22,900) = $27,000 = $.54 per unit (45,000 + 5,000) 50,000 Materials cost for Work in Process, October 31: 5,000 units  $.54 = $2,700 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 38. In a production cost report using process costing, transferred-in costs are similar to: a. Material added at the beginning of the process. b. Conversion costs added during the process. c. Costs transferred to the next process. d. Costs included in beginning inventory. ANS: A The costs transferred in from another department are treated in a manner similar to materials added in a department at the very beginning of processing in the department. They are finished units of the preceding department but will require additional processing in the department to which they were transferred. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 39. What are transferred-in costs as used in a process cost accounting system? a. Labor that is transferred from another department within the same plant instead of hiring temporary workers from the outside b. Costs that have been incurred in a prior department on units that have been moved into a subsequent department c. Supervisory salaries that are transferred from an overhead cost center to a production cost center d. Ending work in process inventory of a previous process that will be used in a succeeding process ANS: B Transferred-in costs, as used in a process cost system, represent the cost of the production of a previous internal process or department subsequently used in a succeeding internal process. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 40. The Columbus Company has three departments A, B and C. Material requisitions amounted to $10,000, $8,000 and $5,000, respectively, for departments A, B and C. In addition, $2,000 of indirect materials were used during the period. What is the entry to record the materials used during the period? a. Work-in-process 23,000 Materials - Department A 10,000 Materials - Department B 8,000 Materials - Department C 5,000 b. Work-in-process - Department A 10,000 Work-in-process - Department B 8,000 Work-in-process - Department C 5,000 Materials 23,000 c. Work-in-process - Department A 10,000 Work-in-process - Department B 8,000 Work-in-process - Department C 5,000 Factory overhead 2,000 Materials 25,000 d. Work-in-process 23,000 Factory overhead 2,000 Materials 25,000 ANS: C The entry to record the use of the materials in departments A, B and C and the indirect materials is: Work-in-process - Department A 10,000 Work-in-process - Department B 8,000 Work-in-process - Department C 5,000 Factory overhead 2,000* Materials 25,000 *Indirect materials PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 41. Wolf Company has two departments, Mixing and Curing. The following information is available for September: Mixing Department: Number of units Cost per equivalent unit Transferred to the curing department 9,000 $2.00 Ending work in process inventory 70 % completed 4,000 $2.00 Curing Department: Completed and transferred out 8,000 $3.00 Ending work in process inventory 30% completed 5,000 $3.00 The entry to record the transfer of inventory from the mixing to the curing department is: a. Work in process - Curing 18,000 Work in process - Mixing 18,000 b. Finished goods 18,000 Work in process - Mixing 18,000 c. Work in process - Mixing 5,600 Work in process - Curing 5,600 d. Work in process - Curing 18,000 Transferred in costs 18,000 ANS: A The entry to transfer the cost of inventory from the mixing to the curing department is: Work in process - Curing 18,000* Work in process - Mixing 18,000 * 9,000 x $2.00 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 42. Wolf Company has two departments, Mixing and Curing. The following information is available for September: Mixing Department: Number of units Cost per equivalent unit Transferred to the curing department 9,000 $2.00 Ending work in process inventory 70 % complete 4,000 $2.00 Curing Department: Completed and transferred out 8,000 $3.00 Ending work in process inventory 30% complete 5,000 $3.00 The entry to record the transfer of inventory from the curing department to the warehouse is: a. Finished goods 18,000 Work in process - Mixing 18,000 b. Finished goods 24,000 Work in process - Curing 24,000 c. Work in process - Curing 24,000 Work in process - Mixing 24,000 d. Work in process - Curing 4,500 Finished goods 4,500 ANS: B The entry to record the completion of production and transfer of the goods to the finished goods warehouse is: Finished goods 24,000* Work in process - Curing 24,000 * 8,000 x $3.00 PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 43. The Assembly Department is the second stage of Pine Company's production cycle. On May 1, the beginning work in process contained 15,000 units that were 40 percent complete. During May, 85,000 units were transferred in from the first stage of Pine's production cycle and 80,000 units were completed and transferred to Finished Goods. On May 31, the ending work in process contained 20,000 units that were 75 percent complete. Using the average cost method, the equivalent units of the Assembly Department are: Transferred-In Costs Materials Conversion Costs a. 85,000 70,000 70,000 b. 100,000 80,000 80,000 c. 100,000 95,000 95,000 d. 120,000 100,000 100,000 ANS: C Units Transferred-in costs: Units completed and transferred out 80,000 Ending work in process: (20,000 x 100% completed) 20,000 Equivalent units 100,000 Material and Conversion Costs: Units completed and transferred (see above) 80,000 Ending work in process: (20,000 x 75% complete) 15,000 Equivalent units 95,000 PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 44. The Assembly Department is the second stage of Pine Company's production cycle. On May 1, the beginning work in process contained 15,000 units that were 40 percent complete. During May, 85,000 units were transferred in from the first stage of Pine's production cycle. On May 31, the ending work in process contained 20,000 units that were 75 percent complete. Using the average cost method, the equivalent units of the Assembly Department are: Transferred-In Costs Materials Conversion Costs a. 85,000 70,000 70,000 b. 100,000 80,000 80,000 c. 100,000 95,000 95,000 d. 120,000 100,000 100,000 ANS: C Units Cost flow analysis: Units in beginning work in process 15,000 Transferred in during month 85,000 Total units worked on 100,000 Less ending work-in-process 20,000 Units transferred out 80,000 Transferred-in costs: Units completed and transferred out (see above) 80,000 Ending work in process: (20,000 x 100% completed) 20,000 Equivalent units 100,000 Material and Conversion Costs: Units completed and transferred (see above) 80,000 Ending work in process: (20,000 x 75% complete) 15,000 Equivalent units 95,000 PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 45. Department B had 1,000 units in beginning work-in-process which had transferred in costs of $2,500 from Department A associated with them. During the period, 12,000 more units having costs of $36,000 were transferred in to Department B from Department A. What is the unit cost for the period of costs transferred from Department A. a. $2.00 b. $2.75 c. $2.96 d. $3.00 ANS: C When costs transferred in have different unit costs in different periods, these costs must be averaged as follows: Units Costs Beginning work-in-process 1,000 $ 2,500 Current period 12,000 36,000 13,000 $38,500 Cost per unit = 38,500 / 13,000 = $2.96 PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic PROBLEM 1. Daniel LLC incurred the following cost in the month of October: Material $55,000 Labor $46,000 Factory Overhead $23,000 There was no beginning inventory. Ending work in process was 10,000 units at 50 percent complete. 15,000 units were completed and transferred out. Prepare a cost of production summary for the month, assuming Daniel uses the average cost method of process costing. ANS: Daniel LLC Cost of Production Summary For the Month Ended October 31, 20-- Cost of production for month: Materials $ 55,000 Labor 46,000 Factory Overhead 23,000 Total cost to be accounted for $124,000 Unit output for the month Finished during month 15,000 Equivalent units of work in process, end of month (10,000 units, one-half completed) 5,000 Total equivalent production 20,000 Unit cost for month: Material ($55,000 /20,000) $2.75 Labor (46,000 / 20,000) 2.30 Factory Overhead (23,000 / 20,000) 1.15 Total $6.20 Inventory Costs: Cost of goods finished during month (15,000 x 6.20) $ 93,000 Cost of work in process, end of month: Material (10,000 x 1/2 x 2.75) $ 13,750 Labor ( 10,000 1/2 2.30) 11,500 Factory Overhead ( 10,000 1/2 1.15) 5,750 31,000 Total production cost accounted for $124,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. Using the data presented below, determine the figures that should be inserted in the blank spaces. Beginning units in process Units started in production Units transferred to finished goods Ending units in process Equivalent units of production a 700 3,200 ________ 600 - 1/3 completed ______ b _____ 2,300 ________ 400 - 1/2 completed 2,450 c 1,200 4,500 5,100 __________________ 5,500 d 1,000 _______ 8,200 ___ - 1/2 completed 8,800 e 2,200 _______ 2,400 500 - 4/5 completed ______ ANS: (a) Stage of Units completion Equivalent Units Beginning units in process 700 + Units started in production 3,200 = Total units to account for 3,900 - Units transferred to finished goods __??? 100% ??? = Ending units in process 600 1/3 200 ??? The units transferred to finished goods is equal to 3,300 (3,900 - 600), therefore the equivalent units of production is equal to 3,500 (3,300 + 200). (b) Units Stage of completion Equivalent Units Beginning units in process ??? + Units started in production 2,300 = Total units to account for ??? - Units transferred to finished goods __??? 100% ??? = Ending units in process 400 1/2 200 2,450 The number of units transferred to finished goods is 2,250 (2,450 - 200). The total number of units to account for is 2,650 (2,250 + 400), therefore the number of units in beginning work-in-process is 350 (2,650 - 2,300). (c) Units Stage of completion Equivalent Units Beginning units in process 1,200 + Units started in production 4,500 = Total units to account for 5,700 - Units transferred to finished goods 5,100 100% 5,100 = Ending units in process ??? ??? ??? 5,500 The number of equivalent units for ending work-in-process is 400 (5,500 - 5,100). The number of units in ending work-in-process is 600 (5,700 - 5,100), therefore, the stage of completion of the ending work-in-process is 2/3 (400 / 600). (d) Units Stage of completion Equivalent Units Beginning units in process 1,000 + Units started in production ??? = Total units to account for ??? - Units transferred to finished goods 8,200 100% 8,200 = Ending units in process ??? 1/2 ??? 8,800 The number of equivalent units for ending work-in-process is 600 (8,800 - 8,200). The number of units in ending work-in-process is 1,200 (600 / (1/2)), therefore, the number of units to account for is 9,400 (8,200 + 1,200) and the number of units started in production is 8,400 (9,400 - 1,000). (e) Units Stage of completion Equivalent Units Beginning units in process 2,200 + Units started in production ??? = Total units to account for ??? - Units transferred to finished goods 2,400 100% 2,400 = Ending units in process 500 4/5 400 ??? The number of equivalent units is 2,800 (2,400 + 400). The total number of units to account for is 2,900 (2,400 + 500), therefore the number of units started in production is 700 (2,900 - 2,200). PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. The records of Jordan Company reflect the following data: Work in process, beginning of the month - 4,500 units; 30% completed at a cost of $16,700 for materials, $7,600 for labor, and $10,400 for overhead. Production costs for the month - materials - $54,300 labor; - $25,400; overhead - $34,600 Units completed and transferred to finished goods - 18,000 Work in process, end of month - 5,000 units; 40% completed Calculate the unit cost for the month for materials, labor and factory overhead. ANS: Units completed and transferred to finished goods (18,000 x 100%) 18,000 Ending in process (5,000 x 40%) 2,000 Equivalent units of production 20,000 Material Labor Factory Overhead Costs in beginning in process $16,700 $ 7,600 $10,400 Production costs for month 54,300 25,400 34,600 Total costs $71,000 $33,000 $45,000 Equivalent units - 20,000 Cost per unit $3.55 $1.65 $2.25 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 4. Consider the following cost of production summary for Carrigan Products for May. Prepare the journal entries to record the production activity. Carrigan Products Cost of Production Summary For the Month Ended May 31, 20-- Cost of work in process, beginning of month: Materials $ 8,200 Labor 5,500 Factory overhead 2,000 $15,700 Cost of production for month: Materials $24,000 Labor 17,600 Factory overhead 16,900 58,500 Total costs to be accounted for $74,200 Unit output for month: Finished and transferred to Finished goods during month 2,000 Equivalent units of work in process, end of month (1,000 units, 80% completed) 800 Total equivalent production 2,800 Unit cost for month: Materials [($8,200 + $24,000) / 2,800] $ 11.50 Labor [($5,500 + $17,600) / 2,800] 8.25 Factory overhead [($2,000 + $16,900) / 2,800] 6.75 Total $ 26.50 Inventory costs: Cost of goods finished and transferred to Finished goods during month: (2,000  $26.50) $53,000 Cost of work in process, end of month: Materials (1,000  .8  $11.50) $ 9,200 Labor (1,000  .8  $8.25) 6,600 Factory overhead (1,000  .8  $6.75) 5,400 21,200 Total production costs accounted for $74,200 ANS: Work-in-process 24,000 Materials 24,000 To record requisition of materials Work-in-process 17,600 Payroll 17,600 To record distribution of labor Work-in-process 16,900 Factory overhead 16,900 To record application of factory overhead Finished goods 53,000 Work-in-process 53,000 To record the completion of goods PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. The Paul Manufacturing Company uses the process cost system and the average cost method. The following production data are for the month of April, 20--. Production Costs Work in process, beginning of month: Materials $ 4,350 Labor 3,200 Factory overhead 1,902 $ 9,452 Costs incurred during month: Materials $43,200 Labor 32,304 Factory overhead 19,020 94,524 Total $103,976 Production Report Units In process, beginning of month 500 Finished and transferred during month 11,900 Work in process, end of month 1,200 Stage of completion 65% Prepare a cost of production summary for the month. ANS: Paul Manufacturing Company Cost of Production Summary For the Month Ended April 30, 20-- Cost of work in process, beginning of month: Materials $ 4,350 Labor 3,200 Factory overhead 1,902 $ 9,452 Cost of production for month: Materials $43,200 Labor 32,304 Factory overhead 19,020 94,524 Total costs to be accounted for $103,976 Unit output for month: Finished and transferred to finished goods during month 11,900 Equivalent units of work in process, end of month (1,200 units, 65% completed) 780 Total equivalent production 12,680 Unit cost for month: Materials [($4,350 + $43,200) / 12,680] $3.75 Labor [($3,200 + $32,304) / 12,680] 2.80 Factory overhead [($1,902 + $19,020) / 12,680] 1.65 Total $8.20 Inventory costs: Cost of goods finished and transferred to finished goods during month (11,900  $8.20) $ 97,580 Cost of work in process, end of month: Materials (1,200  .65  $3.75) $2,925 Labor (1,200  .65  $2.80) 2,184 Factory overhead (1,200  .65  $1.65) 1,287 6,396 Total production costs accounted for $103,976 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. The Joan Company uses the process cost system and average cost method. The following production data are for the month of July, 20--. Production Costs Work in process, beginning of month: Materials $18,500 Labor 8,750 Factory overhead 4,850 $ 32,100 Costs incurred during month: Materials $93,500 Labor 42,450 Factory overhead 33,550 169,500 Total $201,600 Production Report Units In process, beginning of month 4,000 Finished and transferred during month 28,000 Work in process, end of month 10,000 Stage of completion 40% (a) Prepare a cost of production summary for the month. (b) Prepare the journal entries to record production for the month ANS: (a) Joan Company Cost of Production Summary For the Month Ended July 31, 20-- Cost of work in process, beginning of month: Materials $ 18,500 Labor 8,750 Factory overhead 4,850 $ 32,100 Cost of production for month: Materials $ 93,500 Labor 42,450 Factory overhead 33,550 169,500 Total costs to be accounted for $201,600 Unit output for month: Finished and transferred to finished goods during month 28,000 Equivalent units of work in process, end of month (10,000 units, one-half completed) 4,000 Total equivalent production 32,000 Unit cost for month: Materials [($18,500 + $93,500) / 32,000] $3.50 Labor [($8,750 + $42,450) / 32,000] 1.60 Factory overhead [($4,850 + $33,550) / 32,000] 1.20 Total $6.30 Inventory costs: Cost of goods finished and transferred to finished goods during month (28,000  $6.30) $176,400 Cost of work in process, end of month: Materials (10,000  .4  $3.50) $14,000 Labor (10,000  .4  $1.60) 6,400 Factory overhead (10,000  .4  $1.20) 4,800 25,200 Total production costs accounted for $201,600 (b) Work-in-process 93,500 Materials 93,500 To record requisition of materials Work-in-process 42,450 Payroll 42,450 To record distribution of labor Work-in-process 33,550 Factory overhead 33,550 To record application of factory overhead Finished goods 176,400 Work-in-process 176,400 To record the completion of goods Note to instructor: The difficulty of this problem can be reduced by eliminating requirement (b). PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. Asia, Inc., manufactures one product in two departments on a continuous basis and uses the average cost method of process cost accounting. The following information was reported for the month of August, 20--: Production Costs Cutting Department Assembly Department Work in process, beginning of month: Cost in Cutting Department $ 8,700 Materials $ 8,600 $ 585 Labor 4,200 1,600 Factory overhead 3,500 $ 16,300 1,000 3,185 Costs incurred during month: Materials $61,400 $ 5,595 Labor 26,425 12,820 Factory overhead 22,750 110,575 8,064 28,570 Total $126,875 In addition, the cost of production summary for the Assembly Department follows: Asia, Inc. Cost of Production Summary--Assembly Department For the Month Ended August 31, 20-- Cost of work in process, beginning of month: Cost in Cutting Department $ 8,700 Cost in Assembly Department: Materials $ 585 Labor 1,600 Factory overhead 1,000 3,185 $ 11,885 Cost of goods received from Cutting Department during month 116,000 Cost of production for month: Materials $ 5,595 Labor 12,820 Factory overhead 8,064 26,479 Total costs to be accounted for $154,364 Unit output for month: Finished and transferred to stockroom during month 8,000 Equivalent units of work in process, end of month (600 units, 40% completed) 240 Total equivalent production 8,240 Unit cost for month: Materials [($585 + $5,595) / 8,240] $ .75 Labor [($1,600 + $12,820) / 8,240] 1.75 Factory overhead [($1,000 + $8,064) / 8,240] 1.10 Total $ 3.60 Inventory costs: Cost of goods finished and transferred to stockroom during month: Cost in Cutting Dept. (8,000 x $14.50) $116,000 Cost in Assembly Dept. (8,000 x $ 3.60) 28,800 Total (8,000 x $18.10) $144,800 Cost of work in process, end of month: Cost in Cutting Dept. (600  $14.50) $ 8,700 Cost in Assembly Dept.: Materials (600  40%  $.75) $180 Labor (600  40%  $1.75) 420 Factory overhead (600  40%  $1.10) 264 864 9,564 Total production costs accounted for $154,364 Prepare the journal entries to record production. ANS: Work-in-process - Cutting Department 61,400 Work-in-process - Assembly Department 5,595 Materials 66,995 To record requisition of materials Work-in-process - Cutting Department 26,425 Work-in-process - Assembly Department 12,820 Payroll 39,245 To record distribution of labor Work-in-process - Cutting Department 22,750 Work-in-process - Assembly Department 8,064 Factory overhead 30,814 To record application of factory overhead Work-in-process - Assembly Department 116,000 Work-in-process - Cutting Department 116,000 To record transfer of production from Department A to Department B Finished goods 144,800 Work-in-process - Assembly Department 144,800 To record the completion of goods PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. Asia, Inc., manufactures one product in two departments on a continuous basis and uses the average cost method of process cost accounting. The following information was reported for the month of August, 20--: Production Costs Cutting Department Assembly Department Work in process, beginning of month: Cost in Cutting Department $ 8,700 Materials $ 8,600 $ 585 Labor 4,200 1,600 Factory overhead 3,500 $ 16,300 1,000 3,185 Costs incurred during month: Materials $61,400 $ 5,595 Labor 26,425 12,820 Factory overhead 22,750 110,575 8,064 28,570 Total $126,875 Production Report Cutting Department Assembly Department In process, beginning of month 1,100 600 Finished and transferred during month 8,000 8,000 Work in process, end of month 1,500 600 Stage of completion 50% 40% Prepare a cost of production summary for each department for the month. ANS: Asia, Inc. Cost of Production Summary--Cutting Department For the Month Ended August 31, 20-- Cost of work in process, beginning of month: Materials $ 8,600 Labor 4,200 Factory overhead 3,500 $ 16,300 Cost of production for month: Materials $61,400 Labor 26,425 Factory overhead 22,750 110,575 Total costs to be accounted for $126,875 Unit output for month: Finished and transferred to Assembly Department during month 8,000 Equivalent units of work in process, end of month (1,500 units, 50% completed) 750 Total equivalent production 8,750 Unit cost for month: Materials [($8,600 + $61,400)/ 8,750] $ 8.00 Labor [($4,200 + $26,425) / 8,750] 3.50 Factory overhead [($3,500 + $22,750) / 8,750] 3.00 Total $14.50 Inventory costs: Cost of goods finished and transferred to Assembly Department during month (8,000  $14.50) $116,000 Cost of work in process, end of month: Materials (1,500  50%  $8.00) $ 6,000 Labor (1,500  50%  $3.50) 2,625 Factory overhead (1,500  50%  $3.00) 2,250 10,875 Total production costs accounted for $126,875 Asia, Inc. Cost of Production Summary--Assembly Department For the Month Ended August 31, 20-- Cost of work in process, beginning of month: Cost in Cutting Department $ 8,700 Cost in Assembly Department: Materials $ 585 Labor 1,600 Factory overhead 1,000 3,185 $ 11,885 Cost of goods received from Cutting Department during month 116,000 Cost of production for month: Materials $ 5,595 Labor 12,820 Factory overhead 8,064 26,479 Total costs to be accounted for $154,364 Unit output for month: Finished and transferred to stockroom during month 8,000 Equivalent units of work in process, end of month (600 units, 40% completed) 240 Total equivalent production 8,240 Unit cost for month: Materials [($585 + $5,595) / 8,240] $ .75 Labor [($1,600 + $12,820) / 8,240] 1.75 Factory overhead [($1,000 + $8,064) / 8,240] 1.10 Total $3.60 Inventory costs: Cost of goods finished and transferred to stockroom during month: Cost in Cutting Dept. (8,000 x $14.50) $116,000 Cost in Assembly Dept. (8,000 x $ 3.60) 28,800 Total (8,000 x $18.10) $144,800 Cost of work in process, end of month: Cost in Cutting Dept. (600  $14.50) $ 8,700 Cost in Assembly Dept.: Materials (600  40%  $.75) $180 Labor (600  40%  $1.75) 420 Factory overhead (600  40%  $1.10) 264 864 9,564 Total production costs accounted for $154,364 Note to instructor: Difficulty could be modified by requiring the cost of production summary for one department only. PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Gordon Products manufactures one product in two departments on a continuous basis and uses the average cost method of process cost accounting. The following information was reported for the month of May, 20--: Production Costs Department A Department B Work in process, beginning of month: Cost in Department A $ 1,900 Materials $ 4,200 $ 1,900 Labor 3,500 1,600 Factory overhead 1,800 $ 9,500 750 4,250 Costs incurred during month: Materials $74,425 $60,225 Labor 56,625 51,650 Factory overhead 35,200 166,250 17,000 128,875 Total $175,750 Production Report Department A Department B In process, beginning of month 1,600 200 Finished and transferred during month 18,000 17,000 Work in process, end of month 1,000 1,200 Stage of completion 50% 60% a) Prepare a cost of production summary for Department A for the month. b) Prepare a cost of production summary for Department B for the month. c) Prepare the journal entries to record production. ANS: (a) Gordon Products Cost of Production Summary--Department A For the Month Ended May 31, 20-- Cost of work in process, beginning of month: Materials $ 4,200 Labor 3,500 Factory overhead 1,800 $ 9,500 Cost of production for month: Materials $74,425 Labor 56,625 Factory overhead 35,200 166,250 Total costs to be accounted for $175,750 Unit output for month: Finished and transferred to Department B during month 18,000 Equivalent units of work in process, end of month (1,000 units, 50% completed) 500 Total equivalent production 18,500 Unit cost for month: Materials [($4,200 + $74,425) / 18,500] $4.25 Labor [($3,500 + $56,625) / 18,500] 3.25 Factory overhead [($1,800 + $35,200) / 18,500] 2.00 Total $9.50 Inventory costs: Cost of goods finished and transferred to Department B during month: (18,000  $9.50) $171,000 Cost of work in process, end of month: Materials (1,000  .5  $4.25) $ 2,125 Labor (1,000  .5  $3.25) 1,625 Factory overhead (1,000  .5  $2.00) 1,000 4,750 Total production costs accounted for $175,750 (b) Gordon Products Cost of Production Summary--Department B For the Month Ended May 31, 20-- Cost of work in process, beginning of month: Cost in Dept. A $ 1,900 Cost in Dept. B: Materials $1,900 Labor 1,600 Factory overhead 750 4,250 $ 6,150 Cost of goods received from Dept A. during month 171,000 Cost of production for month: Materials $60,225 Labor 51,650 Factory overhead 17,000 128,875 Total costs to be accounted for $306,025 Unit output for month: Finished and transferred to stockroom during month 17,000 Equivalent units of work in process, end 720 of month (1,200 units, 60% completed) Total equivalent production 17,720 Unit cost for month: Materials [($1,900 + $60,225) / 17,720] $3.51 Labor [($1,600 + $51,650) / 17,720] 3.01 Factory overhead [($750 + $17,000) / 17,720] 1.00 Total $7.52 Inventory costs: Cost of goods finished and transferred to stockroom during month: Cost in Dept. A (17,000  $9.50) $161,500 Cost in Dept. B (17,000  7.52) 127,840 Total (17,000  $17.02) $289,340 Cost of work in process, end of month: Cost in Dept. A (1,200  $9.50) $ 11,400 Cost in Dept. B: Materials (1,200  60%  $3.51) $2,527 Labor (1,200  60%  $3.01) 2,167 Factory overhead (1,200  60%  $1.00) 720 5,414 16,814 Total production costs accounted for $306,154* * Rounding Difference (c) Work-in-process - Department A 74,425 Work-in-process - Department B 60,225 Materials 134,650 To record requisition of materials Work-in-process - Department A 56,625 Work-in-process - Department B 51,650 Payroll 108,275 To record distribution of labor Work-in-process - Department A 35,200 Work-in-process - Department B 17,000 Factory overhead 52,200 To record application of factory overhead Work-in-process - Department A 171,000 Work-in-process - Department B 171,000 To record transfer of production from Department A to Department B Finished goods 289,340 Work-in-process - Department B 289,340 To record the completion of goods PTS: 1 DIF: Hard REF: P. OBJ: 7 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. Howard Corporation has two production departments. Curing has 12,000 units in process at the beginning of the period, 3 / 4 complete. During the period, 45,000 units were received from Crushing, 48,000 units were transferred to Finished Goods, and 9,000 units were in process at the end of the period, 2/ 3 complete. Cost information was as follows: Cost of beginning Work in Process: Cost in Crushing $ 21,640 Cost in Curing: Materials 8,810 Labor 1,190 Factory overhead 2,420 Costs during the month: Cost of goods received from Crushing $ 85,520 Cost in Curing: Materials 53,830 Labor 10,690 Factory overhead 17,560 Total costs to be accounted for $201,660 a. Determine the unit cost for the month in Curing. b. Determine the total cost of the products transferred to Finished Goods. c. Determine the total cost of the ending Work in Process inventory. ANS: a. Unit output for month: Finished and transferred to Finished Goods 48,000 Equivalent units of production of Work in Process (9,000 units x 2 / 3 completed) 6,000 Total equivalent production 54,000 Unit cost per month: Cost from Crushing Department Beginning inventory (12,000 units) $ 21,640 Transferred in this month (45,000 units) 85,520 Average cost per unit (57,000 units) 107,160 $1.88 Cost in Curing: Materials {(8,810 + 53,830) / 54,000] $1.16 Labor [(1,190 + 10,690) / 54,000] .22 Factory overhead [(2,420 + 17,560) / 54,000] .37 $1.75 b. Cost of goods transferred to Finished Goods: Cost in Crushing (48,000 x 1.88) $ 90,240 Cost in Curing (48,000 x 1.75) 84,000 Total finished and transferred to Finished Goods $174,240 c. Cost of Work in Process, end of month: Cost in Crushing (9,000 x $1.88) $ 16,920 Materials (9,000 x 2 / 3 x $1.16) 6,960 Labor (9,000 x 2 / 3 x $.22) 1,320 Factory overhead (9,000 x 2 / 3 x .37) 2,220 Total costs in Work in Process, end of month 27,420 Total production costs accounted for $201,660 PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic CHAPTER 6—PROCESS COST ACCOUNTING--ADDITIONAL PROCEDURES MULTIPLE CHOICE 1. The following information is available for the month of April from the First department of the Armque Corporation: Units Work in process, April 1 (50% complete) 90,000 Started in April 250,000 Transferred to Second Department in April 280,000 Work in process, April 30 (40% complete) 60,000 Materials are added in the beginning of the process in the First department. Using the average cost method, what are the equivalent units of production for the month of April? Materials Conversion a. 310,000 250,000 b. 250,000 295,000 c. 340,000 316,000 d. 340,000 304,000 ANS: D Equivalent production: Materials: Finished and transferred during month 280,000 Equivalent units of work in process, end of month (60,000 units, 40% completed, all materials) 60,000 Total 340,000 Labor and factory overhead: Finished and transferred during April 280,000 Work in process, end of April (70,000 units, 40% completed) 24,000 Total 304,000 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. The following information is available for the month of August from the First department of the Twigg Corporation: Units Work in process, August 1 (60% complete) 50,000 Started in August 190,000 Work in process, August 30 (40% complete) 80,000 Materials are added in the beginning of the process in the First department. Using the average cost method, what are the equivalent units of production for the month of August? Materials Conversion a. 192,000 240,000 b. 190,000 192,000 c. 240,000 208,000 d. 240,000 192,000 ANS: D Work in process, August 1 50,000 Started in August 190,000 Total processed during August 240,000 Work in process, August 30 80,000 Finished and transferred during August 160,000 Equivalent production: Materials: Finished and transferred during month 160,000 Equivalent units of work in process, end of month (80,000 units, 40% completed, all materials) 80,000 Total 240,000 Labor and factory overhead: Finished and transferred during August 160,000 Work in process, end of August (80,000 units, 40% completed) 32,000 Total 192,000 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. Information concerning Department A of Ali Company for the month of June is as follows: Units Materials Costs Work in process, beginning of month 20,000 $14,550 Started in June 85,000 $66,300 Units completed 90,000 Work in process, end of month 15,000 All materials are added at the beginning of the process. Using the average cost method, the cost (rounded to two places) per equivalent unit for materials for June is: a. $0.74. b. $0.90. c. $0.77. d. $0.78. ANS: C Units completed during June 90,000 Units in process, June 30 with all materials 15,000 Equivalent production for materials 105,000 Materials cost: Work in process, beginning of June $14,550 Added during June 66,300 Total materials cost $80,850 $80,850 / 105,000 units = cost per equivalent unit $ .77 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 4. Plemmon Company adds materials at the beginning of the process in the forming department, which is the first of two stages of its production cycle. Information concerning the materials used in the forming department in April follows: Units Materials Costs Work in process at April 1 15,000 $ 8,000 Units started during April 60,000 $38,500 Units completed and transferred to next department during April 65,000 Using the average cost method, what is the materials cost of the work in process at April 30 (rounded to nearest dollar)? a. $7,154 b. $6,200 c. $7,750 d. $6,417 ANS: B Units Beginning work in process 15,000 Started 60,000 Total 75,000 Less completed 65,000 Ending work in process (complete as to material) 10,000 Unit cost (See calculation below) $ .62 Materials cost in ending work in process $ 6,200 Units completed during April 65,000 Units in process, April 30 with all materials 10,000 Equivalent production for materials 75,000 Materials cost: Work in process, April 1 $ 8,000 Costs added during April 38,500 Total materials cost for period $46,500 $38,500 / 60,000 units = cost per equivalent unit $ .62 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. The following information is available for the month of April from the First department of the Armque Corporation: Units Work in process, April 1 (50% complete) 90,000 Started in April 250,000 Transferred to Second Department in April 280,000 Work in process, April 30 (40% complete) 60,000 Materials are added at the end of the process in the First department. Using the average cost method, what are the equivalent units of production for the month of April? Materials Conversion a. 304,000 250,000 b. 280,000 295,000 c. 340,000 316,000 d. 280,000 304,000 ANS: D Equivalent production: Materials: Finished and transferred during month 280,000 Equivalent units of work in process, end of month (60,000 units, 40% completed, no materials) 0 Total 280,000 Labor and factory overhead: Finished and transferred during April 280,000 Work in process, end of April (70,000 units, 40% completed) 24,000 Total 304,000 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. The following information is available for the month of August from the First department of the Twigg Corporation: Units Work in process, August 1 (60% complete) 50,000 Started in August 190,000 Work in process, August 30 (40% complete) 80,000 Materials are added at the end of the process in the First department. Using the average cost method, what are the equivalent units of production for the month of August? Materials Conversion a. 192,000 160,000 b. 160,000 192,000 c. 160,000 208,000 d. 240,000 192,000 ANS: B Work in process, August 1 50,000 Started in August 190,000 Total processed during August 240,000 Work in process, August 30 80,000 Finished and transferred during August 160,000 Equivalent production: Materials: Finished and transferred during month 160,000 Equivalent units of work in process, end of month (80,000 units, 40% completed, no materials) 0 Total 160,000 Labor and factory overhead: Finished and transferred during August 160,000 Work in process, end of August (80,000 units, 40% completed) 32,000 Total 192,000 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. During June, Birch Bay Company's Department B equivalent unit product costs computed under the average cost method were as follows: Materials $2 Conversion $3 Transferred-in $5 Materials are introduced at the end of the process in Department B. There were 4,000 units (60 % complete as to conversion costs) in work in process at June 30. The total costs assigned to the June 30 work in process inventory should be: a. $20,000. b. $24,800. c. $27,200. d. $35,200. ANS: C Transferred-in costs: 4,000 units @ $5 $20,000 Conversion costs: 4,000 units (60% complete) @ $3 7,200 $27,200 Because materials are introduced at the end of the process, no materials cost would be included in the ending work in process. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. Van Pelt Company uses the average cost method of process costing. The production report for the Mixing department follows: In process, beginning of period 1,000 units 800 units - materials 50% complete; conversion costs 40% complete 200 units - materials 25% complete; conversion costs 15% complete Placed in process during period 5,000 units Transferred to packing department 4,800 units In process, end of period 1,200 units 700 units - materials 75% complete; conversion costs 50% complete 500 units - materials 25% complete; conversion costs 20% complete What are the equivalent units for: Materials Conversion Costs a. 5,650 5,450 b. 5,450 5,250 c. 4,850 4,400 d. 5,400 5,220 ANS: B Material Conversion Costs Completed and transferred to packing department 4,800 4,800 Ending work-in-process: 700 x 75% - Material 700 x 50% - Conversion costs 525 350 500 x 25% - Material 500 x 20% - Conversion costs 125 100 5,450 5,250 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Normal losses that occur in the manufacturing process are properly classified as: a. Extraordinary items. b. Product costs. c. Period costs. d. Deferred charges. ANS: B Normal losses are properly classified as product costs and considered as part of the total cost of production. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. Stanley Company adds materials at the beginning of the process in Department M. Data concerning the materials used in the March production follows: Units Work in process at March 1 15,000 Started during March 38,000 Completed and transferred to next department during March 37,000 Normal spoilage incurred 2,000 Work in process at March 31 14,000 Using the average cost method, the equivalent units for the materials unit cost calculation are: a. 38,000. b. 51,000. c. 55,000. d. 37,000. ANS: B Units completed and transferred 37,000 Ending work in process with all materials 14,000 51,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. Materials are added at the start of the process in McKay Company's blending department, the first stage of the production cycle. The following information is available for the month of July: Units Work in process, July 1 (60% complete as to conversion costs) 50,000 Started in July 200,000 Transferred to the next department 195,000 Lost in production 15,000 Work in process, July 31 (50% complete as to conversion costs) 40,000 Under McKay's cost accounting system, the costs incurred on the lost units are absorbed by the remaining good units. Using the average cost method, what are the equivalent units for the materials unit cost calculation? a. 210,000 b. 195,000 c. 250,000 d. 235,000 ANS: D Units completed and transferred 195,000 Ending work in process with all materials 40,000 235,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 12. In a process cost system, the cost attributable to abnormal losses that occur due to unexpected circumstances such as machine operator error should be assigned to: a. Ending work in process inventory. b. Cost of goods manufactured and ending work in process inventory in the ratio of units worked on during the period to units remaining in work in process inventory. c. A separate loss account in order to highlight production inefficiencies d. Cost of good manufactured (transferred out) ANS: C Losses from abnormal spoilage should be assigned to a separate account. These should be treated as a period cost. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 13. If the amount of loss in a manufacturing process is abnormal, it should be classified as a: a. Period cost. b. Deferred charge. c. Joint cost. d. Product cost. ANS: A Abnormal loss should be classified as a period cost (charged to expense of the current period and reflected separately on the income statement). PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Analytic 14. What losses should not affect the recorded cost of inventories? a. Normal losses b. Abnormal losses c. Seasonal losses d. Standard losses ANS: B Abnormal losses should not affect the recorded cost of inventories because they are charged off as a period cost rather than being included in the cost of manufactured goods. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 15. In a process cost system, how is the unit cost affected in a production cost report when materials are added in a department subsequent to the first department and the added materials result in additional units? a. It causes an increase in the preceding department's unit cost that necessitates an adjustment of the transferred-in unit cost. b. It causes a decrease in the preceding department's unit cost that necessitates an adjustment of the transferred-in unit cost. c. It causes an increase in the preceding department's unit cost but does not necessitate an adjustment of the transferred-in unit cost. d. It causes a decrease in the preceding department's unit cost but does not necessitate an adjustment of the transferred-in unit cost. ANS: B If added materials result in additional units, it causes a decrease in the preceding department's unit cost and necessitates an adjustment of the transferred-in cost because there are more units over which to spread this cost. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 16. Boyce Company manufactures chemicals. Chemical agent ABX is refined in the Refining department and, after it is transferred to the Mixing department, a reactive agent is added to it. In May, 25,000 gallons of ABX having a cost of $100,000 were transferred from the refining to the Mixing department where 15,000 gallons of the reactive agent were added. When calculating the inventory costs in the Mixing department, what will the cost per unit relating to gallons transferred in from the Refining department be? a. $4.00 b. $2.50 c. $3.75 d. $6.67 ANS: B Gallons transferred in from the Refining Department 25,000 Additional gallons of reactive agent added in Mixing 15,000 Total gallons 40,000 Cost of ABX - $100,000 / 40,000 gallons = $2.50 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 17. In order to compute equivalent units of production using the FIFO method of process costing, work for the period must be broken down to units: a. Completed from beginning inventory, started and completed during the month, and units in ending inventory. b. Completed during the period and units in ending inventory. c. Started during the period and units transferred out during the period. d. Processed during the period and units completed during the period. ANS: A In computing equivalent production under the FIFO method, work for the period must be broken down to units completed from beginning inventory, units started and completed during the month, and units in ending inventory. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 18. Material is added at the beginning of a process in a process costing system. The beginning work in process inventory for this process this period was 30 percent complete as to conversion costs. Using the first-in, first-out method of costing, the total equivalent units for material for this process during this period are equal to the: a. Units started this period in this process. b. Beginning inventory this period for this process. c. Units started this period in this process plus the beginning inventory. d. Units started this period in this process plus 70 percent of the beginning inventory. ANS: A With the FIFO method of costing, equivalent units for materials would be the units started in process this period because the beginning work in process would have been complete as to materials. The proof follows: Beginning work in process, 20% completed 5,000 Units started 25,000 30,000 Units transferred out 22,000 Ending work in process 8,000 Beginning work in process 5,000 Units started and completed (25,000 started less 8,000 remaining in ending work in process 17,000 Ending work in process 8,000 Equivalent units of material: Needed to complete beginning work in process 0 Started and completed (17,000 x 100%) 17,000 Ending work in process (8,000 x 100%) 8,000 Equivalent units of material 25,000 . PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 19. Under which of the following conditions will the first-in, first-out method of process costing produce the same cost of goods manufactured amount as the average cost method? a. When goods produced are homogeneous in nature b. When there is no beginning inventory c. When there is no ending inventory d. When beginning and ending inventories are each 50 percent complete ANS: B When there is no beginning inventory, the FIFO method and the average cost method will both produce the same cost of goods manufactured amount because equivalent production and unit costs will be the same. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 20. The average cost method of process costing differs from the FIFO method of process costing in that the average cost method: a. Requires that ending work in process inventory be stated in terms of equivalent units of production. b. Can be used under any cost-flow assumption. c. Does not consider the degree of completion of beginning work in process inventory when computing equivalent units of production. d. Considers the ending work in process inventory only partially complete. ANS: C The average cost method of process costing does not consider the degree of completion of beginning work in process inventory when computing equivalent units of production, while the FIFO method does. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 21. Regina Manufacturing uses the FIFO method of process costing. The production report for the Curing Department, where the materials are added at the beginning of the period, for September was as follows: In process, beginning of the period 3,000 units Stage of completion 30 % Transferred to stockroom during period 12,000 units In process, end of the period 6,000 units Stage of completion 40 % The number of units started and completed during the period was: a. 12,000 b. 9,000 c. 15,000 d. 6,000 ANS: B Units finished during the period 12,000 Less units in process at beginning of period 3,000 Units started and completed during period 9,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 22. Regina Manufacturing uses the FIFO method of process costing. The production report for the Curing Department, where the materials are added at the beginning of the period, for September was as follows: In process, beginning of the period 3,000 units Stage of completion 30 % Transferred to stockroom during period 12,000 units In process, end of the period 6,000 units Stage of completion 40 % The number of equivalent units for conversion costs during the period was: a. 13,500 b. 16,500 c. 12,300 d. 14,700 ANS: A Units finished during the period 12,000 Less units in process at beginning of period 3,000 Units started and completed during period 9,000 Needed to finish beginning work in process (3,000 x 70%) 2,100 Started and completed during period 9,000 Ending work in process (6,000 x 40%) 2,400 Equivalent units for conversion costs 13,500 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 23. The following information is available for the month of April from the First department of the Armque Corporation: Units Work in process, April 1 (50% complete) 90,000 Started in April 250,000 Transferred to Second Department in April 280,000 Work in process, April 30 (40% complete) 60,000 Materials are added in the beginning of the process in the First department. Using the first-in, first-out method, what are the equivalent units of production for the month of April? Materials Conversion a. 250,000 259,000 b. 340,000 259,000 c. 280,000 271,000 d. 250,000 271,000 ANS: A Equivalent production: Materials: To complete beginning units in process (materials were 100% complete) 0 Units started and finished during the month (250,000 started - 60,000 in ending WIP) 190,000 Equivalent units of work in process, end of month (60,000 units, 40% completed, all materials) 60,000 Total 250,000 Labor and factory overhead: To complete beginning units in process (conversion costs were 50% complete) 45,000 Units started and finished during the month (250,000 started - 60,000 in ending WIP) 190,000 Work in process, end of April (70,000 units, 40% completed) 24,000 Total 259,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 24. Information concerning Department A of Ali Company for the month of June is as follows: Units Materials Costs Work in process, beginning of month 20,000 $14,550 Started in June 85,000 $66,300 Units completed 90,000 Work in process, end of month 15,000 All materials are added at the beginning of the process. Using the first-in, first-out method, the cost (rounded to two places) per equivalent unit for materials for June is: a. $0.63. b. $0.90. c. $0.77. d. $0.78. ANS: D To complete beginning units in process (all had 100% of materials) 0 Units started and completed during the month (85,000 started - 15,000 in ending WIP) 70,000 Units in process, June 30 with all materials 15,000 Equivalent production for materials in period 85,000 Materials cost: Added during June $66,300 Total materials cost for period $66,300 $66,300 / 85,000 units = cost per equivalent unit $ .78 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. Plemmon Company adds materials at the beginning of the process in the forming department, which is the first of two stages of its production cycle. Information concerning the materials used in the forming department in April follows: Units Materials Costs Work in process at April 1 15,000 $ 8,000 Units started during April 60,000 $38,500 Units completed and transferred to next department during April 65,000 Using the FIFO method, what is the materials cost of the work in process at April 30 (rounded to nearest dollar)? a. $7,154 b. $6,200 c. $7,750 d. $6,417 ANS: D Units Beginning work in process 15,000 Started 60,000 Total 75,000 Less completed 65,000 Ending work in process (complete as to material) 10,000 Unit cost (See calculation below) $ .6417 Materials cost in ending work in process $ 6,417 To complete beginning in process units (materials all 100%) 0 Units started and finished during month (60,000 started - 10,000 in ending WIP) 50,000 Units in process, April 30 with all materials 10,000 Equivalent production for materials 60,000 Materials cost: Costs added during June $38,500 Total materials cost for period $38,500 $38,500 / 60,000 units = cost per equivalent unit $ .6417 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. The following information is available for the month of April from the First department of the Armque Corporation: Units Work in process, April 1 (50% complete) 90,000 Started in April 250,000 Transferred to Second Department in April 280,000 Work in process, April 30 (40% complete) 60,000 Materials are added at the end of the process in the First department. Using the first-in, first-out method, what are the equivalent units of production for the month of April? Materials Conversion a. 250,000 259,000 b. 280,000 259,000 c. 340,000 271,000 d. 280,000 271,000 ANS: B Equivalent production: Materials: To complete beginning units in process (materials were 0% complete) 90,000 Units started and finished during the month (250,000 started - 60,000 in ending WIP) 190,000 Equivalent units of work in process, end of month (60,000 units, 40% completed, no materials) 0 Total 280,000 Labor and factory overhead: To complete beginning units in process (conversion costs were 50% complete) 45,000 Units started and finished during the month (250,000 started - 60,000 in ending WIP) 190,000 Work in process, end of April (70,000 units, 40% completed) 24,000 Total 259,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. During June, Birch Bay Company's Department B equivalent unit product costs computed under the FIFO method were as follows: Materials $2 Conversion $3 Transferred-in $5 Materials are introduced at the end of the process in Department B. There were 4,000 units (60 % complete as to conversion costs) in work in process at June 30. The total costs assigned to the June 30 work in process inventory should be: a. $20,000. b. $24,800. c. $27,200. d. $35,200. ANS: C Transferred-in costs: 4,000 units @ $5 $20,000 Conversion costs: 4,000 units (60% complete) @ $3 7,200 $27,200 Because materials are introduced at the end of the process, no materials cost would be included in the ending work in process. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 28. When two products are produced during a common process, what is the factor that determines whether the products are joint products or one principal product and a by-product? a. Potential marketability for each product b. Amount of work expended in the production of each product c. Management policy d. Relative total sales value ANS: D The relative total sales value is the determining factor in deciding whether a product is a joint product or a by-product. Products with relatively little value are by-products. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 29. If two or more products share a common process before they are separated, the joint costs should be allocated in a manner that: a. Assigns a proportionate amount of the total cost to each product by means of a quantitative basis. b. Maximizes total earnings. c. Minimizes variations in a unit of production cost. d. Does not introduce an element of estimation into the process of accumulating costs for each product. ANS: A An allocation method is usually selected that will assign a portion of a given total cost to each of the products that are sharing a physical part of the total item. A quantitative method is chosen that will least affect the gross profit percentage differences among these products. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 30. Each of the following is a method by which to allocate joint costs except: a. Chemical or engineering analysis. b. Relative sales value. c. Relative weight, volume, or linear measure. d. Relative marketing costs. ANS: D Joint costs would not be allocated according to relative marketing costs because marketing costs are not necessarily incurred directly in proportion to production costs. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 31. Joint costs are commonly allocated based upon relative: a. Sales value. b. Marketing costs. c. Conversion costs. d. Prime costs. ANS: A Joint costs are commonly allocated based upon relative sales value. Profitability, conversion costs, and prime costs do not necessarily have a direct relationship to production costs. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 32. Budde Chemicals produces two industrial chemical compounds, X15 and Z24, from the same process, which last year, cost $300,000. Budde produced 15,000 gallons of X15, which sells for $40 per gallon and 45,000 gallons of Z24, which sells for $20 per gallon. Using the relative sales method, how much of the joint cost should be allocated to X15? a. $100,000 b. $200,000 c. $60,000 d. $75,000 ANS: A Product Gallons Selling price Ultimate sales value Percent sales value Assignment of joint costs X15 15,000 $40 $ 400,000 33.3% $100,000 Z24 45,000 $20 800,000 66.7% 200,000 $1,200,000 $300,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 33. If a company produces two products, A and B, from a joint process, and B requires additional processing after the split-off in order to be salable, how is the joint cost allocated to B determined? a. The costs of the additional processing are ignored in allocating joint costs. b. The costs of the additional processing are subtracted from the joint costs allocated to B. c. The relative sales value used to allocate the joint cost are determined after the costs of further processing are subtracted from the ultimate sales value of B. d. None of these are correct. ANS: C The relative sales value used to determine joint costs is determined by subtracting the costs of further processing from the ultimate sales value of B. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 34. Budde Chemicals produces two industrial chemical compounds, X15 and Z24, from the same process, which last year, cost $300,000. Budde produced 15,000 gallons of X15, which sells for $40 per gallon and 45,000 gallons of Z24, which sells for $20 per gallon. After the split-off point, X15 required additional processing costing $200,000 to make it salable. Using the adjusted sales method, how much of the joint cost should be allocated to X15? a. $100,000 b. $240,000 c. $60,000 d. $75,000 ANS: C Product Gallons Selling price Ultimate sales value Costs after split-off Sales value at split-off Percent sales value Assignment of joint costs X15 10,000 $40 $400,000 $200,000 $ 200,000 20% $ 60,000 Z24 40,000 $20 800,000 0 800,000 80% 240,000 $1,200,000 $200,000 $1,000,000 $300,000 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 35. Budde Chemicals produces two industrial chemical compounds, X15 and Z24, from the same process, which last year, cost $300,000. Budde produced 15,000 gallons of X15, which sells for $40 per gallon and 45,000 gallons of Z24, which sells for $20 per gallon. Using the physical units method, how much of the joint cost should be allocated to X15? a. $100,000 b. $225,000 c. $60,000 d. $75,000 ANS: D Product Selling price Gallons Percentage of total gallons Assignment of joint costs X15 $40 15,000 25% $ 75,000 Z24 $20 45,000 75% 225,000 60,000 $300,000 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 36. Which of the following statements best describes a by-product? a. A product with a value that can easily and accurately be determined. b. A product that has a greater value than the main product. c. A product created along with the main product whose sales value does not cover the cost of its production. d. A product that usually produces a small amount of revenue when compared to the main product revenue. ANS: D A by-product is a product that usually produces a small amount of revenue when compared to the main product revenue. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 37. Which of the following is most likely to be accounted for as a by-product? a. Heating oil resulting from processing crude oil at a refinery. b. Cream resulting from processing raw milk at a dairy. c. Sawdust resulting from processing lumber at a lumber mill. d. Ground beef resulting from processing beef at a meat packer. ANS: C Of the choices above, it is most likely that sawdust would have very little sales value compared to the lumber being processed. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 38. Which of the following is not an acceptable method for accounting for by-products in a joint manufacturing process? a. Costs before the split-off point are allocated to by-products. b. The estimated sales value of the by-product reduces the cost of the main product. c. The joint costs allocated to by-products are included in an account called “By-products Inventory.” d. In some instances, the revenue from selling by-products may be treated as “other income” on the income statement. ANS: A Joint costs are not allocated to by-products. When accounting for by-products, the estimated sales value of the by-product reduces the cost of the main product, and is recorded to an account called “Byproducts Inventory.” Alternatively, if the sales value is not easily estimated, the sales may be recorded as “Other Income.” PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective 39. Thomas Lumber Company produces furniture grade lumber and building grade lumber from a joint process. Sawdust, a by-product of the manufacturing process is sold to a local toy manufacturer to stuff leather toys for $10 per ton. In February, the company produced 3,000 tons of sawdust. What is the entry to reduce the cost of the main products by the estimated sales value of the by-product? a. By-product inventory $30,000 Work in process $30,000 b. Work in process $30,000 Other income $30,000 c. Cost of goods sold $30,000 By-product inventory $30,000 d. By-product inventory $30,000 Gain or loss on sale of by-product $30,000 ANS: A If the sales value of the by-product can be estimated, the entry made at the point of separation to set up the by-product inventory and reduce the joint cost of the main products is: By-product inventory $30,000 Work in process $30,000 If the value is not readily estimated, an entry is made at the time of the sale, and is usually treated as other income or a reduction in the cost of the main products. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic PROBLEM 1. Information for Tyson Company in May for Department One, the first stage of the production cycle, is as follows: Materials Conversion Costs Beginning work in process $ 7,500 $ 6,000 Costs added during May 28,500 16,050 Total costs $36,000 $22,050 Goods completed 9,000 units Ending work in process 1,000 units Material costs are added at the beginning of the process. The ending work in process is 80 percent complete as to conversion costs. How would the total costs accounted for be distributed using the average cost method? ANS: Materials Labor Equivalent units: Goods completed 9,000 9,000 Ending in process: Material (1,000 x 100% complete) 1,000 Conversion costs (1,000 x 80% complete) ______ 800 10,000 9,800 Material costs ($36,000 / 10,000 units) $3.60 unit cost Conversion costs ($22,050 / 9,800 units) 2.25 unit cost Total $5.85 unit cost Cost of units completed (9,000 units  $5.85) $52,650 Ending work in process: Materials (1,000 units  $3.60) $3,600 Conversion costs (1,000 units  80%  $2.25) 1,800 5,400 Total costs accounted for $58,050 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. Highlander Corporation is a manufacturer that uses the average cost method to account for costs of production. Highlander manufactures a product that is produced in three separate departments: molding, assembling, and finishing. The following information was obtained for the assembling department for the month of June: Work in process, June 1: 4,000 units composed of the following: Amount Percent of Completion Transferred in from the molding department $60,000 100% Costs added by the assembling department: Direct materials $ 0 0% Direct labor 12,300 60% Factory overhead applied 4,700 50% $17,000 Work in process, June 1 $77,000 The following activity occurred during the month of June: (1) 20,000 units were transferred in from the molding department at a cost of $300,000. (2) Costs were added by the assembling department as follows: Direct materials $ 93,600 Direct labor 43,200 Factory overhead 19,420 $156,220 (3) Materials are added at the end of the process. (4) 18,000 units were completed and transferred to the finishing department. At June 30, 6,000 units were still in process. The degree of completion of work in process at June 30 follows: Direct labor 70% Factory overhead applied 35% Prepare in good form a cost of production report for the assembling department for the month of June. Show supporting computations in good form. The report should include: a. Equivalent units of production. b. Total manufacturing costs. c. Cost per equivalent unit. d. Dollar amount of ending work in process. e. Dollar amount of inventory cost transferred out. ANS: Highlander Corporation Cost of Production Summary--Assembling Department For the Month Ended June 30, 20-- Cost of work in process, beginning of month: Cost in molding dept. $60,000 Cost in assembling dept.: Labor $12,300 Factory overhead 4,700 17,000 $ 77,000 Cost of goods received from molding dept. during month 300,000 Cost of production for month: Materials $93,600 Labor 43,200 Factory overhead 19,420 156,220 Total costs to be accounted for $533,220 Unit output for month: Materials: Finished and transferred to finishing dept. during month 18,000 Equivalent units of work in process, end of month (6,000 units, 0% completed) 0 Total equivalent production 18,000 Labor: Finished and transferred to finishing dept. 18,000 during month Equivalent units of work in process, end of month (6,000 units, 70% completed) 4,200 Total equivalent production 22,200 Factory overhead: Finished and transferred to finishing dept. during month 18,000 Equivalent units of work in process, end of month (6,000 units, 35% completed) 2,100 20,100 Unit cost for month: Materials [($0 + $93,600) / 18,000] $ 5.20 Labor [($12,300 + $43,200) / 22,200] 2.50 Factory overhead [($4,700 + 19,420) / 20,100] 1.20 Total $8.90 Inventory costs: Cost of goods finished and transferred to finishing dept. during month: Cost in molding dept. (18,000  $15.00*) $270,000 Cost in assembling dept. (18,000  $8.90) 160,200 $430,200 Cost of work in process, end of month: Cost in molding dept. (6,000  $15.00) $90,000 Cost in assembling dept. Materials (6,000  0%  $4.00) $ -0- Labor (6,000  70%  $2.50) 10,500 Factory overhead (6,000  35% x $1.20) 2,520 13,020 103,020 Total production cost accounted for $533,220 * Costs from Molding department ($60,000 + $300,000) /24,000 = $15.00 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. Logan, Inc., had 9,000 units of work in process in Department M on March 1 that were 50 percent complete as to conversion costs. Materials are introduced at the beginning of the process. During March, 18,000 units were started, 20,000 units were completed, and there were 1,000 units of normal losses. Logan had 6,000 units of work in process at March 31 that were 60 percent complete as to conversion costs. Under Logan's cost accounting system, lost units reduce the number of units over which total cost can be spread. Using the average cost method, what were the equivalent units for March for conversion costs? ANS: Unit output--Conversion costs: Transferred out 20,000 Ending work in process (6,000 units  60%) 3,600 Equivalent production for conversion costs 23,600 PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 4. Kyle, Inc., instituted a new process in October. During October, 18,000 units were started in Department A. Of the units started, 2,000 were lost in the process, 12,000 were transferred to Department B, and 4,000 remained in work in process at October 31. The work in process at October 31 was 100 percent complete as to material costs and 15% complete as to conversion costs. Material costs of $78,400 and conversion costs of $52,920 were charged to Department A in October. What were the total costs transferred to Department B and assigned to ending work in process using the average cost method? ANS: Cost of production for month: Materials $ 78,400 Conversion costs 52,920 Total costs to be accounted for $131,320 Unit output for month: Materials: Finished and transferred to Department B 12,000 Equivalent units of work in process, end of month (all materials) 4,000 Total equivalent production 16,000 Conversion costs: Finished and transferred to Department B 12,000 Equivalent units of work in process, end of month (4,000 units, 15% completed) 600 Total equivalent production 12,600 Unit cost for month: Materials ($78,400 / 16,000) $ 4.90 Conversion costs ($52,920 / 12,600) 4.20 Total $ 9.10 Inventory costs: Cost of goods transferred to Department B (12,000  $9.10) $109,200 Ending work in process: Material (4,000 x 4.90) 19,600 Labor (600 x 4.20) 2,520 Total ending work in process inventory 22,120 Total production costs accounted for $131,320 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. The Roberto Company had computed the flow of units for Department A for the month of May as follows: Work in process, May 1: 10,000 Started into production during May 39,000 Units to be accounted for 49,000 Beginning work in process Added during the current month Materials $20,800 $ 97,500 Labor 5,200 34,920 Factory overhead 4,800 32,980 Total $30,800 $165,400 Materials are added at the beginning of the process. There were 8,000 units of work in process at May 31. The work in process at May 1 was 70 percent complete as to conversion costs and the work in process at May 31 was 60 percent complete as to conversion costs. What was the cost of the goods transferred out and in ending work in process using the FIFO method? ANS: Unit output for the month: Materials Conversion Costs To complete beginning work in process: Materials needed -0- 30%  10,000 units 3,000 Started and finished during month: All costs added 31,000 31,000 Ending work in process: All materials added 8,000 60%  8,000 4,800 Total 39,000 38,800 Unit costs for month: Materials $97,500 / 39,000 $2.50 Labor $34,920 / 38,800 .90 Factory overhead $32,980 / 38,800 .85 Total $4.25 Inventory Costs: Cost of goods finished and transferred out during month: Beginning units in process: Prior month’s cost $30,800 Current cost to complete: Materials (already complete) 0 Labor (10,000 x 30% x $.90) 2,700 Factory overhead (10,000 x 30% x $.85) 2,550 $ 36,050 Units started and completed during month (31,000 x $4.25) 131,750 Total cost transferred $167,800 Cost of work in process, end of month: Materials (8,000 x $2.50) $20,000 Labor (8,000 x 60% x $.90) 4,320 Factory overhead (8,000 x 60% x $.85) 4,080 28,400 Total production costs accounted for $196,200 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. The Roberto Company had computed the flow of units for Department A for the month of May as follows: Work in process, May 1: 10,000 Started into production during May 39,000 Units to be accounted for 49,000 Beginning work in process Added during the current month Materials $ -0- $235,750 Labor 12,660 166,320 Factory overhead 11,310 150,480 Total $23,970 $552,550 Materials are added at the end of the process. There were 8,000 units of work in process at May 31. The work in process at May 1 was 30 percent complete as to conversion costs and the work in process at May 31 was 20 percent complete as to conversion costs. What was the cost of the goods transferred out and in ending work in process using the FIFO method? ANS: Unit output for the month: Materials Conversion Costs To complete beginning work in process: Materials needed 10,000 70%  10,000 units 7,000 Started and finished during month: All costs added 31,000 31,000 Ending work in process: No materials added -0- 20%  8,000 1,600 Total 41,000 39,600 Unit costs for month: Materials $235,750 / 41,000 $ 5.75 Labor $166,320 / 39,600 4.20 Factory overhead $150,480 / 39,600 3.80 Total $13.75 Inventory Costs: Cost of goods finished and transferred out during month: Beginning units in process: Prior month’s cost $23,970 Current cost to complete: Materials (10,000 x 5.75) 57,500 Labor (10,000 x 70% x $4.20) 29,400 Factory overhead (10,000 x 70% x $3.80) 26,600 $137,470 Units started and completed during month (31,000 x $13.75) 426,250 Total cost transferred $563,720 Cost of work in process, end of month: Materials (None added) $ -0- Labor (8,000 x 20% x $4.20) 6,720 Factory overhead (8,000 x 20% x $3.80) 6,080 12,800 Total production costs accounted for $576,520 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 7. Howard Poster Incorporated had 12,000 units of work in process in Department A on October 1. These units were 60 percent complete as to conversion costs. Materials are added in the beginning of the process. During the month of October, 38,000 units were started and 40,000 units were completed. Howard had 10,000 units of work in process on October 31. These units were 75 percent complete as to conversion costs. 1) Compute the equivalent units for materials and conversion costs for the month of October using the FIFO method. 2) Using the average cost method determine the equivalent units for materials and conversion costs for the month of October. ANS: FIFO equivalent units: Materials Conversion Costs To complete beginning work in process: Materials added -0- 40%  12,000 4,800 Started and finished during month: 40,000 units completed - 12,000 units in process, beginning of month 28,000 28,000 Ending work in process: All materials added 10,000 75%  10,000 7,500 Total 38,000 40,300 Average cost equivalent units: Finished during month 40,000 40,000 Ending work in process: All materials added 10,000 75%  10,000 7,500 Total 50,000 47,500 PTS: 1 DIF: Moderate REF: P. OBJ: 1, 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. Howard Poster Incorporated had 12,000 units of work in process in Department A on October 1. These units were 60 percent complete as to conversion costs. Materials are added at the end of the process. During the month of October, 38,000 units were started and 40,000 units were completed. Howard had 10,000 units of work in process on October 31. These units were 75 percent complete as to conversion costs. 1) Compute the equivalent units for materials and conversion costs for the month of October using the FIFO method. 2) Using the average cost method determine the equivalent units for materials and conversion costs for the month of October. ANS: FIFO equivalent units: Materials Conversion Costs To complete beginning work in process: Materials added 12,000 40%  12,000 4,800 Started and finished during month: 40,000 units completed - 12,000 units in process, beginning of month 28,000 28,000 Ending work in process: All materials added 0 75%  10,000 7,500 Total 40,000 40,300 Average cost equivalent units: Finished during month 40,000 40,000 Ending work in process: Materials added 0 75%  10,000 7,500 Total 40,000 47,500 PTS: 1 DIF: Moderate REF: P. OBJ: 1, 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Keith Company manufactures Products A, B, and C from a joint process. Additional information is as follows: Product A B C Total Units produced 8,000 4,000 2,000 14,000 Joint costs $90,000 ? ? $150,000 Sales value at split off ? ? $30,000 $240,000 Assuming that joint costs are allocated using the relative sales value at split-off approach, what was the sales value at split off for Product A? ANS: Joint cost allocated to Product A of $90,000 / Total joint cost of $150,000 = 60%, so sales value at split off of Product A must be 60%  total sales value of $240,000, or $144,000. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. Jim Davis Company processes hogs into three products, chops, bacon and sausage. Production and selling price data follow: Chops 100,000 lbs. $5.00/ lb. Bacon 210,000 lbs. $4.00/ lb. Sausage 410,000 lbs. $2.00/ lb. Bacon was smoked, sliced and packaged after the split-off point. The cost incurred for these processes was $100,000. Sausage was ground and formed into patties after the split-off. This process cost $60,000. If joint processing costs were $1,500,000, calculate the total cost of each product using the adjusted sales value method. ANS: Product Pounds Selling price Ultimate sales value Costs after split-off Sales value at split-off Percent sales value Assignment of joint costs Chops 100,000 $5.00 $ 500,000 $ 500,000 25% $ 375,000 Bacon 210,000 $4.00 840,000 $100,000 740,000 37% 555,000 Sausage 410,000 $2.00 820,000 60,000 760,000 38% 570,000 $2,260,000 $160,000 $2,000,000 $1,500,000 Total cost: Chops $375,000 Bacon $555,000 + 100,000 = $655,000 Sausage $570,000 + 60,000 = $630,000 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 11. Nate Company manufactures Products A and B from a joint process that also yields a by-product, X. Nate Company accounts for the revenue from its by-product sales as a deduction from the cost of its main products. Additional information is as follows: Product A B X Total Units produced 15,000 9,000 6,000 30,000 Joint costs ? ? ? $180,000 Sales value at split off $420,000 $140,000 $20,000 $580,000 (1) Assuming that joint product costs are allocated using the relative sales value at split-off approach, what was the joint cost allocated to Products A and B? (2) Prepare the journal entry to transfer the finished products to separate inventory accounts. (3) Assuming the sales value of X is stable, prepare the journal entries to: (a) place the by-product in stock (b) record the sale of 3,000 units for $10,500 on account. ANS: (1) In accounting for by-products, the common practice is to make no allocation of the joint costs up to the split-off point. First, the joint costs must be reduced by the $20,000 sales value of the byproduct X ($180,000 - $20,000 = $160,000). Percent Assignment Product Units Relative sales value sales value of joint costs A 10,000 $420,000 75% (160,000 x 75%) $120,000 B 40,000 140,000 25% (160,000 x 25%) 40,000 $560,000 $160,000 (2) Finished goods inventory - A 120,000 Finished goods inventory - B 40,000 Work in process 160,000 (3) By-product inventory 20,000 Work in process 20,000 Accounts receivable 10,500 By-product inventory 10,000 (3,000/6,000 x 20,000) Gain on sale of by-product 500 PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic CHAPTER 7--MASTER BUDGET and FLEXIBLE BUDGETING MULTIPLE CHOICE 1. Budgeting provides the framework for: a. Process costing. b. Breaking semivariable costs into their fixed and variable components. c. Planning and control. d. Delegating authority to managers. ANS: C Budgeting provides the framework for planning how the organization meet the goal of maximizing its income and providing guidelines for controlling costs. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 2. The budget should use historical data: a. Only as a stepping-off point for projections into the future. b. Because things don’t really change. c. And add a 5% growth factor for each year. d. Because management is satisfied with historical results. ANS: A Because the budgeting process involves looking to the future, historical data should only be used as a stepping-off point. The budget must also consider other factors including economic developments and the general business climate. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 3. Which of the following is not a requirement of budgeting? a. Goals must be realistic and possible to attain. b. There must be accountability for actual results. c. Management must clearly define its objectives. d. The budget must not be changed under any circumstances. ANS: D The budget must be flexible enough so it can be modified in light of changing conditions. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 4. A budget prepared for a single level of volume based on management’s best estimate of the level of production and sales for the coming period is a: a. Flexible budget. b. Static budget. c. Continuous budget. d. Capital budget. ANS: B A static budget is prepared for a single level of volume. A flexible budget is prepared for several levels of volume. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 5. A budget that adds a new month at the end of the budget when a month is completed, resulting in a budget that is always one year in advance is a: a. Flexible budget. b. Static budget. c. Continuous budget. d. Capital budget. ANS: C A continuous or rolling budget “rolls forward” so that as one month is completed, another month is added at the end of the budget. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 6. Which of the following is not an operating budget? a. Cash budget b. Sales and administrative budget c. Sales budget d. Cost of goods sold budget ANS: A Operating budgets include components of the budgeted income statement which include options b, c, and d. The cash budget is a financial budget. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 7. The budget that is used as a basis for preparing all other budgets is the: a. cash budget. b. production budget. c. budget balance sheet. d. sales budget. ANS: D The sales budget is used as the basis for the production budget. The sales or production budgets are needed to prepare all other budgets. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 8. Managers should consider all of the following in developing a sales budget except: a. Customer demand. b. Development of new products. c. Present and future economic conditions. d. Cost of materials. ANS: D The cost of materials should be considered in the direct materials budget. Customer demand, new products and economic conditions should be factored into the sales budget. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 9. Participative budgeting: a. Results in managers being less apt to meet or beat their budget projections. b. Motivates managers to meet budget numbers because they set them. c. Describes the budget meetings in which managers participate. d. Leaves room to blame top management in the event budget numbers are not met. ANS: B Managers are more apt to meet or beat their budget projections when using participative budgeting. They are more motivated because they set the numbers and there is no one else to blame for imposing unrealistic standards. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 10. Stan is the manager of a division that has been struggling lately. It is budget time and Stan feels he is under the gun to do well next year. As such, he is building slack into his budget. How will he handle estimates of revenues and expenses? Revenues Expenses a. Overestimate Overestimate b. Overestimate Underestimate c. Underestimate Underestimate d. Underestimate Overestimate ANS: D Budget slack occurs when a manager sets unrealistically low goals in an effort to make average performance look good. If Stan is building slack into his budget, he would budget his sales lower than realistically expected so he would look good when sales beat the budget. Conversely, his budgeted expenses would be higher than realistically expected, so he would look good when his expenses were under budget. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 11. Kerry Kola Company sells Kerry Kola in two sizes: 12 ounce and 32 ounce bottles, at a price of $1.00 and $2.25, respectively. Projected unit sale volumes by region follow: East Region: 12 ounce bottles 200,000 32 ounce bottles 150,000 West Region: 12 ounce bottles 325,000 32 ounce bottles 250,000 What is Kerry Kola’s budgeted sales? a. $1,643,750 b. $1,425,000 c. $1,362,500 d. $1,581,250 ANS: B Kerry Kola’s Sales Budget is calculated as follows: Product and Region Unit Sales Volume Unit Selling Price Total Sales 12 ounce bottles: East 200,000 $1.00 $ 200,000 West 325,000 $1.00 325,000 $ 525,000 32 ounce bottles: East 150,000 $2.25 $ 337,500 West 250,000 $2.25 562,500 $ 900,000 Total sales $1,425,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 12. Which of the following represents the correct relationship between budgets and inventories? a. The direct materials budget includes the budgeted dollar value of the direct materials inventory at the beginning and end of the budget period. b. The direct materials budget includes the budgeted number of units in the direct materials inventory at the beginning and end of the budget period. c. The production budget includes the budgeted number of units in the work in process inventory at the beginning and end of the budget period. d. The direct labor budget includes the budgeted number of units in the work in process inventory at the beginning and end of the budget period. ANS: B The direct materials budget is computed as follows: Budgeted production in units x number of components required per unit = Units of material required for production + Desired units in materials inventory at the end of the period = Total - Estimated units in materials inventory at the beginning of the period = Number of units required to be purchased PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 13. Denny Door Company has budgeted door sales as follows: Year Number of Units Budgeted Sales Dollars March 50,000 $1,000,000 April 60,000 $1,200,000 Finished goods inventory at February 28 will be 8,000 units, but the company is making an effort to reduce inventory and its new policy is that inventory at the end of the month should be 10% of the budgeted sales for the following month. How many units should Denny Door Company produce in March? a. 52,000 b. 62,000 c. 51,000 d. 48,000 ANS: D Denny’s production budget is calculated as follows: Budgeted sales in units in March 50,000 + Desired ending inventory (60,000 x 10%) 6,000 56,000 - Beginning inventory 8,000 48,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 14. Tacy Tires has budgeted production of 150,000 units this fiscal year. There were 15,000 units on hand in finished goods inventory on January 1 and the company’s desired inventory at the end of the year is 12,000 units. Tacy’s sales budget in units is: a. 147,000 b. 150,000 c. 153,000 d. 177,000 ANS: C Budgeted sales, in units Unknown (2) + Desired units in inventory, end of period 12,000 Unknown (1) - Estimated units inventory, beginning of period 15,000 = Budgeted production, in units 150,000 Unknown (1) = 150,000 + 15,000 = 165,000 Unknown (2) = 165,000 - 12,000 = 153,000 PTS: 1 DIF: Hard REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 15. Producing goods evenly throughout the year despite having a seasonal sales pattern could lead to: a. Employee morale issues. b. High costs for recruiting and training new employees. c. The potential for inventory obsolescence. d. Relatively stable inventory levels. ANS: C Even production coupled with a seasonal sales pattern would lead to fluctuating inventory levels. Inventory levels would increase during periods when production levels exceeded sales volumes. If inventory levels were too high, there is the potential that the product could spoil or become outdated before those inventories could be sold. PTS: 1 DIF: Hard REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 16. The format of the direct materials budget is similar to that of the: a. Factory overhead budget. b. Sales budget. c. Production budget. d. Direct labor budget. ANS: C The format of the direct materials budget is similar to that of the production budget as they both consider inventory levels. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 17. Comfy Inc. uses five yards of wool in each blanket it produces. Comfy’s production budget next year is 30,000 blankets. The anticipated wool inventory at January 1 is 40,000 yards, but the company desires to reduce the inventory to 20,000 yards by the end of the year. Each yard of wool costs $10. How many yards of wool should Comfy purchase? a. 190,000 yards b. 130,000 yards c. 170,000 yards d. 1,300,000 yards ANS: B Budgeted production of blankets in units 30,000 Yardage required per blanket x 5 Number of yards required for production 150,000 Desired inventory of wool in yards, December 31 20,000 170,000 Estimated inventory of wool in yards, January 1 40,000 Number of yards of wool to be purchased 130,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 18. Arwin Company’s production budget is as follows: Budgeted sales in units 200,000 Desired units in inventory, December 31 35,000 235,000 Estimated units in inventory, January 1 25,000 Budgeted units of production 210,000 Each unit takes 20 minutes to produce and the standard labor rate is $15 per labor hour. What is Arwin’s direct labor budget? a. $1,050,000 b. $1,000,000 c. $1,175,000 d. $9,450,000 ANS: A Budgeted units of production 210,000 x 1/3 hour each = 70,000 hours 70,000 hours x $15/hr. = $1,050,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 19. Lunchco Inc. produces picnic tables in a two-step process. Pretreated wood is cut in the Cutting Department and then the lumber is assembled into tables in the Assembly Department. It takes 30 minutes of direct labor time to cut the lumber and the standard hourly labor rate in the Cutting Department is $12. The tables take one hour to assemble and the standard hourly rate in the Assembly Department is $10. If Lunchco’s production budget is 20,000, what is the company’s direct labor budget? a. $340,000 b. $680,000 c. $330,000 d. $320,000 ANS: D Lunchco’s direct labor budget is calculated as follows: Cutting Department 20,000 units x 1/2 hr/unit x $12/hr. $120,000 Assembly Department 20,000 units x 1 hr/unit x $10/hr. 200,000 Total budgeted direct labor $320,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 20. Which of the following is not considered when preparing the cost of goods sold budget? a. Budgeted factory overhead. b. Budgeted dollar value of finished goods inventory at the end of the period. c. Budgeted sales dollars. d. Budgeted dollar value of work-in-process inventory at the beginning of the year. ANS: C Budgeted sales dollars is not considered in preparing the cost of goods sold budget. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 21. Budgeted inventories for the Remle Company follow: January 1 December 31 Direct materials $24,800 $26,700 Work in process 57,600 55,200 Finished goods 83,300 87,400 Additional budget information follows: Total manufacturing costs $354,500 Cost of goods manufactured 356,900 Calculate the budgeted cost of goods sold. a. $352,800 b. $350,400 c. $361,000 d. $359,300 ANS: A Finished goods inventory, January 1 $ 83,300 Cost of goods manufactured 356,900 Total goods available for sale 440,200 Finished goods inventory, December 31 87,400 Cost of goods sold $352,800 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 22. Amounts from all of the following budgets feed into the pro-forma income statement except the: a. Capital expenditures budget. b. Factory overhead budget. c. Direct materials budget. d. Sales budget. ANS: A The capital expenditures budget is the budget for asset acquisitions. The sales budget feeds directly into the (pro-forma income statement) income statement budget, while the factory overhead and direct materials budgets feed into the income statement budget indirectly through the cost of goods sold budget. PTS: 1 DIF: Hard REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 23. Information from the operating budgets of Northwest Industries follows: Selling and administrative expenses $ 50,000 Factory overhead 70,000 Sales 450,000 Cost of goods sold 200,000 Direct labor 80,000 If Northwest’s income tax rate is 40%, what is the budgeted net income? a. $120,000 b. $30,000 c. $200,000 d. $80,000 ANS: A The budgeted income statement for Northwest Industries would be as follows: Net sales $450,000 Cost of goods sold 200,000 Gross profit 250,000 Selling and administrative expenses 50,000 Operating income 200,000 Income tax ($200,000 x 40%) 80,000 Net income $120,000 Note that the amounts from the factory overhead and direct labor budgets would have already been included in the amount shown in the cost of goods sold budget. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 24. Consider the following budgets: (1) Direct materials (2) Income statement (3) Production (4) Cost of goods sold In what order should these budgets be prepared? a. 2, 3, 1, 4 b. 3, 4, 1, 2 c. 1, 3, 4, 2 d. 3, 1, 4, 2 ANS: D The sales budget should be prepared first. The budgeted sales should be used to prepare the production budget. The budgeted production will be needed to determine the direct materials budget. The direct materials budget should be used to prepare the cost of goods sold budget. Once the cost of goods sold budget is determined, that needs to be used to prepare the income statement budget. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 25. A plan for timing acquisitions of buildings, equipment or other significant assets is a(n): a. budget balance sheet. b. capital expenditures budget. c. asset budget. d. financing budget. ANS: B A capital expenditures budget is a plan for timing acquisitions of buildings, equipment or other significant assets. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 26. The purpose of a flexible budget is to: a. Compare actual and budgeted results at virtually any level of production. b. Eliminate cyclical fluctuations in production reports by ignoring variable costs. c. Allow management some latitude in meeting goals. d. Reduce the total time in preparing the annual budget. ANS: A The purpose of a flexible budget is to compare actual and budgeted results at virtually any level of production. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 27. Flexible budgeting is a reporting system wherein the: a. Statements included in the budget report vary from period to period. b. Budget standards may be adjusted at will. c. Reporting dates vary according to the levels of activity reported upon. d. Planned level of activity is adjusted to the actual level of activity before the budget comparison report is prepared. ANS: D Flexible budgeting is a reporting system wherein the planned level of activity is adjusted to the actual level of activity before the budget comparison report is prepared. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 28. Which of the following budgets is used to provide an “apples to apples” comparison of budgeted and actual performance at the actual unit volume attained? a. Continuous budget b. Flexible budget c. Master budget d. Static budget ANS: B A flexible budget is used to compare actual and budgeted performance at the actual production volume. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 29. Julia Industries produces cookware. The master budget called for production of 75,000 units this year. The budget at that level of production follows: Sales $1,200,000 Direct materials 300,000 Direct labor 150,000 Variable factory overhead 225,000 Fixed factory overhead 262,500 Fixed selling and administrative expense 112,500 Operating income $ 150,000 Due to the popularity of cooking shows on television, Julia Industries now estimates sales will be 80,000 units. What is budgeted operating income at this level? a. $185,000 b. $160,000 c. $230,000 d. $167,500 ANS: A 75,000 Units Per Unit* 80,000 Units Sales $1,200,000 $16.00 $1,280,000 Direct materials 300,000 4.00 320,000 Direct labor 150,000 2.00 160,000 Variable factory overhead 225,000 3.00 240,000 Fixed factory overhead 262,500 not applicable 262,500 Fixed selling and administrative 112,500 not applicable 112,500 Operating income $ 150,000 $ 185,000 *For sales and variable costs: Per unit = budgeted amount at 75,000 units / 75,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 30. A summary of Tanner Company’s flexible budget of manufacturing costs follows: 10,000 Units Direct materials $30,000 Direct labor 35,000 Variable factory overhead 15,000 Fixed factory overhead 16,000 Total $96,000 What would the flexible budget of manufacturing costs be at a production volume of 12,000 units? a. $80,000 b. $115,200 c. $109,000 d. $112,000 ANS: D 10,000 Units Cost per Unit* 12,000 Units Direct materials $30,000 $3.00 $ 36,000 Direct labor 35,000 3.50 42,000 Variable factory overhead 15,000 1.50 18,000 Fixed factory overhead 16,000 not applicable 16,000 Total $96,000 $112,000 *Cost per unit = budgeted amount at 10,000 units/10,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 31. Quinn Company’s master budget called for 30,000 units of production. Budgeted direct material costs at this level were $450,000 or $15 per unit. Quinn actually produced 32,000 units and incurred direct material costs of $496,000. Quinn uses flexible budgeting to evaluate variances and determined that there was a $16,000 unfavorable direct materials variance. All of the following reasons could have contributed to the flexible budget variance except: a. Quinn produced more than the master budget called for. b. Quinn did a poor job of controlling the purchase cost of the raw materials. c. Quinn did a poor job of controlling the quantity of the direct materials used in the production process. d. None of these is correct. ANS: A Because flexible budgeting compares actual results against budgeted amounts at the actual level of production, in this case 32,000, the variance cannot be due to the fact that production levels were different than what the master budget originally called for. PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 32. Consider the following about Taylor Corporation: Direct materials budget based on 50,000 units produced $200,000 Actual direct materials incurred $190,000 Actual units produced 40,000 Assuming Taylor Corporation uses flexible budgeting, what is the variance related to direct materials? a. $10,000 favorable b. $50,000 unfavorable c. $30,000 unfavorable d. $38,000 unfavorable ANS: C Actual units produced 40,000 Standard material cost per unit ($200,000 / 50,000 units) x $4.00 Budgeted material cost at 40,000 units $160,000 Actual direct material costs incurred 190,000 Unfavorable variance related to direct materials $ 30,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 33. Quinn Company’s master budget called for 30,000 units of production. Budgeted direct material costs at this level were $450,000 or $15 per unit. Quinn actually produced 32,000 units and incurred direct material costs of $496,000. What is Quinn’s direct material variance using flexible budgeting? a. $16,000 U b. $46,000 U c. $74,125 U d. $16,000 F ANS: A Actual units produced 32,000 Budgeted direct material costs per unit x 15 Budgeted direct material costs @ 32,000 units of production 480,000 Actual direct material costs 496,000 Unfavorable direct material variance $ 16,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 34. Consider the flexible budget information relating to direct labor costs for Logan Ltd.: 48,000 units 50,000 units 52,000 units Machining $2.50 per unit $120,000 $125,000 $130,000 Finishing $1.50 per unit 72,000 75,000 78,000 $192,000 $200,000 $208,000 Logan’s actual production was 51,000 units and the related cost was $205,500. What is the variance related to direct labor? a. $1,500 unfavorable b. $5,500 unfavorable c. $2,500 favorable d. $1,500 favorable ANS: A Machining - 51,000 units x $2.50 $127,500 Finishing - 51,000 units x $1.50 76,500 Flexible budget for labor at 51,000 units 204,000 Actual labor costs incurred 205,500 Unfavorable variance $ 1,500 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 35. The absolute maximum number of units that would be possible under the best conceivable operating conditions is a description of which type of manufacturing capacity? a. Practical b. Theoretical c. Currently attainable (expected) d. Normal ANS: B Theoretical capacity describes the absolute maximum number of units that would be possible under the best conceivable operating conditions. Both practical and normal capacity have some allowance for idle capacity. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 36. The level of production that provides complete utilization of all facilities and personnel, but allows for some idle capacity due to operating interruptions such as machinery breakdowns, idle time and other inescapable inefficiencies is: a. practical capacity. b. theoretical capacity. c. budgeted capacity. d. normal capacity. ANS: A Practical capacity provides complete utilization of all facilities and personnel, but allows for some idle capacity. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 37. The level of production that is used by most firms for budget development because it represents a logical balance between maximum production capacity and the capacity demanded by actual sales volume is: a. practical capacity. b. theoretical capacity. c. budgeted capacity. d. normal capacity. ANS: D Normal capacity is the level of production that will meet normal requirements of ordinary sales demand over the years. It is used by most manufacturing firms for budget development. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 38. When using a flexible budget, what will occur to fixed costs (on a per unit basis) as production increases? a. Fixed costs are not considered in flexible budgeting. b. Fixed costs per unit will decrease. c. Fixed costs per unit will remain unchanged. d. Fixed costs per unit will increase. ANS: B When using a flexible budget, fixed costs (on a per unit basis) will decrease as production increases. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 39. The normal capacity of Noel Company is 4,000 units per month. At this volume, budgeted fixed and variable factory overhead are $16,000 and $20,000, respectively. In May, actual production was 4,200 units and actual overhead incurred was $37,900. What was the amount of factory overhead allowed for the actual level of production in May? a. $36,000 b. $36,800 c. $37,000 d. $37,800 ANS: C Budgeted variable overhead per unit ($20,000 / 4,000 units) $5.00 Actual units produced x 4,200 Budgeted variable overhead @ 4,200 units $21,000 Budgeted fixed overhead @ 4,200 units 16,000 Overhead allowed for 4,200 units produced $37,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 40. The normal capacity of Noel Company is 4,000 units per month. At this volume, budgeted fixed and variable factory overhead are $16,000 and $20,000, respectively. In May, actual production was 4,200 units and actual overhead incurred was $37,900. What is the factory overhead application rate at the actual level of production (rounded to the nearest penny)? a. $9.00 b. $8.81 c. $9.02 d. $8.57 ANS: B Budgeted variable overhead per unit ($20,000 / 4,000 units) $5.00 Actual units produced x 4,200 Budgeted variable overhead @ 4,200 units $21,000 Budgeted fixed overhead @ 4,200 units 16,000 Overhead allowed for 4,200 units produced $37,000 Factory overhead application rate = $37,000/4,200 units = $8.81 per unit PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 41. Bisset Corporation has developed the following flexible budget formula for annual indirect labor cost: Total costs = $9,600 + $0.75 per machine hour Operating budgets for the current month are based upon 30,000 hours of planned machine time. Indirect labor costs included in this planning budget are: a. $23,300. b. $22,500. c. $32,100. d. $2,425. ANS: A Annual fixed costs of $9,600 / 12 = monthly fixed cost $ 800 30,000 machine hours  $.75 per machine hour 22,500 Indirect labor cost budgeted for the month $23,300 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 42. The standard capacity of a factory is 9,000 units per month. Cost and production data follow: Standard application rate for fixed factory overhead for 9,000 units $2.00 Standard application rate for variable factory overhead for 9,000 units .50 Actual number of units produced 8,800 Actual factory overhead incurred $22,700 What is the amount of overhead allowed for the actual volume of production? a. $22,000 b. $22,400 c. $22,500 d. $22,700 ANS: B Actual number of units produced 8,800 Standard application rate for variable factory overhead x$ .50 Variable factory overhead allowed for 8,800 units $ 4,400 Standard capacity of factory 9,000 Standard application rate for fixed factory overhead x 2.00 Budgeted fixed factory overhead 18,000 Factory overhead allowed for 8,800 units produced $22,400 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 43. The normal capacity of Noel Company is 4,000 units per month. At this volume, budgeted fixed and variable factory overhead are $16,000 and $20,000, respectively. In May, actual production was 4,200 units and actual overhead incurred was $37,900. What is the variance between budgeted factory overhead per the flexible budget and actual overhead incurred? a. $1,900 U b. $1,000 U c. $900 U d. $100 U ANS: C Budgeted variable overhead per unit ($20,000 / 4,000 units) $5.00 Actual units produced x 4,200 Budgeted variable overhead @ 4,200 units $21,000 Budgeted fixed overhead @ 4,200 units 16,000 Overhead allowed for 4,200 units produced $37,000 Actual overhead incurred 37,900 Unfavorable variance $ 900 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 44. The standard capacity of a factory is 9,000 units per month. Cost and production data follow: Standard application rate for fixed factory overhead for 9,000 units $2.00 Standard application rate for variable factory overhead for 9,000 units .50 Actual number of units produced 8,800 Actual factory overhead incurred $22,700 What is the variance between the overhead per the flexible budget and the actual overhead incurred? a. $200 U b. $300 U c. $100 U d. $300 F ANS: B Actual number of units produced 8,800 Standard application rate for variable factory overhead x$ .50 Variable factory overhead allowed for 8,800 units $ 4,400 Standard capacity of factory 9,000 Standard application rate for fixed factory overhead x 2.00 Budgeted fixed factory overhead 18,000 Factory overhead allowed for 8,800 units produced $22,400 Actual overhead incurred 22,700 Unfavorable factory overhead variance $ 300 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 45. Which of the following is not true regarding service department expenses? a. Preparing a budget for a service department requires the same procedures as those used for production departments. b. Expenses of the service departments are allocated to production departments using a standard application rate. c. Production departments will consider allocated service department expenses in developing their budgets. d. Variances are not computed for expenses in service departments. ANS: D Variances are computed in service departments. The variance will be the difference of the service department’s actual expenses compared to the amount charged to the production departments. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective PROBLEM 1. Keefe Clothing, Inc. manufactures two styles of blue jeans: standard, which sell for $35, and deluxe, which sell for $50. The jeans are sold in three regions: East, West and South. Deluxe jeans account for 25% of the sales in the East Region, 30% in the West Region and 20% in the South Region. Forecasted total sales next year are 30,000, 50,000 and 35,000 in the East, West and South Regions, respectively. Prepare a sales budget for Keefe Clothing, Inc. for next year. ANS: Keefe Clothing, Inc. Sales Budget For the Year Ended December 31, 20-- Product and Region Unit Sales Volume Unit Sales Price Total Sales Standard: East * 22,500 $35.00 $ 787,500 West ** 35,000 35.00 1,225,000 South *** 28,000 35.00 980,000 Total 85,500 $2,992,500 Deluxe: East * 7,500 $50.00 $ 375,000 West ** 15,000 50.00 750,000 South *** 7,000 50.00 350,000 Total 29,500 $1,475,000 Total Revenue $4,467,500 * East 30,000 units x 25% = 7,500 units deluxe; 30,000 - 7,500 = 22,500 units standard ** West 50,000 units x 30% = 15,000 units deluxe; 50,000 - 15,000 = 35,000 units standard *** South 35,000 units x 20% = 7,000 units deluxe; 35,000 - 7,000 = 28,000 units standard PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 2. Bradley Company has forecasted sales for the month of March for its single product to be 10,000 in its Columbus Region, 13,000 units in its Cincinnati Region and 15,000 units in its Cleveland Region. The estimated inventory on March 1 is 4,500 units and the company desires to have 3,800 units on hand March 31. The budgeted sales price is $52.00 per unit. (1) Prepare a sales budget for the month of March. (2) Prepare a production budget for the month of March. ANS: Bradley Company Sales Budget For the Month Ended March 31, 20-- Units Unit Selling Price Total Sales Region: Columbus 10,000 $52.00 $ 520,000 Cincinnati 13,000 52.00 676,000 Cleveland 15,000 52.00 780,000 38,000 $1,976,000 Bradley Company Production Budget For the Month Ended March 31, 20-- Units Sales 38,000 Plus desired ending inventory, March 31 3,800 Total 41,800 Less estimated beginning inventory, March 1 4,500 Total production 37,300 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 3. O’Reilly Outfitters Inc. has forecasted sales of 32,000 tents for the upcoming year. The anticipated finished goods inventory at January 1 is 5,000 units, but management desires this inventory level to be reduced by 20% on December 31. Two materials are used in the production of tents: 36 square yards of nylon having a standard cost of $2.00 per yard, and 20 feet of metal tubing having a standard cost of $.50 per linear foot. Raw material inventory information is as follows: Estimated inventory January 1 Desired inventory December 31 Nylon 110,000 yds. 80,000 yds. Metal tubing 45,000 ft. 35,000 ft. (1) Prepare a production budget for the upcoming year. (2) Prepare a direct materials budget for the upcoming year. ANS: O’Reilly Outfitters Inc. Production Budget For the Year Ended December 31, 20-- Units Budgeted sales 32,000 Plus desired ending inventory, December 31 * 4,000 Total 36,000 Less estimated beginning inventory, January 1 5,000 Total production 31,000 * 5,000 - (5,000 x 20%) = 4,000 O’Reilly Outfitters Inc. Direct Materials Budget For the Year Ended December 31, 20-- Nylon Square Yards Metal Tubing Linear Feet Total Quantities required for production * 1,116,000 620,000 Plus desired ending inventory, Dec. 31 80,000 35,000 Total 1,196,000 655,000 Less estimated beginning inventory, Jan. 1 110,000 45,000 Total quantity to be purchased 1,086,000 610,000 Unit price $ 2.00 $ .50 Total direct materials purchases $2,172,000 $305,000 $2,477,000 * Nylon 31,000 units x 36 yards per unit = 1,116,000 yards Metal tubing 31,000 units x 20 feet per unit = 620,000 feet PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 4. Phelps Company manufactures one product that requires 3 hours of machining direct labor and 2 hours of assembly direct labor. The standard labor rate is $18.00 per direct labor hour in the Machining Department and $15.00 per direct labor hour in the Assembly Department. The product has forecasted sales of 2,000 units in May. The estimated finished goods inventory at May 1 is 250 units and the desired ending inventory at May 31 is 450 units. (1) Prepare a production budget for the month of May. (2) Prepare a direct labor budget for the month of May. ANS: Phelps Company Production Budget For the Month Ended May 31, 20-- Units Budgeted sales 2,000 Plus desired ending inventory, May 31 450 Total 2,450 Less estimated beginning inventory, May 1 250 Total production 2,200 Phelps Company Direct Labor Budget For the Month Ended May 31, 20-- Machining Assembly Total Hours required for production * 6,600 4,400 11,000 Hourly rate $ 18.00 $ 15.00 Direct labor cost $118,800 $66,000 $184,800 * Machining 2,200 units x 3 hours per unit = 6,600 hours Assembly 2,200 units x 2 hours per unit = 4,400 hours PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 5. Jasinski Jewelry produces a component for lapel pins. Budgeted production in April is 8,400 units. Each unit requires 1/3 ounce of gold, and 2 hours of direct labor time. It is estimated that Jasinski will have 100 ounces of gold on hand at April 1, and since management anticipates an increase in the price of gold in the coming months, the desired ending inventory at the end of April is 150 ounces. The standard cost of an ounce of gold is $300. The standard rate for direct labor is $25 per hour. (1) Prepare a direct materials budget. (2) Prepare a direct labor budget. ANS: Jasinski Jewelry Direct Materials Budget For the Month Ended April 30, 20-- Gold (ounces) Quantity of gold required for production * 2,800 Plus desired ending inventory, April 30 150 Total 2,950 Less estimated beginning inventory, April 1 100 Total quantity to be purchased 2,850 Unit price x $300 Total direct material purchases $855,000 * Budgeted production 8,400 units x 1/3 ounce = 2,800 ounces Jasinski Jewelry Direct Labor Budget For the Month Ended April 30, 20-- Direct Labor Hours required for production ** 16,800 Hourly rate x 25 Total direct labor cost $420,000 ** 8,400 units x 2 hours per unit = 16,800 hours PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 6. Prepare a cost of goods sold budget for the KAS Company for the upcoming year from the following estimates: Inventories: Direct Materials Work in Process Finished Goods January 1 $22,600 $32,500 $50,200 December 31 31,400 30,400 48,300 Totals from other budgets: Direct materials purchased $234,500 Direct labor 192,600 Factory overhead 185,700 ANS: KAS Company Cost of Goods Sold Budget For the Year Ended December 31, 20-- Finished goods inventory, Jan. 1 $ 50,200 Work in process inventory, Jan. 1 $ 32,500 Direct materials inventory, Jan. 1 $ 22,600 Direct materials purchases 234,500 Direct materials available for use 257,100 Less direct materials inventory, Dec. 31 31,400 Cost of direct materials used 225,700 Direct labor 192,600 Factory overhead 185,700 Total manufacturing costs 604,000 Total work in process during the year 636,500 Less work in process inventory, Dec. 31 30,400 Cost of goods manufactured 606,100 Cost of goods available for sale 656,300 Less finished goods inventory, Dec. 31 48,300 Cost of goods sold $608,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 7. Wernke Company has the following totals from its operating budgets for November: Cost of goods sold $1,967,000 Sales 2,530,000 Selling and administrative expenses 322,000 Prepare a budgeted income statement for the month of November assuming a 30% income tax rate. ANS: Wernke Company Budgeted Income Statement For the Month Ended November 30, 20-- Sales $2,530,000 Cost of goods sold 1,967,000 Gross profit 563,000 Selling and administrative expenses 322,000 Operating income 241,000 Income tax * 72,300 Net income $ 168,700 * 241,000 x 30% = 72,300 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 8. The following information is from Franklin Industries master budget for the current year: Number of units 15,000 Sales revenue $585,000 Direct materials 165,000 Direct labor 90,000 Variable factory overhead 120,000 Fixed factory overhead 75,000 Variable selling and administrative expenses 60,000 Fixed selling and administrative expenses 20,000 Prepare flexible budgets for the production and sale of 14,000, 15,000 and 16,000 units, respectively. ANS: Number of units 15,000 Per unit amounts Sales revenue $585,000/15,000 $39.00 Direct materials 165,000/15,000 11.00 Direct labor 90,000/15,000 6.00 Variable factory overhead 120,000/15000 8.00 Variable selling and administrative expenses 60,000/15,000 4.00 Franklin Industries Flexible Budget For the Year Ended December 31, 20-- 14,000 units 15,000 units 16,000 units Sales revenue 546,000 585,000 624,000 Direct materials 154,000 165,000 176,000 Direct labor 84,000 90,000 96,000 Variable factory overhead 112,000 120,000 128,000 Variable selling and administrative expenses 56,000 60,000 64,000 Contribution margin 140,000 150,000 160,000 Fixed factory overhead 75,000 75,000 75,000 Fixed selling and administrative expenses 20,000 20,000 20,000 Operating income $ 45,000 $ 55,000 $ 65,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 9. Delaney Company has the following flexible budget formulas and amounts: Selling price per unit $54.00 Direct materials per unit 18.00 Direct labor per unit 12.00 Variable factory overhead per unit 7.00 Variable selling and administrative expenses per unit 4.00 Fixed factory overhead $450,000 Fixed selling and administrative expenses 100,000 Actual results for the month of October for the production and sale of 48,000 units were as follows: Sales revenue $2,605,000 Direct materials 868,000 Direct labor 572,000 Variable factory overhead 334,000 Variable selling and administrative expenses 195,000 Fixed factory overhead 458,000 Fixed selling and administrative expenses 105,000 Prepare a performance report for the month of October. ANS: Delaney Company Performance Report For the Month Ended October 31, 20-- Flexible Budget* Actual Results Variance Sales revenue $2,592,000 $2,605,000 $13,000 F Direct materials 864,000 868,000 4,000 U Direct labor 576,000 572,000 4,000 F Variable factory overhead 336,000 334,000 2,000 F Variable selling and administrative expenses 192,000 195,000 3,000 U Contribution margin 624,000 636,000 12,000 F Fixed factory overhead 450,000 458,000 8,000 U Fixed selling and administrative expenses 100,000 105,000 5,000 U Operating income $ 74,000 $ 73,000 $ 1,000 U * Variable amounts = Number of units x per unit information. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2A - Budget Preparation; 2D - Performance Measurement TOP: AACSB - Analytic 10. The following information is from Franklin Industries master budget for the current year: Number of units 15,000 Sales revenue $585,000 Direct materials 165,000 Direct labor 90,000 Variable factory overhead 120,000 Fixed factory overhead 75,000 Variable selling and administrative expenses 60,000 Fixed selling and administrative expenses 20,000 Franklin actually produced 16,000 units. It’s actual results follow: Number of units 16,000 Sales revenue $620,000 Direct materials 179,500 Direct labor 95,200 Variable factory overhead 126,800 Fixed factory overhead 78,300 Variable selling and administrative expenses 63,700 Fixed selling and administrative expenses 22,400 Prepare a performance report for the year. ANS: Number of units Per unit amounts Amount @ 16,000 units Sales revenue $585,000/15,000 $39.00 $624,000 Direct materials 165,000/15,000 11.00 176,000 Direct labor 90,000/15,000 6.00 96,000 Variable factory overhead 120,000/15000 8.00 126,800 Variable selling and administrative expenses 60,000/15,000 4.00 63,700 Franklin Industries Performance Report For the Year Ended December 31, 20-- Flexible Budget Actual Results Variance Sales revenue $624,000 $620,000 $ 4,000 U Direct materials 176,000 179,500 3,500 U Direct labor 96,000 95,200 800 F Variable factory overhead 128,000 126,800 1,200 F Variable selling and administrative expenses 64,000 63,700 300 F Contribution margin 160,000 154,800 5,200 U Fixed factory overhead 75,000 78,300 3,300 U Fixed selling and administrative expenses 20,000 22,400 2,400 U Operating income $ 65,000 $ 54,100 $10,900 U PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 11. The standard annual capacity of Jones and Smith Company is 25,000 units per month. Two units can be machined in one hour. The flexible budget for factory overhead at this volume follows: Variable: Power $ 80,000 Supplies 30,000 Maintenance 40,000 Total variable factory overhead 150,000 Fixed: Supervisory salaries 70,000 Depreciation of buildings and equipment 20,000 Lights and heat 10,000 Property tax and insurance 20,000 Total fixed factory overhead 120,000 Total factory overhead $270,000 In June, actual production was 22,000 units and actual factory overhead incurred was $258,000. (1) Calculate the standard application rates for fixed and variable overhead at the standard level of volume in relation to units and machine hours. (2) Calculate the amount of factory overhead allowed for the actual volume of production in June and the variance between the actual and budgeted factory overhead. ANS: (1) Application rates for factory overhead per unit: Variable $150,000 / 25,000 = $6.00 per unit Fixed $120,000 / 25,000 = $4.80 per unit Application rates for factory overhead per machine hour: 25,000 units x 1/2 hour per unit = 12,500 Variable $150,000 / 12,500 = $12.00 per machine hour Fixed $120,000 / 12,500 = $ 9.60 per machine hour (2) Factory overhead allowed for the actual volume of production in June is calculated as follows: Variable factory overhead per unit $ 6.00 Actual production in June 22,000 Variable factory overhead allowed for 22,000 units $132,000 Budgeted fixed factory overhead 120,000 Factory overhead allowed for 22,000 units produced 252,000 Actual factory overhead incurred 258,000 Unfavorable factory overhead variance $ 6,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 12. The November monthly factory overhead cost budget for Brass Ltd. at normal capacity of 10,000 or 5,000 direct labor hours follows: Variable: Power $ 6,000 Supplies 12,000 Maintenance 15,000 Total variable factory overhead 33,000 Fixed: Supervisory salaries 24,000 Depreciation of buildings and equipment 8,000 Lights and heat 6,000 Property tax and insurance 22,000 Total fixed factory overhead 60,000 Total factory overhead $93,000 (1) Prepare a flexible budget for 80%, 100% and 120% of normal capacity. (2) Determine the rate for application of factory overhead to work in process at each level of volume in relation to both units and direct labor hours. ANS: Standard labor hours per unit 5,000 / 10,000 = .5 hours Per unit amounts Power $6,000/10,000 $.60 Supplies 12,000/10,000 1.20 Maintenance 15,000/10,000 1.50 10,000 units x 80% = 8,000 units 10,000 units x 120% = 12,000 units Brass Ltd. Factory Overhead Cost Budget For the Month Ended November 30, 20-- 8,000 units 4,000 labor hrs 10,000 units 5,000 labor hrs 12,000 units 6,000 labor hrs Variable: Power $ 4,800 $ 6,000 $ 7,200 Supplies 9,600 12,000 14,400 Maintenance 12,000 15,000 18,000 Total variable factory overhead 26,400 33,000 39,600 Fixed: Supervisory salaries 24,000 24,000 24,000 Depreciation of buildings and equipment 8,000 8,000 6,000 Lights and heat 6,000 6,000 6,000 Property tax and insurance 22,000 22,000 22,000 Total fixed factory overhead 60,000 60,000 60,000 Total factory overhead cost $86,400 $93,000 $99,600 Factory overhead per unit * $10.80 $ 9.30 $ 8.30 Factory overhead per direct labor hour ** $21.60 $18.60 $16.60 * $86,400 / 8,000 = $10.80 $93,000 / 10,000 = $9.30 $99,600 / 12,000 = $8.30 ** $86,400 / 4,000 = $21.60 $93,000 / 4,000 = $18.60 $99,600 / 6,000 = $16.60 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic CHAPTER 8—STANDARD COST ACCOUNTING--MATERIALS, LABOR, and FACTORY OVERHEAD MULTIPLE CHOICE 1. The purpose of standard costing is to: a. Determine optimal production level for a given period. b. Eliminate the need for subjective decisions by management. c. Control costs. d. Allocate cost with more accuracy. ANS: C The purpose of standard costing is to control cost and promote efficiency. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. Which of the following terms best identifies the function of standard costs where any deviation from standards can be quickly detected and responsibility pinpointed so appropriate action may be taken? a. Management by exception b. Contribution approach c. Marginal costing d. Standardized accounting system ANS: A A standard cost system shows the deviations from management's expectation of cost for its manufactured products. These variances (deviations) are exceptions from the established goals; therefore, they are better able to manage when the exceptions are reported by the standard cost system. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 3. Characteristics of ideal standards include all of the following except: a. They generally give rise to unfavorable variances. b. They may cause personnel to become discouraged. c. They take into account normal waste and spoilage. d. They provide a maximum objective for which to strive to improve efficiency. ANS: C Ideal standards are set considering ideal circumstances and are generally not attainable, which results in unfavorable variances. They do not consider normal waste and spoilage. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 4. A manufacturer generally wants to set a standard that: a. Can be achieved only under the most efficient operating conditions. b. Is high enough to provide motivation and promote efficiency, but is still attainable. c. Makes no allowance for normal was or spoilage. d. None of these is correct. ANS: B Options a and c are characteristics of ideal standards, which generally are not attainable and may cause employee morale problems. Generally companies want standards that are high enough to provide motivation, but not too high. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 5. Factors to be considered in setting materials standards include all of the following except: a. Trend of prices of raw materials. b. Historical costs. c. Time necessary to perform tasks. d. New production processes or market developments. ANS: C Historical costs are studied to gain familiarity with the materials standard, however, price trends, market developments and new production processes must be considered as well too. Time necessary to perform tasks would be considered in setting labor standards. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 6. Factors to be considered in setting labor standards include all of the following except: a. Impact of negotiations with labor unions. b. The learning effect. c. Results of engineers’ time studies. d. The purchasing manager’s estimate of suppliers’ prices. ANS: D Wage rates and time to complete tasks are considered in setting labor standards. Union negotiations would impact wage rates, while the learning effect and engineers’ time studies could impact the standard amount of time allowed for tasks. The purchasing manager’s estimate of suppliers’ prices would impact materials standards. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 7. RHO Company began its operations on January 1 and produces a single product that sells for $10.25 per unit. Standard capacity is 80,000 units per year. The 80,000 units were produced and 70,000 units were sold during the year. Manufacturing costs and selling and administrative expenses follow: Fixed Costs Variable Costs Raw materials -- $2.50 per unit produced Direct labor -- 1.50 per unit produced Factory overhead $120,000 1.00 per unit produced Selling and administrative 80,000 .50 per unit sold What is the standard cost of manufacturing a unit of product? a. $6.00 b. $6.50 c. $5.00 d. $5.50 ANS: B Raw materials $2.50 Direct labor 1.50 Factory overhead - variable 1.00 Factory overhead - fixed 1.50 ($120,000 / 80,000 units) Standard unit manufacturing cost $6.50 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 8. When computing variances from standard costs, the difference between actual and standard price multiplied by actual quantity yields: a. Combined price--quantity variance. b. Price variance. c. Volume variance. d. Mix variance. ANS: B The difference between actual and standard price multiplied by actual quantity yields a price variance. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 9. The materials quantity variance, in a standard cost system, is the: a. Difference between the actual and standard quantities. b. Difference between the actual and standard quantities multiplied by the actual unit price. c. Difference between the actual quantity used and the actual quantity purchased multiplied by the standard unit price. d. Difference between the actual and standard quantities multiplied by the standard unit price. ANS: D The materials quantity variance = (actual quantity of materials used - standard quantity of materials allowed) x standard unit price of material. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 10. What type of direct material variances for price and quantity will arise if the actual number of pounds of materials used exceeds standard pounds allowed but actual cost was less than standard cost? Quantity Price a. Favorable Favorable b. Unfavorable Favorable c. Favorable Unfavorable d. Unfavorable Unfavorable ANS: B The use of material in excess of standard will create an unfavorable usage (quantity) variance. If the actual cost of the material is less than standard cost, this gives rise to a favorable price variance. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 11. Woodside Company manufactures tables with vinyl tops. The standard material cost for the vinyl used per Style-R table is $7.20 based on 8 square feet of vinyl at a cost of $.90 per square foot. A production run of 1,000 tables in January resulted in usage of 8,300 square feet of vinyl at a cost of $.85 per square foot, a total cost of $7,055. The materials quantity variance resulting from the above production run was: a. $255 favorable. b. $255 unfavorable. c. $270 unfavorable. d. $270 favorable. ANS: C Materials quantity variance = (actual quantity of materials used - standard quantity of materials allowed) x standard price of material Materials quantity variance = (8,300 - 8,000*) x $.90 * 1,000 units produced x 8 sq. ft. per unit Actual quantity 8,300 sq. ft. Standard quantity 8,000 sq. ft. Excess of actual quantity over standard 300 sq. ft. Standard price $ .90 sq. ft. Materials quantity variance (unfavorable) $ 270 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 12. Thomas Company uses a standard cost system and recognizes the materials purchase price variance at the time materials are purchased. Information for raw materials for Product RBI for the month of October follows: Standard unit price $1.75 Actual purchase price per unit $1.65 Actual quantity purchased 4,000 units Actual quantity used 3,900 units Standard quantity allowed for actual production 3,800 units What is the materials quantity variance? a. $175 unfavorable b. $165 unfavorable c. $175 favorable d. $165 favorable ANS: A Materials quantity variance = (actual quantity of materials used - standard quantity of materials allowed) x standard unit price of materials Materials quantity variance = (3,900 - 3,800) x $1.75 = $175 U (because actual amounts exceeded standard) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 13. Ben's Climbing Gear, Inc. has direct material costs as follows: Actual units of direct materials used 20,000 Standard price per unit of direct materials $2.50 Materials quantity variance--favorable $5,000 What was Ben's standard quantity of material allowed? a. $18,000 b. $24,000 c. $20,000 d. $22,000 ANS: D Materials quantity variance = (actual quantity of materials used - standard quantity of materials allowed) x standard unit price of material $5,000 F = ($20,000 - standard quantity of materials allowed) x $2.50 $2,000 F* = $20,000 - standard quantity of materials allowed $22,000** = standard quantity of materials allowed * 5,000 F/ 2.50 ** 20,000 + 2,000 (note that the favorable variance is added to the actual quantity to arrive at the standard quantity because by definition, a favorable variance occurs when standard quantities exceed actual quantities.) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 14. The actual hourly rate paid above or below the standard hourly rate, multiplied by the actual number of hours worked is the: a. Labor rate variance. b. Labor efficiency variance. c. Labor usage variance. d. Labor direct variance. ANS: A Labor rate variance = (Actual labor rate per hour - Standard labor rate per hour) x Actual number of hours worked. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 15. Information relating to direct labor for the Newstead Company follow: Actual direct labor hours 5,600 Standard direct labor hours 5,400 Total direct labor per payroll $53,200 Standard labor rate per hour $9.00 The labor rate variance is: a. $2,800 unfavorable b. $2,700 unfavorable c. $4,600 unfavorable d. $1,800 unfavorable ANS: A Labor rate variance = (Actual labor rate per hour - standard labor rate per hour) x actual number of hours worked. Labor rate variance = ($9.50* - $9.00) x 5,600 Labor rate variance = $2,800 U (because actual was in excess of standard) * Actual labor rate per hour = $53,200 / 5,600 = $9.50 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 16. Earl Company's direct labor costs for the month of January follow: Actual direct labor hours 18,000 Standard direct labor hours 19,000 Direct labor rate variance--unfavorable $ 1,800 Total payroll $117,000 What was Earl's standard direct labor rate? a. $6.50 b. $6.60 c. $6.16 d. $6.40 ANS: D Labor rate variance = (actual labor rate per hour - standard labor rate per hour) x actual number of hours worked $1,800 U = (6.50** - standard labor rate per hour) x 18,000 1,800 U / 18,000 = .10 .10 = 6.50 - standard labor rate per hour 6.40 = standard labor rate per hour (since variance is unfavorable, the standard rate is less than the actual rate) **Total payroll / actual labor hours worked = actual labor rate per hour $117,000 / 18,000 = $6.50 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 17. When performing input-output variance analysis in standard costing, "standard hours allowed" is a means of measuring: a. Standard output at standard hours. b. Actual output at standard hours. c. Standard output at actual hours. d. Actual output at actual hours. ANS: B Standard hours allowed in standard costing refers to the standard hours allowed for the actual amount of units produced or how many hours the work should have taken. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 18. An unfavorable labor efficiency variance is the: a. Number of actual hours worked in excess of the standard hours allowed multiplied by the standard labor rate. b. Number of actual hours worked in excess of the standard hours allowed multiplied by the actual labor rate. c. The number of actual hours worked below the standard hours allowed multiplied by the standard labor rate. d. Number of actual hours multiplied by the difference in the actual and standard labor rates. ANS: A Labor efficiency variance = (Actual number of hours worked - standard number of hours allowed) x standard labor rate per hour. If actual hours exceed standard hours, the variance will be unfavorable. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 19. Information relating to direct labor for the Newstead Company follow: Actual direct labor hours 5,600 Standard direct labor hours 5,400 Total direct labor per payroll $53,200 Standard labor rate per hour $9.00 The labor efficiency variance is: a. $2,800 unfavorable b. $1,900 unfavorable c. $4,600 unfavorable d. $1,800 unfavorable ANS: D Labor efficiency variance = (Actual number of labor hours worked - standard number of labor hours allowed) x standard labor rate per hour. Labor efficiency variance = (5,600 - 5,400) x $9 Labor efficiency variance = $1,800 U (because actual was in excess of standard) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 20. Alyssa Corporation uses a standard cost system. Direct labor information for Product CER for the month of October is as follows: Standard rate $8.00 per hour Actual rate paid $8.30 per hour Standard hours allowed for actual production 1,400 hours Labor efficiency variance $ 800 unfavorable What are actual hours worked? a. 1,330 b. 1,400 c. 1,500 d. 1,300 ANS: C Labor efficiency variance = (actual number of labor hours worked - standard number of labor hours allowed) x standard labor rate per hour $ 800 U = (actual number of labor hours worked - 1,400) x $8.00 Standard hours  standard rate: 1,400 hours  $8 $11,200 Efficiency variance (unfavorable) 800 Actual hours (X)  $8 $12,000 X = $12,000 = 1,500 hours $8 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 21. Earl Company's direct labor costs for the month of January follow: Actual direct labor hours 18,000 Standard direct labor hours 19,000 Direct labor rate variance--unfavorable $ 1,800 Total payroll $117,000 What was Earl's direct labor efficiency variance? a. $6,500 favorable b. $6,400 unfavorable c. $1,800 favorable d. $6,400 favorable ANS: D Labor efficiency variance = (actual number of labor hours worked - standard number of labor hours allowed) x standard labor rate per hour Labor efficiency variance = (18,000 - 19,000) x $6.40* Labor efficiency variance = 1,000 x 6.40 = $6,400 F (standard exceeded actual) * The standard labor rate must be calculated prior to calculating the variance above by using the labor rate variance as follows: Labor rate variance = (actual labor rate per hour - standard labor rate per hour) x actual number of hours worked $1,800 U = (6.50** - standard labor rate per hour) x 18,000 1,800 U / 18,000 = .10 .10 = 6.50 - standard labor rate per hour 6.40 = standard labor rate per hour (since variance is unfavorable, the standard rate is less than the actual rate) **Total payroll / actual labor hours worked = actual labor rate per hour $117,000 / 18,000 = $6.50 PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 22. The direct labor costs for Boundary Company follow: Standard direct labor hours 34,000 Actual direct labor hours 33,000 Direct labor efficiency variance--favorable $ 12,000 Direct labor rate variance--favorable $ 1,650 Total payroll $394,350 What was Boundary's standard direct labor rate? a. $ 11.95 b. $ 11.49 c. $ 11.60 d. $ 12.00 ANS: D Labor efficiency variance = (actual number of labor hours worked - standard number of labor hours allowed) x standard labor rate per hour $12,000 F = (33,000 -34,000) x standard labor rate per hour Actual hours 33,000 Standard hours 34,000 Standard hours allowed in excess of actual hours 1,000 hours Efficiency variance: $12,000 / 1,000 hours = $12.00 standard rate PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 23. The following information pertains to Genie Company: Standard materials allowed $12,000 Unfavorable materials price variance 2,000 Favorable materials usage variance 1,000 Actual payroll $20,000 Unfavorable labor rate variance 1,500 Unfavorable labor efficiency variance 500 What is the entry to record the direct materials cost and variances, assuming that the price variance is recorded when the materials are put into production? a. Materials 12,000 Materials price variance 2,000 Accounts payable 13,000 b. Work in process 12,000 Materials quantity variance 1,000 Materials price variance 2,000 Materials 11,000 c. Work in process 11,000 Materials price variance 2,000 Materials 13,000 d. Work in process 12,000 Materials price variance 2,000 Materials quantity variance 1,000 Materials 13,000 ANS: D Materials that go into work in process are recorded at standard. Unfavorable variances are debits and favorable variances are credits. The materials account is credited for the residual amount. Work in process 12,000 Materials price variance 2,000 Materials quantity variance 1,000 Materials 13,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 24. Information relating to direct labor for the Newstead Company follow: Actual direct labor hours 5,600 Standard direct labor hours 5,400 Total direct labor per payroll $53,200 Standard labor rate per hour $9.00 The entry to record the direct labor cost is: a. Work in process 53,200 Labor rate variance 2,800 Labor efficiency variance 1,800 Payroll 48,600 b. Work in process 50,400 Labor rate variance 2,800 Payroll 53,200 c. Work in process 48,600 Labor rate variance 2,800 Labor efficiency variance 1,800 Payroll 53,200 d. Work in process 51,400 Labor efficiency variance 1,800 Payroll 53,200 ANS: C Labor efficiency variance = (Actual number of labor hours worked - standard number of labor hours allowed) x standard labor rate per hour. Labor efficiency variance = (5,600 - 5,400) x $9 Labor efficiency variance = $1,800 U (because actual was in excess of standard) Labor rate variance = (Actual labor rate per hour - standard labor rate per hour) x actual number of labor hours worked Labor rate variance = ($9.50* - $9.00) x 5,600 Labor rate variance = $2,800 U (because actual exceeded standard) * Actual labor rate per hour = $53,200 / 5,600 = $9.50 Material (recorded at standard 5,400 x $9.00) 48,600 Labor rate variance 2,800 Labor efficiency variance 1,800 Payroll (actual amounts paid) 53,200 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. The following information pertains to Genie Company: Standard materials allowed $12,000 Unfavorable materials price variance 2,000 Favorable materials usage variance 1,000 Actual payroll $20,000 Unfavorable labor rate variance 1,500 Unfavorable labor efficiency variance 500 What is the entry to record the direct labor cost and variances? a. Payroll 20,000 Labor rate variance 1,500 Labor efficiency variance 500 Accrued payroll 21,500 b. Work in process 18,000 Labor rate variance 1,500 Labor efficiency variance 500 Payroll 20,000 c. Work in process 20,000 Payroll 20,000 d. Work in process 18,000 Labor variances 2,000 Payroll 20,000 ANS: B Labor that goes into work in process is recorded at standard. In this problem, it is the residual amount. Unfavorable variances are debits. The payroll account is credited when labor is applied to production. Work in process 18,000 Labor price variance 1,500 Labor efficiency variance 500 Payroll 20,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. PHI Company began its operations on January 1 and produces a single product that sells for $35.00 per unit. 5,000 units were produced and 4,000 units were sold during the year. Standard costs per unit follow: Standard cost Raw materials $12.50 Direct labor 6.50 Factory overhead 4.00 What is entry to record the finished goods? a. Finished goods 115,000 Work in process 115,000 b. Finished goods 92,000 Work in process 92,000 c. Work in process 115,000 Finished goods 115,000 d. Cost of goods sold 92,000 Finished goods 92,000 ANS: A Total unit cost = $12.50 + $6.50 + $4.00 = $23.00 Finished goods ($23.00 x 5,000) 115,000 Work in process 115,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. If a company follows a practice of isolating variances at the earliest point in time, what would be the appropriate time to isolate and recognize a direct material price variance? a. When material is purchased b. When material is used in production c. When purchase order is originated d. When material is issued ANS: A The earliest point in time to isolate a direct material price variance is when the material is purchased, because at that time the difference between actual price and standard price is known. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 28. In a standard cost system,when the materials price variance is recorded at the time the material is purchased, the materials purchase price variance is obtained by multiplying the: a. Actual price by the difference between actual quantity purchased and standard quantity used. b. Actual quantity purchased by the difference between actual price and standard price. c. Standard price by the difference between standard quantity purchased and standard quantity used. d. Standard quantity purchased by the difference between actual price and standard price. ANS: B The materials purchase price variance is obtained by multiplying the actual quantity purchased by the difference between actual price and standard price. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 29. Andrews Corporation purchased 3,000 gallons of raw materials for $9,200. The standard price is $3.00 per gallon. If Andrews records the price variance at the earliest possible time, the entry to record the purchase of the material is: a. Materials 9,200 Material purchase price variance 200 Accounts payable 9,000 b. Materials 9,000 Accounts payable 9,000 c. Materials 9,000 Material purchase price variance 200 Accounts payable 9,200 d. Materials 9,200 Accounts payable 9,200 ANS: C If the price variance is recorded at the earliest possible time (which would be upon purchase), the entry is to record the material into inventory at standard: Materials (3,000 x $3.00) 9,000 Material purchase price variance 200 Accounts payable 9,200 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 30. Thomas Company uses a standard cost system and recognizes the materials purchase price variance at the time materials are purchased. Information for raw materials for Product RBI for the month of October follows: Standard unit price $1.75 Actual purchase price per unit $1.65 Actual quantity purchased 4,000 units Actual quantity used 3,900 units Standard quantity allowed for actual production 3,800 units What is the materials purchase price variance? a. $390 favorable b. $390 unfavorable c. $400 favorable d. $400 unfavorable ANS: C Materials purchase price variance = (actual unit price of materials - standard unit price of materials) x actual quantity of materials purchased Materials purchase price variance = ($1.65 - $1.75) x 4,000 Actual unit price $1.65 Standard unit price 1.75 Excess of standard price over actual $ .10 Quantity purchased 4,000 units Purchase price variance (favorable - standard price exceeds actual) $ 400 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 31. Thomas Company uses a standard cost system and recognizes the materials purchase price variance at the time materials are purchased. Information for raw materials for Product RBI for the month of October follows: Standard unit price $1.75 Actual purchase price per unit $1.65 Actual quantity purchased 4,000 units Actual quantity used 3,900 units Standard quantity allowed for actual production 3,800 units What is the entry to record the purchase of materials? a. Materials 6,600 Material purchase price variance 400 Accounts payable 7,000 b. Materials 7,000 Material purchase price variance 400 Accounts payable 6,600 c. Materials 6,600 Accounts payable 6,600 d. Materials 6,600 Material purchase price variance 330 Accounts payable 6,270 ANS: B Materials purchase price variance = (actual unit price of materials - standard unit price of materials) x actual quantity of materials purchased Materials purchase price variance = ($1.65 - $1.75) x 4,000 Materials purchase price variance = $400 F (because standard price exceeded actual price) Materials (recorded at standard price 4,000 x 1.75) 7,000 Material purchase price variance 400 Accounts payable (actual 4,000 x 1.65) 6,600 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 32. Thomas Company uses a standard cost system and recognizes the materials purchase price variance at the time materials are purchased. Information for raw materials for Product RBI for the month of October follows: Standard unit price $1.75 Actual purchase price per unit $1.65 Actual quantity purchased 4,000 units Actual quantity used 3,900 units Standard quantity allowed for actual production 3,800 units What is the entry to record material usage? a. Work in process 6,825 Materials quantity variance 175 Materials 7,000 b. Work in process 6,825 Materials quantity variance 175 Materials 6,435 c. Work in process 6,270 Materials quantity variance 165 Materials 6,435 d. Work in process 6,650 Materials quantity variance 175 Materials 6,825 ANS: D Materials quantity variance = (actual quantity of materials used - standard quantity of materials allowed) x standard unit price of materials Materials quantity variance = (3,900 - 3,800) x $1.75 = $175 U (because actual amounts exceeded standard) Work in process (3,800 x 1.75) 6,650 Materials quantity variance 175 Materials (3,900 x 1.75) 6,875 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 33. What is the normal year-end treatment of immaterial variances recognized in a cost accounting system utilizing standards? a. Reclassified to deferred charges until all related production is sold b. Closed to cost of goods sold in the period in which they arose c. Allocated among cost of goods manufactured and ending work in process inventory d. Capitalized as a cost of ending finished goods inventory ANS: B The normal year-end treatment of immaterial variances of standard costs is to close them to cost of goods sold in the period in which they arose. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Analytic 34. How should an efficiency variance that is material in amount be treated at the end of an accounting period? a. Reported as a deferred charge or credit b. Allocated among work in process inventory, finished goods inventory, and cost of goods sold c. Charged or credited to cost of goods manufactured d. Allocated among cost of goods manufactured, finished goods inventory, and cost of goods sold ANS: B A variance that is material in amount should be allocated among work in process inventory, finished goods inventory, and cost of goods sold at the end of an accounting period. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Analytic 35. Standard costing will produce the same income before extraordinary items as actual costing when standard cost variances are assigned to: a. Work in process and finished goods inventories. b. An income or expense account. c. Cost of goods sold and inventories. d. Cost of goods sold. ANS: C If standard cost variances are assigned to cost of goods sold and inventories, the result is the same as actual costing, resulting in the same income before extraordinary items. PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective 36. To effectively use variances to improve operations, management should take the following steps except: a. Taking appropriate action to follow up on variances. b. Breaking down the total variance by usage and price. c. Adding variances together to determine the impact on financial statements. d. Analyzing cause and effect of both favorable and unfavorable variances. ANS: C The use of variances to improve operations normally would not include determination of the impact on the financial statements. Management should break the variances down, determine the cause of the variances, and follow up appropriately. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 37. If the total materials variance (actual cost of materials used compared with the standard cost of the standard amount of materials required) for a given operation is favorable, why must this variance be further evaluated as to price and usage? a. There is no need to further evaluate the total materials variance if it is favorable. b. Generally accepted accounting principles require that all variances be analyzed in three stages. c. All variances must appear in the annual report to equity owners for proper disclosure. d. It is done so that management can evaluate the efficiency of the purchasing and production functions. ANS: D All variances, favorable or unfavorable, must be evaluated. The analysis of a favorable materials variance allows management to evaluate the efficiency of the purchasing and production functions through study of the price and usage variances. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 38. Taking appropriate action on variances includes all of the following except: a. Ignoring the cause of favorable variances. b. Revising the standard because it was set incorrectly. c. Improving the manufacturing process. d. Looking for new suppliers. ANS: A Management should follow up on the causes of both favorable and unfavorable variances. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 39. Which of the following is not likely to have caused a materials price variance? a. The vendor from whom we always bought component XYZ closed and we found a new one. b. One of the workers inadvertently cut several pieces of steel to the wrong length. c. We started using a higher grade of lumber in our process. d. Higher oil prices have increased the costs of shipping the ingredients to us. ANS: B One of the workers cutting steel to the wrong length would impact the materials quantity variance as he created waste, but not the price variance. The other three situations could impact the price paid for materials. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 40. Bobby’s Burger Place monitors its variances on an hourly basis. It is not uncommon for Bobby to send workers home early when which of the following variances indicates that he has over-scheduled the shift? a. Unfavorable labor efficiency variance. b. Favorable labor rate variance. c. Unfavorable materials quantity variance. d. Favorable labor efficiency variance. ANS: A If a shift has been over-scheduled, it would show up as an unfavorable labor efficiency variance since there would be too many hours for the amount of activity. PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 41. Which of the following is not likely to cause a labor efficiency variance? a. We produced more units than were budgeted. b. There was a flu outbreak and workers had to cover unfamiliar positions. c. We purchased materials that were poor in quality. d. One of the supervisors discovered a way to streamline a process. ANS: A Because variance analysis is based on flexible budgeting and we are comparing the actual number of hours incurred for the units produced to the number of hours the production of units should have taken, the fact that we produced more or less units than were budgeted would not impact the labor efficiency variance. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 42. One possible explanation for a company that experiences a favorable labor efficiency variance, but an unfavorable labor rate variance could be: a. The company paid the workers overtime. b. The company hired more experienced workers. c. The company purchased materials that were hard to work with. d. The workers “goofed around” and wasted time. ANS: B If a company hires works that are more experienced, the average wage rate could be higher than the standard rate and they could complete the tasks more quickly resulting in a favorable labor efficiency variance, but an unfavorable labor rate variance. The overtime premium paid to workers is usually charged to overtime, so this should not impact the labor rate variance. Situations c and d would be more likely to result in unfavorable labor efficiency variances. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 43. Under normal circumstances, a purchasing manager who buys poor quality materials because they were cheaper could potentially be responsible for causing all of the following variances except a(n): a. Favorable purchase price variance. b. Unfavorable materials quantity variance. c. Unfavorable purchase price variance. d. Unfavorable labor efficiency variance. ANS: C If the purchasing manager buys the materials because they are cheap, he normally would not have an unfavorable purchase price variance. However, if the materials are difficult to work with, this could lead to unfavorable materials quantity variances and unfavorable labor efficiency variances. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 44. All of the following are features of a standard cost system except: a. Standards change as conditions change. b. Variances may be determined more often than monthly to allow for more timely action. c. Standards are based on estimates. d. The company determines the actual cost of manufacturing a unit. ANS: D When using a standard cost system, the company will not determine the actual cost of manufacturing a unit. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 45. All of the following are features of a standard cost system except: a. Standards should not be adjusted. b. Standards provide incentives for workers to keep costs in line. c. Comparisons between actual and standard are more effective than comparisons between actual costs of the current period and those of the prior period. d. A standard cost system focuses management attention on materials prices and usages. ANS: A Standards should be flexible and should be changed as circumstances warrant. For example, if a new union contract is negotiated, the standard wage rates should be adjusted to reflect the new wage rates. PTS: 1 DIF: Moderate REF: P. OBJ: 6 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 46. Overapplied factory overhead would result if: a. Factory overhead costs incurred were greater than standard costs charged to production. b. The plant was operated at less than normal capacity. c. Factory overhead costs incurred were less than standard costs charged to production. d. Factory overhead costs incurred were unreasonably large in relation to units produced. ANS: C Overapplied overhead would result if factory overhead costs incurred were less than standard costs charged to production. PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 47. The Johns Company budgeted factory overhead at $125,000 for the period for Department A based on a budgeted volume of 50,000 direct labor hours. At the end of the period, the factory overhead control account for Department A had a balance of $126,000. The actual (and allowed) direct labor hours were 52,000. What was the over- or underapplied factory overhead for the period? a. $6,500 underapplied b. $6,500 overapplied c. $4,000 underapplied d. $4,000 overapplied ANS: D Actual factory overhead incurred - factory overhead applied = over- or underapplied factory overhead Budgeted overhead / budgeted direct labor hours = $125,000 / 50,000 = factory overhead application rate per direct labor hour $ 2.50 Actual and allowed direct labor hours x 52,000 Factory overhead applied $130,000 Actual factory overhead incurred 126,000 Overapplied factory overhead for the period $ 4,000 PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 48. Donellan Company has a standard and flexible budgeting system and uses a two-variance analysis of factory overhead. Selected data for the February production activity follows: Budgeted fixed factory overhead costs $ 70,000 Actual factory overhead incurred $250,000 Variable factory overhead rate per direct labor hour $ 7 Standard direct labor hours 25,000 Actual direct labor hours 26,000 The controllable variance for February is: a. $5,000 favorable. b. $5,000 unfavorable. c. $7,000 favorable. d. $7,000 unfavorable. ANS: B Actual factory overhead incurred - standard factory overhead budgeted for actual level of production = controllable variance Standard direct labor hours $25,000 Variable factory overhead rate per hour x 7 Budgeted variable factory overhead 175,000 Budgeted fixed factory overhead 70,000 Standard factory overhead budgeted at actual level of production $245,000 Actual factory overhead incurred 250,000 Controllable variance--unfavorable $ 5,000 PTS: 1 DIF: Moderate REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 49. The data below relate to the month of April for Monroe, Inc., which uses a standard cost system and a two-variance analysis of factory overhead: Actual hours used 16,500 Standard hours allowed for good output 16,250 Actual total overhead $53,200 Budgeted fixed costs $12,000 Budgeted activity in hours 16,000 Total overhead application rate per standard direct labor hour $ 3.25 Variable overhead rate per standard direct labor hour $ 2.50 What was Monroe's controllable variance for April? a. $1,100 favorable b. $1,100 unfavorable c. $575 favorable d. $575 unfavorable ANS: D Actual factory overhead incurred - Standard overhead budgeted for actual level of production = controllable variance Variable overhead application rate per hour $ 2.50 Standard hours allowed x 16,250 Budgeted variable factory overhead $40,625 Budgeted fixed factory overhead 12,000 Total budgeted factory overhead at actual level of production 52,625 Actual factory overhead incurred 53,200 Controllable variance -- unfavorable $ 575 PTS: 1 DIF: Moderate REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 50. Elgin Company's budgeted fixed factory overhead costs are $50,000 per month plus a variable factory overhead rate of $4.00 per direct labor hour. The standard direct labor hours allowed for October production were 20,000. An analysis of the factory overhead indicates that in October Elgin had an unfavorable controllable variance of $1,500 and a favorable volume variance of $500. Elgin uses a two-variance analysis of overhead variances. The actual factory overhead incurred in October is: a. $126,500. b. $128,000. c. $128,500. d. $131,500. ANS: D Controllable variance = Actual factory overhead - Standard overhead budgeted for actual activity level* $1,500 U = Actual factory overhead - $130,000 Actual factory overhead = $131,500 (Unfavorable variance indicates that actual factory overhead exceeds budgeted amounts.) * Standard direct labor hours 20,000 Variable overhead rate per hour x $4.00 Variable overhead budgeted $ 80,000 Fixed overhead budgeted 50,000 Total overhead budgeted $130,000 PTS: 1 DIF: Hard REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 51. A company uses a two-variance analysis for overhead variances, controllable and volume. The volume variance is the difference between the factory overhead applied at standard and: a. Total factory overhead per the flexible budget. b. Actual factory overhead incurred. c. Total factory overhead per the master budget. d. Fixed overhead incurred. ANS: A The volume variance is the difference between the factory overhead per the flexible budget (standard overhead budgeted for actual level of production) and the factory overhead applied at standard. PTS: 1 DIF: Moderate REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 52. The fixed overhead application rate is a function of a predetermined "normal" activity level. If standard hours allowed for good output equal this "normal" activity level for a given period, the volume variance will be: a. Zero. b. Favorable. c. Unfavorable. d. Either favorable or unfavorable depending on the budgeted overhead. ANS: A If standard hours allowed for good output equal the normal activity level for a given period, the volume variance will be zero. Consider the following proof: The volume variance is the difference between the factory overhead per the flexible budget (standard overhead budgeted for actual level of production) and the factory overhead applied at standard. Standard hours allowed for good output (4,000 units x 4 hours) 16,000 Budgeted fixed costs $12,000 Budgeted activity in hours 16,000 Total overhead application rate per standard direct labor hour $ 3.25 Variable overhead rate per standard direct labor hour $ 2.50 Budgeted variable factory overhead 16,000 x $2.50 $40,000 Budgeted fixed factory overhead 12,000 Total budgeted factory overhead at actual level of production 52,000 Factory overhead applied 16,000 x $3.25 52,000 Volume variance $ - PTS: 1 DIF: Hard REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 53. The data below relate to the month of April for Monroe, Inc., which uses a standard cost system and a two-variance analysis of factory overhead: Actual direct labor hours used 16,500 Standard direct labor hours allowed 16,250 Actual total factory overhead $53,200 Budgeted fixed factory overhead $12,000 Budgeted activity in hours 16,000 Total overhead application rate per standard direct labor hour $3.25 Variable overhead application rate per standard direct labor hour $2.50 What was Monroe's volume variance for April? a. $187.50 favorable b. $187.50 unfavorable c. $437.50 favorable d. $437.50 unfavorable ANS: A Standard overhead budgeted for actual level of production - applied overhead at standard = volume variance Variable overhead application rate per hour $ 2.50 Standard hours allowed x 16,250 Budgeted variable factory overhead $40,625.00 Budgeted fixed factory overhead 12,000.00 Total budgeted factory overhead 52,625.00 Overhead applied at standard: 16,250 hours  $3.25 52,812.50 Volume variance -- favorable $ 187.50 PTS: 1 DIF: Moderate REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 54. If a company uses a two-variance analysis for overhead variances and uses a predetermined rate for absorbing manufacturing overhead, the volume variance is the: a. Underapplied or overapplied variable cost element of overhead. b. Underapplied or overapplied fixed cost element of overhead. c. Difference in budgeted costs and actual costs of fixed overhead items. d. Difference in budgeted costs and actual costs of variable overhead items. ANS: B If a company uses a predetermined rate for absorbing manufacturing overhead, the volume variance is the underapplied or overapplied fixed cost element of overhead. Consider the following proof: The volume variance is the difference between the factory overhead per the flexible budget (standard overhead budgeted for actual level of production) and the factory overhead applied at standard. Standard hours allowed for good output (8125 x 2 hrs.) 16,250 Budgeted fixed costs $12,000 Budgeted activity in hours 16,000 Total overhead application rate per standard direct labor hour $ 3.25 Variable overhead rate per standard direct labor hour $ 2.50 Budgeted variable factory overhead 16,250 x $2.50 $40,625.00 Budgeted fixed factory overhead 12,000.00 Total budgeted factory overhead at actual level of production 52,625.00 Factory overhead applied 16,250 x $3.25 52,812.50 Volume variance -- unfavorable $ 187.50 Budgeted fixed factory overhead per hour $12,000 / 16,000 = $.75 per hour Difference in allowed vs. budgeted hours 16,250 - 16,000 = 250 hours Variance attributable to fixed factory overhead 250 x $.75 = $187.50 PTS: 1 DIF: Hard REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 55. Elgin Company's budgeted fixed factory overhead costs are $50,000 per month plus a variable factory overhead rate of $4.00 per direct labor hour. The standard direct labor hours allowed for October production were 20,000. An analysis of the factory overhead indicates that in October, Elgin had an unfavorable budget (controllable) variance of $1,500 and a favorable volume variance of $500. Elgin uses a two-variance analysis of overhead variances. The applied factory overhead in October is: a. $129,500. b. $128,000. c. $130,000. d. $130,500. ANS: D Volume variance = Standard overhead budgeted for actual production level - Applied overhead at standard $500 F = $130,000* - Factory overhead applied at standard $130,500 = Factory overhead applied at standard (Favorable variance indicates that applied overhead exceeds budgeted amount.) * Standard direct labor hours 20,000 Variable overhead rate per hour x $4.00 Variable overhead budgeted $ 80,000 Fixed overhead budgeted 50,000 Total overhead budgeted $130,000 PTS: 1 DIF: Hard REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 56. In a two-variance system for analyzing factory overhead, a favorable volume variance could be caused by: a. The top salesman leaving the company. b. Receiving more orders than anticipated. c. A machine breakdown. d. A work slow-down by workers. ANS: B A favorable volume variance occurs when actual production levels exceed the standard production level set by management. The top salesman leaving the company, a machine breakdown and a work slow-down would be more likely to lead to actual production levels not meeting expected levels of production. PTS: 1 DIF: Hard REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 57. Information on Shonda Company's factory overhead costs follows: Actual variable factory overhead $95,000 Actual fixed factory overhead $28,000 Standard hours allowed for actual production 30,000 Standard variable overhead rate per direct labor hour $3.25 Standard fixed overhead rate per direct labor hour $1.00 What is the factory overhead variance? a. $4,500 unfavorable b. $4,500 favorable c. $2,500 unfavorable d. $2,500 favorable ANS: B Actual factory overhead incurred - standard factory overhead applied = factory overhead variance Variable factory overhead rate per direct labor hour $ 3.25 Fixed factory overhead rate per direct labor hour 1.00 Total factory overhead application rate $ 4.25 Standard hours allowed for actual production x 30,000 Factory overhead applied at standard $127,500 Actual variable factory overhead $ 95,000 Actual fixed factory overhead 28,000 Total actual factory overhead incurred 123,000 Favorable overhead variance $ 4,500 PTS: 1 DIF: Moderate REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 58. In a four-variance method analyzing factory overhead, the variable factory overhead efficiency variance measures: a. The effect of differences in the actual variable factory overhead rate and the standard variable factory overhead rate. b. The difference in the actual hours incurred and standard hours allowed for a given level of production. c. The difference between actual and applied variable factory overhead. d. The difference between actual variable factory overhead and budgeted variable factory overhead. ANS: B The variable overhead efficiency variance is the difference between the actual hours worked and the standard hours allowed multiplied by the standard variable rate per hour. PTS: 1 DIF: Moderate REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 59. The following information pertains to the Braun Company for March: Standard direct labor hours per unit .5 hours Budgeted production level 20,000 units Actual units produced 22,000 units Standard variable rate per direct labor hour $2.00 Standard fixed rate per direct labor hour $3.00 Actual direct labor hours worked 10,500 hours Actual direct labor costs $150,000 Actual fixed factory overhead 31,800 Actual variable factory overhead 22,200 Using the four-variance method of factory overhead variance analysis, what is the spending variance? a. $1,200 unfavorable b. $200 unfavorable c. $1,000 favorable d. $200 favorable ANS: A Spending variance = actual variable overhead - (actual hours worked x standard variable rate per hour) Spending variance = $22,200 - (10,500 x $2) Spending variance = $22,200 - $21,000 Spending variance = $1,200 Unfavorable (because actual exceeded standard) PTS: 1 DIF: Moderate REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 60. The following information pertains to the Braun Company for March: Standard direct labor hours per unit .5 hours Budgeted production level 20,000 units Actual units produced 22,000 units Standard variable rate per direct labor hour $2.00 Standard fixed rate per direct labor hour $3.00 Actual direct labor hours worked 10,500 hours Actual direct labor costs $150,000 Actual fixed factory overhead 31,800 Actual variable factory overhead 22,200 Using the four-variance method of factory overhead variance analysis, what is the efficiency variance? a. $1,200 unfavorable b. $200 unfavorable c. $1,000 favorable d. $200 favorable ANS: C Efficiency variance = (actual hours worked - standard hours allowed) x standard variable rate per hour Efficiency variance = (10,500 - 11,000*) x $2 Efficiency variance = $1,000 Favorable (because actual hours worked were less than standard) * Actual items produced x standard hours allowed (22,000 x .5 = 11,000) PTS: 1 DIF: Moderate REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 61. The following information pertains to the Braun Company for March: Standard direct labor hours per unit .5 hours Budgeted production level 20,000 units Actual units produced 22,000 units Standard variable rate per direct labor hour $2.00 Standard fixed rate per direct labor hour $3.00 Actual direct labor hours worked 10,500 hours Actual direct labor costs $150,000 Actual fixed factory overhead 31,800 Actual variable factory overhead 22,200 Using the four-variance method of factory overhead variance analysis, what is the budget variance? a. $1,200 favorable b. $1,800 unfavorable c. $3,000 favorable d. $1,200 unfavorable ANS: B Budget variance = actual fixed cost - budgeted fixed cost Budget variance = $31,800 - $30,000* Budget variance = $1,800 Unfavorable (because actual fixed costs exceeded budgeted fixed costs) * Budgeted production x standard hours allowed per unit x fixed factory overhead rate (20,000 x .5 x $3 = $30,000) PTS: 1 DIF: Hard REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 62. The following information pertains to the Braun Company for March: Standard direct labor hours per unit .5 hours Budgeted production level 20,000 units Actual units produced 22,000 units Standard variable rate per direct labor hour $2.00 Standard fixed rate per direct labor hour $3.00 Actual direct labor hours worked 10,500 hours Actual direct labor costs $150,000 Actual fixed factory overhead 31,800 Actual variable factory overhead 22,200 Using the four-variance method of factory overhead variance analysis, what is the volume variance? a. $1,200 favorable b. $1,800 unfavorable c. $3,000 favorable d. $1,200 unfavorable ANS: C Volume variance = budgeted fixed cost - standard hours allowed x fixed rate Volume variance = $30,000* - 11,000** x $3 Volume variance = $3,000 favorable (because standard hours allowed exceeded budgeted hours) * Budgeted production x standard hours allowed per unit x fixed factory overhead rate (20,000 x .5 x $3 = $30,000) ** Standard hours allowed = actual units x standard hours per unit 11,000 = 22,000 x .5 PTS: 1 DIF: Hard REF: Appendix. OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 63. Which of the following correctly demonstrates the comparison of the four-variance method of factory overhead analysis to the two-variance method of factory overhead analysis? a. The sum of the spending and budget variances in the four-variance method is equal to the controllable variance in the two-variance method. b. The sum of the budget, spending and efficiency variances in the four-variance method is equal to the controllable variance in the two-variance method. c. The sum of the spending, efficiency and volume variances in the four-variance method is equal to the controllable variance in the two-variance method. d. The budget variance in the four-variance method is equal to the controllable variance in the two-variance method. ANS: B The sum of the variable spending and efficiency variances and the fixed budget variance in the four variance method is equal to the controllable variance in the two-variance method. PTS: 1 DIF: Hard REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 64. Which of the following correctly demonstrates the comparison of the four-variance method of factory overhead analysis to the two-variance method of factory overhead analysis? a. The sum of the spending, efficiency and budget variances in the four-variance method is equal to the volume variance in the two-variance method. b. The sum of the volume and efficiency variances in the four-variance method is equal to the volume variance in the two-variance method. c. The volume variance in the four-variance method is equal to the volume variance in the two-variance method. d. The sum of the budget and volume variances in the four-variance method is equal to the volume variance in the two-variance method. ANS: C The volume variance in the four variance method is equal to the volume variance in the two-variance method. PTS: 1 DIF: Hard REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 65. In the three-variance method of factory overhead analysis, what standard cost variance represents the difference between actual factory overhead incurred and budgeted factory overhead based on actual hours worked? a. Volume variance b. Efficiency variance c. Budget (spending) variance d. Quantity variance ANS: C The spending (budget) variance represents the difference between actual factory overhead incurred and budgeted factory overhead based on actual hours worked. PTS: 1 DIF: Moderate REF: Appendix OBJ: 11 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 66. The following information is available from the Tomoto Company: Actual factory overhead $16,500 Actual fixed overhead expenses $ 9,200 Budgeted fixed overhead expenses $ 9,000 Actual hours 3,600 Standard hours 3,800 Variable overhead rate per direct labor hour $ 2.25 Assuming that Tomoto uses a three-variance analysis of overhead variances, what is the budget (spending) variance? a. $600 favorable b. $600 unfavorable c. $450 favorable d. $450 unfavorable ANS: A Budget variance = Actual factory overhead incurred - Budgeted factory overhead for actual hours worked Budget variance = $16,500 - $17,100* Budget variance = $600 F (Actual is less than budget so variance is unfavorable) *Actual hours 3,600 Variable overhead rate x $2.25 Variable overhead budgeted $ 8,100 Budgeted fixed overhead 9,000 Budgeted overhead for actual hours worked $17,100 PTS: 1 DIF: Moderate REF: Appendix OBJ: 11 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 67. In a three-variance method of factory overhead analysis, the variance that indicates that the volume of production was more or less than budgeted is the: a. Budget variance. b. Capacity variance. c. Spending variance. d. Efficiency variance. ANS: B The factory overhead capacity variance in a three-variance method of factory overhead analysis indicates the volume of production was more or less than budgeted because it reflects the difference between budgeted fixed overhead and the fixed overhead rate multiplied by the actual hours worked. The factory overhead efficiency variance is the difference between the factory overhead applied and the actual hours worked multiplied by the standard rate. The budget or spending factory overhead variance is the difference between the actual overhead incurred and the budgeted overhead for the actual hours worked. PTS: 1 DIF: Moderate REF: Appendix OBJ: 11 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 68. In a three-variance method of factory overhead analysis, the variance that measures the difference between the factory overhead applied and the actual hours worked multiplied by the standard rate is the: a. Budget variance. b. Capacity variance. c. Spending variance. d. Efficiency variance. ANS: D The factory overhead efficiency variance in a three-variance method of factory overhead analysis is the difference between the factory overhead applied and the actual hours worked multiplied by the standard rate. The budget or spending factory overhead variance is the difference between the actual overhead incurred and the budgeted overhead for the actual hours worked. The capacity factory overhead variance is the difference between the budgeted overhead for the actual hours worked and the actual hours worked multiplied by the standard rate. PTS: 1 DIF: Moderate REF: Appendix OBJ: 11 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic PROBLEM 1. Hernandez Corporation uses a standard cost system and has established the following standards for one unit of product: Standard Quantity Standard Price Standard Cost Direct materials 10 pounds $2.60 per pound $26.00 Direct labor .25 hour $10.00 per hour 2.50 $28.50 During October, the company purchased 240,000 pounds of material at a total cost of $588,000. The total factory wages for October were $49,400. During October, 21,000 units of product were manufactured using 211,000 pounds of material and 5,200 direct labor hours. Material quantity and price variances are recorded when materials are used. a. Compute the material quantity and labor efficiency variances. b. Compute the material price and labor rate variances. Show whether each of the above variances was either favorable or unfavorable. ANS: (a) Standard Quantity or Hours Actual Quantity or Hours Difference Standard Cost Variance Materials Quantity 210,000* 211,000 1,000 lbs. $2.60 lb. $2,600 Variance lbs. lbs. (unfav.) (unfav.) Labor Efficiency 5,250** 5,200 50 hrs. $10.00 hr. $500 Variance hrs. hrs. (fav.) (fav.) * Actual production x standard allowed (21,000 x 10 lbs = 210,000) ** Actual production x standard allowed (21,000 x .25 hrs = 5,250) (b) Standard Cost Actual Cost Difference Actual Quantity or Hours Variance Materials Price $2.60/lb. $2.45/lb.* $.15(fav.) 211,000 $31,650 Variance lbs. (fav.) Labor Rate $10.00/hr. $9.50/hr.** $.50(fav.) 5,200 $2,600 Variance hrs. (fav.) * Actual total cost / actual pounds purchased ($588,000 / 240,000 = $2.45) ** Actual total cost / actual hours ($49,400 / 5,200 = $9.50) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 2. Fill in the missing figures below: Units produced 7,900 Standard hours per unit 5 hours Standard hours allowed (a) Standard rate per hour $12.00 Actual hours worked 39,900 Actual labor cost (b) Labor rate variance $5,985 favorable Labor efficiency variance (c) ANS: (a) Standard hours allowed = units produced x standard hours per unit Standard hours allowed = 7,900 x 5 = 39,500 (b) Labor rate variance = Actual payroll - (Actual hours worked x standard rate) $5,985 F = Actual payroll - (39,900 x $12.00) $5,985 F = Actual payroll - $478,800 Actual payroll = $472,815 (favorable variance is deducted from standard) (c) Labor efficiency variance = (Actual hours - standard hours allowed) x Standard rate Labor efficiency variance = (39,900 - 39,500) x $12 = $4,800 U (actual in excess of standard) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 3. The normal capacity of the Malloy Company is 20,000 direct labor hours and 10,000 units per month. A finished unit requires 15 pounds of materials at an estimated cost of $1.00 per pound. The estimated cost of labor is $12.00 per hour. It is estimated that overhead for a month will be $15,000. During the month of June, 19,000 direct labor hours were worked at an average rate of $11.50 an hour. The number of units produced was 9,000, using all 132,000 pounds of material that were purchased at a cost of $1.05 per pound. a. Prepare a standard cost summary showing the standard unit cost. b. Calculate the material and labor variances. c. Prepare entries in general journal form to charge materials and labor to work in process. Indicate whether the variances are favorable or unfavorable. ANS: Standard Cost Summary (a) Materials (15 lbs. @ $1.00 per lb.) $15.00 Labor (2 hrs. @ $12.00 per hr.) 24.00 Factory overhead ($15,000 / 10,000 units) 1.50 Standard cost per unit $40.50 (b) Standard Quantity or Hours Actual Quantity or Hours Difference Standard Cost Variance Materials Quantity 135,000* 132,000 3,000 lbs. $1.00 lb. $3,000 Variance lbs. lbs. (fav.) (fav.) Labor Efficiency 18,000** 19,000 1,000 hrs. $12.00 hr. $12,000 Variance hrs. hrs. (unfav.) (unfav.) * Actual production x standard allowed (9,000 x 15 lbs. = 135,000) ** Actual production x standard allowed (9,000 x 2 hrs*** = 18,000) *** Normal hours / normal units (20,000 / 10,000 = 2) Standard Cost Actual Cost Difference Actual Quantity or Hours Variance Materials Price $1.00/lb. $1.05/lb. $.05(unfav.) 132,000 $6,600 Variance lbs. (unfav.) Labor Rate $12.00/hr. $11.50/hr. $.50(fav.) 19,000 $9,500 Variance hrs. (fav.) (c) Work in Process (9,000  $15) 135,000 Materials Price Variance--unfavorable 6,600 Materials Quantity Variance-- favorable 3,000 Materials (132,000  $1.05) 138,600 Work in Process 216,000 Labor Efficiency Variance--unfavorable 12,000 Labor Rate Variance--favorable 9,500 Payroll 218,500 Note to instructor - requirement (c) may be optional. If it is not assigned, this problem would be moderate in difficulty. PTS: 1 DIF: Hard REF: P. OBJ: 3, 4 NAT: IMA 2D - Performance Measurement; 2B - Cost Management TOP: AACSB - Analytic 4. The following information pertains to Skandalis Company's production of one unit of its manufactured product during the month of June: Standard quantity of materials 10 lbs. Standard cost per lb. $.85 Standard direct labor hours .5 Standard wage rate per hour $12.00 Materials purchased 200,000 lbs. Cost of materials purchased $.82 per lb. Materials consumed for manufacture of 10,000 units 112,000 lbs. Actual direct labor hours required for 10,000 units 4,600 Actual direct labor cost per hour $12.25 (a) The materials price variance is recognized when materials are purchased. Compute materials price and quantity variances and labor rate and efficiency variances. (b) Prepare the journal entries to record: (1) the purchase of the materials, (2) putting materials into production, and (3) direct labor costs. ANS: Standard Quantity or Hours Actual Quantity or Hours Difference Standard Cost Variance Materials Quantity 100,000* 112,000 12,000 lbs. $.85/lb. $10,200 Variance lbs. lbs. (unfav.) (unfav.) Labor Efficiency 5,000** 4,600 400 hrs. $12.00/hr. $4,800 Variance hrs. hrs. (fav.) (fav.) *Actual production x lbs. allowed per unit (10,000 x 10 = 100,000) ** Actual production x hrs. allowed per unit (10,000 x .5 = 5,000) Standard Cost Actual Cost Difference Actual Quantity or Hours Variance Materials Purchase $.85/lb. $.82/lb. $.03(fav.) 200,000 $6,000 Price lbs. (fav.) Variance Labor Rate $12.00/hr. $12.25/hr. $.25(unfav.) 4,600 $1,150 Variance hrs. (unfav.) b. Materials (200,000 x .85) 170,000 Materials purchase price variance - favorable 6,000 Accounts payable (200,000 x .82) 164,000 Work in process (100,000 x .85) 85,000 Materials quantity variance - unfavorable 10,200 Materials (112,000 x .85) 95,200 Work in process (5,000 x 12.00) 60,000 Labor rate variance - unfavorable 1,150 Labor efficiency variance - favorable 4,800 Payroll (4,600 x 12.25) 56,350 Note to instructor - requirement (b) may be optional. If (b) is not assigned, this problem would be moderate in difficulty. PTS: 1 DIF: Hard REF: P. OBJ: 3, 4 NAT: IMA 2D - Performance Measurement; 2B - Cost Management TOP: AACSB - Analytic 5. Perez Company adopted a standard cost system several years ago. The standard costs for the prime costs of its single product follow: Material: 10 kilograms @ $4.50 per kilogram $45.00 Labor: 6 hours @ $8.50 per hour $51.00 The following operating data were taken from the records for November: (1) Units completed: 5,800 units (2) Budgeted output: 6,000 units (3) Materials purchased and used: 60,000 kilograms (4) Total actual labor costs: $306,600 (5) Actual hours of labor: 36,500 hours (6) Materials quantity variance: $2,250 unfavorable (7) Net materials variance: $450 unfavorable Compute the following: a. Labor rate variance b. Labor efficiency variance c. Actual kilograms of material used in the production process d. Actual cost paid per kilogram of material ANS: (a) Standard Cost Actual Cost Difference Actual Quantity or Hours Variance Labor Rate $8.50/hr. $8.40/hr.* $.10 36,500 $3,650 Variance (fav.) hrs. (fav.) * $306,600 labor cost / 36,500 hours worked = $8.40 per hour (b) Standard Quantity or Hours Actual Quantity or Hours Difference Standard Cost Variance Labor Efficiency 34,800 36,500 1,700 hrs. $8.50/hr. $14,450 Variance hrs.** hrs. (unfav.) (unfav.) ** 5,800 units produced x 6 hrs allowed = 34,800 (c) Standard Quantity or Hours Actual Quantity or Hours Difference Standard Cost Variance Materials Quantity 58,000 unknown 500 kg.# $4.50/kg. $2,250 Variance kg.*** kg. (unfav.) (unfav.) *** 5,800 units x 10 kg. per unit # working back: $2,250 / $4.50 = 500 kg. The actual kg. would be 58,500 (58,000 + 500) The unfavorable variance is added to standard. (d) Standard Cost Actual Cost Difference Actual Quantity or Hours Variance Materials Price $4.50/ kg. Unknown $.03## 60,000 $1,800 Variance (fav.) kg. (fav.) ## $1,800/ 60,000 = .03 Working back: 4.50 - .03 = 4.47 (Favorable variance is subtracted from standard) PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 6. Rhodes Corporation manufactures a product with the following standard costs: Direct materials (20 yards @ $1.85 per yard) $ 37.00 Direct labor (4 hours @ $12.00 per hour) 48.00 Variable factory overhead (4 hours @ $5.40 per hour) 21.60 Fixed factory overhead (4 hours @ $3.60 per hour) 14.40 Total standard cost per unit of output $121.00 Standards are based on normal monthly production involving 2,000 direct labor hours (500 units of output). The following information pertains to the month of July: Direct materials purchased (16,000 yards @ $1.80 per yard) $28,800 Direct materials used (9,400 yards) Direct labor (1,880 hours @ $12.20 per hour) 22,936 Actual factory overhead 16,850 Actual production in July: 460 units a. Compute the following variances for the month of July, indicating whether each variance is favorable or unfavorable: (1) Materials purchase price variance (2) Materials quantity variance (3) Labor rate variance (4) Labor efficiency variance b. Give potential reasons for each of the variances. Be sure to consider inter-relationships among variances. ANS: (a) Materials purchase price variance = (Actual unit price - standard unit price) x actual quantity of materials purchased Materials purchase price variance = ($1.80 - $1.85) x 16,000 = $800 favorable (actual price less than standard price) Materials quantity variance = (Actual quantity of materials used - standard quantity of materials allowed) x standard unit price Materials quantity variance = (9,400 - 9,200*) x $1.85 = $370 unfavorable (actual quantity exceeds standard quantity) * 460 units x 20 yards per unit = 9,200 Labor rate variance = (Actual rate per hour - standard rate per hour) x Actual hours worked Labor rate variance = ($12.20 - $12.00) x 1,880 = $376 unfavorable (actual rate exceeds standard rate) Labor efficiency variance = (Actual hours worked - standard hours allowed) x standard rate Labor efficiency variance = (1,880 - 1,840**) x $12.00 = $480 unfavorable (actual hours exceed standard hours allowed) ** 460 units x 4 hours per unit = 1,840 (b) The favorable purchase price variance may have occurred because the purchasing manager purchased materials at a lower price that were of lesser quality. The workers encountered production problems as a result of the lesser quality materials which resulted in using more materials and taking more time than anticipated. The supervisor also had to assign more experienced workers to this production, which resulted in a higher average wage rate. Note to instructor: If requirement (b) is not assigned, this problem would be moderate in difficulty. PTS: 1 DIF: Hard REF: P. OBJ: 3, 4, 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic, Reflective 7. Rhodes Corporation manufactures a product with the following standard costs: Direct materials (20 yards @ $1.85 per yard) $ 37.00 Direct labor (4 hours @ $12.00 per hour) 48.00 Variable factory overhead (4 hours @ $5.40 per hour) 21.60 Fixed factory overhead (4 hours @ $3.60 per hour) 14.40 Total standard cost per unit of output $121.00 Standards are based on normal monthly production involving 2,000 direct labor hours (500 units of output). The following information pertains to the month of July: Direct materials purchased (16,000 yards @ $1.80 per yard) $28,800 Direct materials used (9,400 yards) Direct labor (1,880 hours @ $12.20 per hour) 22,936 Actual factory overhead 16,850 Actual production in July: 460 units a. Compute the budgeted fixed overhead. b. Assuming Rhodes uses the two-variance method of analyzing factory overhead, computer the following variances for the month of July, indicating whether each variance is favorable or unfavorable: (1) Factory overhead controllable variance (2) Factory overhead volume variance ANS: (a) Computation of budgeted fixed factory overhead: Direct labor hours 2,000 Fixed factory overhead rate per direct labor hour x $3.60 Total fixed factory overhead $ 7,200 (b) (1) Factory overhead controllable variance: Actual total factory overhead $16,850 Budgeted factory overhead at standard hours for actual level of production: Fixed $7,200 Variable (460 units  4 hours  $5.40) 9,936 17,136 Factory overhead budget variance (favorable) $ 286 (Actual factory overhead incurred was less than that budgeted) (2) Factory overhead volume variance: Budgeted factory overhead at actual level of production $17,136 Overhead applied to production ($5.40 + $3.60) x (460 x 4 hours) 16,560 Volume variance (unfavorable) $ 576 (budgeted overhead was in excess of applied overhead) PTS: 1 DIF: Moderate REF: P. OBJ: 8, 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 8. VanDerPloeg, Inc. produces farm equipment at several plants. The business is seasonal and cyclical in nature. The accountant for the Denver plant uses flexible budgeting to help the plant management control operations. Data for Denver follows: Budget data for the year: Normal monthly capacity of the plant in direct labor hours 12,000 hours Materials costs (6 lbs. @ $1.50) $9.00/unit Labor costs (2 hours @ $12.00) $24.00/unit Overhead estimate at normal monthly capacity: Variable (controllable) Indirect labor $ 6,750 Indirect materials 600 Repairs 750 Total variable $ 8,100 Fixed (noncontrollable): Depreciation $ 5,000 Supervision 4,000 Total fixed $ 9,000 Total fixed and variable $ 17,100 Actual data for January: Units produced 3,900 Costs incurred Materials (24,000 lbs.) $ 36,000 Direct labor 91,500 Indirect labor 5,000 Indirect materials 600 Repairs 900 Depreciation 5,000 Supervision 4,000 Total $143,000 a. Compute the fixed and variable factory overhead application rates per unit of production. b. Assuming VanDerPloeg uses the two-variance method of analyzing factory overhead, compute the two overhead variances. c. Prepare a flexible budget performance report for January comparing actual and budgeted costs of all cost elements for the actual activity for the month. d. Prove the factory overhead budget variance from the above report. ANS: (a) Total variable cost $8,100 / 6,000* units $1.35 variable factory overhead application rate Total fixed cost $9,000 / 6,000 units 1.50 fixed factory overhead application rate Total factory overhead application rate $2.85 * Normal capacity of 12,000 hours / 2 hours per unit = 6,000 units. (b) Actual Factory Overhead Factory Overhead for Actual Prod. Level Applied Factory Overhead Fixed: $ 9,000 3,900 units @ $2.85 Var.: 3,900 @ $1.35 = 5,265 $14,265 $11,115 $15,500 Controllable Var. Volume Var. $1,235 (unfav) $3,150 (unfav) (c) Cost Element Budget (3,900 units) Actual Costs Under (Over) Budget Materials: (3,900 units  $9) $35,100.00 $ 36,000.00 $ (900.00) Labor: (3,900 units  $24) 93,600.00 91,500.00 2,100.00 Factory overhead: Indirect labor (d) ($6,750  65%*) 4,387.50 5,000.00 (612.50) \ Indirect materials \ ($600  65%) 390.00 600.00 (210.00) > $1,235 Repairs / control- ($750  65%) 487.50 900.00 (412.50) / lable Depreciation 5,000.00 5,000.00 -- variance Supervision 4,000.00 4,000.00 -- (unfav.) $142,965.00 $143,000.00 $ (35.00) * $3,900 units / 6,000 units = 65% of normal activity. Note to instructor: Requirements c and d review chapter 7 concepts. If these requirements are not assigned, the problem difficulty is moderate. PTS: 1 DIF: Hard REF: P. OBJ: 8, 9 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 9. The Jurcevich Corporation manufactures and sells a single product. A standard cost system is used by the company. The standard factory overhead cost for a unit of product is as follows: Variable overhead (1.5 hours @ $3 per hour) 4.50 Fixed overhead (1.5 hours @ $1 per hour) 1.50 Total standard cost per unit $6.00 The overhead cost per unit was calculated for the year based on a 60,000 unit volume as follows: Variable factory overhead cost: Indirect labor (30,000 hours @ $8) $240,000 Factory supplies (60,000 gallons of oil @ $.80 per gallon) 48,000 Allocated variable service costs from other departments 12,000 Total variable costs $300,000 Fixed overhead costs: Supervision $ 28,000 Depreciation 50,000 Other fixed costs 12,000 Total fixed overhead costs $ 90,000 Total annual factory overhead budget for 60,000 units $390,000 The charges to the manufacturing department for April are given below for the 5,200 units produced: Indirect labor (2,400 hrs. @ $8.15 per hr.) $19,560 Factory supplies (6,000 gallons @ $.55) 3,300 Allocated variable service department costs 3,200 Supervision 2,490 Depreciation 3,750 Other fixed costs 1,000 Total $33,300 (a) Assuming Jurcevich uses the two-variance method of analyzing factory overhead, calculate the following variances from standard cost: (1) Factory overhead controllable variance (2) Factory overhead volume variance (b) Prepare the journal entry to apply factory overhead to work in process and record the variances. ANS: (a) (1) Factory overhead controllable variance: Actual factory overhead incurred $33,300 Budget based on standard hours allowed: Variable cost: 5,200 units produced  1.5 hours per unit = 7,800 hrs.  $3 per hr. $23,400 Fixed cost: $90,000 / 12 months 7,500 Total budget 30,900 Unfavorable controllable variance $ 2,400 (2) Factory overhead volume variance: Budget (see above) $30,900 Standard hours allowed  standard rate: (5,200 units  1.5 hours = 7,800 hours  $4.00) 31,200 Favorable volume variance $ 300 (b) Work in process (7,800 hours x $4.00) 31,200 Factory overhead controllable variance 2,400 Factory overhead volume variance 300 Factory overhead 33,300 PTS: 1 DIF: Moderate REF: P. OBJ: 9 NAT: IMA 2D - Performance Measurement; 2B - Cost Management TOP: Analytic 10. Palek Company has adopted the following standards: Input Total Direct materials 3 lbs. @ $3.60 per lb. $10.80 Direct labor 5 hrs. @ $12.00 per hr. 60.00 Factory overhead: Variable $4.00 per direct labor hour 20.00 Fixed $5.00 per direct labor hour 25.00 45.00 Standard cost per unit $115.50 Palek's January budget was based on normal volume of 40,000 standard labor hours. During January, Palek produced 7,900 units with records indicating the following data: Direct materials purchased 25,000 lbs. @ $3.65 Direct materials used 23,400 lbs. Direct labor 39,900 hrs. @ $11.85 Factory overhead $375,000 Fixed factory overhead $210,000 Assuming Palek uses the four-variance method of analyzing factory overhead, compute the following variances for the month of January and indicate whether each is favorable or unfavorable: a. Factory overhead spending variance b. Factory overhead efficiency variance c. Factory overhead budget variance d. Factory overhead volume variance ANS: Factory overhead spending variance = Actual variable overhead - (actual hours x standard variable rate per hour) Factory overhead spending variance = $165,000* - (39,900 x $4) Factory overhead spending variance = $165,000 - $159,600 = $5,400 unfavorable (actual in excess of standard) *$375,000 - $210,000 = $165,000 Factory overhead efficiency variance = (Actual hours -standard hours allowed) x standard variable rate per hour) Factory overhead efficiency variance = (39,900 - 39,500**) x $4 = $1,600 unfavorable (actual hours in excess of standard hours) ** 7,900 units x 5 hours per unit = 39,500 Factory overhead budget variance = Actual fixed overhead - Budgeted fixed overhead Factory overhead budget variance = $210,000 - $200,000*** = $10,000 unfavorable (actual exceeded budget) *** 40,000 normal hours x $5.00 per hour = $200,000 Factory overhead volume variance = Budgeted fixed overhead - (standard hours allowed x fixed rate per hour) Factory overhead volume variance = $200,000 - (39,500 x $5) Factory overhead volume variance = $200,000 - $197,500 = $2,500 unfavorable (standard hours allowed were less than normal hours) PTS: 1 DIF: Moderate REF: Appendix OBJ: 10 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 11. Palek Company has adopted the following standards: Input Total Direct materials 3 lbs. @ $3.60 per lb. $10.80 Direct labor 5 hrs. @ $12.00 per hr. 60.00 Factory overhead: Variable $4.00 per direct labor hour 20.00 Fixed $5.00 per direct labor hour 25.00 45.00 Standard cost per unit $115.50 Palek's January budget was based on normal volume of 40,000 standard labor hours. During January, Palek produced 7,900 units with records indicating the following data: Direct materials purchased 25,000 lbs. @ $3.65 Direct materials used 23,400 lbs. Direct labor 39,900 hrs. @ $11.85 Factory overhead $375,000 Fixed factory overhead $210,000 Assuming Palek uses the three-variance method of analyzing factory overhead, compute the following variances for the month of January and indicate whether each is favorable or unfavorable: a. Factory overhead budget variance b. Factory overhead capacity variance c. Factory overhead efficiency variance ANS: (a) Factory overhead budget variance: Actual total factory overhead $375,000 Budgeted total factory overhead for actual hours worked (39,900  $4.00) + (40,000  $5.00) 359,600 Factory overhead budget variance $ 15,400 unfavorable (b) Factory overhead capacity variance: Budgeted total factory overhead for actual hours worked $359,600 Actual hours worked at standard rate (39,900  $9) 359,100 Factory overhead capacity variance $ 500 unfavorable (c) Factory overhead efficiency variance: Actual hours worked at standard rate $359,100 Applied total factory overhead (standard hours allowed at standard rate (7,900  5 hrs.  $9.00) 355,500 Factory overhead efficiency variance $ 3,600 unfavorable PTS: 1 DIF: Moderate REF: Appendix OBJ: 11 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic CHAPTER 9—COST ACCOUNTING FOR SERVICE BUSINESSES MULTIPLE CHOICE 1. Which of the following is a characteristic of a service organization? a. Provides a tangible product b. Carries large inventories c. Receives payments for physical properties d. Service is consumed at time it is provided ANS: D Answers a, b, and d all involve tangible products; only answer c involves a service. PTS: 1 DIF: Easy REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Analytic 2. Which of the following is generally not considered a service organization? a. Hair stylists b. Lawyers c. Auto dealerships d. Plumbers ANS: C An auto dealership has as its principle function the selling of automobiles rather than a service. Although physical items are obtained from hair stylists, lawyers, and plumbers, the principle function they perform is a service. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Reflective 3. Service organizations display the following characteristics, except that: a. They create more jobs than do manufacturers. b. They employ more people than do manufacturing concerns. c. They carry larger inventories than do manufacturing concerns. d. They account for more than half of all goods and services produced. ANS: C Service organizations are a major component in the United States economy. A characteristic that they do not have, however, is the carrying of large inventories. A service is not a tangible, inventoriable item. PTS: 1 DIF: Moderate REF: P. OBJ: Introduction NAT: IMA 4 - Business Applications TOP: AACSB - Reflective 4. Examples of service businesses that would use job order costing would include all of the following except: a. an accounting firm that has audit clients of various sizes and complexities. b. a “quick oil change” shop that offers only basic maintenance services. c. an automotive body repair shop specializing in collision repair. d. a high end salon offering hair, manicure and spa services. ANS: B The accounting firm, collision repair shop and the salon would have customers (jobs) with varying complexities and sizes. Job order costing would be beneficial in these cases. The oil change shop that offers only basic maintenance services such as oil changes, would not have as many complexities among its customers as the others. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 5. A service firm, such as a law firm, would choose direct labor dollars over direct labor hours as a cost driver for overhead because: a. Overhead is more related to dollars charged than hours worked. b. Labor hours are harder to track. c. Labor rates change and thus overhead is automatically updated. d. Partners and managers incur overhead equally. ANS: A Overhead based on labor dollars takes into account that the higher paid individual often incurs more overhead than someone with a smaller salary. A partner in a law firm uses more administrative time and has a nice office than does a new attorney, although they both may work the same number of hours. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 6. An example of a direct cost that can be specifically identified with a job and does not have to be allocated to the job using an overhead rate is: a. travel expenses. b. fringe benefits. c. utilities. d. office machine lease costs. ANS: A Travel expenses can usually be specifically identified with a job. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 7. Boyle’s Body Shop repairs automobiles that have been involved in collisions. It’s budget information follows: Budgeted direct labor cost $200,000 Budgeted overhead 500,000 Budgeted labor rate per hour $10 Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on direct labor hours. Paul Evans brought his car to Boyle for fender repair. It took 5 hours and the new parts for the job totaled $200. How much overhead was applied to the Evans job? a. $50 b. $125 c. $200 d. $175 ANS: B Predetermined overhead rate = Budgeted overhead / Budgeted cost driver Predetermined overhead rate = $500,000 / 20,000 direct labor hours* = $25 per hour. Applied overhead = Predetermined overhead rate x actual cost driver for job Applied overhead = $25 x 5 hours = $125. * Budgeted direct labor cost / Budgeted labor rate = Budgeted direct labor hours $200,000 / $10 = 20,000 hours PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 8. Boyle’s Body Shop repairs automobiles that have been involved in collisions. It’s budget information follows: Budgeted direct labor cost $200,000 Budgeted overhead 500,000 Budgeted labor rate per hour $10 Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on direct labor hours. Paul Evans brought his car to Boyle for fender repair. It took 5 hours and the new parts for the job totaled $200. What was the total cost of the Evans job? a. $375 b. $200 c. $250 d. $325 ANS: A Predetermined overhead rate = Budgeted overhead / Budgeted cost driver Predetermined overhead rate = $500,000 / 20,000 direct labor hours* = $25 per hour. Applied overhead = Predetermined overhead rate x actual cost driver for job Applied overhead = $25 x 5 hours = $125. * Budgeted direct labor cost / Budgeted labor rate = Budgeted direct labor hours $200,000 / $10 = 20,000 hours Direct materials $200 Direct labor (5 hours x $10) 50 Applied overhead 125 Total for job $375 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 9. Boyle’s Body Shop repairs automobiles that have been involved in collisions. It’s budget information follows: Budgeted direct labor cost $200,000 Budgeted overhead 500,000 Budgeted labor rate per hour $10 Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on direct labor hours. Paul Evans brought his car to Boyle for fender repair. It took 5 hours and the new parts for the job totaled $200. If Evans was charged $500, what was the percentage of profit to the selling price? a. 35% b. 60% c. 50% d. 25% ANS: D Predetermined overhead rate = Budgeted overhead / Budgeted cost driver Predetermined overhead rate = $500,000 / 20,000 direct labor hours* = $25 per hour. Applied overhead = Predetermined overhead rate x actual cost driver for job Applied overhead = $25 x 5 hours = $125. * Budgeted direct labor cost / Budgeted labor rate = Budgeted direct labor hours $200,000 / $10 = 20,000 hours Direct materials $200 Direct labor (5 hours x $10) 50 Applied overhead 125 Total for job $375 Profit for job = $500 - $375 = $125 Profit percentage = $125 / $500 = 25% PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 10. A report that compares the budgeted costs for the job to the actual costs incurred and indicates the variances is a: a. Budget analysis. b. Job cost sheet. c. Cost analysis. d. Cost performance report. ANS: D A cost performance report compares budgeted cost to actual costs incurred for a job, and indicates the variances. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 11. The first budget to be prepared for a professional services firm should be the: a. Direct expense budget. b. Labor budget. c. Overhead budget. d. Revenue budget. ANS: D The revenue budget should be the first budget prepared because the amount of client business must be projected before estimating the labor hours and overhead required. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 12. Items that should be considered in developing a revenue budget for a professional firm include all of the following except: a. Expected new business. b. Expected mix of professional labor hours. c. Expected mix of work. d. All of these should be considered in preparing a revenue budget for a professional firm. ANS: D A firm should consider expected new business, the mix of hours (due to different rates charged), and the mix of work (different departments may bill at different rates). PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 13. Which of the following should be included in computing a revenue budget for a professional services firm? a. Wage rates. b. Predetermined overhead rate. c. Billing rate. d. Direct costs. ANS: C A professional firm would use billing rates multiplied by the estimated labor hours in each category to determine budgeted revenue. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 14. Hebert & Co. CPA’s anticipates that partners will bill 2,000 professional hours, managers will bill 7,500 professional hours and staff accountants will bill 25,000 professional hours. Billing rates are $250, $150 and $75 for partners, managers and staff accountants, respectively. What is Hebert & Co.’s budgeted revenue? a. $5,462,500 b. $3,500,000 c. $5,175,000 d. $3,750,000 ANS: B Partners 2,000 hours x $250 $ 500,000 Mangers 7,500 hours x $150 1,125,000 Staff 25,000 hours x $ 75 1,875,000 Total budgeted revenue $3,500,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 15. Hebert & Co. CPA’s anticipates that partners will bill 2,000 professional hours, managers will bill 7,500 professional hours and staff accountants will bill 25,000 professional hours. Salary rates are $100, $60 and $30 for partners, managers and staff accountants, respectively. What is Hebert & Co.’s budgeted professional labor cost? a. $2,185,000 b. $2,070,000 c. $2,500,000 d. $1,400,000 ANS: D Partners 2,000 hours x $100 $ 200,000 Mangers 7,500 hours x $ 60 450,000 Staff 25,000 hours x $ 30 750,000 Total budgeted professional labor cost $1,400,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 16. In a professional services firm, the term “overhead” refers to: a. Expenses other than professional labor that can be traced to specific jobs. b. Indirect labor costs. c. Indirect expenses incurred to support the activities of the firm. d. Indirect expenses incurred in the factory. ANS: C Overhead in a professional services firm includes indirect expenses to support the firm’s activities. These expenses will include indirect labor and other costs. Expenses that can be traced to specific jobs are direct costs. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 17. All of the operating expenses in a professional firm are: a. Overhead costs. b. Period costs. c. Labor costs. d. Product costs. ANS: B All of the operating expenses in a professional firm are period costs because they are expensed as incurred as there is no inventory amounts to which they can be attached. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 18. A professional firm’s budgeted income statement would include all of the following lines except: a. Cost of Goods Sold. b. Overhead. c. Revenue. d. Labor. ANS: A A professional services firm’s budget would not include cost of goods sold as goods are not sold in a services firm. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective 19. The practice of taking overhead costs previously in a single indirect cost pool and separating them into a number of homogeneous cost pools with separate cost drivers for each pool is: a. Peanut-butter costing. b. Process costing. c. Activities-based costing. d. Job costing. ANS: C Activities-based costing is the process of separating overhead costs into a number of homogeneous cost pools with separate cost drivers for each pool. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 20. There are several advantages to using activity-based costing. Which of the following is one of these advantages? a. Services not performed in a department are allocated a portion of the cost of operating that department. b. Each department can choose the activity base that relates best to its cost. c. Simplified costing is time-consuming and expensive to administer. d. Activity-based rates are much less time-consuming to prepare. ANS: B Activity-based costing is applied by activity, allowing a closer matching of the incurrence of overhead and the application of it. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 21. An example of an indirect cost that could be traced directly to individual jobs by examining invoices is: a. Office rent. b. Telephone and fax charges. c. Depreciation expense on office machines. d. Office supplies. ANS: B An analysis of telephone bills could aid in charging telephone and fax charges directly to clients. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 22. The practice of assigning costs evenly to jobs using a single overhead rate when different jobs actually consume resources in different proportions is sometimes called: a. Smooth costing. b. Process costing. c. Activities-based costing. d. Peanut-butter costing. ANS: D Sometimes the practice of assigning costs evenly to jobs using a single overhead rate is referred to as “peanut-butter” costing. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 23. Consider the budget information for Bert and Ernie Design firm: Professional labor $1,000,000 Administrative labor 200,000 Lease expense 50,000 Design equipment depreciation 25,000 Samples and books 10,000 Utilities 20,000 Professional hours 100,000 hours Number of rooms redone 2,000 rooms Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the number of rooms redone, and facilities costs, which is assigned to jobs based on the number of professional labor hours. The design support cost pool includes design equipment depreciation and samples and books. The lease expense and utilities are considered facilities costs. What is the budgeted rate per cost driver for design support? a. $17.50 b. $35.00 c. $.35 d. $.70 ANS: A Design support includes the following costs: Depreciation of design equipment $25,000 Books and samples 10,000 Total design support costs $35,000 Divided by number of rooms redone 2,000 Rate per number of rooms redone $17.50 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 24. Consider the budget information for Bert and Ernie Design firm: Professional labor $1,000,000 Administrative labor 200,000 Lease expense 50,000 Design equipment depreciation 25,000 Samples and books 10,000 Utilities 20,000 Professional hours 100,000 hours Number of rooms redone 2,000 rooms Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the number of rooms redone, and facilities costs, which is assigned to jobs based on the number of professional labor hours. The design support cost pool includes design equipment depreciation and samples and books. The lease expense and utilities are considered facilities costs. What is the budgeted rate per cost driver for facilities costs? a. $17.50 b. $1.05 c. $.70 d. $37.50 ANS: C Facilities costs include the following costs: Lease expense $ 50,000 Utilities 20,000 Total design support costs $ 70,000 Divided by number professional labor hours 100,000 Rate per number of professional labor hours $.70 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 25. Sanborn Architectural Designs Inc. has three partners that each earn $80,000 per year, and three associates that earn $58,000 per year. Each partner and associate has 2,000 billable hours per year. Using an activity-based costing approach, if a partner worked 10 hours on a project, the amount of labor cost that should be billed to the project is: a. $200. b. $320. c. $400. d. $500. ANS: C Activity-based costing looks at the base in question--in this case, partners' salaries--and disregards associates' salaries. Thus, a job would be billed as total cost divided by total hours. 3 x $80,000 3 x 2,000 = 240,000 6,000 = 400 x 10 = $400 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 26. Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases. Information about costs follow: Cost Pool Budgeted Costs Budgeted Cost Driver Budgeted Rate Legal support $1,500,000 $2,000,000 professional labor cost $.75 / professional labor dollar Secretarial support 800,000 4,000 partner labor hours $200 / partner labor hour Facilities 600,000 12,000 professional labor hours $50 / professional labor hour The Laurel case required 60 professional hours, 20 of which were partner hours, and labor costs totaled $10,000. How much overhead was assigned to the Laurel case? a. $13,500 b. $14,000 c. $6,500 d. $14,500 ANS: D Legal support $.75 x $10,000 $ 7,500 Secretarial support $200 x 20 hours 4,000 Facilities $50 x 60 hours 3,000 $14,500 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 27. Hunter and Quinn Collision Repair uses activity-based costing to determine the costs of its cases. Information about costs follow: Cost Pool Budgeted Costs Budgeted Cost Driver Paint shop operations and clean up $300,000 750 paint jobs Machine costs 120,000 1,500 machine hours Facilities 80,000 2,000 labor hours Seth’s car was repaired after he was involved in a rear-end collision. The repair involved 3 hours of machine time, 5 hours of labor at $30 per hour, and the rear of the car was repainted. How much overhead was assigned to Seth’s repair job? a. $2,000 b. $941 c. $990 d. $840 ANS: D Cost Pool Budgeted Rate Seth’s job Overhead Paint shop $300,000 / 750 = $400 per paint job 1 job $400 Machine costs $120,000 / 1,500 = $80 per mach. hr. 3 hours 240 Facilities $80,000 / 2,000 = $40 per labor hr. 5 hours 200 $840 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 28. Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases. Information about costs follow: Cost Pool Budgeted Costs Budgeted Cost Driver Budgeted Rate Legal support $1,500,000 $2,000,000 professional labor cost $.75 / professional labor dollar Secretarial support 800,000 4,000 partner labor hours $200 / partner labor hour Facilities 600,000 12,000 professional labor hours $50 / professional labor hour The Laurel case required 60 professional hours, 20 of which were partner hours, and labor costs totaled $10,000. If direct costs relating to the case were $1,000, what were the total costs of the Laurel case? a. $23,000 b. $25,500 c. $21,500 d. $15,500 ANS: B Legal support $.75 x $10,000 $ 7,500 Secretarial support $200 x 20 hours 4,000 Facilities $50 x 60 hours 3,000 Total overhead applied $14,500 Labor costs $10,000 Overhead costs 14,500 Direct costs 1,000 Total costs of Laurel case $25,500 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 29. Sanborn Architectural Designs Inc. has three partners that each earn $80,000 per year, and three associates that earn $58,000 per year. Each partner and associate has 2,000 billable hours per year. Using a simplified approach, if a partner worked 10 hours on a project, the amount of labor cost that should be billed to the project is: a. $350. b. $200. c. $320. d. $345. ANS: D A simplified approach generates an average rate (total earnings divided by total hours): (3 x $80,000) + (3 x $58,000) 6 x 2,000 If a job used 10 hours, then the rate times the hours worked is: $414,000 12,000 = $34.50 x 10 hours = $345 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 30. Natasha's Interior Designs has support staff for its professional designers. The two professionals work a total of 1,800 hours each and make $45,000 each per year. The total support budget is $90,000, of which $60,000 is professional support, and $30,000 is general office overhead. A job requiring 30 professional hours should be billed how much for overhead if a simplified costing approach is used and hours are the cost driver? a. $25 b. $30 c. $600 d. $750 ANS: D Divide the total overhead incurred of $90,000 by the hours worked by the two professionals, 1,800 hours each, which results in $25 an hour. If a job takes 30 hours, then $25  30 hours = $750. $90,000 = $25 3,600 hrs. $25  30 hours = $750 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 31. Natasha's Interior Designs has support staff for its professional designers. The two professionals work a total of 1,800 hours each and make $45,000 each per year. The total support budget is $90,000, of which $60,000 is professional support, and $30,000 is general office overhead. A job requiring 30 professional hours should be billed how much for overhead if a simplified costing approach is used and labor cost is the cost driver? a. $25 b. $30 c. $750 d. $900 ANS: C Labor cost is calculated by determining that each associate works for $25 an hour ($45,000 / 1,800 = $25 per hr.). If two professionals each work 1,800 hours, or a total of 3,600 hours, at $25 an hour, the total labor cost is $90,000. The overhead of $90,000 divided by the cost driver labor cost of $90,000 gives an overhead rate of $1 per $1 of labor cost. If the job incurred professional pay of $750 (30 hours x $25), then overhead applied should be $750. PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 32. Determining whether the benefit received from more refined information exceeds the cost of obtaining the information is a(n): a. Pricing decision. b. Activity-based cost model. c. Cost/benefit decision. d. Cost performance report. ANS: C A cost/benefit decision involves weighing the cost of obtaining more refined information against the benefit that the additional information may have to the decision making process. In some cases, the difference in the costs determined with the additional information to the costs determined originally is not significant enough to change the decision, so the benefit of obtaining the additional information did not justify the cost. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 33. Which of the following is not one of the categories of a balanced scorecard? a. Customer b. Financial c. Learning and Growth d. Quality ANS: D The four categories of the balanced score card are: Learning and Growth, Internal Business Processes, Customer and Financial. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic 34. In creating a balanced scorecard, the number of quality defects would belong to which category of performance measures? a. Learning and Growth b. Internal Business Processes c. Customer d. Financial ANS: B The number of quality defects would be an indication of how efficient a company’s production process is. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 35. In creating a balanced scorecard, the number of customer complaints would belong to which category of performance measures? a. Learning and Growth b. Internal Business Processes c. Customer d. Financial ANS: C The number of customer complaints would be an indication of how satisfied a company’s customers are. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 36. In creating a balanced scorecard, the rate of employee turnover would belong to which category of performance measures? a. Learning and Growth b. Internal Business Processes c. Customer d. Financial ANS: A The rate of employee turnover would be an indication of how satisfied a company’s employees are. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 37. In creating a balanced scorecard, the return on investment would belong to which category of performance measures? a. Learning and Growth b. Internal Business Processes c. Customer d. Financial ANS: D The return on investment would be an indication of how profitable the company is. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 38. Which of the following is the best example of a non-financial performance measure for the customer perspective of an airline’s balanced scorecard? a. Percentage of seats filled. b. Pilot flight hours. c. Percentage of on-time arrivals. d. Revenue per flight. ANS: A The percentage of seats filled would be an indication of customer satisfaction. Pilot flight hours would be included in the learning and growth perspective as it is an indicator of employee experience and training. Percentage of on-time arrivals is an indicator of efficiency and would be included in the Internal Business Perspective. Revenue per flight is a financial measure. Note to faculty: This problem could be amended so that the student could answer the question about any one of the four perspectives of the balanced scorecard for an airline. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 39. Which of the following is the best example of a non-financial performance measure for the learning and growth perspective of a college’s balanced scorecard? a. Size of endowment. b. Number of degrees awarded. c. Number of conferences attended by faculty members. d. Percentage of students retained from freshman to sophomore year. ANS: C The number of conferences attended by faculty members is an indication of training or growth. The size of the endowment is a financial measure. The number of degrees awarded would be an internal business process measure and the percentage of students retained from freshman to sophomore year would be an indication of customer satisfaction. Note to faculty: This problem could be amended so that the student could answer the question about any one of the four perspectives of the balanced scorecard for a college. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 40. Which of the following is the best example of a non-financial performance measure for the internal business process perspective of a professional baseball team’s balanced scorecard? a. Number of repeat season ticket holders b. Win - loss record. c. Revenue from team apparel. d. Number of top minor league prospects. ANS: B The win-loss record would be an indication of how well the company is performing its processes, in this case winning games. The number of repeat season ticket holders would be an indication of customer satisfaction. The revenue from team apparel would be a financial measure. The number of top minor league prospects could be a measure of learning and growth (training). Note to faculty: This problem could be amended so that the student could answer the question about any one of the four perspectives of the balanced scorecard for a baseball team. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 41. When creating a balanced scorecard, the following guidelines should be followed in choosing performance measures except: a. There should not be too many performance measures. b. There should be more financial measures than any of the other categories. c. The measures should be consistent with company strategy. d. Employees should be able to understand and have control over the performance measures on which they are evaluated. ANS: B A balanced scorecard should not be weighted toward financial measures. Too many measures may cause employees to lose focus of what is important, and employees should understand and have control over the performance measures on which they are evaluated. The measures should be consistent with company strategy. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective PROBLEM 1. Joleen Harmon, CPA, has two clients and uses a job order cost system. Client A requires 20 hours of partner time and 100 hours of staff time. Client B will use 12 hours of partner time and 75 hours of staff time. Partners are paid $85 an hour and bill support time at 50% of their hourly rate. Staff are paid $25 an hour and bill support time at $20 per billable hour. What is the total charge to each of these clients if profit is added at 20% over cost? ANS: Client A: 20 partner hours at $85 $1,700 Partner support, 50%  $1,700 850 Staff, 100 hours at $25 2,500 Staff support, 100  $20 2,000 Total cost $7,050 Profit (20%  $7,050) 1,410 Client bill $8,460 Client B: 12 partner hours at $85 $1,020 Partner support, 50%  $1,020 510 Staff, 75 hours at $25 1,875 Staff support, 75  $20 1,500 Total cost $4,905 Profit (20%  $4,905) 981 Client bill $5,886 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. Walters and Witt, a law firm that uses job order costing, is analyzing the profitability of its cases. During the year, the firm represented the Umberg Company in numerous routine legal issues, for which it charged a monthly retainer fee of $2,500. Budget information for the firm follows: Direct labor: Partners $ 500,000 Associates 900,000 Paralegals 600,000 Total $2,000,000 Overhead: Secretarial support $ 900,000 Depreciation of office equipment 300,000 Fringe benefits 400,000 Lease expense 200,000 Utilities 300,000 Communication expenses 250,000 Office supplies 150,000 Total $2,500,000 Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively. Budgeted and actual time for the Umberg case follows: Budget Actual Partners 20 hours 23 hours Associates 40 hours 42 hours Paralegals 80 hours 72 hours In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for $1,000 of direct costs. (a) Assuming that Walters and Witt allocates overhead to jobs using direct labor cost as the cost driver, compute the predetermined overhead rate. (b) Compute the cost of the Umberg work this year. (c) Prepare a cost performance report for the Umberg work this year. (d) Compute the profit that Walters and Witt had on the Umberg work this year. ANS: (a) Predetermined overhead rate = budgeted overhead / budgeted cost driver. Predetermined overhead rate = $2,500,000 / $2,000,000 = 125% (b) (c) Partner rate* $100 x 125% = $125 + $100 = $225 Associate rate* $60 x 125% = $75 + $60 = $135 Paralegal rate* $20 x 125% = $25 + $20 = $45 * Includes direct labor plus overhead based on direct labor cost. Actual: Partner 23 hours x $225 $5,175 Associate 42 hours x $135 5,670 Paralegal 72 hours x $45 3,240 Budgeted: Partner 20 hours x $225 $4,500 Associate 40 hours x $135 5,400 Paralegal 80 hours x $45 3,600 Umberg Company Cost Performance Report For year ended December 31, 20-- Item Actual Result Budget Variance Partners’ salaries and overhead $ 5,175 $ 4,500 $675 U Associates’ salaries and overhead 5,670 5,400 270 U Paralegals’ salaries and overhead 3,240 3,600 360 F Direct costs 875 1,000 125 F Total $14,960 $14,500 $460 U U = Unfavorable; F = Favorable (d) Annual revenue for the Umberg work = $2,500 x 12 = $30,000 Profit = $30,000 - $14,960 = $15,040 (50.1%) PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management; 2D - Performance Measurement TOP: AACSB - Analytic 3. Domino Consulting has two departments, Information Technology Consulting and General Business Consulting. The firm has Partners, Senior Consultants and Junior Consultants in each department. The firm is preparing its budgets for the upcoming year. The controller received the following information from the marketing department about anticipated demand for the firm’s products in the upcoming year: Department: Total Professional Hours: Information Technology 32,000 General Business 40,000 The controller then worked with the human resources department to determine the following information about staffing and salary rates for each department: Information Technology General Business Ratio of partner hours: senior consultant hours: junior consultant hours 1:2:7 1:2.5:6.5 Salary Rates per hour: Partner $150 $125 Senior Consultant $75 $60 Junior Consultant $40 $30 The controller has also determined that in order to be profitable, billing rates should be three times the amount paid to employees. The marketing department has determined that billing rates computed on that basis are comparable to what other consulting firms charge. (a) Prepare a revenue budget for Domino Consulting Company. (b) Prepare a labor budget for Domino Consulting Company. ANS: (a) Domino Consulting Company Revenue Budget For the Year Ended December 31, 20-- Item Professional Hours* Billing Rate** Total Revenues Information Technology: Partner 3,200 $450 $ 1,440,000 Senior Consultant 6,400 225 1,440,000 Junior Consultant 22,400 120 2,688,000 Subtotal 32,000 $ 5,568,000 General Business: Partner 4,000 $375 $ 1,500,000 Senior Consultant 10,000 180 1,800,000 Junior Consultant 26,000 90 2,340,000 Subtotal 40,000 $ 5,640,000 Total 72,000 $11,208,000 Professional hours were computed as follows: Information Technology: 1+2+7 = 10 1/10 x 32,000 = 3,200 partner hours 2/10 x 32,000 = 6,400 senior consultant hours 7/10 x 32,000 = 22,400 junior consultant hours General Business: 1+2.5+6.5 = 10 1/10 x 40,000 = 4,000 partner hours 2.5/10 x 40,000 = 10,000 senior consultant hours 6.5/10 x 40,000 = 26,000 junior consultant hours ** Billing rates were obtained by multiplying the appropriate salary rate by 3. Domino Consulting Company Professional Labor Budget For the Year Ended December 31, 20-- Item Professional Hours* Wage Rate Total Labor Dollars Information Technology: Partner 3,200 $150 $ 480,000 Senior Consultant 6,400 75 480,000 Junior Consultant 22,400 40 896,000 Subtotal 32,000 $1,856,000 General Business: Partner 4,000 $125 $ 500,000 Senior Consultant 10,000 60 600,000 Junior Consultant 26,000 30 780,000 Subtotal 40,000 $1,880,000 Total 72,000 $3,736,000 PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 4. Frederick and Ivey, CPA have the following budgeted items for the month of July: Depreciation - equipment $2,500 Fringe benefits 5,000 Lease expense 3,000 Professional salaries (from budget) 10,000 Professional dues and subscriptions 1,500 Revenues (from budget) 35,000 Utilities 1,000 Secretarial support 2,800 Travel 1,200 Prepare a budgeted income statement for the month of July. ANS: Frederick and Ivey, CPA Budgeted Income Statement For the Month Ended July 31, 20-- Revenues (from Revenue budget) $35,000 Operating Costs: Professional labor (from Professional Labor Budget) $10,000 Overhead support * 15,800 Direct costs ** 1,200 27,000 Operating Income $ 8,000 *Overhead Budget: Depreciation - equipment $ 2,500 Fringe benefits 5,000 Lease expense 3,000 Professional dues and subscriptions 1,500 Utilities 1,000 Secretarial support 2,800 Total $15,800 **Travel is usually a direct cost related to specific jobs. PTS: 1 DIF: Moderate REF: P. OBJ: 2 NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic 5. Walters and Witt, a law firm, is analyzing the profitability of its cases. During the year, the firm represented the Umberg Company in numerous routine legal issues, for which it charged a monthly retainer fee of $2,500. Budget information for the firm follows: Professional labor: Partners $ 500,000 Associates 900,000 Paralegals 600,000 Total $2,000,000 Overhead: Secretarial salaries $ 900,000 Depreciation of office equipment 300,000 Fringe benefits 400,000 Lease expense 200,000 Utilities 300,000 Communication expenses 250,000 Office supplies 150,000 Total $2,500,000 Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively. Actual time spent for the Umberg cases follows: Actual Partners 23 hours Associates 42 hours Paralegals 72 hours In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for $1,000 of direct costs. Walters and Witt uses activity-based costing to determine the cost of its cases. With a consultant’s help, the firm has developed the following information about cost pools: Cost Pool Expenses Included Cost Allocation Base Secretarial support Secretarial salaries Partner labor hours Fringe benefits Fringe benefits Professional labor dollars Office support Depreciation, lease, utilities, communications and supplies Professional labor hours (a) Compute the budgeted rate per unit of cost driver for each cost pool. (b) Using activity-based costing, compute the cost of the Umberg work this year. (c) Compute the profit that Walters and Witt had on the Umberg work this year. ANS: (a) Cost Pool Budgeted Costs Budgeted Cost Drivers Budgeted Rate Secretarial support $ 900,000 5,000 partner hours* $180/ partner labor hour Fringe benefits 400,000 $2,000,000 20% professional labor dollars Office support 1,200,000** 50,000 hours* $24/ professional labor hour *Budgeted hours: Partners: $500,000/$100 = 5,000 hours Associates $900,000/$60 = 15,000 hours Paralegals $600,000/$20 = 30,000 hours Total hours 50,000 hours (b) Actual professional labor: Partner 23 hours x $100 $ 2,300 Associate 42 hours x $60 2,520 Paralegal 72 hours x $20 1,440 Total labor 137 hours $ 6,260 Overhead: Secretarial support 23 hours x $180 $ 4,140 Fringe benefits $6,260 x 20% 1,252 Office support 137 hours x $24 3,288 Total overhead $ 8,680 Total $14,940 (c) Annual revenue for the Umberg work = $2,500 x 12 = $30,000 Profit = $30,000 - $14,940 = $15,060 (50.2%) PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. Dye and Dye, Attorneys-at-Law, each bill 1,500 hours per year and receive pay of $100,000 each. Four paralegals work for the firm and each receives pay of $40,000 and works 2,000 hours per year. Overhead of $396,000 is anticipated, of which $300,000 is attorney support, and the rest is paralegal support. Determine overhead under each of the following circumstances: a. A simplified cost approach is used based on hours. b. A simplified cost approach is used based on payroll dollars. c. An activity-based costing approach is used. Attorney support is based on labor costs, and paralegal support is based on hours worked. ANS: (a) 1,500 professional hours  2 = 3,000 2,000 paralegal hours  4 = 8,000 Total hours 11,000 Overhead costs of $396,000 / 11,000 = $36 per hour (b) $100,000  2 = $200,000 $ 40,000  4 = 160,000 $360,000 total payroll $396,000 overhead / $360,000 payroll = $1.10 of overhead per dollar of payroll (c) $100,000  2 = $200,000; $300,000 / $200,000 = $1.50 of overhead per dollar of attorney payroll $396,000 - $300,000 (attorney support) = $96,000 $96,000 / (4  2,000) = $12 per hour of paralegal support PTS: 1 DIF: Moderate REF: P. OBJ: 3, 4 NAT: IMA 2B - Cost Measurement TOP: AACSB - Analytic 7. Listed below are balanced scorecard measure for various companies. Label each as either Learning and Growth, Internal Business Processes, Customer or Financial. On-time departures Worldwide Airlines Percentage of customers retained for next season Hi-Growth Lawn Care Drive-through waiting times Burger Boy Fast Foods Profit margin Porter Company Number of teachers on staff having masters degrees Central High School Number of customer complaints TV Cable Company Number of defective products manufactured Nyso Manufacturing Percentage of customer accounts collected City Hospital Rate of table turnover Neighborhood Chili Parlor Number of employees receiving five, ten and twenty year service pins Zimmerman Manufacturing ANS: On-time departures Internal business process - would indicate how well the airline was sticking to its schedule. Percentage of customers retained for next season Customer - would indicate how satisfied customers were with their service this season. Drive-through waiting times Internal business process - would indicate how quickly the company was preparing fast food orders. Profit margin Financial Number of teachers on staff having masters degrees Learning and growth - would be an indication of the amount of training that the teachers have. Number of customer complaints Customer - would be an indication of the level of customer satisfaction. Number of defective products manufactured Internal business processes - would be an indication of the efficiency of the manufacturing process. Percentage of customer accounts collected Financial - would be an indication of how much cash the hospital is collecting. Rate of table turnover Internal business processes - would be an indication of how quickly patrons are being served. Number of employees receiving five, ten and twenty year service pins Learning and growth - employee longevity is an indication of employee satisfaction. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective 8. Good Locks is a high end salon which offers hair cuts and styling and manicures and pedicures. Debbie Tresser is the owner of Good Locks and she is working with a consultant to develop a balanced scorecard to be used to evaluate the performance of Good Locks and to focus her efforts on making improvements to operations when necessary. Required: 1. Name the four perspectives of a balanced scorecard. 2. For each of the four perspectives, name two measures Debbie should consider including in her scorecard. ANS: 1. The four perspectives are: Learning and Growth, Internal Business Processes, Customer and Financial 2. Potential perspectives include: Learning and Growth: Employee turnover Number of continuing education hours attended by staff members Number of licenses held by staff members Internal Business Processes Average wait time for appointments Average time of service Number of “accidents” where someone’s hair is dyed the wrong color, etc. Number of hours without a safety incident Board of health certification as to cleanliness Customer Number of customer complaints Result of customer surveys Number of repeat customers Number of new customers resulting from referrals Financial Revenues Operating income Profit margin for each service Booth rental income PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 2D - Performance Evaluation TOP: AACSB - Reflective CHAPTER 10—COST ANALYSIS FOR MANAGEMENT DECISION MAKING MULTIPLE CHOICE 1. Which of the following is a more descriptive term of the type of cost accounting often called "direct costing"? a. Prime costing b. Out-of-pocket costing c. Variable costing d. Relevant costing ANS: C Variable costing may be considered a more descriptive term than direct costing because only the variable costs are used to determine a product's cost. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. What costs are treated as product costs under direct costing? a. Only direct costs b. Only variable manufacturing costs c. All variable costs d. All variable and fixed manufacturing costs ANS: B Only variable production costs are treated as product costs in direct or variable costing. Although all variable costs are subtracted from sales in order to determine the contribution margin, only those variable costs related to the manufacturing process are allocated to the products. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 3. The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs are: a. Sunk costs. b. Product costs. c. Fixed as to the total cost. d. Period costs. ANS: D The variable costing method assigns all fixed costs to the period in which they originated; therefore, they are all classified as period costs. PTS: 1 DIF: Easy REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 4. Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and the company sells approximately 500,000 gears each year. Unit cost data for the year follows: Direct material $9.00 Direct labor 8.00 Other costs: Variable Fixed Manufacturing $3.00 $7.00 Distribution 5.00 3.00 The unit cost of gears for variable costing inventory purposes is: a. $14. b. $17. c. $20. d. $24. ANS: C Under variable costing, only variable manufacturing costs are assigned to the product. These costs include: Direct materials $ 9.00 Direct labor 8.00 Variable manufacturing cost 3.00 Total variable costs $20.00 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 5. Mobile, Inc., manufactured 700 units of Product A, a new product, during the year. Product A's variable and fixed manufacturing costs per unit were $5.00 and $2.00, respectively. The inventory of Product A on December 31 of the year consisted of 100 units. There was no inventory of Product A on January 1 of the year. What would be the change in the dollar amount of inventory on December 31 if the variable costing method was used instead of the absorption costing method? a. $800 decrease b. $200 decrease c. $500 decrease d. $200 increase ANS: B Ending inventory under absorption costing (100 units x $7) $700 Ending inventory under variable costing (100 units x $5) 500 $200 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 6. Which of the following is true about absorption costing? a. No fixed factory overhead is charged to production. b. It is also known as direct costing. c. The term used to designate the difference between sales and cost of goods sold is the “manufacturing margin.” d. Over-applied factory overhead is reflected in the income statement as a reduction cost of goods sold. ANS: D Overapplied factory overhead occurs only with absorption costing. Choices a, b and c are characteristics of variable costing. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 7. Which of the following does not appear on an income statement prepared using variable costing? a. Gross margin/profit. b. Manufacturing margin c. Fixed production costs. d. Variable production costs. ANS: A The term commonly used in variable costing to designate the difference between sales and variable cost of goods sold is manufacturing margin. It is a absorption costing statement that would be expected to show gross margin/profit. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 8. What factor related to manufacturing costs causes the difference in net earnings computed using absorption costing and net earnings computed using variable costing? a. Absorption costing considers all costs in the determination of net earnings, whereas variable costing considers only direct costs. b. Absorption costing "inventories" all direct costs, but variable costing considers direct costs to be period costs. c. Absorption costing "inventories" all fixed manufacturing costs for the period in ending finished goods inventory, but variable costing expenses all fixed costs. d. Absorption costing allocates fixed manufacturing costs between cost of goods sold and inventories, and variable costing considers all fixed costs to be period costs. ANS: D Absorption costing considers fixed manufacturing costs to be an essential element of cost in producing a product; therefore, fixed manufacturing costs are allocated to the inventories and cost of goods sold. However, when variable costing is used, all fixed costs for a given period are charged only to that period. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 9. Net income reported under absorption costing will exceed net income reported under variable costing for a given period if: a. Production equals sales for that period. b. Production exceeds sales for that period. c. Sales exceed production for that period. d. The variable overhead exceeds the fixed overhead. ANS: B When production exceeds sales under the absorption cost method, the unsold (ending) inventory contains part of the fixed cost of the period which, along with other inventory costs, are deferred to the next period. Under the variable costing method, all fixed costs are charged to the current period. Therefore, when production exceeds sales and results in unsold inventory, net income reported under absorption costing will exceed the net income reported under variable costing for the period. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 10. A manager can increase income under absorption costing by a. increasing variable costs. b. increasing production. c. increasing fixed costs. d. increasing leased assets. ANS: B By increasing production, the fixed costs are absorbed by more units. This lowers the cost per unit and thus increasing income. PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 11. The use of either absorption or variable costing will make little difference in companies a. with large inventories. b. using JIT. c. with high fixed costs. d. with high variable costs. ANS: B If JIT or just-in-time is used then inventories levels are minimized. Absorption and variable cost would have nearly identical results as no costs are deferred in inventories. PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 12. A basic tenet of variable costing is that fixed overhead costs should be currently expensed. What is the basic rationale behind this procedure? a. Fixed overhead costs will occur whether or not production occurs and so it presents a clearer picture of how changes in production volume affect costs and income. b. Fixed overhead costs are generally immaterial in amount and the cost of assigning the amounts to specific products would outweigh the benefits. c. Allocation of fixed overhead costs is arbitrary at best and could lead to erroneous decisions by management. d. Fixed overhead costs are uncontrollable and should not be charged to a specific product. ANS: A Variable costing assumes that the category of costs defined as fixed costs will occur with or without production and should be charged as expenses in the period in which they are incurred as a current cost. It highlights the relationship between sales and variable production costs thus providing a clearer picture of how changes in production volume affect costs and income. PTS: 1 DIF: Hard REF: P. OBJ: 2 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 13. Absorption cost is required for: a. income tax purposes. b. external financial reporting but not income tax purposes. c. both external financial reporting and income tax purposes. d. neither external financial reporting nor income tax purposes. ANS: C Although variable costing may provide useful information for internal decision making, it is not a generally accepted accounting method of reporting inventory for external financial statements nor is it permitted by the Internal Revenue Service to compute taxable income. PTS: 1 DIF: Easy REF: P. OBJ: 2 NAT: IMA 2E - External Financial Reporting TOP: AACSB - Analytic 14. Segment profitability analysis may be used to evaluate the profitability of: a. Divisions. b. Sales territories. c. Product lines. d. All of these are correct. ANS: D Segment profitability analysis may be used to evaluate the profitability of divisions, sales territories, product lines, or other identifiable organizational unit. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 15. When evaluating profitability of a segment, costs that are directly identifiable with a specific segment are called: a. Direct costs. b. Common costs. c. Indirect costs. d. Fixed costs. ANS: A Direct costs are costs, variable or fixed, that are directly identifiable with a specific segment, so they would disappear if that segment was eliminated. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 16. When evaluating profitability of a segment, costs that would disappear if the company eliminated the segment are called: a. Direct costs. b. Common costs. c. Indirect costs. d. Fixed costs. ANS: A Direct costs are costs, variable or fixed, that are directly identifiable with a specific segment, so they would disappear if that segment was eliminated. PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 17. The excess of revenue over variable costs, including manufacturing, selling and administrative, is called: a. Gross margin. b. Manufacturing margin. c. Contribution margin. d. Segment margin. ANS: C Contribution margin is defined as sales less variable costs. PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 18. Johns Company operates in three different industries each of which is appropriately regarded as a reportable segment. Segment No. 1 contributed 60 percent of Johns Company's total sales. Sales for Segment No. 1 were $600,000 and total variable costs were $400,000. Total common costs for all segments were $320,000. Johns allocates common costs based on the ratio of each segment's sales to the total sales. What should be the contribution margin presented for Segment No. 1? a. $(100,000) b. $8,000 c. $20,000 d. $200,000 ANS: D Segment No. 1 Sales $600,000 Less variable costs 400,000 Contribution margin $200,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 19. Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and variable costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were 60% of sales. Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000, respectively. Common fixed costs of $200,000 were arbitrarily allocated equally to each segment. What was the contribution margin of the Audio Segment. a. $50,000 b. $300,000 c. $200,000 d. $150,000 ANS: B Sales $500,000 Variable costs (500,000 x 40%) 200,000 Contribution margin $300,000 PTS: 1 DIF: Easy REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 20. Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and variable costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were 60% of sales. Fixed costs directly traceable to the Audio and Video segments were $150,000 and $120,000, respectively. Common fixed costs of $200,000 were arbitrarily allocated equally to each segment. What was the segment margin of the Video Segment. a. $200,000 b. $80,000 c. $(20,000) d. $150,000 ANS: B Sales $500,000 Variable costs (500,000 x 60%) 300,000 Contribution margin 200,000 Direct fixed costs 120,000 Segment margin $ 80,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 21. Consider the Marshall Company’s segment analysis: Division A Division B Total Company Sales $300,000 $200,000 $500,000 Variable costs 150,000 150,000 300,000 Contribution margin 150,000 50,000 200,000 Direct fixed costs 50,000 30,000 80,000 Segment margin 100,000 20,000 120,000 Allocated common fixed costs 90,000 60,000 150,000 Operating income (loss) $ 10,000 $(40,000) $(30,000) Common costs are allocated arbitrarily based on sales dollars. If Marshall eliminates Segment B, what is the impact on the operating loss of the company? a. The loss decreases by $40,000. b. The loss increases by $20,000. c. The loss decreases by $60,000. d. The loss increases by $40,000. ANS: B Since the common costs are arbitrarily allocated, a more appropriate segment analysis follows: Division A Division B Total Company Sales $300,000 $200,000 $500,000 Variable costs 150,000 150,000 300,000 Contribution margin 150,000 50,000 200,000 Direct fixed costs 50,000 30,000 80,000 Segment margin 100,000 20,000 120,000 Common fixed costs - - 150,000 Operating income (loss) $100,000 $ 20,000 $(30,000) It is apparent from this analysis, that the company would lose $20,000 of profits. PTS: 1 DIF: Hard REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 22. A technique that uses the degrees of cost variability to measure the effect of changes in volume on resulting profits is: a. Standard costing. b. Variance analysis. c. Cost-volume-profit analysis. d. Segment profitability analysis. ANS: C Cost-volume-profit analysis uses the degrees of cost variability to measure the effect of changes in volume on profitability. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 23. Break-even sales volume in units is determined by: a. Dividing the fixed cost by the difference between the unit selling price and unit variable costs. b. Subtracting the fixed cost from the contribution margin. c. Dividing the fixed cost by the unit selling price. d. Subtracting the variable cost per unit from the unit selling price. ANS: A Break-even sales volume = fixed costs / (unit selling price - unit variable cost) PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 24. If the selling price and the variable cost per unit both increase 10 percent and fixed costs do not change, what is the effect on the contribution margin per unit and the contribution margin ratio? a. Contribution margin per unit and the contribution margin ratio both remain unchanged. b. Contribution margin per unit and the contribution margin ratio both increase. c. Contribution margin per unit increases and the contribution margin ratio decreases. d. Contribution margin per unit increases and the contribution ratio remains unchanged. ANS: D If the selling price is originally greater than the variable cost and they both increase by the same percentage, the absolute increase in selling price will be greater than the variable cost increase. Therefore, the contribution margin will be increased. If the relative increase in both items is the same, the ratio measuring them will not be affected. To prove this numerically, assume sales are $10 and variable costs are $5. A 10% increase will make sales $11 and variable costs $5.50. Original Example With 10% Increase Contribution margin $10 - $5 = $5 $11 - $5.50 = $5.50 Contribution margin ratio $5 / $10 = 50% $5.50 / $11 = 50% PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 25. The Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are $100,000. What must total sales be to break even? a. $266,667 b. $250,000 c. $200,000 d. $166,667 ANS: B Selling price $10.00 100% Variable costs 6.00 60% Contribution margin $ 4.00 40% Break-even sales volume = Fixed cost Contribution margin ratio = $100,000 .40 = $250,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 26. The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. How many tickets does the Blue Saints Band need to sell to break even? a. 23,000 b. 20,000 c. 14,000 d. 17,500 ANS: D Break-even sales volume (units) = Fixed cost / Unit contribution margin Break-even sales volume = $350,000 / ($25 - $5) = 17,500 tickets. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 27. Consider the income statement for Pickbury Farm: Sales $500,000 Variable costs 350,000 Contribution margin 150,000 Fixed costs 80,000 Net income $ 70,000 What is the break-even point in sales dollars (rounded to the nearest dollar)? a. $714,286 b. $500,000 c. $266,667 d. $120,000 ANS: C Break-even point in dollars = Fixed cost / contribution margin ratio Break-even point = $80,000 / ($150,000/$500,000) Break-even point = $80,000 / 30% = $266,667 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 28. Each of the following would affect the break-even point except a change in the: a. Variable cost per unit. b. Total fixed costs. c. Sales price per unit. d. Number of units sold. ANS: D A change in the number of units sold will not have any effect on the determination of the break-even point. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 29. Tennenholtz Company’s break-even graph is depicted below. The line labeled “D” is: a. The sales line. b. The contribution margin line. c. The total cost line. d. The variable cost line. ANS: C The line starting on the J axis where the F line (fixed cost line) intersects J that has the upward slope is the total cost line. The upward slope from the fixed cost line represents the variable costs. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 30. Tennenholtz Company’s break-even graph is depicted below. Which area indicates the profitability of the company’s product? a. E. b. G. c. B. d. H. ANS: C The area labeled “B” indicates the profitability of the product. It is beyond the break-even point, and the revenue line, labeled “C” exceeds the total cost line, which is labeled “D.” PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 31. Franklin Company is a medium-sized manufacturer of bicycles. During the year a new line called "Radical" was made available to Franklin's customers. The break-even point for sales of Radical is $250,000 with a contribution margin ratio of 40 percent. Assuming that the profit for the Radical line during the year amounted to $80,000, total sales during the year would have amounted to: a. $450,000. b. $420,000. c. $400,000. d. $475,000. ANS: A Break-even sales $250,000 Contribution margin ratio x 40% Contribution margin $100,000 Calculated fixed cost (must equal contribution margin to break-even 100,000 Net income $ -0- Sales to make $80,000 profit: Sales = .60S + $100,000 (fixed) + $80,000 (profit) .40S = $100,000 + $80,000 S = $180,000 .40 S = $450,000 PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 32. Kehler Corporation wished to market a new product for $2.00 a unit. Fixed costs to manufacture this product are $100,000. The contribution margin is 40 percent. How many units must be sold to realize net income of $100,000 from this product? a. 200,000 b. 250,000 c. 300,000 d. 350,000 ANS: B Selling price $ 2.00 Contribution margin x 40% Contribution margin $ .80 Fixed cost $100,000 Net income 100,000 Total $200,000 Total $200,000 / $.80 = 250,000 units PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 33. The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. How many tickets does the Blue Saints Band need to sell to achieve net income of $75,000. a. 21,250 b. 14,000 c. 17,500 d. 17,000 ANS: A Target volume (units) = (Fixed cost + target net income) / Unit contribution margin. Target volume = $350,000 + $75,000 / ($25 - $5) Target volume = $425,000 / $20 = 21,250 tickets PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 34. Consider the income statement for Pickbury Farm: Sales $500,000 Variable costs 350,000 Contribution margin 150,000 Fixed costs 80,000 Net income $ 70,000 At what sales level does Pickbury achieve net income of $100,000? a. $700,000 b. $600,000 c. $300,000 d. $530,000 ANS: B Target sales volume = (Fixed cost + Target profit) / contribution margin ratio Target sales volume = ($80,000 + $100,000) / ($150,000/$500,000) Target sales volume = $180,000 / 30% = $600,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 35. If the fixed costs related to a product increase while variable costs and sales price remain constant, what will happen to (1) contribution margin and (2) break-even point? Contribution Margin Break-even Point a. Unchanged Unchanged b. Unchanged Increase c. Increase Decrease d. Decrease Increase ANS: B The contribution margin is determined using only variable costs and is unaffected by fixed costs. The fixed cost increase, however, will require more sales to break even. To prove numerically, assume that the sales price is $10 per unit and variable costs are $5 per unit. The contribution margin of $10 - $5 = $5 does not change. However, if fixed costs increase from $10,000 to $20,000, the break even point increases from 2,000 units ($10,000/$5) to 4,000 units ($20,000/$5). PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 36. Which of the following would cause the break-even point to change? a. Sales volume increased. b. Fixed costs increased due to addition to physical plant. c. Total variable costs increased as a function of higher production. d. Total production decreased. ANS: B An increase in fixed cost will also increase the break-even point. Changes in production levels will not impact the break-even point. PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 37. A company increased the selling price for its product from $1.00 to $1.20 a unit when total fixed costs increased from $400,000 to $450,000 and variable cost per unit remained unchanged. How would these changes affect the break-even point? a. The break-even point in units would be increased. b. The break-even point in units would be decreased. c. The break-even point in units would remain unchanged. d. The effect cannot be determined from the information given. ANS: B The change in fixed cost from $400,000 to $450,000 represents an increase of 12.5 percent; therefore, if the contribution margin increases: 1. by more than 12.5 percent, the break-even point would decrease. 2. at 12.5 percent, the break-even point would be unchanged. 3. by less than 12.5 percent, the break-even point would increase. The relative change in contribution margin is 20%; therefore, the effect of the change is a decrease in the break-even point. To prove numerically, assume variable costs are $.20 per unit: Contribution Margin Break-even point in units Selling price $1.00; fixed costs $400,000 $1.00 - $.20 = $.80 $400,000/ $.80 = 500,000 units Selling price $1.20; fixed costs $450,000 $1.20 - $.20 = $1.00 $450,000/ $1.00 = 450,000 units PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 38. The relative percentage of unit sales among the various products made by a firm is the: a. sales volume. b. sales margin. c. sales mix. d. sales ratio. ANS: C The sales mix is the relative percentage of unit sales among the various products made by a firm. PTS: 1 DIF: Easy REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 39. Consider the following information about the Gumm Company: Budgeted Sales Unit Contribution Margin Mint gum 6,000 cases $2.00 Bubble gum 4,000 cases $2.50 Budgeted fixed costs are $550,000. The weighted-average unit contribution margin is: a. $2.25 b. $4.50 c. $2.20 d. $2.30 ANS: C Number of units Unit CM Total Mint gum 6,000 $2.00 $12,000 Bubble gum 4,000 $2.50 10,000 Total 10,000 $22,000 $22,000 / 10,000 units = $2.20 per case PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 40. Consider the following information about the Gumm Company: Budgeted Sales Unit Contribution Margin Mint gum 6,000 cases $2.00 Bubble gum 4,000 cases $2.50 Budgeted fixed costs are $550,000. The break-even point in total cases is: a. 250,000 b. 275,000 c. 220,000 d. 200,000 ANS: A Weighted-average contribution margin: Number of units Unit CM Total Mint gum 6,000 $2.00 $12,000 Bubble gum 4,000 $2.50 10,000 Total 10,000 $22,000 $22,000 / 10,000 units = $2.20 per case Break-even in units = fixed cost / weighted-average contribution margin Break-even = $550,000 / $2.20 = 250,000 case PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 41. Consider the following information about the Gumm Company: Budgeted Sales Unit Contribution Margin Mint gum 6,000 cases $2.00 Bubble gum 4,000 cases $2.50 Budgeted fixed costs are $550,000. The break-even number of cases for the mint gum is: a. 250,000 b. 100,000 c. 132,000 d. 150,000 ANS: D Weighted-average contribution margin: Number of units Unit CM Total Mint gum 6,000 $2.00 $12,000 Bubble gum 4,000 $2.50 10,000 Total 10,000 $22,000 $22,000 / 10,000 units = $2.20 per case Break-even in units = fixed cost / weighted-average contribution margin Break-even = $550,000 / $2.20 = 250,000 case 250,000 units x (6,000/10,000) = 150,000 cases of mint gum. PTS: 1 DIF: Hard REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 42. The margin of safety is the amount: a. by which the sales price per unit exceeds the variable cost per unit. b. that the contribution margin exceeds fixed cost. c. by which the profit calculated under absorption costing exceeds the profit calculated under variable costing. d. that sales can decrease before the company will suffer a loss. ANS: D The margin of safety is the amount that sales can decrease before the company will suffer a loss. It can be expressed in dollars or units and is calculated by subtracting break-even sales revenue from sales revenue under review. PTS: 1 DIF: Easy REF: P. OBJ: 5 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 43. The Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are $100,000. If the company is currently selling 30,000 units, what is the margin of safety in units? a. 5,000 b. 10,000 c. 25,000 d. 20,000 ANS: A Selling price $10.00 100% Variable costs 6.00 60% Contribution margin $ 4.00 40% Break-even in units = Fixed cost Contribution margin per unit = $100,000 $4.00 = 25,000 With sales volume of 30,000 units, the margin of safety would be 30,000 - 25,000 or 5,000 units. PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 44. The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. At the current level of sales, what is the margin of safety in dollars? a. $137,500 b. $87,500 c. $180,000 d. $115,000 ANS: A Break-even volume (dollars) = Fixed cost / Contribution margin ratio. Break-even volume = $350,000 / ($25 - $5 / $20) Break-even volume = $350,000 / 80% = $437,500 Sales dollars at current level = $25 x 23,000 = $575,000 Margin of safety = Sales revenue - break-even sales revenue Margin of safety = $575,000 - $437,500 = $137,500 PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 45. Consider the income statement for Pickbury Farm: Sales $500,000 Variable costs 350,000 Contribution margin 150,000 Fixed costs 80,000 Net income $ 70,000 What is the margin of safety ratio (to the nearest percentage point)? a. 47% b. 70% c. 30% d. 88% ANS: A Break-even point in dollars = Fixed cost / contribution margin ratio Break-even point = $80,000 / ($150,000/$500,000) Break-even point = $80,000 / 30% = $266,667 Margin of safety ratio = (sales - break-even sales) / sales Margin of safety ratio = ($500,000 - $266,667) / $500,000 Margin of safety ratio = $233,333 / $500,000 = 46.67% PTS: 1 DIF: Moderate REF: P. OBJ: 5 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 46. The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. At the current level of sales, what is the margin of safety ratio? a. 20.0% b. 23.9% c. 15.2% d. 31.3% ANS: B Break-even volume (dollars) = Fixed cost / Contribution margin ratio. Break-even volume = $350,000 / ($25 - $5 / $20) Break-even volume = $350,000 / 80% = $437,500 Sales dollars at current level = $25 x 23,000 = $575,000 Margin of safety = Sales revenue - break-even sales revenue Margin of safety = $575,000 - $437,500 = $137,500 Margin of safety ratio = Margin of safety / sales Margin of safety ratio = $137,500 / $575,000 = 23.9% PTS: 1 DIF: Hard REF: P. OBJ: 5 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 47. The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are $350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints Band has sold 23,000 tickets so far. How many tickets does the Blue Saints Band need to sell to achieve net income of $50,000 after income tax, assuming the income tax rate is 50%? a. 2,500 b. 18,000 c. 22,500 d. 17,500 ANS: C Target volume (units) = (Fixed cost + (target net income/(1 - tax rate)) / Unit contribution margin. Target volume = ($350,000 + ($50,000 / (1 - .5) / ($25 - $5) Target volume = $350,000 + $100,000 / $20 = 22,500 tickets PTS: 1 DIF: Hard REF: P. OBJ: 6 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 48. The difference in cost between two alternatives, such as to make a component part of a final product versus buying the part from an outside supplier is called: a. Variable cost. b. Differential cost. c. Product cost. d. Indirect cost. ANS: B The difference in cost between two alternatives is the differential cost. PTS: 1 DIF: Easy REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 49. Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and the company sells approximately 500,000 gears each year. Unit cost data for the year follows: Direct material $9.00 Direct labor 8.00 Other costs: Variable Fixed Manufacturing $3.00 $7.00 Distribution 5.00 3.00 Donellan has received an offer from a foreign manufacturer to purchase 25,000 gears. Domestic sales would be unaffected by this transaction. If the offer is accepted, variable distribution costs will increase $1.00 per gear for insurance, shipping, and import duties. The relevant unit cost to a pricing decision on this offer is: a. $18.00. b. $20.00. c. $24.00. d. $26.00. ANS: D Direct materials $ 9.00 Direct labor 8.00 Variable manufacturing cost 3.00 Variable distribution cost 5.00 Increase in variable distribution costs 1.00 Total $26.00 The fixed manufacturing and distribution costs are irrelevant to the decision because they are not changed by the 25,000 gear order. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 50. Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 80% capacity. The windows usually sell for $20.00 each. Costs for each window follow: Direct materials $ 5.00 Direct labor 3.00 Variable factory overhead 2.00 Fixed factory overhead 4.00 Total $14.00 The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should: a. Reject the offer because it currently does not have enough capacity to accept the order. b. Reject the order because the company will lose $20,000 on the order. c. Accept the offer because the company will realize $20,000 in additional contribution margin. d. Accept the offer because the company will realize $40,000 in additional contribution margin. ANS: C Bradley has enough excess capacity to manufacture 20,000 additional units (100,000 x (1 - .80). The relevant costs are: Direct materials $ 5.00 Direct labor 3.00 Variable factory overhead 2.00 Total $10.00 The $12.00 special selling price exceeds the variable costs of $10.00 for a contribution margin of $2.00 each, or a total contribution margin of $20,000 (10,000 x $2.00). PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 51. Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% capacity. The windows usually sell for $20.00 each. Costs for each window follow: Direct materials $ 5.00 Direct labor 3.00 Variable factory overhead 2.00 Fixed factory overhead 4.00 Total $14.00 The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should: a. Reject the offer because it currently does not have enough capacity to accept the order. b. Reject the order because the company will lose $20,000 on the order. c. Accept the offer because the company will realize $20,000 in additional contribution margin. d. Accept the offer because the company will realize $40,000 in additional contribution margin. ANS: A Bradley should reject the offer if it would have to displace orders for the windows that are priced higher than $12.00. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 52. The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost is called: a. Contribution pricing. b. Differential pricing. c. Capacity pricing. d. Special pricing. ANS: A The practice of accepting a selling price when there is excess capacity as long as it exceeds variable cost is called contribution pricing, thus contributing some positive contribution margin in times of excess capacity. PTS: 1 DIF: Easy REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 53. Chapman Corporation manufactures lamps. Management is currently studying whether the company should continue to make the cord assembly or purchase them from Graham Company for $5.25. Chapman needs 20,000 cord assemblies a year. If the part is purchased, the company can not use the released facilities for another manufacturing activity. Chapman’s unit cost to manufacture the cord assembly is: Direct materials $2.25 Direct labor 1.75 Factory overhead (70% fixed) 2.50 Total $6.50 The decision Chapman should make and the related differential income is: Decision Differential Income a. Buy from Graham $10,000 b. Make the assembly $10,000 c. Make the assembly $25,000 d. Buy from Graham $25,000 ANS: B The relevant cost of manufacturing the cord assembly: Direct materials $2.25 Direct labor 1.75 Variable factory overhead (2.50 x 30%) .75 Total $4.75 Number of assemblies 20,000 Cost to make assemblies $ 95,000 Cost to purchase assemblies (5.25 x 20,000) $105,000 Chapman should made the cord assembly. The differential income in making the assemblies is $10,000 ($105,000 - $95,000). PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 54. Cleese Company currently purchases a finished part from Idle Company, but is considering using it excess capacity to make the part. Normal capacity is 20,000 hours, but Cleese is currently running at 17,000 hours. Details about budgeted factory overhead follow: Total Per Hour Fixed factory overhead $40,000 $2.00 Variable factory overhead 50,000 2.50 $90,000 $4.50 Direct costs to manufacture 1,000 parts in-house would be: Materials $ 6,000 Direct labor (2,000 @ $8 per hour) 16,000 $22,000 The relevant unit cost Cleese should use to decide whether to make or buy the part is: a. $31.00 b. $24.50 c. $27.00 d. $26.00 ANS: C Direct material ($6,000 / 1,000) $ 6.00 Direct labor (2* hours @ 8.00) 16.00 Variable factory overhead (2 hours @ 2.50) 5.00 Total $27.00 * 2,000 hours / 1,000 units = 2 hours per unit. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 55. Another term for cost incurred to sell and deliver products is: a. Differential costs. b. Administrative costs. c. General costs. d. Distribution costs. ANS: D Another term for selling and delivery costs is distribution costs. PTS: 1 DIF: Easy REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 56. An example of a distribution cost that can be directly assigned to selling activity would be: a. Advertising costs. b. Commissions. c. Sales manager’s salary. d. Telephone expenses. ANS: B Commissions would be directly linked to specific sales. The other costs are indirect costs of selling. PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective 57. In performing an activity-based costing study for distribution costs, appropriate cost drivers for preparing orders for shipment would include all of the following except the: a. Number of orders shipped. b. Time spent packing orders. c. Time devoted to selling each product. d. Number of items per order. ANS: C The time devoted to selling each product would not impact the cost for preparing the orders for shipping. PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Reflective PROBLEM 1. Praeger Company began operations on January 1 and produces a single product that sells for $10.00 per unit. Standard capacity is 100,000 units per year. During the year, 100,000 units were produced and 80,000 units were sold. There was no inventory at the beginning of the year. Manufacturing costs and selling and administrative expenses follow: Fixed Costs Variable Costs Raw materials -- $2.50 per unit produced Direct labor -- 1.50 per unit produced Factory overhead $250,000 .50 per unit produced Selling and administrative 100,000 .50 per unit sold There were no variances from the standard variable costs. Any under- or overapplied overhead is written off directly at year end as an adjustment to cost of goods sold. a. In presenting inventory on the balance sheet at December 31, what is the unit cost under absorption costing? b. In presenting inventory on the balance sheet at December 31, what is the unit cost under variable costing? c. What is the net income for the year under absorption costing? d. What is the net income for the year under direct costing? e. What is the cost of the ending inventory under absorption costing? f. What is the cost of the ending inventory under variable costing? ANS: (a) Materials $2.50 Labor 1.50 Overhead--Fixed ($250,000 / 100,000) 2.50 Overhead--Variable .50 $7.00 (b) Materials $2.50 Direct labor 1.50 Overhead--Variable .50 $4.50 (c) Sales (80,000  $10) $800,000 Cost of goods sold (80,000  $7.00) $560,000 Under- or overapplied factory overhead* - 560,000 Gross profit $240,000 Selling and administrative [$100,000 + (80,000 x $.50)] 140,000 Net income $100,000 * There is no under- or overapplied fixed factory overhead since actual the production level was equal to the expected production level of standard capacity (d) Sales $800,000 Cost of goods sold ($4.50  80,000) 360,000 Manufacturing margin $440,000 Fixed factory overhead $250,000 Selling and administrative 140,000 390,000 Net income $ 50,000 (e) Ending inventory is 20,000 units (100,000 - 80,000) Inventory under absorption costing (20,000 x $7.00) $140,000 Inventory under variable costing (20,000 x $4.50) $ 90,000 PTS: 1 DIF: Moderate REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 2. The Tijama Manufacturing Company has determined the cost of manufacturing a unit of product to be as follows, based on normal production of 50,000 units per year: Direct materials $20.00 Direct labor 15.00 Variable factory overhead 10.00 $45.00 Fixed factory overhead 12.00 $57.00 Operating statistics for the month of August and September include: August September Units produced 4,200 4,000 Units sold 3,500 4,200 Selling and administrative expenses $25,000 $35,000 The selling price is $70 per unit. There were no inventories on August 1, and there is no work in process at September 30. Prepare comparative income statements for each month under the following methods: a. Absorption costing method b. Direct costing method ANS: The Tijama Manufacturing Co. Income Statement For the Month Ended August 31, 20-- (a) Absorption Costing (b) Direct Costing Sales (3,500 units  $70) $245,000 $245,000 Cost of goods sold (3,500  $57; $199,500 3,500  $45) 157,500 Subtract overapplied fixed overhead 400* 199,100 Gross margin $ 45,900 Manufacturing margin $ 87,500 Fixed factory overhead $50,000 Selling & administrative expenses 25,000 25,000 75,000 Net income (loss) $ 20,900 $ 12,500 * Calculation of underapplied fixed factory overhead: Fixed overhead per year: $12 per unit  50,000 units = $600,000 Fixed overhead per month: $600,000 / 12 months = 50,000 Fixed factory overhead applied to production: 4,200 units  $12 $50,400 Fixed overhead per month 50,000 Fixed factory overhead overapplied $ 400 The Tijama Manufacturing Co. Income Statement For the Month Ended September 30, 20-- (a) Absorption Costing (b) Direct Costing Sales (4,200 units  $70) $294,000 $294,000 Cost of goods sold (4,200  $57) $239,400 (4,200  $45) 189,000 Add underapplied fixed overhead 2,000** 241,400 Gross margin $ 52,600 Contribution margin $105,000 Fixed factory overhead $50,000 Selling & administrative expenses 35,000 35,000 85,000 Net income (loss) $ 17,600 $ 20,000 ** Calculation of underapplied fixed factory overhead: Fixed factory overhead applied to production (4,000  $12) $48,000 Fixed factory overhead per month 50,000 Fixed factory overhead underapplied $ 2,000 PTS: 1 DIF: Hard REF: P. OBJ: 1 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic 3. Jasper Company makes two versions of one product, Standard and Deluxe. In November, sales of standard and Deluxe amount to $680,000 and $520,000, respectively. The contribution margin ratio for Standard is 30% and Standard had direct fixed production and administrative costs of $125,000. The contribution margin ratio for Deluxe was 40% and direct fixed costs were $160,000. Common costs that couldn’t be allocated in a meaningful way were $100,000. Prepare a segmented income statement for the month of November. ANS: Jasper Company Segmented Income Statement For the Month ended November 30, 20-- Standard Deluxe Total Sales revenue $680,000 $520,000 $1,200,000 Less variable costs 476,000 312,000 788,000 Contribution margin 204,000 208,000 412,000 Less direct fixed costs 125,000 160,000 285,000 Segment margin $ 79,000 $ 48,000 127,000 Less common fixed costs 100,000 Net income $ 27,000 PTS: 1 DIF: Moderate REF: P. OBJ: 3 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 4. The following data relate to a year's budgeted activity for Jorgensen Corporation, a single product company: Per Unit Selling price $8.00 Variable manufacturing costs 3.00 Variable selling costs 2.00 Fixed manufacturing costs (based on 120,000 units) .25 Fixed selling costs (based on 120,000 units) .75 Total fixed costs remain unchanged within the relevant range in which the company is currently operating. a. What is the projected annual break-even sales in units? b. What dollar amount of sales would Jorgenson need to achieve operating income of $30,000? c. If fixed costs increased $7,500, how many more units must be sold to break even? ANS: (a) Selling price per unit $ 8.00 Less variable cost per unit 5.00 Contribution margin $ 3.00 Fixed cost--manufacturing ($.25  120,000 units) $ 30,000 Fixed cost--selling ($.75  120,000 units) 90,000 Total fixed costs $120,000 BE = Fixed Costs = $120,000 = 40,000 units Contribution Margin $3 (b) Contribution margin ratio = $3 / $8 = 37.5% Fixed Costs + Desired Income = $120,000 + $30,000 = $400,000 Contribution Margin Ratio .375 (c) $7,500 / $3.00 (contribution margin per unit) = 2,500 units Jorgenson would have to sell 2,500 additional units to cover the additional fixed cost. PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 5. A traditional break-even chart is illustrated below: Identify each letter on the above chart, using the proper terminology. ANS: Lettered Item in Break-even Chart Terminology Lettered Item in Break-even Chart Terminology A Break-even point F Fixed cost line B Net income area G Fixed cost area C Sales line H Variable cost area D Total cost line I x-axis (units) E Net loss area J y-axis (dollars) PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 6. Tress Enterprises manufactures shampoo and conditioner. Last year, Tress sold 120,000 bottles of product. Unit sales of conditioner amounted to 60% of the number of units of shampoo. This trend is expected to continue. The selling price for both products is $12.00, however, the variable cost of a unit of shampoo is $6.00, while the variable cost of a unit of conditioner is $8.00. Fixed costs are expected to be $420,000. (a) Compute the number of each product sold. (b) Compute the weighted-average contribution margin per unit. (c) Compute the overall break-even point in units. (d) Compute the unit sales of shampoo and conditioner at the break-even point. (e) Compute the dollar sales of shampoo and conditioner at the break-even point. ANS: (a) Total sales = shampoo sales + conditioner sales 120,000 = x + .6x 120,000 = 1.6x x = 75,000 (shampoo sales) Conditioner sales = .6 x 75,000 = 45,000 (b) Contribution Product Sales Price Unit variable cost margin per unit Number of units Total Shampoo $12.00 $6.00 $6.00 75,000 $450,000 Conditioner 12.00 8.00 4.00 45,000 180,000 120,000 $630,000 Weighted-average unit contribution margin = $630,000 / 120,000 = $5.25 (c) Break-even point in units $420,000 / $5.25 = 80,000 units. (d) and (e) Shampoo sales in units = 80,000 x (75,000 / 120,000) = 50,000 x $12 = $600,000 Conditioner sales = 80,000 x (45,000 / 120,000) = 30,000 x $12 = $360,000 PTS: 1 DIF: Moderate REF: P. OBJ: 4 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 7. The Gaylord Company has sales of $800,000, variable costs of $400,000, and fixed costs of $250,000. Compute the following: a. Contribution margin ratio b. Break-even sales volume c. Margin of safety ratio d. Net income as a percentage of sales ANS: (a) Contribution margin ratio = $800,000 - $400,000 $800,000 = 50.0% (b) Break-even sales volume = $250,000 = $500,000 .50 (c) Margin of safety ratio = $800,000 - $500,000 = 37.5% $800,000 (d) Net income percentage = 50.0%  37.5% = 18.75% PTS: 1 DIF: Moderate REF: P. OBJ: 4, 5 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 8. Sherpa Manufacturing has the following income statement for 6,000 units: Sales $600,000 Variable costs 360,000 Contribution margin 240,000 Fixed costs 80,000 Net income $160,000 (a) At what sales volume (in sales dollars) does Sherpa break even? (b) At what sales volume (in units) does Sherpa break even? (c) Given the income statement above, compute the margin of safety. (d) What level of sales volume must be attained to reach net income of $200,000? (e) What level of sales volume must be attained to reach net income of $180,000, assuming Sherpa had to pay income taxes at a rate of 40%? ANS: (a) Contribution margin ratio = contribution margin / sales Contribution margin ratio = $240,000 / $600,000 = 40% Break-even point in sales dollars = fixed costs / contribution margin ratio Break-even point in sales dollars = $80,000 / 40% = $200,000. (b) Unit contribution margin = contribution margin / number of units Unit contribution margin = $240,000 / 6,000 = $40 per unit Break-even point in units = fixed costs / unit contribution margin Break-even point in units = $80,000 / $40 = 2,000 units (c) Margin of safety = sales revenues - break-even sales volume Margin of safety = $600,000 - $200,000 = $400,000 (d) Target volume of sales = (target profit + fixed costs) / contribution margin ratio Target volume of sales = ($200,000 + $80,000) / 40% = $700,000 (e) Target volume of sales = (fixed costs + (target after-tax income/(1 - tax rate))/ contribution margin ratio Target volume of sales = ($80,000 + ($180,000/(1 - 40%) / 40% Target volume of sales = (80,000 + 300,000) / 40% = $950,000 PTS: 1 DIF: Hard REF: P. OBJ: 4, 5, 6 NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic 9. Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian company. This order specified that the selling price per unit should not exceed $50. Since the order was received without the effort of the sales department, no commission would be paid. However, an export handling charge of $5 per unit would be incurred. Management anticipates that acceptance of the order will have no effect on other sales. The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this level for the coming year without the Canadian order. Unit costs based on estimated actual capacity for the coming year include: Selling price $65.00 Expenses: Direct materials $18.00 Direct labor 16.00 Variable factory overhead 10.00 Fixed factory overhead 3.00 Sales commissions 5.00 Other marketing expenses (two-thirds variable) 3.00 General expenses (60% fixed) 5.00 Total $60.00 Prepare an analysis showing the effect on profits if the special order is accepted by the company. Based on your analysis, should the order be filled, and why? ANS: Westwood Gear, Inc. Effect of Special Order on Profits Differential costs: Per Unit Direct materials $18.00 Direct labor 16.00 Variable factory overhead 10.00 Other marketing expenses 2.00 Export-handling charge 5.00 General expenses (40% variable) 2.00 Total $53.00 Differential selling price 50.00 Loss $ 3.00 Loss per unit  units sold = $3  10,000 = $30,000 decrease in profit The order would be likely turned down if it affected normal customers, or it generated a loss. In this case a loss was created. On the other hand, if this is a new market, and the company can justify using this special order as a means to enter a new potentially profitable market they may undertake the venture even if money is lost on the one order. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 10. Busby Company needs 10,000 units of a certain part to use in its production cycle. The following information is available: Costs incurred by Busby to make the part: Direct materials $15 Direct labor 12 Variable factory overhead 13 Fixed factory overhead 10 Total $50 Costs to buy the part from Thurco: $45 If Busby buys the part from Thurco instead of making it, Busby could not use the released facilities in another manufacturing activity. However, twenty percent of the fixed overhead would be avoided because one of the supervisors could be let go. (a) In deciding whether to make or buy the part, what are the relevant costs that Busby must consider. (b) What decision should Busby make? ANS: (a) Variable costs to manufacture the product: Direct materials $15 Direct labor 12 Variable factory overhead 13 $40 Cost to buy the part from Thurco $45 Savings from releasing the supervisor ( 2) $43 (b) Based on the above analysis, Busby should continue to make the part. PTS: 1 DIF: Moderate REF: P. OBJ: 7 NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective 11. Hoctor Industries wishes to determine the profitability of its products and asks the cost accountant to make a comparative analysis of sales, cost of sales and distribution costs of each product for the year. The accountant gathers the following information which will be useful in preparing the analysis: Standard Deluxe Number of units sold 500,000 350,000 Number of orders received 15,000 4,000 Selling price per unit $10 $20 Cost per unit $ 4 $12 Advertising expenses total $100,000, with 60% being expended to advertise the Deluxe model. The representatives commissions are 5% and 7% for the standard and deluxe models, respectively. The sales manager’s salary of $50,000 is allocated evenly between products. Other miscellaneous selling costs are estimated to be $6 per order received. (a) Compute the selling cost per unit. (b) Prepare an analysis for Hoctor Industries that will show in comparative form the income derived from the sale of each unit for the year. ANS: (a) Expense Standard Deluxe Total Selling expenses: Advertising $100,000 x 40% $100,000 x 60% $ 40,000 $ 60,000 $ 100,000 Commissions 500,000 x $10 x 5% 350,000 x $20 x 7% 250,000 490,000 740,000 Sales manager salary $50,000 x 1/2 $50,000 x 1/2 25,000 25,000 50,000 Miscellaneous selling costs 15,000 x $6 4,000 x $6 90,000 24,000 114,000 Total selling costs $405,000 $599,000 $1,004,000 Number of units 500,000 350,000 Selling cost per unit $ .81 $1.71 (b) Hoctor Industries Comparative Income Analysis For the Year Ended December 31, 20-- Standard Deluxe Total Sales 500,000 x $10 350,000 x $20 $5,000,000 $7,000,000 $12,000,000 Manufacturing cost 500,000 x $4 350,000 x $12 2,000,000 4,200,000 6,200,000 Selling cost 405,000 599,000 1,004,000 Operating profit $2,595,000 $2,201,000 $4,796,000 PTS: 1 DIF: Moderate REF: P. OBJ: 8 NAT: IMA 2B - Cost Management TOP: AACSB - Analytic