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. 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, 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 ,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 orde