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CHAPTER 4
DISCUSSION QUESTIONS
Q4-1. The five parts are: The income statement is primarily a meas-
(a) Direct materials section ure of what has been earned, and not a
(b) Direct labor section measure of “earning power.” For plant assets,
(c) Factory overhead the balance sheet is primarily a measure of
(d) Work in process inventories accountability for expenditures, showing
(e) Finished goods inventories acquisition costs less costs allocated to past
Q4-2. The balance sheet is a statement of financial operations. This measure of accountability
position; the income statement is a statement may be quite different from “true value.”
of activity. The income statement is comple- To increase its usefulness as one element
mentary to the balance sheet, accounting in in judging earning power, the income state-
particular for the change in the proprietary ment is prepared with a distinction between
equity as a result of operations during the year. operating and nonoperating items. For the
In that respect, the income statement is essen- same reason, certain items may be eliminated
tially nothing more than a major section of the from the income statement and shown in the
retained earnings account. Therefore, the rev- statement of retained earnings. However, the
enue and expense accounts in the income effect of nonrecurring and nonoperating trans-
statement have been termed “explanatory” actions is not entirely eliminated.
accounts, explaining the ebb and flow of rev- Information revealed by a series of
enues and expenses that lead to the new income statements is more significant in
income (or loss) and to the new retained earn- judging earning power than information
ings balance in the balance sheet. revealed by one income statement. The
Q4-3. The ordinary balance sheet and income income of a business may follow or even
statement are intended to provide informa- exaggerate the ups and downs of the busi-
tion as to financial position and results of ness cycle and, therefore, the income of any
operation of a business, in accordance with one year will not represent earning power.
several assumptons that are made in prepar- Changes in law or local zoning ordinances
ing the statements. From the standpoint of may result in a marked change in the earning
the criticisms made, the most important of power of a business. Likewise, changes in
these assumptions are that cost less appro- public taste, development of new products,
priate amortization of cost measures unex- appearance of new competition, acquisition of
pired cost, and that a business may be subsidiaries, changes in management and
assumed to be going to continue operations the like, all may change earning power and
indefinitely into the future. Accounting state- yet not be clearly reflected, if reflected at all,
ments are usually prepared on the theory in one income statement.
that a sale or some other definite event is The accounting use of historical, rather
essential before revenue is recognized. than current, dollars in measuring deprecia-
Basically, the asset side of a balance sheet tion and cost of goods sold may result in dis-
contains a presentation of the amounts of torting any view of earning power obtained
cost incurred, which can be presumed to from a single income statement.
benefit future periods. An income statement In regard to plant assets, it can be said that
presents the amount of revenue recognized their value to a going concern is usually
as having been realized during the period dependent upon the earning power of the
less the portion of all costs incurred that business. Such a value is not necessarily the
does not appear to be fairly deferrable to same as liquidation value, cost, cost less
future periods. amortization, replacement value, or any other
4-1
, To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
4-2 Chapter 4
kind of value. The phrase “true value” has no in service businesses such as medical, legal,
definite connotation. architectural, construction engineering,
Q4-4. Actual describes the way costs are meas- accounting, and consulting firms, as men-
ured, i.e., at actual historical amounts; tioned in the text. Other examples include
absorption describes which elements of cost shipbuilding, bridge building, tool and die
are allocated to inventory accounts, i.e., all manufacturing, art and antique restoration,
elements of manufacturing cost are fully allo- and contract research.
cated to inventories; process describes how Q4-11. As mentioned in the text, process costing
cost information is accumulated, i.e., costs would be common in the milling, brewing,
are accumulated for each process or depart- chemical, and textile industries; in simple
ment in the factory. assembly operations; and in service busi-
Q4-5. Prime costing systems allocate only the prime nesses serving large numbers of customers
costs, direct material and direct labor, to simultaneously, such as airlines. Other exam-
inventory accounts. Direct costing systems, ples include petroleum refining, basic food
also called variable costing systems, allocate processing, and manufacture of low-cost con-
the variable manufacturing costs, direct mate- sumer products such as toys, disposable
rial, direct labor, and variable factory over- pens, razors, and lighters.
head to the inventory accounts. Absorption Q4-12. Aspects common to job order and process
costing systems allocate to inventories part or costing are:
all of fixed factory overhead, in addition to all (a) They can be used by service organiza-
variable manufacturing costs. tions.
Q4-6. Actual costing measures product costs at (b) They require considerable detail to calcu-
actual historical amounts, while standard late the cost of work in process.
costing measures product costs by using pre- (c) The work in process account in the gen-
determined amounts of resources to be con- eral ledger is supported by subsidiary
sumed and predetermined prices of those records.
resources. Q4-13. A blended costing method uses job order cost-
Q4-7. Process costing accumulates costs for each ing to accumulate some element(s) of cost and
process or department in the factory and process costing to accumulate others.
maintains detailed records and calculations of Q4-14. Flexible manufacturing systems consist of an
the costs of work in process. Job order cost- integrated collection of automated production
ing accumulates costs for each job, lot, batch, processes, automated materials movement,
or contract and maintains detailed records and computerized system controls to utilize
and calculations of the costs of work in facilities in efficiently manufacturing a highly
process. Backflush costing accumulates costs flexible variety of products.
by working backwards through the available Q4-15. The advantages of a flexible manufacturing
information after production is completed (i.e., system over the other systems include short
at the end of the accounting period) and (near zero) setup times, the absence of a
maintains no detailed records of the costs of learning curve, lower lead times to shipment,
work in process. lower direct labor cost per unit, lower direct
Q4-8. Actual costing is more common than standard labor cost in total, and lower work in process
costing in defense-related industries, while inventories.
standard costing is somewhat more common Q4-16. The initial cost of creating a flexible manufac-
elsewhere. turing system is much higher than that of
Q4-9. Super-full absorption or super absorption other manufacturing systems.
refers to the income tax requirement that Q4-17. Manufacturing settings suited for backflush
some purchasing and storage costs be allo- costing are distinguished by very fast pro-
cated to inventory accounts. cessing speeds, which remove both the
Q4-10. Job order costing would be common in repair incentive and the opportunity to track the
shops, building construction, and printing; and detailed costs of work in process.
, To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
Chapter 4 4-3
EXERCISES
E4-1 Calculation of cost of goods sold (in thousands):
Total manufacturing cost............................................. $110
Add work in process inventory, beginning ................ 80
$190
Less work in process inventory, ending .................... 90
Cost of goods manufactured ...................................... $100
Add finished goods inventory, beginning .................. 150
Cost of goods available for sale ................................. $250
Less finished goods inventory, ending ...................... 120
Cost of goods sold....................................................... $130
E4-2 Calculation of cost of goods sold (in thousands):
Direct materials used ................................................... $ 90
Direct labor.................................................................... 60
Factory overhead.......................................................... 80
Total manufacturing cost............................................. $230
. Add work in process inventory, beginning ................ 250
$480
Less work in process inventory, ending .................... 210
Cost of goods manufactured ...................................... $270
Add finished goods inventory, beginning .................. 340
Cost of goods available for sale ................................. $610
Less finished goods inventory, ending ...................... 300
Cost of goods sold....................................................... $310
CHAPTER 4
DISCUSSION QUESTIONS
Q4-1. The five parts are: The income statement is primarily a meas-
(a) Direct materials section ure of what has been earned, and not a
(b) Direct labor section measure of “earning power.” For plant assets,
(c) Factory overhead the balance sheet is primarily a measure of
(d) Work in process inventories accountability for expenditures, showing
(e) Finished goods inventories acquisition costs less costs allocated to past
Q4-2. The balance sheet is a statement of financial operations. This measure of accountability
position; the income statement is a statement may be quite different from “true value.”
of activity. The income statement is comple- To increase its usefulness as one element
mentary to the balance sheet, accounting in in judging earning power, the income state-
particular for the change in the proprietary ment is prepared with a distinction between
equity as a result of operations during the year. operating and nonoperating items. For the
In that respect, the income statement is essen- same reason, certain items may be eliminated
tially nothing more than a major section of the from the income statement and shown in the
retained earnings account. Therefore, the rev- statement of retained earnings. However, the
enue and expense accounts in the income effect of nonrecurring and nonoperating trans-
statement have been termed “explanatory” actions is not entirely eliminated.
accounts, explaining the ebb and flow of rev- Information revealed by a series of
enues and expenses that lead to the new income statements is more significant in
income (or loss) and to the new retained earn- judging earning power than information
ings balance in the balance sheet. revealed by one income statement. The
Q4-3. The ordinary balance sheet and income income of a business may follow or even
statement are intended to provide informa- exaggerate the ups and downs of the busi-
tion as to financial position and results of ness cycle and, therefore, the income of any
operation of a business, in accordance with one year will not represent earning power.
several assumptons that are made in prepar- Changes in law or local zoning ordinances
ing the statements. From the standpoint of may result in a marked change in the earning
the criticisms made, the most important of power of a business. Likewise, changes in
these assumptions are that cost less appro- public taste, development of new products,
priate amortization of cost measures unex- appearance of new competition, acquisition of
pired cost, and that a business may be subsidiaries, changes in management and
assumed to be going to continue operations the like, all may change earning power and
indefinitely into the future. Accounting state- yet not be clearly reflected, if reflected at all,
ments are usually prepared on the theory in one income statement.
that a sale or some other definite event is The accounting use of historical, rather
essential before revenue is recognized. than current, dollars in measuring deprecia-
Basically, the asset side of a balance sheet tion and cost of goods sold may result in dis-
contains a presentation of the amounts of torting any view of earning power obtained
cost incurred, which can be presumed to from a single income statement.
benefit future periods. An income statement In regard to plant assets, it can be said that
presents the amount of revenue recognized their value to a going concern is usually
as having been realized during the period dependent upon the earning power of the
less the portion of all costs incurred that business. Such a value is not necessarily the
does not appear to be fairly deferrable to same as liquidation value, cost, cost less
future periods. amortization, replacement value, or any other
4-1
, To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
4-2 Chapter 4
kind of value. The phrase “true value” has no in service businesses such as medical, legal,
definite connotation. architectural, construction engineering,
Q4-4. Actual describes the way costs are meas- accounting, and consulting firms, as men-
ured, i.e., at actual historical amounts; tioned in the text. Other examples include
absorption describes which elements of cost shipbuilding, bridge building, tool and die
are allocated to inventory accounts, i.e., all manufacturing, art and antique restoration,
elements of manufacturing cost are fully allo- and contract research.
cated to inventories; process describes how Q4-11. As mentioned in the text, process costing
cost information is accumulated, i.e., costs would be common in the milling, brewing,
are accumulated for each process or depart- chemical, and textile industries; in simple
ment in the factory. assembly operations; and in service busi-
Q4-5. Prime costing systems allocate only the prime nesses serving large numbers of customers
costs, direct material and direct labor, to simultaneously, such as airlines. Other exam-
inventory accounts. Direct costing systems, ples include petroleum refining, basic food
also called variable costing systems, allocate processing, and manufacture of low-cost con-
the variable manufacturing costs, direct mate- sumer products such as toys, disposable
rial, direct labor, and variable factory over- pens, razors, and lighters.
head to the inventory accounts. Absorption Q4-12. Aspects common to job order and process
costing systems allocate to inventories part or costing are:
all of fixed factory overhead, in addition to all (a) They can be used by service organiza-
variable manufacturing costs. tions.
Q4-6. Actual costing measures product costs at (b) They require considerable detail to calcu-
actual historical amounts, while standard late the cost of work in process.
costing measures product costs by using pre- (c) The work in process account in the gen-
determined amounts of resources to be con- eral ledger is supported by subsidiary
sumed and predetermined prices of those records.
resources. Q4-13. A blended costing method uses job order cost-
Q4-7. Process costing accumulates costs for each ing to accumulate some element(s) of cost and
process or department in the factory and process costing to accumulate others.
maintains detailed records and calculations of Q4-14. Flexible manufacturing systems consist of an
the costs of work in process. Job order cost- integrated collection of automated production
ing accumulates costs for each job, lot, batch, processes, automated materials movement,
or contract and maintains detailed records and computerized system controls to utilize
and calculations of the costs of work in facilities in efficiently manufacturing a highly
process. Backflush costing accumulates costs flexible variety of products.
by working backwards through the available Q4-15. The advantages of a flexible manufacturing
information after production is completed (i.e., system over the other systems include short
at the end of the accounting period) and (near zero) setup times, the absence of a
maintains no detailed records of the costs of learning curve, lower lead times to shipment,
work in process. lower direct labor cost per unit, lower direct
Q4-8. Actual costing is more common than standard labor cost in total, and lower work in process
costing in defense-related industries, while inventories.
standard costing is somewhat more common Q4-16. The initial cost of creating a flexible manufac-
elsewhere. turing system is much higher than that of
Q4-9. Super-full absorption or super absorption other manufacturing systems.
refers to the income tax requirement that Q4-17. Manufacturing settings suited for backflush
some purchasing and storage costs be allo- costing are distinguished by very fast pro-
cated to inventory accounts. cessing speeds, which remove both the
Q4-10. Job order costing would be common in repair incentive and the opportunity to track the
shops, building construction, and printing; and detailed costs of work in process.
, To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com
Chapter 4 4-3
EXERCISES
E4-1 Calculation of cost of goods sold (in thousands):
Total manufacturing cost............................................. $110
Add work in process inventory, beginning ................ 80
$190
Less work in process inventory, ending .................... 90
Cost of goods manufactured ...................................... $100
Add finished goods inventory, beginning .................. 150
Cost of goods available for sale ................................. $250
Less finished goods inventory, ending ...................... 120
Cost of goods sold....................................................... $130
E4-2 Calculation of cost of goods sold (in thousands):
Direct materials used ................................................... $ 90
Direct labor.................................................................... 60
Factory overhead.......................................................... 80
Total manufacturing cost............................................. $230
. Add work in process inventory, beginning ................ 250
$480
Less work in process inventory, ending .................... 210
Cost of goods manufactured ...................................... $270
Add finished goods inventory, beginning .................. 340
Cost of goods available for sale ................................. $610
Less finished goods inventory, ending ...................... 300
Cost of goods sold....................................................... $310
