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Flashcards in B1-3 Deck (53):
1

The following information was extracted from the accounting records of Taft Manufacturing Company:

Direct materials purchased $90,000

Direct materials used 86,000

Direct manufacturing labor costs 20,000

Indirect manufacturing labor costs 22,000

Sales salaries 14,000

Other factory expenses 32,000

Selling and administrative expenses 20,000

What was the cost of goods manufactured?

a.

128,000

b.

198,000

c.

160,000

d.

164,000

 

Choice "c" is correct. The cost of goods manufactured is calculated as indicated below:

 
Direct materials used $ 86,000
 
Direct manufacturing labor costs  20,000
 
Indirect manufacturing labor costs 22,000
 
Other factory expenses 32,000
 
$ 160,000

Note that purchases (additions to inventory) are excluded from the cost of goods manufactured computation since they would be included in the computation of direct materials used and that both sales salaries and selling and administrative expenses (period costs) are excluded from the computation of costs of goods manufactured as well.

Choice "a" is incorrect. The proposed solution excludes other factory expense in error.

Choice "d" is incorrect. The proposed solution values materials at the purchase amount and not the amount used in error.

Choice "b" is incorrect. The proposed solution includes a combination of purchase costs, product costs, and period costs in error.

 

2

A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis?

a.

$240,000

b.

$260,000

c.

$200,000

d.

$300,000

 

Choice "d" is correct. Using a physical quantity basis with no additional processing costs after the split-off point, product X is 240,000 gallons and product Y is 160,000 gallons, for a total of 400,000 gallons. That means that product X is allocated 60% (240,000 / 400,000) of the joint costs and product Y is allocated 40% (160,000 / 400,000) of the joint costs. Product X is thus allocated 60% of the $500,000 joint costs, or $300,000. The data about selling costs is a distracter because the joint costs are allocated on a physical quantity basis.

Choice "c" is incorrect. $200,000 is the amount of the joint cost that is allocated to product Y, not product X.

Choice "a" is incorrect, per the above calculation. [$240,000 is $1 for each gallon of product X. However, it is difficult to determine where the $1 comes from.]

Choice "b" is incorrect, per the above calculation. [$260,000 is a nice round number, and $260,000 plus the $240,000 adds to the $500,000 joint cost. However, that is about all it is worth.]

3

Conversion costs do not include:

a.

Indirect materials.

b.

Indirect labor.

c.

Direct materials.

d.

Direct labor.

 

Choice "c" is correct. Conversion costs consist of direct labor and overhead. Accordingly, conversion costs include all product costs except direct materials.

Choice "b" is incorrect. Indirect labor is overhead.

Choice "a" is incorrect. Indirect materials is overhead.

Choice "d" is incorrect. Conversion costs include direct labor.

4

Boyle, Inc. makes two products, X and Y that require allocation of indirect manufacturing costs. The following data was compiled by the accountant before making any allocations:

Product X   Product Y

Quantity produced   10,000    20,000

Direct manufacturing labor hours  15,000    5,000

Setup hours   500   1,500

The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?

~Product X
~Product Y
a.

$200,000

$200,000

b.

$250,000

$150,000

c.

$150,000

$250,000

d.

$100,000

$300,000

 

Choice "d" is correct. The setup hours are used because neither quantity produced nor direct manufacturing hours are activities. The calculation is as follows:

Setup Hours      % of Setup Hours     Allocation

Product X

500          500 / 2,000 = 25%       $100,000

Product Y

1,500       1,500 / 2,000 = 75%       $300,000

Total

2,000        100%                          $400,000

Choices "c", "a", and "b" are incorrect, based on the above explanation.

5

Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?

a.

$480,000

b.

$400,000

c.

$200,000

d.

$120,000

 

Choice "a" is correct.

Joint costs allocated based upon relative sales value at split off are allocated based upon the ratio of individual sales values to sales value at split off. The ratio is computed at 80% and 20% and applied to the $600,000 in joint cost to arrive at the joint cost allocation below. Be careful of the question. This question asks for the amount of allocated joint costs, but others may ask for total costs. In those instances, you would add the allocated costs to the direct costs that can be traced to the product prior to split off.

 

Choice "d" is incorrect. This selection represents the allocation to legs.

Choice "c" is incorrect. This selection represents the relative sales value of white breast meat at split off.

Choice "b" is incorrect, per the above computation.

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6

The following is selected information from the records of Ray, Inc.:

Purchases of raw materials

$ 6,000

Raw materials, beginning

500

Raw materials, ending

800

Work-in-process, beginning

0

Work-in-process, ending

0

Cost of goods sold

12,000

Finished goods, beginning

1,200

Finished goods, ending

1,400

What is the total amount of conversion costs?

a.

$6,100

b.

$6,500

c.

$5,900

d.

$5,500

 

Choice "b" is correct. Conversion costs (labor and overhead) are equal to $6,500 and are derived from the relationship between the finished goods and work in process inventory.

Beginning ($1,200) and ending ($1,400) finished goods inventory and cost of goods sold ($12,000) are used to squeeze costs of goods manufactured of $12,200

Cost of goods manufactured ($12,200) is then used in combination with beginning and ending WIP inventories of $0 to derive total costs incurred ($12,200) and then, in combination with materials ($5,700) the conversion costs of $6,500 as follows:

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Choices "d", "c", and "a" are incorrect, per the above calculation.

7

Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:

a.

A company's manufacturing operations are basically labor based.

b.

Manufacturing overhead is the largest cost component of its product cost.

c.

A company's manufacturing operations are all highly automated.

d.

The manufactured products differ in the resources consumed from the individual departments in the plant.

Choice "d" is correct. Generally, individual departmental rates (rather than a plant-wide rate for applying overhead) would be used if the manufactured products differ in the resources consumed from the individual departments in the plant.

Choice "c" is incorrect. Plant-wide rates would probably be used if a company's manufacturing operations are all highly automated.

Choice "a" is incorrect. Plant-wide rates would probably be used if a company's manufacturing operations are basically labor based.

Choice "b" is incorrect. Plant-wide rates would probably be used if manufacturing overhead is the largest cost component of its product cost.

8

In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base?

a.

Salary of service department employees.

b.

Direct materials usage.

c.

Units of product sold.

d.

Units of electrical power consumed.

Choice "d" is correct. Units of electrical power consumed would be a good indication of producing departments' demand on the service department.

Choice "c" is incorrect. Units sold is not a good base with which to allocate to production departments. It relates more to a sales department.

Choice "a" is incorrect. The salaries of service department employees represent the costs to be allocated, not the activity base on which to base the allocation.

Choice "b" is incorrect. Although direct materials are used in production, they may not be the best base for allocation because they do not always have a direct relationship to the incurrence of service department costs.

9

The steps that a company, using a traditional cost system, would take to implement activity-based costing include:

I.

Evaluation of the existing system to assess how well the system supports the objective of an activity-based cost system.

II.

Identification of the activities for which cost information is needed with differentiation between value adding and non-value adding activities.

a.

Neither I nor II.

b.

Only I.

c.

Only II.

d.

Both I and II.

 

Choice "d" is correct. Both steps are essential to implementing activity-based costing.

10

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

a.

Electricity expense.

b.

Repair and maintenance expense.

c.

Depreciation expense.

d.

Employee benefits expense.

 

Choice "d" is correct. Activity-based costing seeks to assign overhead costs in a manner that identifies consumption of resources. Employee salaries or even head count are more appropriate cost drivers than machine hours for employee benefits expense. Machine hours would be more likely identified as cost drivers for electric, repairs and maintenance, and depreciation expense.

Choice "a" is incorrect. Machine hours are likely an appropriate cost driver for electricity expense.

Choice "b" is incorrect. Machine hours are likely an appropriate cost driver for repairs and maintenance expense.

Choice "c" is incorrect. Machine hours are likely an appropriate cost driver for depreciation expense.

11

A cost that bears an observable and known relationship to a quantifiable activity base is a(n):

a.

Engineered cost.

b.

Indirect cost.

c.

Target cost.

d.

Fixed cost.

 

Choice "a" is correct. An engineered cost bears an observable and known relationship to a quantifiable activity base.

Choice "b" is incorrect. Indirect costs (overhead costs) are all manufacturing costs other than direct material and direct labor.

Choice "c" is incorrect. A target cost is carefully predetermined standard cost that should be attained.

Choice "d" is incorrect. Fixed costs are all those organization and plant costs that continue to be incurred and cannot be reduced without damaging the organization's ability to meet long-range goals.

12

The benefit that management can expect from traditional costing includes which of the following:

a.

Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality.

b.

Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.

c.

Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.

d.

Leads to a more competitive position by evaluating cost drivers, i.e., costs associated with the complexity of the transaction rather than the production volume.

Choice "c" is correct. The benefit that management can expect from traditional costing includes using a common departmental or factory wide measure of activity, such as direct labor hours or dollars, to distribute manufacturing overhead to products.

Choices "d", "a", and "b" are incorrect. They are characteristics of activity-based costing.

13

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

a.

Total costs.

b.

Joint costs.

c.

Sales price less a normal profit margin at point of sale.

d.

Relative sales value at split-off.

Choice "d" is correct. Sales price less the cost to complete is defined as the relative sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.

Choice "a" is incorrect. Sales price at point of sale reduced by cost to complete is the additional contribution to income generated by completing the product. It is not equal to total costs.

Choice "b" is incorrect. Sales price at point of sale reduced by cost to complete is the additional contribution to income generated by completing the product. It is not equal to joint costs. (If it were, this would be a zero profit situation.)

Choice "c" is incorrect. Selling price less a normal profit margin is generally a cost figure. It is not equal to sales price less the cost to complete, which is the additional contribution to income generated by completing the product. (If it were, this would be a zero profit situation.)

14

Costs are allocated to cost objectives in many ways and for many reasons. Which one of the following is a purpose of cost allocation?

a.

Aiding in variable costing for internal reporting.

b.

Measuring income and assets for external reporting.

c.

Evaluating revenue center performance.

d.

Implementing activity-based costing.

Choice "b" is correct. Cost allocation is essential for measuring income and assets for external reporting.

Choice "c" is incorrect. Revenue centers are responsible for revenues only. Cost allocation is not relevant.

Choice "a" is incorrect. Variable costing matches costs directly variable with volume to the items produced or sold. Costs are not allocated as it is clear to which items they relate.

Choice "d" is incorrect. Cost allocation will not aid in implementing ABC. ABC requires determining the cost drivers (cause) and cost (effect).

15

Arbor Corporation uses a water cooling system in its manufacturing operations. Gallons of water purchased for engine cooling increases with manufacturing production. Water and sewer utility costs recorded by the Arbor Corporation are billed to the company based on a minimum charge plus a rate for utilization beyond the minimum charge for 5,000 gallons of usage. Arbor would most likely classify its utility costs as:

a.

Semivariable costs.

b.

Variable costs.

c.

Fixed costs.

d.

Non diversifiable.

Choice "a" is correct. Utility costs are semivariable. Utility costs share the characteristics of both fixed and variable costs over the relevant range. They are unchanged for the first 5,000 gallons (fixed) and then increase per gallon used in excess of 5,000 gallons after the threshold (variable).

Choice "b" is incorrect. Variable costs change in proportion to production over the relevant range. Costs for water and sewer utilization are unchanged up to 5,000 gallons of consumption and only increase as consumption exceeds 5,000 gallons. Costs do not change in proportion to volume in the relevant range, they are not variable.

Choice "c" is incorrect. Fixed costs do not change over the relevant range. Costs for water and sewer utilization are unchanged only up to 5,000 gallons of consumption but increase as consumption exceeds 5,000 gallons. Costs change in the relevant range, they are not fixed.

Choice "d" is incorrect. Nondiversifiable classifications generally relate to portfolio risks, not costs.

16

Which of the following is true about activity-based costing?

a.

It should not be used with process or job costing.

b.

It can be used with either process or job costing.

c.

It can be used only with job costing.

d.

It can be used only with process costing.

Choice "b" is correct. Activity-based costing (ABC) assumes that the resource-consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing.

Choices "a", "d", and "c" are incorrect. Activity-based costing (ABC) assumes that the resource consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing. It is inappropriate to state that it should not be used with either system.

17

Weighted-average and first in, first out (FIFO) equivalent units would be the same in a period when which of the following occurs?

a.

No beginning inventory exists.

b.

Beginning inventory equivalent units are less than 50% complete.

c.

Beginning inventory equivalent units exceed 50% complete.

d.

No ending inventory exists.

Choice "a" is correct. FIFO and weighted average produce the same equivalent units when there is no beginning inventory. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO.

Choice "d" is incorrect. Treatment of ending inventory by the FIFO and weighted-average methods is identical. Elimination of ending inventory alone would not cause FIFO and weighted-average method equivalent unit computations to be identical.

Choice "c" is incorrect. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO. Even if there is no change in inventory, the treatment of beginning inventory will cause FIFO to be different from weighted average.

Choice "b" is incorrect. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO. The treatment of beginning inventory will cause FIFO to be different from weighted average.

18

A cost that is fixed per unit is an example of a:

a.

Direct cost.

b.

Fixed cost.

c.

Mixed cost.

d.

Variable cost.

 

Choice "d" is correct. A variable cost is one that varies in total but is fixed per unit. For example, if a starter is needed in the manufacture of an automobile, the cost of starters varies with the number of automobiles. The more automobiles, the greater the cost of starters. However, the cost for each starter remains constant.

Choice "b" is incorrect. A fixed cost is one that is fixed in total but varies per unit.

Choice "c" is incorrect. A mixed cost is one that contains both fixed and variable costs.

Choice "a" is incorrect. A direct cost can be either fixed or variable.

19

A cost driver is defined as:

a.

A causal factor that increases the total cost of a cost objective.

b.

The significant factor in the development of a new product.

c.

The largest cost in a manufacturing process.

d.

An indirect cost that cannot be traced to a particular cost objective but is essential to the business.

 

Choice "a" is correct. A cost driver is a causal factor (the cause) that increases the cost (the effect) of a cost objective.

Choices "c", "b", and "d" are incorrect, per the above definition.

20

A CPA would recommend implementing an activity-based costing system under which of the following circumstances?

a.

The client produced products that heterogeneously consume resources.

b.

The client is a single-product manufacturer.

c.

The client produced many different products that homogeneously consume resources.

d.

Most of the client's costs currently are classified as direct costs.

Choice "a" is correct. ABC costing is recommended when more than one product is produced and those products do not uniformly consume indirect resources (heterogeneous consumption).

Example: Suppose 50 kilowatts of electricity are used to produce a single unit of item A and 500 kilowatts of electricity are used to produce a single unit of item B. To assign the cost of electricity (an indirect cost) based on the number of items produced would not reflect the true costs of producing the items.

Choice "b" is incorrect. ABC costing is most beneficial when multiple products are produced.

Choice "d" is incorrect. ABC costing is used to assign indirect costs based on the product's demands for resource-consuming activities. If the majority of the costs are direct, then ABC costing would not be recommended.

Choice "c" is incorrect. If resources are consumed in a homogeneous or uniform manner, ABC costing is not needed. A traditional cost system that uses a single cost driver would be appropriate in this situation.

21

If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?

a.

Conversion costs.

b.

Direct materials.

c.

Direct labor.

d.

Prime costs.

Choice "a" is correct. Conversion costs include both direct labor and overhead. Increases in crude oil prices are likely to impact the cost of generating electricity (and, by extension, the rate for electricity). Electricity is significant in manufacture of the product in the fact pattern and would likely increase the overhead costs of the manufacturer.

Choice "b" is incorrect. Electricity is not included in direct materials. Direct material costs would likely not increase.

Choice "c" is incorrect. Electricity is not included in direct labor. Direct labor costs would likely not increase.

Choice "d" is incorrect. Prime costs are the sum of direct materials and direct labor. Electricity is not included in prime costs. Prime costs would likely not increase.

22

Which of the following types of costs are prime costs?

a.

Direct materials and direct labor.

b.

Direct materials, direct labor, and overhead.

c.

Direct labor and overhead.

d.

Direct materials and overhead.

Choice "a" is correct. Prime costs are normally defined as direct materials and direct labor.

Choice "d" is incorrect. Direct materials and overhead do not represent prime costs. Prime costs are direct material and direct labor.

Choice "c" is incorrect. Direct labor and overhead are normally referred to as conversion costs, not prime costs.

Choice "b" is incorrect. Direct materials, direct labor, and overhead comprise total costs, not simply prime costs.

23

In a traditional job order cost system, the issue of indirect materials to a production department increases:

a.

Work in process control.

b.

Factory overhead control.

c.

Stores control.

d.

Factory overhead applied.

 

Choice "b" is correct. Indirect materials are included in factory overhead costs as they are used in the production process. Therefore, the issue of indirect materials would decrease stores control and increase factory overhead control.

Choice "c" is incorrect. Indirect materials are a component of stores prior to being issued to the production department. When issued, the amount would decrease stores control.

Choice "a" is incorrect. Indirect costs are recorded in factory overhead control when they are incurred, but these costs do not increase work-in-process until the overhead is applied.

Choice "d" is incorrect. Factory overhead applied is the allocated amount of factory overhead that is applied to work-in-process based on estimates of production and costs.

24

Which of the following would cause overhead to be overapplied?

a.

Actual overhead is less than overhead applied.

b.

Actual overhead was equal to the budgeted amount but fewer items were manufactured.

c.

Actual overhead is greater than overhead applied.

d.

The number of units produced was the budgeted amount but a larger amount of overhead was actually incurred.

Choice "a" is correct. Overapplied overhead occurs when the amount of overhead applied exceeds the actual amount of overhead incurred.

Choices "c", "b", and "d" are incorrect. Each of these would cause overhead to be underapplied.

25

A basic assumption of activity-based costing (ABC) is that:

a.

Only variable costs are included in activity-cost pools.

b.

Products or services require the performance of activities, and activities consume resources.

c.

Only costs that respond to unit-level drivers are product costs.

d.

All manufacturing costs vary directly with units of production.

Choice "b" is correct. Activity-based costing divides the production process into activities where costs are accumulated. The production process assumes activities consume resources (direct materials, direct labor, and manufacturing overhead), and that the outcome of the production process requires performance of the activities.

Choice "d" is incorrect. All manufacturing costs do not vary directly with units of production. Fixed manufacturing costs are an element in the production process.

Choice "c" is incorrect. Product costs include all manufacturing costs, regardless of whether the costs respond to unit-level drivers.

Choice "a" is incorrect. Activity-based costing divides the production process into activities where costs are accumulated. The production process assumes activities consume resources (direct materials, direct labor, and manufacturing overhead). Both variable and fixed manufacturing costs are accumulated in the activity-cost pools.

26

Cost drivers are:

a.

Activities that cause costs to increase as the activity increases.

b.

A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of factory, used to assign to activities.

c.

Accounting measurements used to evaluate whether or not performance is proceeding according to plan.

d.

Costs linked to two or more other costs.

Choice "a" is correct. Cost drivers are activities that cause costs to increase as the activity increases. The cost driver is often non-financial.

Choice "c" is incorrect. Cost drivers are not accounting measurements; often they are non-financial-for example, the number of parts ordered rather than the dollar value.

Choice "b" is incorrect. Often cost drivers are a mechanical basis used to assign costs, but they may also have a financial basis.

Choice "d" is incorrect. Cost drivers are not necessarily cost, but the cause of costs being incurred.

27

Which of the following is assigned to goods that were either purchased or manufactured for resale?

a.

Product cost.

b.

Relevant cost.

c.

Opportunity cost.

d.

Period cost.

Choice "a" is correct. Product cost is assigned to goods (products) that were either purchased or manufactured for resale.

Choice "b" is incorrect. Relevant costs are costs that are relevant to a particular decision.

Choice "d" is incorrect. Period costs are costs that are expensed during a period. They are not charged to a product (capitalized), which is why they are expensed.

Choice "c" is incorrect. Opportunity costs are costs that would have been saved or profits that would have been earned if another decision alternative had been selected.

28

In its April Year 1 production, Hern Corp., which does not use a standard cost system, incurred total production costs of $900,000, of which Hern attributed $60,000 to normal spoilage and $30,000 to abnormal spoilage. Hern should account for this spoilage as:

a.

Period cost of $90,000.

b.

Inventoriable cost of $60,000 and period cost of $30,000.

c.

Inventoriable cost of $90,000.

d.

Period cost of $60,000 and inventoriable cost of $30,000.

 

Choice "b" is correct. Normal spoilage is considered a necessary cost of production and is a product (inventoriable) cost. Abnormal spoilage is considered unnecessary and is a period cost. 

Choice "a" is incorrect. Normal spoilage is considered a necessary cost of production and is a product (inventoriable) cost. 

Choice "c" is incorrect. Abnormal spoilage is considered unnecessary and is a period cost. 

Choice "d" is incorrect. Normal spoilage is a normal product (inventory) cost. Abnormal spoilage is considered unnecessary to production and is expensed (period cost).

29

Which of the following costs would decrease if production levels were increased within the relevant range?

a.

Total variable costs.

b.

Total fixed costs.

c.

Fixed costs per unit.

d.

Variable costs per unit.

 

Choice "c" is correct. In the relevant range, fixed costs are constant in total, but decrease per unit as production levels increase.

Choice "b" is incorrect. Although total fixed costs are constant in total in the relevant range, the call of the question relates to per-unit fixed costs. Fixed costs per unit decrease as production levels increase.

Choice "d" is incorrect. Variable costs per unit remain unchanged in the relevant range, but increase in total as unit volume increases.

Choice "a" is incorrect. Total variable costs increase as total unit volume increases in the relevant range.

30

The distribution of overhead costs is known as:

a.

Cost allocation.

b.

Cost management.

c.

Uncontrollable cost allocation.

d.

Burden distribution.

Choice "a" is correct. Cost allocation is the distribution of overhead or support costs based on any one of a variety of methods.

Choice "b" is incorrect. Cost management refers to the control of costs.

Choice "d" is incorrect. Although the term is descriptive, it is not used.

Choice "c" is incorrect. Overhead costs are not "uncontrollable."

31

Conversion cost pricing:

a.

Places heavy emphasis on indirect costs and disregards consideration of direct costs.

b.

Places heavy emphasis on direct costs and disregards consideration of indirect costs.

c.

Places minimal emphasis on the cost of materials used in manufacturing a product.

d.

Could be used when the customer furnishes the material used in manufacturing a product.

 

Choice "d" is correct. Conversion cost pricing could be used when the customer furnishes the material used in manufacturing a product.

Choice "c" is incorrect. Conversion cost pricing places no (not minimal) emphasis on the cost of materials used in manufacturing a product.

Choices "a" and "b" are incorrect. Conversion cost pricing places heavy emphasis on indirect (overhead) costs and direct labor, but disregards consideration of direct materials.

32

Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode's overall gross margin?

a.

Gross margin increases by $4 for each unit of May sold.

b.

Gross margin increases by $1 for each unit of May sold.

c.

Gross margin increases by $3 for each unit of May sold.

d.

No effect.

Choice "b" is correct. Changing the accounting from by-product to joint product changes the computation of gross margin because the $1 selling cost is treated differently under each method. Using the by-product method, the $1 selling expense is netted against the $4 selling price to arrive at a $3 deduction from cost of goods sold. Since gross margin is calculated as sales less cost of goods sold, the $1 does flow into the gross margin amount using this method. Using the joint product method, the $1 cost would be a selling expense, which is not included in the calculation of gross margin. Instead, selling expenses are deductedfrom gross margin (after it is computed) to arrive at net income. Although the total net income is the same under both methods, the joint product method results in an increased gross margin of $1 per unit of May sold. 

Choice "d" is incorrect. The $1 selling expense would be deducted from gross margin using the joint product method.

Choice "c" is incorrect. The $4 sales price is included in the calculation of gross margin under both methods.

Choice "a" is incorrect. The $4 sales price is included in calculation of gross margin under both methods.

33

Multiple or departmental overhead rates are considered preferable to a single or plant-wide overhead rate when:

a.

Cost drivers, such as direct labor, are the same over all processes.

b.

The single or plant-wide rate is related to several identified cost drivers.

c.

Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.

d.

Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.

Choice "d" is correct. When various products are manufactured, multiple overhead rates are preferable to a single overhead rate. Activity-based costing would be better still.

Choice "a" is incorrect. If cost drivers were the same over all processes, a single rate could be used.

Choice "c" is incorrect. If individual cost drivers cannot be determined, multiple overhead rates will be meaningless.

Choice "b" is incorrect. If a single or plant-wide rate is related to several identified cost drivers, then the single rate is accurate and appropriate.

34

Which of the following topics is the focus of managerial accounting?

a.

The needs of the organization's internal parties.

b.

Financial statements and other financial reports.

c.

The needs of creditors.

d.

Historical cost principles.

Choice "a" is correct. Managerial accounting focuses on the needs of internal users (managers) and on data relevant for decision making.

Choice "b" is incorrect. Financial accounting focuses on financial statements and other reporting in conformity with GAAP.

Choice "d" is incorrect. Managerial accounting focuses on future costs and the impact of decisions on future profitability, not historical costs. Financial accounting focuses on historical costs.

Choice "c" is incorrect. Financial, not managerial, accounting focuses on the needs of external users such as creditors and investors.

35

Which of the following is true regarding inventoriable costs?

a.

Inventoriable costs include only the prime costs of manufacturing a product.

b.

Inventoriable costs include only the conversion costs of manufacturing a product.

c.

Inventoriable costs are regarded as assets before the products are sold.

d.

Inventoriable costs exclude fixed factory overhead.

Choice "c" is correct. Inventoriable costs are assets until sold, when they become "cost of goods sold."

Choice "a" is incorrect. Prime costs include direct materials and direct labor, but not factory overhead.

Choice "b" is incorrect. Conversion costs are direct labor and overhead, but exclude direct material.

Choice "d" is incorrect. Fixed factory overhead is capitalized as part of inventoriable costs.

36

Management has carefully evaluated the likelihood and impact of events on its foreign operations. In the event of a 3% variation in exchange rate, the impact is estimated at $10 million without any action taken by management and $4 million if the company purchases a hedge instrument. The impact of the residual risk of changes in foreign currency exchange on achieving company's business objectives is:

a.

$14 million.

b.

$10 million.

c.

$ 6 million.

d.

$ 4 million.

Choice "d" is correct. The $4 million risk exposure, after management purchases the hedge, is the residual risk. Residual risk is the risk that remains after management responds to the risk.

Choice "a" is incorrect. The inherent risk is not the sum of the inherent risk of $10 million and the residual risk of $4 million.

Choice "b" is incorrect. Inherent risk is the risk to an entity in the absence of any actions management might take to alter either the risk's likelihood or impact. The $10 million exposure identified in the problem is the risk exposure without management's intervention.

Choice "c" is incorrect. The inherent risk is not the difference between the inherent risk of $10 million and the residual risk of $4 million.

37

Which of the following is not a basic approach to allocating costs for costing inventory in joint-cost situations?

a.

Physical measures such as weights or volume.

b.

Constant gross margin percentage net realizable value method.

c.

Sales value at split-off.

d.

Flexible budget amounts.

Choice "d" is correct. Joint costs will most likely be allocated based upon relative unit volume, relative sales value at split off, or net realizable value. Flexible budget amounts are not used to allocate joint costs

Choice "c" is incorrect. Sales value at split-off is a recognized method of allocating joint costs.

Choice "a" is incorrect. Physical measures, such as weights or volume, are a recognized method of allocating joint costs.

Choice "b" is incorrect. Constant gross margin percentage net realizable value method is a recognized method of allocating joint costs.

38

Activity based costing refines product cost information because the cost system:

a.

Emphasizes long-term product analysis (when fixed costs become variable costs).

b.

Was designed to value inventory in the aggregate and not relate to product cost information.

c.

Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.

d.

Causes managers, who are aware of distortions in the traditional cost system, to make intuitive, imprecise adjustments to the traditional cost information without understanding the complete impact.

Choice "a" is correct. Activity-based costing refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become variable costs).

Choices "b", "c", and "d" are incorrect. They are characteristics of traditional cost systems.

39

The use of activity-based costing normally results in:

a.

Substantially greater unit costs for low-volume products than is reported by traditional product costing.

b.

Substantially lower unit costs for low-volume products than is reported by traditional product costing.

c.

Decreased set-up costs being charged to low-volume products.

d.

Equalizing set-up costs for all product lines.

Choice "a" is correct. The use of activity-based costing normally results in substantially greater unit costs for low-volume products than is reported by traditional product costing.

Choice "b" is incorrect, per the explanation above.

Choice "c" is incorrect. Increased (not decreased) set-up costs are charged to low-volume products under activity-based costing.

Choice "d" is incorrect. Activity-based costing does not equalize set-up costs for all product lines.

40

What is the normal effect on the numbers of cost pools and allocation bases when an activity-based cost (ABC) system replaces a traditional cost system?

~Cost pools
~Allocation bases
a.

Increase

Increase

b.

No effect

No effect

c.

Increase

No effect

d.

No effect

Increase

 

Choice "a" is correct. Activity-based costing (ABC) tends to increase both the number of cost pools and the number of allocation bases. ABC breaks down a production process into many activities. It then accumulates costs by activity (i.e., cost pools) using an appropriate allocation base for each activity. A traditional cost system would use one cost and one allocation base (i.e., for factory overhead). On the other hand, ABC would designate many activities within the process and allocate costs by activity using a different allocation base for each activity.

Choices "b", "c", and "d" are incorrect, based on the above explanation.

41

Limitations of an activity-based costing system include which of the following?

a.

It eliminates arbitrary assignment of overhead costs.

b.

The expense of obtaining cost data is relatively high.

c.

Activity-based costing systems are less reliable.

d.

Control of overhead costs is enhanced.

Choice "b" is correct. Activity based costs anticipates increased cost pools and increased allocation bases. The determination of the amounts that go in these pools and their related cost drivers will likely be more costly than traditional systems. Increased costs of ABC represent a limitation of the system.

Choice "d" is incorrect. Improved control over overhead costs is a benefit, not a limitation of activity based costing.

Choice "c" is incorrect. Activity based costing systems tend to produce more accurate and more reliable information than traditional cost allocation systems.

Choice "a" is incorrect. Activity based costing attempts to trace costs to activities that consume resources and thereby eliminate the arbitrary assignment of overhead costs. The enhanced traceability of costs is a benefit and not a limitation of ABC.

42

Because of changes that are occurring in the basic operations of many firms, all of the following represent trends in the way indirect costs are allocated, except:

a.

Using throughput time as an application base to increase awareness of the costs associated with lengthened throughput time.

b.

Using cost drivers as application bases to increase the accuracy of reported product costs.

c.

Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost of detailed allocations.

d.

Using several machine cost pools to measure product costs on the basis of time in a machine center.

Choice "c" is correct. Plant-wide application rates applied to machine hours is a traditional costing approach. More detailed cost allocations are now preferred.

Choices "a", "d", and "b" are incorrect. These are all trends in the revolution occurring in cost accounting (in the manufacturing environment).

43

Smile Labs develops 35mm film using a four-step process that moves progressively through four departments. The company specializes in overnight service and has the largest drug store chain as its primary customer. Currently, direct labor, direct materials, and overhead are accumulated by department. The cost accumulation system that best describes the system Smile Labs is using is:

a.

Activity-based costing.

b.

Operation costing.

c.

Job order costing.

d.

Process costing.

Choice "d" is correct. Process costing is a method of allocating production costs to products and services by averaging the cost over the total units produced. Costs are usually accumulated by department rather than by job.

Choice "b" is incorrect. Operation costing is a hybrid system that allows the company to use job order costing for some costs of production and process costing for other costs.

Choice "a" is incorrect. Activity-based costing is a system that accumulates all costs of overhead for each of the activities of the organization and then allocates those activity costs to the cost objects that caused the activity.

Choice "c" is incorrect. Job order costing is a method of allocating production costs to products and services that are identifiable as separate units and require greater or lesser amounts of work to complete.

44

Which of the following choices shows the proper treatment of sales commissions and abnormal spoilage charges when calculating a manufactured good's inventoriable cost?

~Sales Commissions
~Abnormal Spoilage
a.

Exclude

Exclude

b.

Include

Include

c.

Exclude

Include

d.

Include

Exclude

 

Choice "a" is correct. Product (inventoriable) costs include direct labor, direct material, and applied overhead. Direct material costs anticipate a provision for normal spoilage. Sales commissions are selling and administrative expenses that are period (not product) costs, and abnormal spoilage is charged against income of the period as a separate component of cost of goods sold.

Choices "b", "d", and "c" are incorrect based on the above explanation.

45

Which one of the following best describes direct labor?

a.

Both a product cost and a prime cost.

b.

Both a period cost and a prime cost.

c.

A product cost.

d.

A prime cost.

Choice "a" is correct. Direct labor is a prime cost, a conversion cost and a product cost. "a" is the best answer because it includes two of these costs.

Choice "d" is incorrect. Prime cost is the sum of direct labor and direct material.

Choice "c" is incorrect. Product costs are direct material, direct labor and overhead.

Choice "b" is incorrect. Direct labor is not a period cost.

46

In an activity-based costing system, cost reduction is accomplished by identifying and eliminating:

~All cost drivers
~Nonvalue-adding activities
a.

Yes

No

b.

No

Yes

c.

No

No

d.

Yes

Yes

 

Choice "b" is correct. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalue-adding activities would reduce costs, which is one of the objectives of activity-based costing systems.

Choice "c" is incorrect. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalue-adding activities would reduce costs.

Choice "d" is incorrect. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalue-adding activities would reduce costs.

Choice "a" is incorrect. Eliminating all cost drivers would eliminate all activity. Eliminating nonvalue-adding activities would reduce costs.

47

Which of the following nonvalue-added costs associated with manufactured work in process inventory is most significant?

a.

The cost of additional resources consumed to produce any individual product.

b.

The cost of labor that cannot be traced to any individual product.

c.

The cost of moving, handling, and storing any individual product.

d.

The cost of materials that cannot be traced to any individual product.

Choice "c" is correct. Value added costs are those resource uses that provide value to the consumer. The cost of inventorying products, generally moving, handling and storing them, does not add value to the product and is generally considered one of the most significant non-value activities/costs that a manufacturer should reduce because it can be controlled.

Choice "d" is incorrect. Costs of materials that cannot be traced to an individual product are often not controllable and are thus less manageable than inventory costs.

Choice "b" is incorrect. Costs of labor that cannot be traced to an individual product are often not controllable and are thus less manageable than inventory costs.

Choice "a" is incorrect. The incremental costs of producing an individual product is a variable cost that remains fixed per unit over the relevant range. This incremental cost can not be controlled and is less significant that inventory costs.

48

Under ABC, the allocation of costs to particular cost objectives allows a firm to analyze all of the following,except:

a.

Whether a product line should be discontinued.

b.

Whether a particular department should be expanded.

c.

Why the sales of a particular product have increased.

d.

Whether a particular manager earns a bonus.

Choice "c" is correct. Cost allocation and analysis will not explain a sales increase.

Choices "b", "a", and "d" are incorrect. Analysis of each of these is facilitated by allocating costs to particular cost objectives via activity-based costing.

49

In an activity-based costing system, what should be used to assign a department's manufacturing overhead costs to products produced in varying lot sizes?

a.

A single cause and effect relationship.

b.

Relative net sales values of the products.

c.

A product's ability to bear cost allocations.

d.

Multiple cause and effect relationships.

Choice "d" is correct. Activity-based costing assigns costs to activities or transactions and allocates them to products according to their use of each activity. This method means multiple cause and effect relationships may exist. 

Choice "a" is incorrect. Activity-based costing assigns costs to activities or transactions and allocates them to products according to their use of each activity.

Choice "b" is incorrect. The essence of activity-based costing is determining the activities that are involved in producing a product. Relative sales value is not based on this approach.

Choice "c" is incorrect. Assigning costs to departments should not be based on ability to bear costs. It should be based on each department's appropriate share of these costs, based on cause and effect.

50

For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:

a.

Total costs.

b.

Sales price less a normal profit margin at point of sale.

c.

Net sales value at split-off.

d.

Joint costs.

Choice "c" is correct. Sales price less the cost to complete is defined as the net sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.

Choice "d" is incorrect. Sales price at point of sale reduced by cost to complete is the additional contribution to income generated by completing the product. It is not equal to joint costs. (If it were, this would be a zero profit situation.)

Choice "a" is incorrect. Sales price at point of sale reduced by cost to complete is the additional contribution to income generated by completing the product. It is not equal to total costs.

Choice "b" is incorrect. Selling price less a normal profit margin is generally a cost figure. It is not equal to sales price less the cost to complete, which is the additional contribution to income generated by completing the product. (If it were, this would be a zero profit situation.)

51

Fab Co. manufactures textiles. Among Fab's Year 1 manufacturing costs were the following salaries and wages:

Loom operators    $ 120,000

Factory foremen      45,000

Machine mechanics   30,000

What was the amount of Fab's Year 1 direct labor?

a.

$120,000

b.

$150,000

c.

$165,000

d.

$195,000

 

Choice "a" is correct. Direct labor represents the cost of labor directly associated with the manufacturing of the finished product. The loom operators would qualify as direct labor, while the factory foremen and the machine mechanics would qualify as indirect labor, or overhead. Total direct labor is $120,000.

Choices "d", "c", and "b" are incorrect based on the above explanation.

52

An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:

a.

Direct costing.

b.

Target costing.

c.

Activity-based costing.

d.

Variable costing.

Choice "c" is correct. Activity-based costing is an accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers.

Choices "a" and "d" are incorrect. Direct costing (more accurately called variable or marginal costing) capitalizes only the variable production costs (direct materials, direct labor, and variable overhead) to inventory (product costs), while fixed costs are expensed.

Choice "b" is incorrect. Target costing carefully predetermines standard costs that should be attained.

53