CLSBE

Universidade Catlica Portuguesa

Cost Accounting

Test 3
May 16, 2012

Ricardo F Reis

1. What is the nature of the work-in-process account?

A. Inventory.
B. Cost of goods sold.
C. Productivity.
D. Nominal.
Answer (A) is correct. Work-in-process is an inventory account. All the manufacturing costs charged to
work-in-process this period and those remaining in the account from last period (BWIP) are allocated
between goods that are completed and goods that are incomplete at year-end (EWIP). However, the costs
of abnormal spoilage will be removed and charged to a loss account.
2. A nonmanufacturing organization may use
A. Job-order costing but not process costing.
B. Process costing but not job-order costing.
C. Either job-order or process costing.
D. Neither job-order costing nor process costing.
Answer (C) is correct. A nonmanufacturing organization may use either cost accumulation procedure. For
example, banks frequently use process costing for certain departments and job-order costing for others.
Public accounting firms ordinarily use job order costing.

3. The following information pertains to a companys Finishing Department operations in May.

Units
% Completion
Work-in-process, May 1
2,000
40%
Units started during May
10,000
Units completed and transferred to FG
8,000
Work-in-process, May 31
?
25%
Materials are added at the end of the process, and conversion costs are incurred evenly throughout the
process. The equivalent units of materials added during May were
A. 8,000
B. 8,200
C. 9,100
D. 10,000
Answer (A) is correct. Given that the materials are added at the end of the process, no equivalent units of
materials are included in beginning or ending work-in-process. Thus, the equivalent units of materials
equal the 8,000 units [(2,000 100%) + (8,000 2,000) + (4,000 0%)] transferred out during May.
4. Separate equivalent units calculations are often not made for
A. Conversion costs.
B. Transferred-in costs.
C. Direct materials costs.
D. Direct labor costs.
Answer (D) is correct. Overhead in traditional costing systems is often applied on the basis of a direct
labor activity base such as hours or cost. Thus, a single EUP calculation is made for conversion costs
(direct labor and overhead). There is no basis for separating these costs if they are incurred uniformly.
5. In comparing the FIFO and weighted-average methods for calculating equivalent units:
A. The FIFO method tends to smooth costs out more over time than the weighted-average
method.
B. The weighted-average method is more precise than the FIFO method because the weightedaverage method is based only on the work completed in the current period.
C. The two methods will give similar results even if physical inventory levels and production costs
(material and conversion costs) fluctuate greatly from period to period.
D. The FIFO method is better than the weighted-average method for judging the performance in a
period independently from performance in preceding periods.
Answer (D) is correct. The calculation of the cost per equivalent unit using the FIFO method keeps the
costs in one period separate from the costs of prior periods. Under the weighted-average method, the
costs in the beginning work-in-process inventory are combined with current-period costs.
6. The units transferred in from the first department to the second department should be included in the
computation of the equivalent units for the second department under which of the following methods of
process costing?
FIFO
Weighted-Average
A.
Yes
Yes
B.
Yes
No
C.
No
Yes
D.
No
No
Answer (A) is correct. The units transferred from the first to the second department should be included in
the computation of equivalent units for the second department regardless of the cost flow assumption
used. The transferred-in units are considered raw materials added at the beginning of the period.

7. Assuming no beginning work-in-process (BWIP) inventory, and that the ending work-in process
(EWIP) inventory is 50% complete as to conversion costs, the number of equivalent
units as to conversion costs would be
A. The same as the units completed.
B. The same as the units placed in process.
C. Less than the units completed.
D. Less than the units placed in process.
Answer (D) is correct. Given no BWIP, it is immaterial whether FIFO or weighted average is used. Thus,
conversion cost EUP equal the units that were started and completed this period, plus the EUP in EWIP.
Because the units in EWIP are 50% complete as to conversion costs, they will not be fully counted for
purposes of determining EUP.
[Fact Pattern #1]
A manufacturing company employs a process cost system. The companys product passes through both
Department 1 and Department 2 in order to be completed. Conversion costs are incurred uniformly
throughout the process in Department 2. The direct material is added in Department 2 when conversion is
80% complete. This direct material is a preservative that does not change the volume. Spoiled units are
discovered at the final inspection and are recognized then for costing purposes. The physical flow of units
for the current month is presented below.
Beginning work-in-process in Department 2 (90%complete with respect to conversion costs) 14,000
Transferred in from Department 1 76,000
Completed and transferred to finished goods 80,000
Spoiled units all normal 1,500
Ending work-in-process in Department 2 (60% complete with respect to conversion costs) 8,500
(Refers to Fact Pattern #1)
9. If the manufacturing company uses the weighted-average method, the equivalent units for
direct materials in Department 2 for the current month would be
A. 67,500
B. 80,000
C. 81,500
D. 90,000
Answer (C) is correct. The weighted-average method does not distinguish between work done currently
and in the prior period. Given that materials are added when units are 80% complete, that ending work-inprocess is 60% complete, and that goods are inspected when they are 100% complete, and assuming that
equivalent units are calculated for normal spoilage, the total weighted-average equivalent units for direct
materials equal 81,500 (80,000 units transferred + 1,500 normally spoiled units).

(Refers to Fact Pattern #1)

10. If the manufacturing company uses the FIFO (first-in, first-out) method, the equivalent units
for conversion costs in Department 2 for the current month would be
A. 72,500
B. 74,000
C. 85,200
D. 86,600
Answer (B) is correct. The FIFO method distinguishes between work done in the prior period and work
done currently. The total FIFO equivalent units equal the work done currently on beginning work-inprocess, plus the work done on ending work-in-process, plus all units started and completed currently.
Hence, total FIFO equivalent units equal 74,000 {(14,000 units in BWIP 10%) + (8,500 units in EWIP
60%) + [(81,500 spoiled and transferred 14,000 units in BWIP) 100%]}.
[Fact Pattern #2]
The Cutting Department is the first stage of Mark Companys production cycle. BWIP for this department
was 80% complete as to conversion costs. EWIP was 50% complete. Information as to conversion costs
in the Cutting Department for January is presented in the next column.
Units
CC
WIP at January 1
25,000
$ 22,000
Units started and costs incurred during January
135,000
143,000
Units completed and transferred to next department during January 100,000
(Refers to Fact Pattern #2)
11. Using the FIFO method, what was the conversion cost of WIP in the Cutting Department at
January 31?
A. $22,000
B. $33,000
C. $39,000
D. $78,000
Answer (C) is correct. Under the FIFO method, EUP for a period include only the work done that period
and exclude any work done in a prior period. The total of conversion cost EUP for the period is calculated
below.
Work Done in Units Current Period CC (EUP)
BWIP 25,000 20% 5,000
Started & completed 75,000 100% 75,000
EWIP 60,000 50% 30,000
Total EUP 110,000
The total of the conversion costs for the period is given as $143,000. Dividing by total EUP of 110,000
gives a unit cost of $1.30. Thus, the conversion cost of the EWIP inventory is $39,000 (30,000 EUP in
EWIP $1.30).
(Refers to Fact Pattern #2)
12. What is the per-unit conversion cost of goods started last period and completed this period?
A. $22,000 25,000
B. $1.10
C. $28,500 25,000
D. $1.30
Answer (C) is correct. The total of the units started last period and completed this period is 25,000. These
units were 80% completed at the start of the period, at a cost of $22,000. The cost to complete was
$6,500 (5,000 EUP $1.30). The total cost of $28,500 is divided by 25,000 to obtain the unit cost.

(Refers to Fact Pattern #2)

13. What is the unit conversion cost of goods started this period and completed this period using
the weighted-average method?
A. $1.10
B. $1.14
C. $1.27
D. $1.30
Answer (C) is correct. The weighted-average method combines the costs in BWIP and the current-period
costs. Thus, it calculates total EUP as total units to account for minus the work yet to be done on EWIP.
The total cost to account for is $165,000 ($22,000 BWIP + $143,000 current costs). Total units to account
for are 160,000 (25,000 BWIP + 135,000 started in January), and units in EWIP 50% complete equal
60,000 (160,000 100,000 transferred). Hence, weighted-average EUP equal 130,000 [160,000 (60,000
50%)], and the unit cost is $1.27 ($165,000 130,000).
14. Kerner Manufacturing uses a process cost system to manufacture laptop computers. The following
information summarizes operations relating to laptop computer model #KJK20 during the quarter ending
March 31:
Units
Direct Materials
WIP inventory, January 1
100
$ 70,000
Started during the quarter
500
Completed during the quarter
400
WIP inventory, March 31
200
Costs added during the quarter $750,000
Beginning work-in-process inventory was 50% complete for direct materials. Ending work-in-process
inventory was 75% complete for direct materials. Using the FIFO method, what were the equivalent units
of production with regard to materials for March?
A. 450
B. 500
C. 550
D. 600
Answer (B) is correct. Under the FIFO method, equivalent units are determined based only on work
performed during the current period. They include work performed to complete BWIP, work on units
started and completed during the period, and work done on EWIP. Thus, total FIFO equivalent units of
materials are
BWIP 100 units 50% = 50
Started and completed (400 100 in BWIP) 300 units 100% = 300
EWIP 200 units 75% = 150
Total equivalent units 500

15. Forming Department is the first of a two-stage production process. Spoilage is identified when
the units complete the forming process. Costs of spoiled units are assigned to units completed
and transferred to the second department in the period spoilage is identified. The following
concerns Formings conversion costs:
Conversion Units
Costs
Beginning work-in-process (50% complete)
2,000
$10,000
Units started during month
8,000
75,500
Spoilage-normal
500
Units completed & transferred
7,000
Ending work-in-process (80% complete)
2,500
What was Formings weighted-average conversion cost transferred to the second department?
A. $59,850
B. $64,125
C. $67,500
D. $71,250
Answer (C) is correct. Under the weighted-average method, total equivalent units include the equivalent
units transferred and the equivalent units in ending work-in-process. Because normal spoilage costs
attach to the good output, the transferred costs equal the costs of both the good units and the spoiled
units. Total conversion costs under the weighted-average method are $85,500 ($10,000 BWIP + $75,500
May costs). Total equivalent units are 9,500 [7,000 good units transferred + (2,500 uninspected units in
EWIP 80%) + 500 completed units spoiled]. Accordingly, the conversion cost per equivalent unit is $9
($85,500 9,500), and total costs transferred are $67,500 [(7,000 good units transferred + 500 completed
units spoiled) $9].
16. Which of the following businesses is an example of a company that primarily uses process costing?
A. microprocessors
B. pharmaceutical company
C. oil refinery
D. all of the above use primarily costing process
Answer (D) is correct.
17. In process costing costs are often divided into two main categories. Why?
A. In process costing costs are separated according to the time they are introduced into the
production process. The two cost categories are direct materials and conversion costs. The direct
materials are often added at the beginning of the process and conversion costs are often added
evenly throughout the process.
B. In process costing costs split according to the inventory system used. Indirect costs are treated
under the weighted average cost method and the direct costs are treated according to FIFO.
C. In process costing costs are separated according to the time they are introduced into the
production process. The two cost categories are fixed costs and variable costs. Fixed costs are
added at the beginning of the process and variable costs are added at the end.
D. In process costing costs split according to the type of product or service. The cost of direct
materials is applicable only in the production of goods while conversion costs are applicable only
in service delivery.
Answer (A) is correct.

18. Which of the following better describes the distinctive feature of the weighted average method when
computing and allocating costs to both completed units and EWIP?
A. Computes the equivalent unit cost of current periods production. Allocates this cost to both
completed and transferred out equivalent units and EWIP equivalent units.
B. Standard costs are allocated first to finish the BWIP, then to units started and completed in the
period, and finally for units in EWIP.
C. Calculates the equivalent unit cost of all the work done to date and affects this cost to both
equivalent units completed and transferred out of the process and to equivalent units in EWIP
inventory
D. Allocates the cost of equivalent units in BWIP of previous accounting periods to the units
completed and transferred, and allocates the current periods equivalent unit cost to: firstly to
complete the BWIP, then to start and complete units, and finally to EWIP.
Answer (C) is correct.
19. Which of the following better describes the distinctive feature of the FIFO method when computing and
allocating costs to both completed units and EWIP?
A. Computes the equivalent unit cost of current periods production. Allocates this cost to both
completed and transferred out equivalent units and EWIP equivalent units
B. Assigns the cost of previous accounting periods equivalent units in BWIP inventory to the first
units completed and transferred out of the process and assigns the cost of equivalent units
worked on during the current period first to complete BWIP, next to start and complete new units,
and finally to units in EWIP inventory.
C. Standard costs are allocated first to finish the BWIP, then to units started and completed in the
period, and finally for units in EWIP.
D. Calculates the equivalent unit cost of all the work done to date and affects this cost to both
equivalent units completed and transferred out of the process and to equivalent units in EWIP
inventory.
Answer (B) is correct.
20. Transferred in costs are those costs incurred in the preceding accounting period. Do you agree?
A. No. Transferred in costs, or previous department costs are costs incurred in the previous
department that have been transferred to a subsequent department. These costs may be costs
incurred in the preceding department during the current accounting period or in a prior period.
B. No. Transferred in costs, or costs of the current period, are costs incurred only when the
product is being processed in the current department. As costs are incurred in the current period,
they are transferred and assigned to units.
C. None of the above is correct. Costs transferred have nothing to do with the costs incurred
during the accounting periods.
D. Yes. Transferred in costs are costs incurred in previous accounting periods. As units move
from one accounting period to another, the respective costs are transferred.
Answer (A) is correct.

21. Normal spoilage is planned spoilage. Explain:

A. Normal spoilage is spoilage that is inherent to the production process and that does not arise
under efficient production conditions.
B. Normal spoilage is spoilage that is not inherent to the production process and that emerge
even under efficient production conditions.
C. Normal spoilage is not inherent to the production process.
D. Normal spoilage is spoilage inherent to a particular production process and emerge even in
efficient production conditions. Managers decide the rate of spoilage they consider normal,
depending on the specific production process conditions.
Answer (D) is correct.
22. Costs of abnormal spoilage are losses. Explain :
A. Costs of abnormal spoilage are losses. All types of spoilage, rework and scrap costs for the
period are losses as the product is not perfectly produced nor sold.
B. Abnormal spoilage is spoilage that is not inherent to the production process and that does not
arise under efficient production conditions. Has a total low sales value when compared with the
total amount of sales. Since abnormal spoilage have a sales value, they are not considered a
loss.
C. Abnormal spoilage is spoilage that is not inherent to the production process and that does not
arise under efficient production conditions. Abnormal spoilage cost are losses and they measure
the inefficiency that needs to be written-off in the accounting period.
D. Abnormal spoilage is a spoilage that is inherent to the production process that arises under
conditions of efficient production. Thus, abnormal spoilage costs are not losses.
Answer (C) is correct.
23. The unit cost of normal spoilage is the same as the unit cost of abnormal spoilage. Explain.
A. No. If the abnormal spoilage is detected in a different point of the production process from that
of normal spoilage, then the unit cost will be different.
B. Yes. There is no difference between the unit cost of normal and abnormal spoilage. Both
normal and abnormal spoilage are inefficiencies resulting from the production process.
C. Yes. If normal spoilage and abnormal spoilage are detected at the same point in the
production process, then the unit cost will be the same.
D. Answers A and C are correct.
Answer (D) is correct.