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Chapter 2 17
C. $110,000. 27. In a manufacturing company, the cost of goods
D. $128,000. completed during the period would include which
E. $228,000. of the following elements?
A. Raw materials used.
Answer: A LO: 5 Type: A B. Beginning finished goods inventory.
C. Marketing costs.
19. Which of the following employees would not be D. Depreciation of delivery trucks.
classified as indirect labor? E. More than one of the above.
A. Custodian.
B. Salesperson. Answer: A LO: 6 Type: RC
C. Assembler of wooden furniture.
D. Plant security guard. 28. Which of the following equations is used to
E. Choices "B" and "C." calculate cost of goods sold during the period?
A. Beginning finished goods + cost of goods
Answer: E LO: 5 Type: RC, N manufactured + ending finished goods.
B. Beginning finished goods - ending finished
20. Depreciation of factory equipment would be goods.
classified as: C. Beginning finished goods + cost of goods
A. operating cost. manufactured.
B. "other" cost. D. Beginning finished goods + cost of goods
C. manufacturing overhead. manufactured - ending finished goods.
D. depreciation expense. E. Beginning finished goods + ending finished
E. administrative cost. goods - cost of goods manufactured.
21. Which of the following costs is not a component of 29. Work-in-process inventory is composed of:
manufacturing overhead? A. direct material and direct labor.
A. Indirect materials. B. direct labor and manufacturing overhead.
B. Factory utilities. C. direct material and manufacturing overhead.
C. Factory equipment. D. direct material only.
D. Indirect labor. E. direct material, direct labor, and
E. Property taxes on the manufacturing plant. manufacturing overhead.
22. The accounting records of Westcott Company 30. Fort Walton Industries began July with a finished-
revealed the following costs: goods inventory of $48,000. The finished-goods
inventory at the end of July was $41,000 and the
Factory utilities $ cost of goods sold during the month was
35,000 $125,000. The cost of goods manufactured during
Wages of assembly-line 170,000 July was:
personnel A. $77,000.
Customer entertainment 45,000 B. $84,000.
Indirect materials used 19,000 C. $118,000.
Depreciation on salespersons' 51,000 D. $132,000.
cars E. some other amount.
Production equipment rental 110,000
costs Answer: C LO: 6 Type: A
Costs that would be considered in the calculation 31. Kansas Plating Company reported a cost of goods
of manufacturing overhead total: manufactured of $260,000, with the firm's year-
A. $164,000. end balance sheet revealing work in process and
B. $215,000. finished goods of $35,000 and $67,000,
C. $385,000. respectively. If supplemental information
D. $430,000. disclosed raw materials used in production of
E. some other amount. $40,000, direct labor of $70,000, and
manufacturing overhead of $120,000, the
Answer: A LO: 5 Type: A company's beginning work in process must have
been:
23. Which of the following statements is (are) correct? A. $5,000.
A. Overtime premiums should be treated as a B. $37,000.
component of manufacturing overhead. C. $65,000.
B. Overtime premiums should be treated as a D. $97,000.
component of direct labor. E. some other amount.
C. Idle time should be treated as a component
of direct labor. Answer: C LO: 6 Type: A
D. Idle time should be accounted for as a
special type of loss. 32. The accounting records of Bronco Company
E. Both "B" and "C" are correct. revealed the following information:
25. Prime costs are comprised of: Bronco's cost of goods manufactured is:
A. direct materials and manufacturing A. $519,000.
overhead. B. $522,000.
B. direct labor and manufacturing overhead. C. $568,000.
C. direct materials, direct labor, and D. $571,000.
manufacturing overhead. E. some other amount.
D. direct materials and direct labor.
E. direct materials and indirect materials. Answer: A LO: 6 Type: A
35. Leggio Industries reported the following data for 43. Fixed costs are those costs that:
the year just ended: sales revenue, $950,000; cost A. vary directly with changes in activity.
of goods sold, $420,000; cost of goods B. vary inversely with changes in activity.
manufactured, $330,000; and selling and C. remain constant on a per-unit basis.
administrative expenses, $170,000. Leggio's D. increase on a per-unit basis as activity
gross margin would be: increases.
A. $30,000. E. remain constant as activity changes.
B. $200,000.
C. $360,000. Answer: E LO: 8 Type: RC
D. $530,000.
E. $620,000. 44. The fixed cost per unit:
A. will increase as activity increases.
Answer: D LO: 6 Type: A B. will increase as activity decreases.
C. will decrease as activity increases.
36. Pumpkin Enterprises began operations on January D. will remain constant.
1, 20x1, with all of its activities conducted from a E. will exhibit the behavior described in choices
single facility. The company's accountant "B" and "C."
concluded that the year's building depreciation
should be allocated as follows: selling activities, Answer: E LO: 8 Type: N
20%; administrative activities, 35%; and 45. Which of the following is an example of a fixed
manufacturing activities, 45%. If Pumpkin sold cost?
60% of 20x1 production during that year, what A. Paper used in the manufacture of textbooks.
percentage of the depreciation would appear B. Property taxes paid by a firm to the City of
(either directly or indirectly) on the 20x1 income Los Angeles.
statement? C. The wages of part-time workers who are paid
A. 27%. $8 per hour.
B. 45%. D. Gasoline consumed by salespersons' cars.
C. 55%. E. Surgical supplies used in a hospital's
D. 82%. operating room.
E. 100%.
Answer: B LO: 8 Type: N
Answer: D LO: 6 Type: A
46. The variable costs per unit are $4 when a
37. An employee accidentally overstated the year's company produces 10,000 units of product. What
advertising expense by $50,000. Which of the are the variable costs per unit when 8,000 units
following correctly depicts the effect of this error? are produced?
A. Cost of goods manufactured will be A. $4.00.
overstated by $50,000. B. $4.50.
B. Cost of goods sold will be overstated by C. $5.00.
$50,000. D. $5.50.
C. Both cost of goods manufactured and cost of E. Some other amount.
goods sold will be overstated by $50,000.
D. Cost of goods sold will be overstated by Answer: A LO: 8 Type: A
$50,000, and cost of goods manufactured
will be understated by $50,000. 47. The fixed costs per unit are $10 when a company
E. None of the above. produces 10,000 units of product. What are the
fixed costs per unit when 12,500 units are
Answer: E LO: 6 Type: A produced?
A. $4.
38. Which of the following would likely be a cost driver B. $6.
for the amount of direct materials used? C. $8.
A. The number of units sold. D. $10.
B. The number of direct labor hours worked. E. Some other amount.
C. The number of machine hours worked.
D. The number of employees working in the Answer: C LO: 8 Type: A
factory.
E. The number of units produced. 48. Total costs are $120,000 when 10,000 units are
produced; of this amount, variable costs are
Answer: E LO: 7 Type: N $48,000. What are the total costs when 12,000
units are produced?
39. The choices below depict five costs of Benton A. $57,600.
Corporation and a possible driver for each cost. B. $72,000.
Which of these choices likely contains an C. $120,000.
inappropriate cost driver? D. $129,600.
A. Gasoline consumed; number of miles driven. E. $144,000.
B. Manufacturing overhead incurred in a heavily
automated facility; direct labor hours. Answer: D LO: 8 Type: A
C. Sales commissions; gross sales revenue.
D. Building maintenance cost; building square 49. Baxter Company, which pays a 10% commission to
footage. its salespeople, reported sales revenues of
E. Personnel department cost; number of $210,000 for the period just ended. If fixed and
employees. variable sales expenses totaled $56,000, what
would these expenses total at sales of $168,000?
Answer: B LO: 7 Type: N A. $16,800.
B. $35,000.
40. Variable costs are those costs that: C. $44,800.
A. vary inversely with changes in activity. D. $51,800.
B. vary directly with changes in activity. E. Some other amount.
C. remain constant as activity changes.
Chapter 2 19
Answer: D LO: 8 Type: A C. $300.
D. $3,045.
50. Which of the following would not be characterized E. $3,255.
as a cost object?
A. An automobile manufactured by General Answer: A LO: 10 Type: A
Motors.
B. The New York Fire Department. 59. The average cost per student when 16 students
C. A Burger King restaurant located in enroll in the school is:
Cleveland, Ohio. A. $100.
D. A Delta Airlines flight from Atlanta to Miami. B. $125.
E. All of the above are examples of cost objects. C. $175.
D. $300.
Answer: E LO: 9 Type: N E. $400.
51. Costs that can be easily traced to a specific Answer: C LO: 10 Type: A
department are called:
A. direct costs.
B. indirect costs.
60. The costs that follow all have
C. product costs. applicability for a manufacturing
D. manufacturing costs.
E. processing costs. enterprise. Which of the choices
Answer: A LO: 9 Type: RC listed correctly denotes the costs’
52. Which of the following would not be considered a
applicability for a service provider?
Uncontrollable Opportunity
direct cost with respect to the service department
Cos C
of a new car dealership? t o
A. Wages of repair techniques.
s
B. Property taxes paid by the dealership. t
C. Repair parts consumed.
Applicable Not applicable
D. Salary of the department manager. Not applicable Applicable
E. Depreciation on new equipment used to
Applicable Applicable
analyze engine problems. Not applicable Applicable Applicable
Not applicable Applicable Not applicable
Answer: B LO: 9 Type: N
Answer: C LO: 10 Type: RC
53. Indirect costs:
A. can be traced to a cost object.
B. cannot be traced to a particular cost object. EXERCISES
C. are not important.
D. are always variable costs. Cost Concepts; Different Types of Entities
E. may be indirect with respect to Disney World
but direct with respect to one its major 61. Consider the three firms that follow: (1)
components, Epcot Center.
Continental Airlines, (2) BMW, and (3) Target.
These firms, examples of service providers,
Answer: B LO: 9 Type: RC, N
manufacturers, and merchandisers, tend to have
54. The salary that is sacrificed by a college student different characteristics with respect to costs and
who pursues a degree full time is a(n):
financial-statement disclosures.
A. sunk cost.
B. out-of-pocket cost.
Required:
C. opportunity cost. Determine which of the preceding firms (1, 2,
D. differential cost.
and/or 3) would likely:
E. marginal cost. A. Disclose operating expenses on the income
statement.
Answer: C LO: 10 Type: N B. Have product costs.
C. Have period costs.
55. The tuition that will be paid next semester by a D. Disclose cost of cost good sold on the income
college student who pursues a degree is a(n):
statement.
A. sunk cost. E. Have no meaningful investment in inventory.
B. out-of-pocket cost.
F. Maintain raw-material, work-in-process, and
C. indirect cost. finished-goods inventories.
D. average cost.
G. Have variable and fixed costs.
E. marginal cost.
LO: 2, 3, 8 Type: N
Answer: B LO: 10 Type: N
Answer:
56. Which of the following costs should be ignored A. 1, 2, 3
when choosing among alternatives?
A. Opportunity costs.
B. Sunk costs. E.
C. Out-of-pocket costs.
D. Differential costs.
E. None of the above. 1
B. 2, 3
Answer: B LO: 10 Type: RC
F.
57. If the total cost of alternative A is $50,000 and the
total cost of alternative B is $34,000, then $16,000
is termed the: 2
A. opportunity cost. C. 1, 2, 3
B. average cost.
C. sunk cost.
D. out-of-pocket cost. G.
E. differential cost.
C. The similarity: Both inventories are 65. The following selected costs were extracted from
carried for sale by the respective businesses. the accounting records of Los Angeles Machining
The difference: Retailers purchase (LAM):
merchandise inventory; in contrast,
manufacturing firms produce their goods. 1. Direct materials used in production
2. Wages of machine operators
Identification of Product Costs and Period Costs, Cost 3. Factory utilities
Behavior 4. Sales commissions
5. Salary of LAM's president
63. Eastside Manufacturing produces small electric 6. Factory depreciation
engines. Identify the following costs as direct 7. Wages of plant security guards
materials (DM), direct labor (DL), manufacturing 8. Uncollectible accounts expense
overhead (MOH), or a period cost (PC). Also 9. Machine lubricant used in production
indicate whether the cost is variable (V) or fixed
(F) with respect to behavior. Required:
By the use of numbers, identify the costs that
A. Commissions paid to salespeople would be used to calculate:
B. Straight-line depreciation on the factory A. cost of goods manufactured.
building B. manufacturing overhead.
C. Salary of the plant supervisor C. total period costs.
D. Wages of the assembly-line workers D. total conversion costs.
E. Machine lubricant used in production E. total direct costs of LAM's credit and
activities collections department.
F. Engine casings used in production F. LAM's inventory valuation.
activities
G. Advertising placed in trade journals LO: 2, 5, 6, 9 Type: N
H. Lease payments for the president's
automobile Answer:
I. Property taxes paid on the factory A. 1, 2, 3, 6, 7, 9
facilities B. 3, 6, 7, 9
C. 4, 5, 8
LO: 2, 5, 8 Type: N D. 2, 3, 6, 7, 9
E. 8
Answer: F. 1, 2, 3, 6, 7, 9
A. PC, V
B. MOH, F Cost of Goods Manufactured and Cost of Goods Sold
C. MOH, F
D. DL, V 66. Panama Manufacturing had the following data for
E. MOH, V the period just ended:
F. DM, V
G. PC, F Work in process, Jan. 1 $ 21,000
H. PC, F Work in process, Dec. 40,000
I. MOH, F 31
J. Finished goods, Jan. 1 70,000
Identification of Product Costs and Period Costs, Cost Finished goods, Dec. 61,000
Behavior 31
Direct materials used 126,000
64. Consider the following items: Direct labor 260,000
Factory depreciation 80,000
A. Tomatoes used in the manufacture of Sales 945,000
Heinz ketchup Advertising expense 52,000
B. Administrative salaries of executives Factory utilities 27,000
employed by Southwest Airlines Indirect materials 19,000
C. Wages of assembly-line workers at a Indirect labor 35,000
Ford plant
D. Marketing expenditures of the Los Required:
Angeles Dodgers baseball club
E. Commissions paid to Coca-Cola's
A. Calculate Panama's cost of goods
manufactured.
salespeople
F. Straight-line depreciation on B. Calculate Panama's cost of goods sold.
manufacturing equipment owned by Dell
Computer LO: 6 Type: A
G. Shipping charges incurred by Office
Chapter 2 21
from the 20x3 accounting records of Miami
Answer: Products:
A. Direct materials used $126,000
Direct labor 260,000 Raw materials used $284,000
Manufacturing overhead: Direct labor 178,000
Factory depreciation 80,000 Indirect labor 35,000
Factory utilities 27,000 Selling and administrative salaries 250,000
Indirect materials 19,000 Building depreciation* 330,000
Indirect labor 35,000 Other selling and administrative 80,000
Total manufacturing costs $547,000 expenses
Add: Work in process, Jan. 1 21,000 Other factory costs 620,000
$568,000
Deduct: Work in process, Dec. 31 40,000 *Seventy percent of the company's
Cost of goods manufactured $528,000 building was devoted to production
activities; the remaining 30% was used
B. Finished goods, Jan. 1 $ 70,000 for selling and administrative functions.
Add: Cost of goods manufactured 528,000
Goods available for sale $598,000 Miami's beginning and ending work-in-process
Deduct: Finished goods, Dec. 31 61,000 inventories amounted to $306,000 and $245,000,
Cost of goods sold $537,000 respectively. The company's beginning and ending
finished-goods inventories were $450,000 and
$440,000, respectively.
Required:
Income-Related Computations
A. Calculate Miami's manufacturing overhead
67. Hampton Company had the following inventory for the year.
balances at the beginning and end of the year:
B. Calculate Miami's cost of goods
January 1 December 31 manufactured.
Raw material $ 50,000 $ 35,000 C. Compute the company's cost of goods sold.
Work in process 130,000 170,000
Finished goods 280,000 255,000 LO: 5, 6 Type: A
Item B: Required:
Total production costs $ 285,000 A. Assuming that present cost behavior patterns
Less: Direct materials used (90,000) continue, compute the total expected costs in
Less: Manufacturing overhead (115,000) the upcoming accounting period.
Direct labor $ 80,000 B. George Levy is about to prepare a graph that
shows the unit cost behavior for variable
Item C: selling and administrative cost. If the graph’s
Beginning work in process $ 8,000 horizontal axis is volume and the vertical axis
Add: Total production costs 285,000 is dollars, briefly describe what George’s
Less: Ending work in process (20,000) graph should look like.
Transferred to finished goods $273,000 C. Determine whether the following costs are
variable or fixed in terms of behavior:
1. Yearly lease payments for a state-of-the-
Item D: art cutting machine.
Sales $560,000 2. A fee paid to a consultant who provided
Divided by rate 140% advice about quality issues. The fee
Cost of goods sold $400,000 was based on the number of consulting
hours provided.
Item E: 3. Cost of an awards dinner for "star"
Ending finished goods $ 30,000 salespeople.
Add: Cost of goods sold 400,000
Less: Transferred to finished goods (273,000) LO: 7, 8 Type: A, N
Beginning finished goods $157,000
Answer:
Fixed and Variable Cost Behavior Direct materials (100,000 x $15) $1,500,000
Direct labor (100,000 x $8) 800,000
71. Mighty Muffler, Inc., operates an automobile Variable overhead (100,000 x 1,100,000
service facility. The table below shows the cost $11)
incurred during a month when 600 mufflers were Fixed overhead (80,000 x $6) 480,000
replaced. Variable selling and 475,000
administrative
(95,000 x $5)
Number of Muffler Replacements
Fixed selling and administrative 160,000
500 600 700 (80,000 x $2)
Total costs: Total costs $4,515,000
Fixed costs A $ 8,400 C
Variable costs B 6,000 D The variable selling and administrative costs are
Total costs E $14,400 F constant at $5 per unit. Thus, the graph is a straight,
horizontal line.
Cost per muffler replacement:
Fixed cost G H I Fixed
Variable cost J K L Variable
Total cost per muffler M N O Variable
replacement Elements of Financial Statements, Cost Behavior
Chapter 2 23
Information related to the current year's activities $450,000 variation between these two
follows. amounts?
C. Finished goods, Jan. 1 Product costs are attached to the units produced
Add: Cost of goods manufactured (20,000 units x $140) (i.e., work in process) and, thus, inventoried on the
Cost of goods available for sale balance sheet. These costs are later charged to
Deduct: Finished goods, Dec. 31 finished goods when the goods are completed.
Cost of goods sold Another transfer occurs when the finished units
are sold, with the costs now transferred to cost of
D. 1. No change. Direct labor is a variable cost, and the cost pergoods soldremain
unit will on theconstant.
income statement.
2. No change. Despite the increase in the number of units produced, this is a fixed cost, which remains the
same in total. Financial Statements of Service, Retailing, and
Manufacturing Firms
Economic Characteristics of Costs
s 77. The income statements and balance sheets of
74. The following terms are used to describe various service, retailing, and manufacturing businesses
economic characteristics of costs: tend to differ.
C. The cost of feeding 300 children in a public B. A retailer will typically disclose inventories as
school cafeteria is $450 per day, or $1.50 per one-line item entitled merchandise
child per day. What economic term describes inventories. Manufacturers, on the other
this $1.50 cost? hand, carry three different types of
inventories: raw materials, work in process,
D. The management of a high-rise office and finished goods.
building uses 3,000 square feet of space in
the building for its own administrative Definition of Cost Terms
functions. This space could be rented for
$30,000. What economic term describes this 78. Briefly define and discuss the terms in each of the
$30,000 of lost rental revenue? pairs that follow.
E. The cost of building an automated assembly A.
B.
Direct and indirect costs
Direct materials and indirect materials
line in a factory is $700,000; a manually
operated assembly line would cost $250,000. C. Manufacturing overhead and direct labor
What economic term is used to describe the
Answer:
A. Direct costs are logically and practically
related (i.e., easily traceable) to a particular
cost object. An indirect cost, on the other
hand, is not. Whether a cost is direct or
indirect depends on the cost object under
consideration. A cost may be easily traceable
to a company, for example, but not easily
traced to a department of that firm.
LO: 8 Type: N
Answer:
The doctor's observations are incorrect, as
gasoline is a variable cost and insurance is a fixed
cost. Gasoline cost will increase with the number
of miles driven, whereas insurance outlays will
remain the same. The doctor seems to have
confused the "total" perspective, as defined by
accountants, with the notion of per-unit cost
behavior.
LO: 10 Type: RC
Answer:
Sunk costs have already been incurred. They are
part of history and cannot be altered. Therefore,
sunk costs are not relevant for any current or
future management decision.
Chapter 2 25