Chapter 2: Basic Cost Management Concepts and Accounting for Mass Customization Operations

MULTIPLE C OICE !UE"TIO#" 1. Which of the following statements is true? A. The word "cost" has the same meaning in all situations in which it is used. B. Cost data, once classified and recorded for a specific application, are appropriate for use in any application. C. Different cost concepts and classifications are used for different purposes. D. All organi ations incur the same types of costs. !. Costs incurred in one year are always meaningful in the following year. Answer" C #$" 1 Type" %C &. 'roduct costs are" A. e(pensed when incurred. B. in)entoried. C. treated in the same manner as period costs. D. treated in the same manner as ad)ertising costs. !. su*tracted from cost of goods sold. Answer" B #$" & Type" %C +. Which of the following is a product cost? A. ,lass in an automo*ile. B. Ad)ertising. C. The salary of the )ice president-finance. D. %ent on a factory. !. Both "A" and "D." Answer" ! #$" & Type" . /. Which of the following would not *e classified as a product cost? A. Direct materials. B. Direct la*or. C. 0ndirect materials. D. 0nsurance on the manufacturing plant. !. 1ales commissions. Answer" ! #$" & Type" %C, .

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2. The accounting records of Tacoma Company re)ealed the following costs" direct materials used, 3145,5556 direct la*or, 3+25,5556 manufacturing o)erhead, 3/55,5556 and selling and administrati)e e(penses, 3&&5,555. Tacoma7s product costs total" A. 32&5,555. B. 3425,555. C. 38&5,555. D. 31,1/5,555. !. some other amount. Answer" C #$" & Type" A 9. Costs that are e(pensed when incurred are called" A. product costs. B. direct costs. C. in)entoria*le costs. D. period costs. !. indirect costs. Answer" D #$" & Type" %C 4. Which of the following is a period cost? A. Direct material. B. Ad)ertising e(pense. C. Depreciation on cars dri)en *y a firm7s president and treasurer. D. :iscellaneous supplies used in production acti)ities. !. Both "B" and "C." Answer" ! #$" & Type" . ;. Which of the following is not a period cost? A. #egal costs. B. 'u*lic relations costs. C. 1ales commissions. D. Wages of assem*ly-line wor<ers. !. The salary of a company7s chief financial officer =C>$?. Answer" D #$" & Type" %C, . 8. The accounting records of @ill Corporation re)ealed the following selected costs" 1ales commissions, 3/5,5556 plant super)ision, 38/,5556 and administrati)e e(penses, 31;2,555. @ill7s period costs total" A. 3/5,555. B. 38/,555. C. 31;2,555. D. 3&&2,555. !. 3+18,555. Answer" D #$" & Type" A

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15. Which of the following entities would most li<ely ha)e raw materials, wor< in process, and finished goods? A. !((on Corporation. B. :acy7s Department 1tore. C. Wendy7s. D. 1outhwest Airlines. !. Colum*ia Ani)ersity. Answer" A #$" + Type" . 11. 1elling and administrati)e e(penses would li<ely appear on the *alance sheet of" A. The ,ap. B. Te(as 0nstruments. C. Turner Broadcasting 1ystem. D. all of the a*o)e firms. !. none of the a*o)e firms. Answer" ! #$" + Type" . 1&. Which of the following in)entories would a discount retailer such as Wal-:art report as an asset? A. %aw materials. B. Wor< in process. C. >inished goods. D. :erchandise in)entory. !. All of the a*o)e. Answer" D #$" + Type" %C 1+. Which of the following in)entories would a company ordinarily hold for sale? A. %aw materials. B. Wor< in process. C. >inished goods. D. %aw materials and finished goods. !. Wor< in process and finished goods. Answer" C #$" + Type" %C 1/. Beno Corporation engages in mass customi ation and direct sales, the latter *y accepting customer orders o)er the 0nternet. As a result, Beno" A. would pro*a*ly *egin the manufacturing process upon receipt of a customer7s order. B. would typically ha)e fairly low in)entory le)els for the amount of sales re)enue generated. C. would typically ha)e fairly high in)entory le)els for the amount of sales re)enue generated. D. would li<ely find choices "A" and "B" to *e applica*le. !. would li<ely find choices "A" and "C" to *e applica*le. Answer" D #$" / Type" %C

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12. Companies that engage in mass customi ation" A. tend to ha)e a relati)ely low production )olume. B. tend to ha)e a high production )olume that in)ol)es highly standardi ed end-products. C. tend to ha)e a high production )olume, many standardi ed components, and customerspecified com*inations of components. D. tend to ha)e a high production )olume, many uniCue components, and customer-specified com*inations of components. !. could *e typified *y the refining operations of 1hell $il. Answer" C #$" / Type" %C 19. :idwest :otors manufactures automo*iles. Which of the following would not *e classified as direct materials *y the company? A. 1heet metal used in the automo*ile7s *ody. B. Tires. C. 0nterior leather. D. CD player. !. Wheel lu*ricant. Answer" ! #$" 2 Type" . 14. Which of the following employees of a commercial printerDpu*lisher would *e classified as direct la*or? A. Boo< *inder. B. 'lant security guard. C. 1ales representati)e. D. 'lant super)isor. !. 'ayroll super)isor. Answer" A #$" 2 Type" . 1;. .orwood Appliance produces washers and dryers in an assem*ly-line process. #a*or costs incurred during a recent period were" corporate e(ecuti)es, 3155,5556 assem*ly-line wor<ers, 3;5,5556 security guards, 31;,5556 and plant super)isor, 3+5,555. The total of .orwood7s direct la*or cost was" A. 3;5,555. B. 38;,555. C. 3115,555. D. 31&;,555. !. 3&&;,555. Answer" A #$" 2 Type" A

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18. Which of the following employees would not *e classified as indirect la*or? A. Custodian. B. 1alesperson. C. Assem*ler of wooden furniture. D. 'lant security guard. !. Choices "B" and "C." Answer" ! #$" 2 Type" %C, . &5. Depreciation of factory eCuipment would *e classified as" A. operating cost. B. "other" cost. C. manufacturing o)erhead. D. depreciation e(pense. !. administrati)e cost. Answer" C #$" 2 Type" %C &1. Which of the following costs is not a component of manufacturing o)erhead? A. 0ndirect materials. B. >actory utilities. C. >actory eCuipment. D. 0ndirect la*or. !. 'roperty ta(es on the manufacturing plant. Answer" C #$" 2 Type" %C &&. The accounting records of Westcott Company re)ealed the following costs" >actory utilities Wages of assem*ly-line personnel Customer entertainment 0ndirect materials used Depreciation on salespersons7 cars 'roduction eCuipment rental costs 3 +2,555 145,555 /2,555 18,555 21,555 115,555

Costs that would *e considered in the calculation of manufacturing o)erhead total" A. 319/,555. B. 3&12,555. C. 3+;2,555. D. 3/+5,555. !. some other amount. Answer" A #$" 2 Type" A

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&+. Which of the following statements is =are? correct? A. $)ertime premiums should *e treated as a component of manufacturing o)erhead. B. $)ertime premiums should *e treated as a component of direct la*or. C. 0dle time should *e treated as a component of direct la*or. D. 0dle time should *e accounted for as a special type of loss. !. Both "B" and "C" are correct. Answer" A #$" 2 Type" %C &/. Con)ersion costs are" A. direct material, direct la*or, and manufacturing o)erhead. B. direct material and direct la*or. C. direct la*or and manufacturing o)erhead. D. prime costs. !. period costs. Answer" C #$" 2 Type" %C &2. 'rime costs are comprised of" A. direct materials and manufacturing o)erhead. B. direct la*or and manufacturing o)erhead. C. direct materials, direct la*or, and manufacturing o)erhead. D. direct materials and direct la*or. !. direct materials and indirect materials. Answer" D #$" 2 Type" %C &9. Which of the following statements is true? A. 'roduct costs affect only the *alance sheet. B. 'roduct costs affect only the income statement. C. 'eriod costs affect only the *alance sheet. D. 'eriod costs affect *oth the *alance sheet and the income statement. !. 'roduct costs e)entually affect *oth the *alance sheet and the income statement. Answer" ! #$" 9 Type" . &4. 0n a manufacturing company, the cost of goods completed during the period would include which of the following elements? A. %aw materials used. B. Beginning finished goods in)entory. C. :ar<eting costs. D. Depreciation of deli)ery truc<s. !. :ore than one of the a*o)e. Answer" A #$" 9 Type" %C

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&;. Which of the following eCuations is used to calculate cost of goods sold during the period? A. Beginning finished goods E cost of goods manufactured E ending finished goods. B. Beginning finished goods - ending finished goods. C. Beginning finished goods E cost of goods manufactured. D. Beginning finished goods E cost of goods manufactured - ending finished goods. !. Beginning finished goods E ending finished goods - cost of goods manufactured. Answer" D #$" 9 Type" %C &8. Wor<-in-process in)entory is composed of" A. direct material and direct la*or. B. direct la*or and manufacturing o)erhead. C. direct material and manufacturing o)erhead. D. direct material only. !. direct material, direct la*or, and manufacturing o)erhead. Answer" ! #$" 9 Type" %C +5. >ort Walton 0ndustries *egan Fuly with a finished-goods in)entory of 3/;,555. The finishedgoods in)entory at the end of Fuly was 3/1,555 and the cost of goods sold during the month was 31&2,555. The cost of goods manufactured during Fuly was" A. 344,555. B. 3;/,555. C. 311;,555. D. 31+&,555. !. some other amount. Answer" C #$" 9 Type" A +1. Gansas 'lating Company reported a cost of goods manufactured of 3&95,555, with the firm7s year-end *alance sheet re)ealing wor< in process and finished goods of 3+2,555 and 394,555, respecti)ely. 0f supplemental information disclosed raw materials used in production of 3/5,555, direct la*or of 345,555, and manufacturing o)erhead of 31&5,555, the company7s *eginning wor< in process must ha)e *een" A. 32,555. B. 3+4,555. C. 392,555. D. 384,555. !. some other amount. Answer" C #$" 9 Type" A

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+&. The accounting records of Bronco Company re)ealed the following information" %aw materials used Direct la*or :anufacturing o)erhead Wor<-in-process in)entory, 1D1 >inished-goods in)entory, 1D1 Wor<-in-process in)entory, 1&D+1 >inished-goods in)entory, 1&D+1 Bronco7s cost of goods manufactured is" A. 3218,555. B. 32&&,555. C. 329;,555. D. 3241,555. !. some other amount. Answer" A #$" 9 Type" A ++. The accounting records of Dolphin Company re)ealed the following information" Total manufacturing costs Wor<-in-process in)entory, Fan. 1 Wor<-in-process in)entory, Dec. +1 >inished-goods in)entory, Fan. 1 >inished-goods in)entory, Dec. +1 Dolphin7s cost of goods sold is" A. 325;,555. B. 32&8,555. C. 32+1,555. D. 322+,555. !. some other amount. Answer" C #$" 9 Type" A +/. >or the year Hust ended, Cole Corporation7s manufacturing costs =raw materials used, direct la*or, and manufacturing o)erhead? totaled 31,255,555. Beginning and ending wor<-in-process in)entories were 395,555 and 385,555, respecti)ely. Cole7s *alance sheet also re)ealed respecti)e *eginning and ending finished-goods in)entories of 3&25,555 and 31;5,555. $n the *asis of this information, how much would the company report as cost of goods manufactured =C,:? and cost of goods sold =C,1?? A. C,:, 31,/+5,5556 C,1, 31,/95,555. B. C,:, 31,/45,5556 C,1, 31,2/5,555. C. C,:, 31,2+5,5556 C,1, 31,/95,555. D. C,:, 31,245,5556 C,1, 31,2/5,555. !. 1ome other amounts. Answer" B #$" 9 Type" A 32+5,555 29,555 4;,555 1/9,555 1&+,555 3 95,555 1&2,555 +95,555 25,555 1;8,555 49,555 1/5,555

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Hilton, Managerial Accounting, Seventh Edition

+2. #eggio 0ndustries reported the following data for the year Hust ended" sales re)enue, 3825,5556 cost of goods sold, 3/&5,5556 cost of goods manufactured, 3++5,5556 and selling and administrati)e e(penses, 3145,555. #eggio7s gross margin would *e" A. 3+5,555. B. 3&55,555. C. 3+95,555. D. 32+5,555. !. 39&5,555. Answer" D #$" 9 Type" A +9. 'ump<in !nterprises *egan operations on Fanuary 1, &5(1, with all of its acti)ities conducted from a single facility. The company7s accountant concluded that the year7s *uilding depreciation should *e allocated as follows" selling acti)ities, &5I6 administrati)e acti)ities, +2I6 and manufacturing acti)ities, /2I. 0f 'ump<in sold 95I of &5(1 production during that year, what percentage of the depreciation would appear =either directly or indirectly? on the &5(1 income statement? A. &4I. B. /2I. C. 22I. D. ;&I. !. 155I. Answer" D #$" 9 Type" A +4. An employee accidentally o)erstated the year7s ad)ertising e(pense *y 325,555. Which of the following correctly depicts the effect of this error? A. Cost of goods manufactured will *e o)erstated *y 325,555. B. Cost of goods sold will *e o)erstated *y 325,555. C. Both cost of goods manufactured and cost of goods sold will *e o)erstated *y 325,555. D. Cost of goods sold will *e o)erstated *y 325,555, and cost of goods manufactured will *e understated *y 325,555. !. .one of the a*o)e. Answer" ! #$" 9 Type" A +;. Which of the following would li<ely *e a cost dri)er for the amount of direct materials used? A. The num*er of units sold. B. The num*er of direct la*or hours wor<ed. C. The num*er of machine hours wor<ed. D. The num*er of employees wor<ing in the factory. !. The num*er of units produced. Answer" ! #$" 4 Type" .

Chapter 2

+8. The choices *elow depict fi)e costs of Benton Corporation and a possi*le dri)er for each cost. Which of these choices li<ely contains an inappropriate cost dri)er? A. ,asoline consumed6 num*er of miles dri)en. B. :anufacturing o)erhead incurred in a hea)ily automated facility6 direct la*or hours. C. 1ales commissions6 gross sales re)enue. D. Building maintenance cost6 *uilding sCuare footage. !. 'ersonnel department cost6 num*er of employees. Answer" B #$" 4 Type" . /5. Jaria*le costs are those costs that" A. )ary in)ersely with changes in acti)ity. B. )ary directly with changes in acti)ity. C. remain constant as acti)ity changes. D. decrease on a per-unit *asis as acti)ity increases. !. increase on a per-unit *asis as acti)ity increases. Answer" B #$" ; Type" %C /1. As acti)ity decreases, unit )aria*le cost" A. increases proportionately with acti)ity. B. decreases proportionately with acti)ity. C. remains constant. D. increases *y a fi(ed amount. !. decreases *y a fi(ed amount. Answer" C #$" ; Type" %C /&. Which of the following is not an e(ample of a )aria*le cost? A. 1traight-line depreciation on a machine that has a fi)e-year ser)ice life. B. Wages of manufacturing wor<ers whose pay is *ased on hours wor<ed. C. Tires used in the production of tractors. D. Aluminum used to ma<e patio furniture. !. Commissions paid to sales personnel. Answer" A #$" ; Type" . /+. >i(ed costs are those costs that" A. )ary directly with changes in acti)ity. B. )ary in)ersely with changes in acti)ity. C. remain constant on a per-unit *asis. D. increase on a per-unit *asis as acti)ity increases. !. remain constant as acti)ity changes. Answer" ! #$" ; Type" %C

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Hilton, Managerial Accounting, Seventh Edition

//. The fi(ed cost per unit" A. will increase as acti)ity increases. B. will increase as acti)ity decreases. C. will decrease as acti)ity increases. D. will remain constant. !. will e(hi*it the *eha)ior descri*ed in choices "B" and "C." Answer" ! #$" ; Type" . /2. Which of the following is an e(ample of a fi(ed cost? A. 'aper used in the manufacture of te(t*oo<s. B. 'roperty ta(es paid *y a firm to the City of #os Angeles. C. The wages of part-time wor<ers who are paid 3; per hour. D. ,asoline consumed *y salespersons7 cars. !. 1urgical supplies used in a hospital7s operating room. Answer" B #$" ; Type" . /9. The )aria*le costs per unit are 3/ when a company produces 15,555 units of product. What are the )aria*le costs per unit when ;,555 units are produced? A. 3/.55. B. 3/.25. C. 32.55. D. 32.25. !. 1ome other amount. Answer" A #$" ; Type" A /4. The fi(ed costs per unit are 315 when a company produces 15,555 units of product. What are the fi(ed costs per unit when 1&,255 units are produced? A. 3/. B. 39. C. 3;. D. 315. !. 1ome other amount. Answer" C #$" ; Type" A /;. Total costs are 31&5,555 when 15,555 units are produced6 of this amount, )aria*le costs are 3/;,555. What are the total costs when 1&,555 units are produced? A. 324,955. B. 34&,555. C. 31&5,555. D. 31&8,955. !. 31//,555. Answer" D #$" ; Type" A

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/8. Ba(ter Company, which pays a 15I commission to its salespeople, reported sales re)enues of 3&15,555 for the period Hust ended. 0f fi(ed and )aria*le sales e(penses totaled 329,555, what would these e(penses total at sales of 319;,555? A. 319,;55. B. 3+2,555. C. 3//,;55. D. 321,;55. !. 1ome other amount. Answer" D #$" ; Type" A 25. Which of the following would not *e characteri ed as a cost o*Hect? A. An automo*ile manufactured *y ,eneral :otors. B. The .ew Kor< >ire Department. C. A Burger Ging restaurant located in Cle)eland, $hio. D. A Delta Airlines flight from Atlanta to :iami. !. All of the a*o)e are e(amples of cost o*Hects. Answer" ! #$" 8 Type" . 21. Costs that can *e easily traced to a specific department are called" A. direct costs. B. indirect costs. C. product costs. D. manufacturing costs. !. processing costs. Answer" A #$" 8 Type" %C 2&. Which of the following would not *e considered a direct cost with respect to the ser)ice department of a new car dealership? A. Wages of repair techniCues. B. 'roperty ta(es paid *y the dealership. C. %epair parts consumed. D. 1alary of the department manager. !. Depreciation on new eCuipment used to analy e engine pro*lems. Answer" B #$" 8 Type" . 2+. 0ndirect costs" A. can *e traced to a cost o*Hect. B. cannot *e traced to a particular cost o*Hect. C. are not important. D. are always )aria*le costs. !. may *e indirect with respect to Disney World *ut direct with respect to one its maHor components, !pcot Center. Answer" B #$" 8 Type" %C, .

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2/. The salary that is sacrificed *y a college student who pursues a degree full time is a=n?" A. sun< cost. B. out-of-poc<et cost. C. opportunity cost. D. differential cost. !. marginal cost. Answer" C #$" 15 Type" . 22. The tuition that will *e paid ne(t semester *y a college student who pursues a degree is a=n?" A. sun< cost. B. out-of-poc<et cost. C. indirect cost. D. a)erage cost. !. marginal cost. Answer" B #$" 15 Type" . 29. Which of the following costs should *e ignored when choosing among alternati)es? A. $pportunity costs. B. 1un< costs. C. $ut-of-poc<et costs. D. Differential costs. !. .one of the a*o)e. Answer" B #$" 15 Type" %C 24. 0f the total cost of alternati)e A is 325,555 and the total cost of alternati)e B is 3+/,555, then 319,555 is termed the" A. opportunity cost. B. a)erage cost. C. sun< cost. D. out-of-poc<et cost. !. differential cost. Answer" ! #$" 15 Type" . Ase the following to answer Cuestions 2;-28" Wee Care is a nursery school for pre-<indergarten children. The school has determined that the following *iwee<ly re)enues and costs occur at different le)els of enrollment" .um*er of 1tudents !nrolled 15 12 19 &5 &1 Total %e)enue 3+,555 /,255 /,;55 9,555 9,+55 Total Costs 3&,155 &,455 &,;55 +,&55 +,&22

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2;. The marginal cost when the twenty-first student enrolls in the school is" A. 322. B. 3122. C. 3+55. D. 3+,5/2. !. 3+,&22. Answer" A #$" 15 Type" A 28. The a)erage cost per student when 19 students enroll in the school is" A. 3155. B. 31&2. C. 3142. D. 3+55. !. 3/55. Answer" C #$" 15 Type" A 95. The costs that follow all ha)e applica*ility for a manufacturing enterprise. Which of the choices listed correctly denotes the costsL applica*ility for a ser)ice pro)ider? 'eriod Cost Ancontrolla*le Cost $pportunity Cost Applica*le Applica*le .ot applica*le Applica*le .ot applica*le Applica*le Applica*le Applica*le Applica*le .ot applica*le Applica*le Applica*le .ot applica*le Applica*le .ot applica*le Answer" C #$" 15 Type" %C E$E%CI"E" Cost Concepts& 'ifferent T(pes of Entities 91. Consider the three firms that follow" =1? Continental Airlines, =&? B:W, and =+? Target. These firms, e(amples of ser)ice pro)iders, manufacturers, and merchandisers, tend to ha)e different characteristics with respect to costs and financial-statement disclosures. %eCuired" Determine which of the preceding firms =1, &, andDor +? would li<ely" A. Disclose operating e(penses on the income statement. B. @a)e product costs. C. @a)e period costs. D. Disclose cost of cost good sold on the income statement. !. @a)e no meaningful in)estment in in)entory. >. :aintain raw-material, wor<-in-process, and finished-goods in)entories. ,. @a)e )aria*le and fi(ed costs. #$" &, +, ; Type" .

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Answer" A. 1, &, + B. &, + C. 1, &, + D. &, + Content of )inancia* "tatements and %eports 9&. Consider the following cost items" 1. &. +. /. 2. 9. 4. ;. 8.

!. 1 >. & ,. 1, &, +

1ales commissions earned *y a company7s sales force. %aw materials purchased during the period. Current year7s depreciation on a firm7s manufacturing facilities. Kear-end completed production of a carpet manufacturer. The cost of products sold to customers of an apparel store. Wages earned *y machine operators in a manufacturing plant. 0ncome ta(es incurred *y an airline. :ar<eting costs of an electronics manufacturer. 0ndirect la*or costs incurred *y a manufacturer of office eCuipment.

%eCuired" A. !)aluate the costs Hust cited and determine whether the associated dollar amounts would *e found on the firm7s *alance sheet, income statement, or schedule of cost of goods manufactured. B. What maHor asset will normally *e insignificant for ser)ice enterprises and relati)ely su*stantial for retailers, wholesalers, and manufacturers? Briefly discuss. C. Briefly e(plain the similarity and difference *etween the merchandise in)entory of a retailer and the finished-goods in)entory of a manufacturer. #$" +, 9 Type" . Answer" A. 1. 0ncome statement &. 1chedule of cost of goods manufactured +. 1chedule of cost of goods manufactured /. Balance sheet 2. 0ncome statement 9. 1chedule of cost of goods manufactured 4. 0ncome statement ;. 0ncome statement 8. 1chedule of cost of goods manufactured B. The asset that differs among these *usinesses is in)entory. 1er)ice *usinesses typically carry no =or )ery little? in)entory. %etailers and wholesalers normally stoc< considera*le in)entory. :anufacturers also carry significant in)entories, typically su*di)ided in three categories" raw materials, wor< in process, and finished goods. The similarity" Both in)entories are carried for sale *y the respecti)e *usinesses. The difference" %etailers purchase merchandise in)entory6 in contrast, manufacturing firms produce their goods.

C.

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Identification of Product Costs and Period Costs+ Cost Beha,ior 9+. !astside :anufacturing produces small electric engines. 0dentify the following costs as direct materials =D:?, direct la*or =D#?, manufacturing o)erhead =:$@?, or a period cost ='C?. Also indicate whether the cost is )aria*le =J? or fi(ed =>? with respect to *eha)ior. A. B. C. D. !. >. ,. @. 0. Commissions paid to salespeople 1traight-line depreciation on the factory *uilding 1alary of the plant super)isor Wages of the assem*ly-line wor<ers :achine lu*ricant used in production acti)ities !ngine casings used in production acti)ities Ad)ertising placed in trade Hournals #ease payments for the president7s automo*ile 'roperty ta(es paid on the factory facilities

#$" &, 2, ; Type" . Answer" A. 'C, J B. :$@, > C. :$@, > D. D#, J !. :$@, J >. D:, J ,. 'C, > @. 'C, > 0. :$@, >

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Hilton, Managerial Accounting, Seventh Edition

Identification of Product Costs and Period Costs+ Cost Beha,ior 9/. Consider the following items" A. B. C. D. !. >. ,. @. 0. Tomatoes used in the manufacture of @ein <etchup Administrati)e salaries of e(ecuti)es employed *y 1outhwest Airlines Wages of assem*ly-line wor<ers at a >ord plant :ar<eting e(penditures of the #os Angeles Dodgers *ase*all clu* Commissions paid to Coca-Cola7s salespeople 1traight-line depreciation on manufacturing eCuipment owned *y Dell Computer 1hipping charges incurred *y $ffice Depot on out-going orders 1pea<ers used in 1ony home-theater systems 0nsurance costs related to a :ary Gay Cosmetics7 manufacturing plant

%eCuired" Complete the ta*le that follows and classify each of the costs listed as =1? a product or period cost and =&? a )aria*le or fi(ed cost *y placing an "M" in the appropriate column. 0tem A B C D ! > , @ 0 'roduct or 'eriod Cost 'roduct 'eriod Jaria*le or >i(ed Cost Jaria*le >i(ed

#$" &, 2, ; Type" . Answer" 0tem A B C D ! > , @ 0 'roduct or 'eriod Cost 'roduct 'eriod M M M M M M M M M Jaria*le or >i(ed Cost Jaria*le >i(ed M M M M M M M M M

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Identification of -arious Cost Concepts 92. The following selected costs were e(tracted from the accounting records of #os Angeles :achining =#A:?" 1. &. +. /. 2. 9. 4. ;. 8. Direct materials used in production Wages of machine operators >actory utilities 1ales commissions 1alary of #A:7s president >actory depreciation Wages of plant security guards Ancollecti*le accounts e(pense :achine lu*ricant used in production

%eCuired" By the use of num*ers, identify the costs that would *e used to calculate" A. cost of goods manufactured. B. manufacturing o)erhead. C. total period costs. D. total con)ersion costs. !. total direct costs of #A:7s credit and collections department. >. #A:7s in)entory )aluation. #$" &, 2, 9, 8 Type" . Answer" A. 1, &, +, 9, 4, 8 B. +, 9, 4, 8 C. /, 2, ; D. &, +, 9, 4, 8 !. ; >. 1, &, +, 9, 4, 8

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Cost of .oods Manufactured and Cost of .oods "o*d 99. 'anama :anufacturing had the following data for the period Hust ended" Wor< in process, Fan. 1 Wor< in process, Dec. +1 >inished goods, Fan. 1 >inished goods, Dec. +1 Direct materials used Direct la*or >actory depreciation 1ales Ad)ertising e(pense >actory utilities 0ndirect materials 0ndirect la*or 3 &1,555 /5,555 45,555 91,555 1&9,555 &95,555 ;5,555 8/2,555 2&,555 &4,555 18,555 +2,555

%eCuired" A. Calculate 'anama7s cost of goods manufactured. B. Calculate 'anama7s cost of goods sold. #$" 9 Type" A Answer" A. Direct materials used Direct la*or :anufacturing o)erhead" >actory depreciation >actory utilities 0ndirect materials 0ndirect la*or Total manufacturing costs Add" Wor< in process, Fan. 1 Deduct" Wor< in process, Dec. +1 Cost of goods manufactured B. >inished goods, Fan. 1 Add" Cost of goods manufactured ,oods a)aila*le for sale Deduct" >inished goods, Dec. +1 Cost of goods sold 31&9,555 &95,555 ;5,555 &4,555 18,555 +2,555 32/4,555 &1,555 329;,555 /5,555 32&;,555 3 45,555 2&;,555 328;,555 91,555 32+4,555

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Income/%e*ated Computations 94. @ampton Company had the following in)entory *alances at the *eginning and end of the year" %aw material Wor< in process >inished goods Fanuary 1 3 25,555 1+5,555 &;5,555 Decem*er +1 3 +2,555 145,555 &22,555

During the year, the company purchased 3155,555 of raw material and spent 3+/5,555 on direct la*or. $ther data" manufacturing o)erhead incurred, 3/25,5556 sales, 31,295,5556 selling and administrati)e e(penses, 385,5556 income ta( rate, +5I. %eCuired" A. Calculate cost of goods manufactured. B. Calculate cost of goods sold. C. Determine @ampton7s net income. #$" 9 Type" A Answer" A. Direct materials used" %aw materials, Fan. 1 Add" 'urchases %aw materials a)aila*le for use Deduct" %aw material, Dec. +1 %aw material used Direct la*or :anufacturing o)erhead Total manufacturing costs Add" Wor< in process, Fan. 1 Deduct" Wor< in process, Dec. +1 Cost of goods manufactured B. >inished goods, Fan. 1 Add" Cost of goods manufactured Cost of goods a)aila*le for sale Deduct" >inished goods, Dec. +1 Cost of goods sold 1ales re)enue #ess" Cost of goods sold ,ross margin #ess" 1elling and administrati)e e(penses 0ncome *efore ta(es 0ncome ta( e(pense =32;5,555 ( +5I? .et income

3 25,555 155,555 3125,555 +2,555 3 112,555 +/5,555 /25,555 3 852,555 1+5,555 31,5+2,555 145,555 3 ;92,555 3 &;5,555 ;92,555 31,1/2,555 &22,555 3 ;85,555 31,295,555 ;85,555 3 945,555 85,555 3 2;5,555 14/,555 3 /59,555

C.

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Hilton, Managerial Accounting, Seventh Edition

E*ements of )inancia* "tatements 9;. The following selected information was e(tracted from the &5(+ accounting records of :iami 'roducts" %aw materials used Direct la*or 0ndirect la*or 1elling and administrati)e salaries Building depreciationN $ther selling and administrati)e e(penses $ther factory costs 3&;/,555 14;,555 +2,555 &25,555 ++5,555 ;5,555 9&5,555

N1e)enty percent of the company7s *uilding was de)oted to production acti)ities6 the remaining +5I was used for selling and administrati)e functions. :iami7s *eginning and ending wor<-in-process in)entories amounted to 3+59,555 and 3&/2,555, respecti)ely. The company7s *eginning and ending finished-goods in)entories were 3/25,555 and 3//5,555, respecti)ely. %eCuired" A. Calculate :iami7s manufacturing o)erhead for the year. B. Calculate :iami7s cost of goods manufactured. C. Compute the company7s cost of goods sold. #$" 2, 9 Type" A Answer" A. 0ndirect la*or Building depreciation =3++5,555 ( 45I? $ther factory costs Total B. %aw material used Direct la*or :anufacturing o)erhead Total manufacturing costs Add" Wor< in process, *eg. Deduct" Wor< in process, end. Cost of goods manufactured C. >inished goods, *eg. Add" Cost of goods manufactured Cost of goods a)aila*le for sale Deduct" >inished goods, end. Cost of goods sold 3 +2,555 &+1,555 9&5,555 3 ;;9,555 3 &;/,555 14;,555 ;;9,555 31,+/;,555 +59,555 31,92/,555 &/2,555 31,/58,555 3 /25,555 1,/58,555 31,;28,555 //5,555 31,/18,555

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Income and )inancia*/"chedu*e Ca*cu*ations: 0or1ing Bac12ards 98. The selected amounts that follow were ta<en from Gentuc<y Corporation7s accounting records" %aw material used Direct la*or Total manufacturing costs Wor<-in-process in)entory, 1D1 Cost of goods manufactured Cost of goods a)aila*le for sale >inished-goods in)entory, 1&D+1 1ales re)enue 1elling and administrati)e e(penses 0ncome ta( e(pense %eCuired" Compute the following" A. :anufacturing o)erhead. B. Wor<-in-process in)entory, 1&D+1. C. >inished-goods in)entory, 1D1. D. Cost of goods sold. !. ,ross margin. >. .et income. #$" 9 Type" A Answer" A. Total manufacturing costs #ess" %aw material used Direct la*or :anufacturing o)erhead B. Total manufacturing costs Add" Wor<-in-process in)entory, 1D1 #ess" Cost of goods manufactured Wor<-in-process in)entory, 1&D+1 C. Cost of goods a)aila*le for sale #ess" Cost of goods manufactured >inished-goods in)entory, 1D1 Cost of goods a)aila*le for sale #ess" >inished-goods in)entory, 1&D+1 Cost of goods sold 1ales re)enue #ess" Cost of goods sold ,ross margin 315/,555 3&4,555 +2,555 9&,555 3 /&,555 315/,555 18,555 31&+,555 155,555 3 &+,555 3142,555 155,555 3 42,555 3142,555 95,555 3112,555 3+55,555 112,555 31;2,555 3 &4,555 +2,555 15/,555 18,555 155,555 142,555 95,555 +55,555 1&2,555 1;,555

D.

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Hilton, Managerial Accounting, Seventh Edition

>.

,ross margin #ess" 1elling and administrati)e e(penses 0ncome ta( e(pense .et income

31;2,555 31&2,555 1;,555 1/+,555 3 /&,555

)*o2 of Costs+ Missing -a*ues 45. The :orton Company recorded the following transactions for >e*ruary &5(1" 'urchases Beginning in)entory !nding in)entory Direct materials used Direct la*or :anufacturing o)erhead =includes indirect materials used of 315,555? Transferred to finished goods Cost of goods sold :aterials 3155,555 1;,555 A Wor< in 'rocess 3 ;,555 &5,555 85,555 B 112,555 C D >inished ,oods 3 ! +5,555

1ales were 3295,555, with sales prices determined *y adding a /5I mar<up to the firm7s manufacturing cost. The total cost of direct materials used, direct la*or, and manufacturing o)erhead during the month was 3&;2,555. %eCuired" Calculate the missing )alues. #$" 9 Type" A Answer" "te# A$ Beginning materials Add" 'urchases #ess" Direct materials used #ess" 0ndirect materials used !nding materials "te# %$ Total production costs #ess" Direct materials used #ess" :anufacturing o)erhead Direct la*or "te# C$ Beginning wor< in process Add" Total production costs #ess" !nding wor< in process Transferred to finished goods

3 1;,555 155,555 =85,555? =15,555? 3 1;,555 3 &;2,555 =85,555? =112,555? 3 ;5,555 3 ;,555 &;2,555 =&5,555? 3&4+,555

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"te# &$ 1ales Di)ided *y rate Cost of goods sold "te# E$ !nding finished goods Add" Cost of goods sold #ess" Transferred to finished goods Beginning finished goods )i3ed and -aria4*e Cost Beha,ior

3295,555 1/5I 3/55,555 3 +5,555 /55,555 =&4+,555? 3124,555

41. :ighty :uffler, 0nc., operates an automo*ile ser)ice facility. The ta*le *elow shows the cost incurred during a month when 955 mufflers were replaced. .um*er of :uffler %eplacements 255 955 455 Total costs" >i(ed costs Jaria*le costs Total costs Cost per muffler replacement" >i(ed cost Jaria*le cost Total cost per muffler replacement A B ! , F : 3 ;,/55 9,555 31/,/55 @ G . C D > 0 # $

%eCuired" >ill in the missing amounts, la*eled A through $, in the ta*le. #$" ; Type" A

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Hilton, Managerial Accounting, Seventh Edition

Answer" .um*er of :uffler %eplacements 255 955 455 Total costs" >i(ed costs Jaria*le costs Total costs Cost per muffler replacement" >i(ed cost Jaria*le cost Total cost per muffler replacement 3 ;,/55.55 2,555.55 31+,/55.55 3 3 19.;5 15.55 &9.;5 3 ;,/55.55 9,555.55 31/,/55.55 3 3 1/.55 15.55 &/.55 3 ;,/55.55 4,555.55 312,/55.55 3 3 1&.55 15.55 &&.55

E'planator( note)$ A and C each eCual 3;,/55, since fi(ed costs do not )ary with acti)ity. F, G, and # each eCual 315 =39,555 O 955?, since )aria*le cost per replacement remains constant. B eCuals 32,555 =255 ( 315? D eCuals 34,555 =455 ( 315? , eCuals 319.;5 =3;,/55 O 255? @ eCuals 31/.55 =3;,/55 O 955? 0 eCuals 31&.55 =3;,/55 O 455?

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)i3ed and -aria4*e Cost Beha,ior 4&. ,lo*al 1ystems *egan *usiness on Fanuary 1 of the current year, producing a single product that is popular with home *uilders. Demand was )ery strong, allowing the company to sell its entire manufacturing output of ;5,555 units. The following unit costs were incurred" :anufacturing costs" Direct materials Direct la*or Jaria*le o)erhead >i(ed o)erhead 1elling and administrati)e costs" Jaria*le >i(ed 312 ; 11 9 2 &

,lo*al anticipates an increase in producti)e output to 155,555 units and sales of 82,555 units in the ne(t accounting period. The company uses appropriate dri)ers to determine cost *eha)ior and estimates. %eCuired" A. Assuming that present cost *eha)ior patterns continue, compute the total e(pected costs in the upcoming accounting period. B. ,eorge #e)y is a*out to prepare a graph that shows the unit cost *eha)ior for )aria*le selling and administrati)e cost. 0f the graphLs hori ontal a(is is )olume and the )ertical a(is is dollars, *riefly descri*e what ,eorgeLs graph should loo< li<e. C. Determine whether the following costs are )aria*le or fi(ed in terms of *eha)ior" 1. Kearly lease payments for a state-of-the-art cutting machine. &. A fee paid to a consultant who pro)ided ad)ice a*out Cuality issues. The fee was *ased on the num*er of consulting hours pro)ided. +. Cost of an awards dinner for "star" salespeople. #$" 4, ; Type" A, . Answer" Direct materials =155,555 ( 312? Direct la*or =155,555 ( 3;? Jaria*le o)erhead =155,555 ( 311? >i(ed o)erhead =;5,555 ( 39? Jaria*le selling and administrati)e =82,555 ( 32? >i(ed selling and administrati)e =;5,555 ( 3&? Total costs 31,255,555 ;55,555 1,155,555 /;5,555 /42,555 195,555 3/,212,555

The )aria*le selling and administrati)e costs are constant at 32 per unit. Thus, the graph is a straight, hori ontal line. >i(ed Jaria*le Jaria*le

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Hilton, Managerial Accounting, Seventh Edition

E*ements of )inancia* "tatements+ Cost Beha,ior 4+. GC :anufacturing, which *egan operations on Fanuary 1 of the current year, produces an industrial scraper that sells for 3+&2 per unit. 0nformation related to the current year7s acti)ities follows. .um*er of scrapers produced .um*er of scrapers sold Jaria*le costs per unit" Direct materials Direct la*or :anufacturing o)erhead Annual fi(ed costs" :anufacturing o)erhead 1elling and administrati)e &5,555 14,555 3&2 +2 95 3/55,555 1/5,555

GC carries its finished-goods in)entory at the a)erage unit cost of production. There was no wor< in process at year-end. %eCuired" A. Compute the company7s a)erage unit cost of production. B. Determine the cost of the Decem*er +1 finished-goods in)entory. C. Compute the company7s cost of goods sold. D. 0f ne(t year7s production increases to &+,555 units and general cost *eha)ior patterns do not change, what is the li<ely effect on" 1. The direct-la*or cost of 3+2 per unit? Why? &. The fi(ed manufacturing o)erhead cost of 3/55,555? Why? #$" 2, 9, ; Type" A Answer" A. >i(ed manufacturing o)erhead per unit" 3/55,555 &5,555 scrapers produced P 3&5 A)erage unit manufacturing cost" Direct materials Direct la*or Jaria*le manufacturing o)erhead >i(ed manufacturing o)erhead A)erage unit cost B. 'roduction =units? 1ales =units? !nding finished-goods in)entory =units? +,555 units ( 31/5 P 3/&5,555 3 &2 +2 95 &5 31/5 &5,555 14,555 +,555

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C.

>inished goods, Fan. 1 Add" Cost of goods manufactured =&5,555 units ( 31/5? Cost of goods a)aila*le for sale Deduct" >inished goods, Dec. +1 Cost of goods sold 1. &.

3 --&,;55,555 3&,;55,555 /&5,555 3&,+;5,555

D.

.o change. Direct la*or is a )aria*le cost, and the cost per unit will remain constant. .o change. Despite the increase in the num*er of units produced, this is a fi(ed cost, which remains the same in total.

Economic Characteristics of Costs 4/. The following terms are used to descri*e )arious economic characteristics of costs" $pportunity cost $ut-of-poc<et cost 1un< cost Differential cost :arginal cost A)erage cost

%eCuired" Choose one of the preceding terms to characteri e each of the amounts descri*ed *elow. !ach term may *e used only once. A. The cost of including one e(tra child in a day-care center. B. The cost of merchandise in)entory purchased fi)e years ago. The goods are now o*solete. C. The cost of feeding +55 children in a pu*lic school cafeteria is 3/25 per day, or 31.25 per child per day. What economic term descri*es this 31.25 cost? D. The management of a high-rise office *uilding uses +,555 sCuare feet of space in the *uilding for its own administrati)e functions. This space could *e rented for 3+5,555. What economic term descri*es this 3+5,555 of lost rental re)enue? !. The cost of *uilding an automated assem*ly line in a factory is 3455,5556 a manually operated assem*ly line would cost 3&25,555. What economic term is used to descri*e the 3/25,555 )ariation *etween these two amounts? >. %efer to the preceding Cuestion and assume that the firm is currently *uilding the assem*ly line for 3455,555. What economic term is used to descri*e the 3455,555 construction cost? #$" 15 Type" . Answer" A. :arginal cost B. 1un< cost C. A)erage cost D. $pportunity cost !. Differential cost >. $ut-of-poc<et cost

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Hilton, Managerial Accounting, Seventh Edition

'I"CU""IO# !UE"TIO#" Product Costs and Period Costs 42. :adison Corporation has a single facility that it uses for manufacturing, sales, and administrati)e acti)ities. 1hould the company7s *uilding depreciation charge *e e(pensed in its entirety or is a different accounting procedure appropriate? !(plain. #$" & Type" . Answer" The company7s depreciation charge is, in part, a period cost and, in part, a product cost. The portion that relates to selling and administrati)e acti)ities should *e e(pensed when incurred. 0n contrast, the portion that relates to manufacturing should *e attached to the goods produced, with the costs now in)entoried on the *alance sheet. Product Costs and Period Costs+ Cost )*o2s 49. :anufacturers ha)e esta*lished a cost classification called product costs. Define the term "product cost" and note where these costs appear in the financial statements. Be specific. #$" &, 2 Type" %C Answer" 'roduct costs are costs that relate to the manufacturing process and consist of direct materials, direct la*or, and manufacturing o)erhead. 1imply stated, these are costs incurred to ma<e a product. 'roduct costs are attached to the units produced =i.e., wor< in process? and, thus, in)entoried on the *alance sheet. These costs are later charged to finished goods when the goods are completed. Another transfer occurs when the finished units are sold, with the costs now transferred to cost of goods sold on the income statement. )inancia* "tatements of "er,ice+ %etai*ing+ and Manufacturing )irms 44. The income statements and *alance sheets of ser)ice, retailing, and manufacturing *usinesses tend to differ. %eCuired" A. Which of these *usinesses will disclose a cost-of-goods-sold figure on the income statement? Why? B. Briefly descri*e the difference *etween a retailing firm and manufacturer7s disclosure of in)entories on the *alance sheet. #$" + Type" %C Answer" A. %etailers and manufacturers will disclose a cost-of-goods-sold figure *ecause *oth of these entities sell goods. 1er)ice *usinesses, in contrast, do not gi)en that such firms pro)ide ser)ices.

Chapter 2

B. A retailer will typically disclose in)entories as one-line item entitled merchandise in)entories. :anufacturers, on the other hand, carry three different types of in)entories" raw materials, wor< in process, and finished goods. 'efinition of Cost Terms 4;. Briefly define and discuss the terms in each of the pairs that follow. A. Direct and indirect costs B. Direct materials and indirect materials C. :anufacturing o)erhead and direct la*or #$" 2, 8 Type" %C Answer" A. Direct costs are logically and practically related =i.e., easily tracea*le? to a particular cost o*Hect. An indirect cost, on the other hand, is not. Whether a cost is direct or indirect depends on the cost o*Hect under consideration. A cost may *e easily tracea*le to a company, for e(ample, *ut not easily traced to a department of that firm. B. Direct materials form an integral part of the finished product and, at the same time, are easily traced to that product. 0ndirect materials, which are part of manufacturing o)erhead, generally do not meet these guidelines. .ote, though, that some indirect material may *e easily traced to the product =e.g., fi)e sCuirts of wood glue in a piece of furniture? *ut it may *e too costly to do so. C. :anufacturing o)erhead consists of indirect materials, indirect la*or, plant depreciation, factory utilities, and other factory-related costs. This cost component reflects all manufacturing costs other than direct materials and direct la*or. Direct la*or, in contrast, consists of wages of those employees who wor< directly on the goods in production =machine operators, assem*ly-line wor<ers, and so forth?. Beha,ior of )i3ed and -aria4*e Costs 48. 0n discussing the operation of his automo*ile, a doctor once o*ser)ed that gasoline is a fi(ed cost *ecause the cost per gallon is relati)ely sta*le. 0nsurance, on the other hand, is a )aria*le cost *ecause the cost per mile )aries in)ersely with the num*er of miles dri)en. Comment on the doctor7s o*ser)ation. #$" ; Type" . Answer" The doctor7s o*ser)ations are incorrect, as gasoline is a )aria*le cost and insurance is a fi(ed cost. ,asoline cost will increase with the num*er of miles dri)en, whereas insurance outlays will remain the same. The doctor seems to ha)e confused the "total" perspecti)e, as defined *y accountants, with the notion of per-unit cost *eha)ior.

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Hilton, Managerial Accounting, Seventh Edition

Economic Characteristics of Costs+ %e*e,ance for 'ecisions ;5. Descri*e the economic characteristics of sun< costs and opportunity costs, and e(plain the impact that these costs may ha)e on decisions. #$" 15 Type" %C Answer" 1un< costs ha)e already *een incurred. They are part of history and cannot *e altered. Therefore, sun< costs are not rele)ant for any current or future management decision. $pportunity costs, in contrast, are rele)ant for current and future decisions. 1uch costs are defined as the net *enefits from a decision alternati)e that was not selectedQthat is, the *enefits were sacrificed to pursue another option.

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47