Achievement Test 2: Chapters 3-4 Name ___________________________

Managerial Accounting, 5e Instructor ________________________

Section # _________ Date __________

Part I II III IV V Total

Points 30 10 25 20 15 100

Score

PART I — MULTIPLE CHOICE (30 points)

Instructions: Designate the best answer for each of the following questions.

____ 1. Given the following data, compute equivalent units of production for conversion costs:
Beginning Work in Process—8,000 units, 40% complete
Units Completed and Transferred Out—90,000 units
Ending Work in Process—6,000 units, 20% complete.
a. 88,000
b. 91,200
c. 94,400
d. 96,000

____ 2. When there is beginning work in process, units transferred out can be computed by
subtracting
a. ending work in process units from the units accounted for.
b. ending work in process units from the units started into production.
c. beginning work in process units from the units to be accounted for.
d. beginning work in process units from the units started into production.

____ 3. Given the following data, compute equivalent units of production for materials costs.
Materials are added at the beginning of the process.
Beginning Work in Process—8,000 units, 40% complete
Units Completed and Transferred Out—90,000 units
Ending Work in Process—6,000 units, 20% complete.
a. 88,000
b. 91,200
c. 94,400
d. 96,000
AT2- 2 Test Bank for Managerial Accounting, Fifth Edition

____ 4. Which of the following does not describe a characteristic of process costing?
a. Job cost sheets must pass from one production department to the next on a daily
basis.
b. Once production begins, it continues until the finished product emerges.
c. All units of production receive precisely the same amount of material, labor, and
overhead.
d. Work in process accounts are maintained for each production department.

____ 5. Which of the following is not an important element of JIT (just in time) processing?
a. A company must have dependable suppliers who are willing to deliver on short
notice exact quantities of raw materials according to precise quality specifications.
b. A company must have a multiskilled work force, so that one worker can have the
responsibility to operate and maintain several different types of machines.
c. A process cost accounting system must be in place.
d. A total quality control system must be established throughout the manufacturing
operations.

____ 6. In a JIT cost accounting system,

a. reduced product quality is offset by reduced cost.
b. manufacturing overhead is applied in the traditional manner.
c. Raw Materials and Work in Process Inventory accounts are replaced by Raw and
In-Process Inventory.
d. conversion costs are eliminated.

____ 7. The number of purchase orders would be an appropriate cost driver for
a. inspecting and testing cost.
b. machining cost.
c. ordering and receiving materials cost.
d. supervising cost.

____ 8. All of the following are true about low-volume products except
a. they often require more special handling than high-volume products.
b. the overhead costs incurred by low-volume products are often disproportionate to
a traditional allocation base.
c. they are frequently responsible for more overhead costs per unit than a high-
volume product.
d. direct labor hours is usually a better cost driver for assigning overhead costs to
low-volume products.

____ 9. The primary benefit of activity-based costing is that it leads to

a. more cost pools used to assign overhead costs to products.
b. more accurate product costing.
c. enhanced control over overhead costs.
d. better management decisions.

____ 10. All of the following are value-added activities in a manufacturing operation except
a. assembly.
b. engineering design.
c. inspections.
d. machining.
 Achievement Test 2 AT2- 3

____ 11. ABC costing is an approach for allocating

a. direct materials to products.
b. direct labor to products.
c. manufacturing overhead to products.
d. direct materials and direct labor to products.

____ 12. The first step in activity-based costing is to

a. assign overhead costs for each activity cost pool to products.
b. compute the activity-based overhead rate.
c. identify cost drivers that accurately measure each activity's contribution to the
finished product.
d. identify and classify the major activities involved in the manufacture of specific
products.

PART II — TRUE/FALSE (10 points)

Instructions: Designate whether each of the following statements is true or false by circling the T
or F.

T F 1. The flow of costs is essentially the same in a job order and a process cost system.

T F 2. The method of assigning costs is essentially the same in a job order and a process
cost system.

T F 3. Machine hours are widely used in allocating manufacturing overhead costs in a

process cost system.

T F 4. Manufacturing costs in beginning work in process are ignored in computing the cost
of units transferred out and the cost of ending work in process.

T F 5. A cost reconciliation schedule is prepared to assign total costs to units transferred

out and in ending work in process.

T F 6. Activity-based costing allocates overhead to multiple activity cost pools and assigns
the activity cost pools to products by means of cost drivers.

T F 7. The first step in activity-based costing is to identify the cost driver that has a strong
correlation to the activity pool.

T F 8. An activity-based overhead rate is computed by dividing the estimated overhead

per activity by the number of cost drivers expected to be used per activity.

T F 9. Non-value-added activities are production-related activities that add cost to a

product without increasing its market value.

T F 10. Product-level activities are required to support or sustain an entire production

process.
AT2- 4 Test Bank for Managerial Accounting, Fifth Edition

PART III — PROCESS COSTING (25 points)

Instructions: Using the following data, complete the requirements given below. When you are
given amounts to assume as the answers to previous requirements, be careful to use such
assumed amounts rather than your answers (in order to minimize carry-through errors).

The Finishing Department of Curtis Corporation reports the following for January 2011:

Production: All materials are added at the beginning of the process. Beginning work in process
20,000 units, 60% complete. Units started into production 240,000 units. Ending work in process
10,000 units, 30% complete.

Manufacturing Costs: Beginning work in process, $40,000, comprised of $15,000 of materials and
$25,000 of conversion costs. Materials added $160,000; labor and overhead added $465,000.

(a) Required: Compute equivalent units of production for (1) materials and (2) conversion
costs.
Materials Conversion

(b) Assume your answers to (a) above were 250,000 units for materials and 245,000 for
conversion costs.
Required: Compute the unit costs for the month.

Materials Conversion

(c) Assume your answers to (b) above were $.90 for materials and $2.10 for conversion costs.
Required: Determine the costs to be assigned to the 240,000 units transferred out.

(d) Assume the same unit costs as given in (c) above.

Required: Determine the costs assigned to the 10,000 units in ending work in process.
 Achievement Test 2 AT2- 5

PART IV — ACTIVITY-BASED COSTING (20 points)

Bright Window Company designs and builds custom windows for luxury homes. Most of the
windows are custom made but occasionally the company does mass production on order. Its
budgeted manufacturing overhead costs for the year 2011 are as follows:

Overhead Cost Pools Amount

Purchasing $ 180,000
Production (cutting, milling, finishing) 400,000
Setting up machines 135,000
Inspecting 160,000
Utilities 300,000
Total budget overhead costs $1,175,000

For the last three years, the company has been charging overhead to products on the basis of
machine hours. For the year 2011, 100,000 machine hours are budgeted.

Susan Craft, owner-manager of Bright Window, recently directed her accountant to implement the
activity-based costing system she has repeatedly proposed. At Susan's request, the accountant
and production foreman identify the following cost drivers and their usage for the previously
budgeted overhead cost pools.

Overhead Cost Pools Activity Cost Drivers Total Drivers

Purchasing Number of orders 500
Production (cutting, milling, finishing) Direct labor hours 80,000
Setting up machines Number of setups 1,000
Inspecting Number of inspections 5,000
Utilities Square feet occupied 75,000

During this month, the company received an order for 50 window sets from a housing
development contractor. The accountant prepares cost estimates for producing components for
50 window sets so Susan can submit a contract price per window set to the contractor. The
following data for the production of 50 window sets is accumulated:

Direct materials $120,000

Direct labor $135,000
Machine hours 12,000
Direct labor hours 10,000
Number of purchase orders 50
Number of machine setups 80
Number of inspections 380
Number of square feet occupied 7,000

Instructions
(a) Compute the predetermined overhead rate using traditional costing with machine hours as
the basis.
(b) Compute the manufacturing cost per window set under traditional costing.
(c) Compute the manufacturing cost per window set under the proposed activity-based costing.
AT2- 6 Test Bank for Managerial Accounting, Fifth Edition

PART V — ABC COST DRIVERS (15 points)

Sharpe Corporation manufactures all-terrain vehicles (ATV) in its Columbia, Missouri plant.

Instructions
Identify an appropriate cost driver that may be used to assign each of the following costs to each
line of ATVs. Cost drivers may be used more than once. Cost drivers are listed below.

Cost Drivers
Machine hours
Number of parts
Number of finished vehicles
Engineering hours
Number of setups
Number of employees/direct labor hours
Number of tests
Number of orders
Square footage

Cost Cost Driver

1. Assembling __________________________

2. Engineering __________________________

3. Machining __________________________

4. Ordering and receiving __________________________

5. Painting __________________________

6. Machine setup __________________________

7. Storing __________________________

8. Supervising __________________________

9. Packing and shipping __________________________

10. Inspecting and testing __________________________

 Achievement Test 2 AT2- 7

Solutions — Achievement Test 2: Chapters 3-4

PART I — MULTIPLE CHOICE (30 points)

1. b 5. c 9. b
2. a 6. c 10. c
3. d 7. c 11. c
4. a 8. a 12. d

PART II — TRUE/FALSE (10 points)

1. T 6. T
2. F 7. F
3. T 8. T
4. F 9. T
5. T 10. F

PART III — PROCESS COSTING (25 points)

(a) Materials (Units) Conversion (Units)

250,000 250,000
+ 10,000 + 3,000
260,000 253,000

(b) Materials Conversion

$175,000 $490,000
—————— = $.70 —————— = $2.00
250,000 units 245,000 units

(c) $720,000 ($.90 + $2.10) × 240,000

(d) $ 9,000 ($.90 × 10,000)

6,300 ($2.10 × 10,000 × .30)
$15,300

PART IV — ACTIVITY-BASED COSTING (20 points)

(a) Predetermined overhead rate using machine hours:

$1,175,000 ÷ 100,000 hours = $11.75 per machine hour

(b) Manufacturing cost per window set under traditional costing:

Direct materials $120,000
Direct labor 135,000
Overhead (12,000 × $11.75) 141,000
Total cost of 50 window sets $396,000

Cost per window set ($396,000 ÷ 50) $7,920

AT2- 8 Test Bank for Managerial Accounting, Fifth Edition

(c) Manufacturing cost per window set under activity-based costing:

Computation of Activity-Based Overhead Rate

Estimated Total Activity-Based

Activity Cost Pool Overhead ÷ Estimated Drivers = Overhead Rate
Purchasing $ 180,000 500 orders $360 per order
Production 400,000 80,000 D/L hrs. $5 per D/L hr.
Setting up machines 135,000 1,000 setups $135 per setup
Inspecting 160,000 5,000 inspections $32 per inspection
Utilities 300,000 75,000 sq. ft. $4 per sq. ft.
$1,175,000

Assignment of Overhead to Order of 50 Window Sets

Expected Activity-Based
Activity Cost Pool Use of Driver Overhead Rate Cost Assigned
Purchasing 50 orders $360 $ 18,000
Production 10,000 D/L hrs. $5 50,000
Setting up machines 80 setups $135 10,800
Inspecting 380 inspections $32 12,160
Utilities 7,000 sq. ft. $4 28,000
$118,960

Total manufacturing cost per window set under ABC:

Direct materials $120,000
Direct labor 135,000
Overhead 118,960
Total cost of 50 window sets $373,960

Total cost per window set: ($373,960 ÷ 50) $7,479.20

PART V — ABC COST DRIVERS (15 points)

1. Number of parts 6. Number of setups

2. Engineering hours 7. Square footage
3. Machine hours 8. Number of employees/direct labor hours
4. Number of orders 9. Number of finished vehicles
5. Number of parts 10. Number of tests