CHAPTER 1—INTRODUCTION TO COST ACCOUNTING

MULTIPLE CHOICE

1. The business entity that converts purchased raw materials into finished goods by using labor,
technology, and facilities is a:
a. Manufacturer.
b. Merchandiser.
c. Service business.
d. Not-for-profit service agency.
ANS: A
The business entity that converts purchased raw materials into finished goods by using labor,
technology, and facilities is a manufacturer.

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic

2. The business entity that purchases finished goods for resale is a:

a. Manufacturer.
b. Merchandiser.
c. Service business.
d. For-profit service business.
ANS: B
The business entity that purchases finished goods for resale is a merchandiser.

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic

3. The type of merchandiser who purchases goods from the producer and sells to stores who sell to the
consumer is a:
a. Manufacturer.
b. Retailer.
c. Wholesaler.
d. Service business.
ANS: C
The type of merchandiser that purchases goods from the producer and sells to the retailer is a
wholesaler.

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic

4. Examples of service businesses include:

a. Airlines, architects, and hair stylists.
b. Department stores, poster shops, and wholesalers.
c. Aircraft producers, home builders, and machine tool makers.
d. None of these are correct.
ANS: A
Examples of service businesses include airlines, architects, and hair stylists.

PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

 NAT: IMA 4 - Business Applications TOP: AACSB - Reflective

5. ISO 9000 is a set of international standards for:

a. determining the selling price of a product.
b. cost control.
c. quality management.
d. planning,
ANS: C
ISO 9000 is a set of international standards for quality management.

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic

6. Unit cost information is important for making all of the following marketing decisions except:
a. Determining the selling price of a product.
b. Bidding on contracts.
c. Determining the amount of advertising needed to promote the product.
d. Determining the amount of profit that each product earns.
ANS: C
Unit cost information is used in determining selling price, bidding on contracts and determining
product profitability, but would not have a bearing on determining how much the product would need
to be advertised.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 3B - Strategic Marketing TOP: AACSB - Analytic

7. The process of establishing objectives or goals for the firm and determining the means by which they
will be met is:
a. controlling.
b. analyzing profitability.
c. planning.
d. assigning responsibility.
ANS: C
The process of establishing goals and objectives for a firm is planning. Controlling, analyzing
profitability and assigning responsibility are functions that take place after the planning process to
determine whether or how successfully goals have been obtained.

PTS: 1 DIF: Easy REF: P. OBJ: 1

NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic

8. Control is the process of monitoring the company’s operations to determine whether the company’s
objectives are being achieved. Effective control is achieved through all of the following except:
a. periodically measuring and comparing company results.
b. assigning responsibility for costs to employees responsible for those costs.
c. constantly monitoring employees to ensure they do exactly as they are told.
d. taking necessary corrective action when variances warrant doing so.
ANS: C
While periodically measuring and comparing company results, assigning responsibility for those
results to employees and taking necessary corrective action are all part of control; it does not include
constantly monitoring employees to make sure they are following directions.
 PTS: 1 DIF: Moderate REF: P. OBJ: 1
NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

9. Aaron Smith is the supervisor of the Machining Department of Bennett Corporation. He has control
over and is responsible for manufacturing costs traced to the department. The Machining Department
is an example of a(n):
a. cost center.
b. inventory center.
c. supervised work center.
d. worker’s center.
ANS: A
The criteria for a cost center are 1) a reasonable basis on which manufacturing costs may be traced and
2) a person who has control over and is accountable for many of the costs charged to that center.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

10. Which of the following items of cost would be least likely to appear on a performance report based on
responsibility accounting for the supervisor of an assembly line in a large manufacturing situation?
a. Direct labor
b. Indirect materials
c. Selling expenses
d. Repairs and maintenance
ANS: C
Selling expenses would be least likely to appear on a performance report, because the supervisor
would not have responsibility for the sales function.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

11. Which of the following items of cost would be least likely to appear on a performance report based on
responsibility accounting for the supervisor of an assembly line in a large manufacturing situation?
a. Direct labor
b. Supervisor's salary
c. Materials
d. Repairs and maintenance
ANS: B
A supervisor's salary would be least likely to appear on a performance report, because that person's
salary is determined by the company and is not controllable by the supervisor.

PTS: 1 DIF: Hard REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

12. Responsibility accounting would most likely hold a manager of a manufacturing unit responsible for:
a. cost of raw materials.
b. quantity of raw materials used.
c. the number of units ordered.
d. amount of taxes incurred.
ANS: B
 In responsibility accounting the manager of a cost center is only responsible for those costs and
activities that manager controls. A manufacturing manager would not likely be responsible for the
cost of the materials (the purchasing manager would have that responsibility), the number of units
ordered (that would be driven by demand) or the taxes incurred.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

13. Which of the following statements best describes a characteristic of a performance report prepared for
use by a production line department head?
a. The costs in the report should include only those controllable by the department head.
b. The report should be stated in dollars rather than in physical units so the department head
knows the financial magnitude of any variances.
c. The report should include information on all costs chargeable to the department, regardless
of their origin or control.
d. It is more important that the report be precise than timely.
ANS: A
The performance report should include only those costs controllable by the department head. It should
also be timely and should include production data as well as dollar amounts.

PTS: 1 DIF: Easy REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

14. Joshua Company prepares monthly performance reports for each department. The budgeted amounts
of wages for the Finishing Department for the month of August and for the eight-month period ended
August 31 were $12,000 and $100,000, respectively. Actual wages paid through July were $91,500,
and wages for the month of August were $11,800. The month and year-to-date variances, respectively,
for wages on the August performance report would be:
a. $200 F; $8,500 F
b. $200 F; $3,300 U
c. $200 U; $3,300 U
d. $200 U; $8,500 F
ANS: B
Calculation of monthly variance:
Budgeted wages for August $12,000
Actual wages for August 11,800
Variance for August $ 200 F

Calculation of year-to-date variance:

Budgeted wages for the eight-month period ended August 31 $100,000
Actual wages for the eight-month period ended August 31 (91,500 + 11,800) 103,300
Variance for eight-month period ended August 31 $ 3,300 U

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

15. As a result of recent accounting scandals involving companies such as Enron and World Com, the
Sarbanes-Oxley Act of 2002 was written to protect shareholders of public companies by improving
a. management accounting.
b. corporate governance.
c. professional competence.
d. the corporate legal process.
 ANS: B
The Sarbanes-Oxley act was written primarily to improve the corporate governance of publicly held
companies.

PTS: 1 DIF: Moderate REF: P. OBJ: 2

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

16. Which of the following is not a key element of the Sarbanes Oxley Act to improve corporate
governance?
a. The establishment of the Public Company Accounting Oversight Board
b. Requiring a company’s annual report to contain an internal control report that includes
management’s opinion on the effectiveness of internal control
c. Severe criminal penalties for retaliation against “whistleblowers”
d. Requiring that the company’s performance reports are prepared in accordance with
generally accepted accounting principles
ANS: D
The Sarbanes-Oxley Act does not require that companies prepare performance reports in accordance
with generally accepted accounting principles.

PTS: 1 DIF: Moderate REF: P. OBJ: 2

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

17. Cost accounting differs from financial accounting in that financial accounting:
a. Is mostly concerned with external financial reporting.
b. Is mostly concerned with individual departments of the company.
c. Provides the additional information required for special reports to management.
d. Puts more emphasis on future operations.
ANS: A
Items (b) through (d) are characteristics of cost accounting, whereas Item (a) is a feature of financial
accounting.

PTS: 1 DIF: Moderate REF: P. OBJ: 3

NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective

18. Taylor Logan is an accountant with the Tanner Corporation. Taylor’s duties include preparing reports
that focus on both historical and estimated data needed to conduct ongoing operations and do long-
range planning. Taylor is a(n)
a. certified financial planner.
b. management accountant.
c. financial accountant.
d. auditor.
ANS: B
A management accountant prepares reports that focus on both historical and estimated data that are
used to conduct ongoing operations and do long-range planning. Financial accountants prepare
financial statements needed by external users to evaluate a business, while auditors conduct
examinations on those financial statements. A certified financial planner is a consultant that helps
individuals with financial planning, including investment advice.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 4 - Business Applications TOP: AACSB - Reflective
19. The following data were taken from Mansfield Merchandisers on January 31:
Merchandise inventory, January 1 $ 90,000
Sales salaries 35,000
Merchandise inventory, January 31 65,000
Purchases 560,000

What was the Cost of goods sold in January?

a. $585,000
b. $650,000
c. $620,000
d. $535,000
ANS: A
Merchandise Inventory, January 1 $ 90,000
Plus Purchases 560,000
Merchandise Available for Sale $650,000
Less Merchandise Inventory, January 31 65,000
Cost of Goods Sold $585,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

20. Umberg Merchandise Company’s cost of goods sold last month was $1,350,000. the Merchandise
Inventory at the beginning of the month was $250,000 and there was $325,000 of Merchandise
Inventory at the end of the month. Umberg’s merchandise purchases were:
a. $1,350,000
b. $1,275,000
c. $1,425,000
d. $1,675,000
ANS: C
Merchandise purchases added to Merchandise Inventory at the beginning of the month results in the
merchandise available for sale. At the end of the month, these goods either remain in Merchandise
Inventory or are sold, which results in Cost of Goods Sold, so the total of ending Merchandise
Inventory and Cost of Goods Sold is also the merchandise available for sale. Therefore, the equation
can be rearranged to compute the merchandise purchases as follows:

Cost of Goods Sold $1,350,000

Plus Ending Merchandise Inventory 325,000
Merchandise Available for Sale 1,675,000
Less Beginning Merchandise Inventory 250,000
Merchandise Purchases $1,425,000

PTS: 1 DIF: Hard REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

21. Ashley Corp. had finished goods inventory of $50,000 and $60,000 at April 1 and April 30,
respectively, and cost of goods manufactured of $175,000 in April. Cost of goods sold in April was:
a. $165,000
b. $175,000
c. $185,000
d. $225,000
ANS: A
 Finished Goods Inventory, April 1 $ 50,000
Plus Cost of Goods Manufactured 175,000
Finished Goods Available for Sale 225,000
Finished Goods Inventory, April 30 60,000
Cost of Goods Sold $165,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

22. The balance in Kayser Manufacturing Company’s Finished Goods account at November 30 was
$825,000. Its November cost of goods manufactured was $2,350,000 and its cost of goods sold in
November was $2,455,000. What was the balance in Kayser’s Finished Goods at November 1?
a. $435,000
b. $640,000
c. $710,000
d. $930,000
ANS: D
Cost of goods manufactured added to Finished Goods at the beginning of the month results in the
finished goods available for sale. At the end of the month, these goods either remain in Finished
Goods or are sold, which results in Cost of Goods Sold, so the total of ending Finished Goods and Cost
of Goods Sold is also the finished goods available for sale. Therefore, the equation can be rearranged
to compute the beginning balance in Finished Goods as follows:

Cost of Goods Sold $2,455,000

Plus Finished Goods Inventory, November 30 825,000
Finished Goods Available for Sale 3,280,000
Less Cost of Goods Manufactured 2,350,000
Finished Goods Inventory, November 1 $ 930,000

PTS: 1 DIF: Hard REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

23. Inventory accounts for a manufacturer include all of the following except:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: A
Inventory accounts for a manufacturer include Materials, Work in Process, and Finished Goods.
Merchandise Inventory is the inventory account for a merchandiser.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

24. For a manufacturer, the total cost of manufactured goods completed but still on hand is:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: B
 Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are
goods completed, but still on hand, while Work in Process are goods which have been started and are
in various stages of production, but are not yet completed. Materials are items which have been
purchased and on hand to be used in the manufacturing process, but have not yet been issued into
production.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

25. For a manufacturer, manufacturing costs incurred to date for goods in various stages of production, but
not yet completed is:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: C
Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are
goods completed, but still on hand, while Work in Process are goods which have been started and are
in various stages of production, but are not yet completed. Materials are items which have been
purchased and on hand to be used in the manufacturing process, but have not yet been issued into
production.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

26. For a manufacturer, the cost of all materials purchases and on hand to be used in the manufacturing
process is:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: D
Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are
goods completed, but still on hand, while Work in Process are goods which have been started and are
in various stages of production, but are not yet completed. Materials are items which have been
purchased and on hand to be used in the manufacturing process, but have not yet been issued into
production.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

27. In the financial statements, Materials should be categorized as:

a. Revenue.
b. Expenses.
c. Assets.
d. Liabilities.
ANS: C
Materials are included in inventory, which is an asset on the balance sheet because it has a future
benefit.

PTS: 1 DIF: Moderate REF: P. OBJ: 3

NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective
28. A(n) __________ requires estimating inventory balances during the year for interim financial
statements and shutting down operations to count all inventory items at the end of the year.
a. periodic inventory system
b. inventory control account
c. perpetual inventory system
d. inventory cost method
ANS: A
A periodic inventory system requires a company to make estimates of inventory balances throughout
the year, and a complete physical count of inventory at the end of the year. A perpetual inventory
system provides a continuous record of purchases, issues and inventory balances. The inventory
balances are verified with periodic counts of selected inventory items throughout the year.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

29. Witt Company, like most manufacturers, maintains a continuous record of purchases, materials issued
into production and balances of all goods in stock, so that inventory valuation data is available at any
time. This is an example of a(n)
a. perpetual inventory system.
b. inventory control account.
c. periodic inventory system.
d. inventory cost method.
ANS: A
A perpetual inventory system maintains a continuous record of purchases, issues and inventory
balances. A periodic inventory system requires a physical count of all inventory at the end of the year
and estimates of inventory balances throughout the year when preparing interim financial statements.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

30. Which of the following is most likely to be considered an indirect material in the manufacture of a
sofa?
a. Lumber
b. Glue
c. Fabric
d. Foam rubber
ANS: B
While glue would be included in the finished product, its cost would be relatively insignificant,
therefore, it would not be cost effective to trace its cost to specific products.

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

31. The Macke Company’s payroll summary showed the following in November:

Sales department salaries $10,000

Supervisor salaries 20,000
Assembly workers’ wages 25,000
Machine operators’ wages 35,000
Maintenance workers’ wages 15,000
Accounting department salaries 5,000
 What is the amount that would be included in direct labor in November?
a. $25,000
b. $60,000
c. $95,000
d. $120,000
ANS: B
Assembly workers and machine operators would be considered direct labor.
Assembly workers’ wages $25,000
Machine operators’ wages 35,000
Total direct labor $60,000

The supervisors and maintenance workers would be included in overhead, while the sales and
accounting department salaries would be included in selling and administrative expense.

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

32. The Macke Company’s payroll summary showed the following in November:

Sales department salaries $10,000

Supervisor salaries 20,000
Assembly workers’ wages 25,000
Machine operators’ wages 35,000
Maintenance workers’ wages 15,000
Accounting department salaries 5,000

What is the amount that would be included in factory overhead in November?

a. $20,000
b. $35,000
c. $95,000
d. $120,000
ANS: B
The supervisors’ salaries and maintenance workers’ wages would be included in factory overhead.
Supervisors’ salaries $20,000
Maintenance workers’ wages 15,000
Total direct labor $35,000

The wages of the assembly workers and machine operators would be included in direct labor, while the
sales and accounting department salaries would be included in selling and administrative expense.

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

33. Factory overhead includes:

a. Indirect labor but not indirect materials.
b. Indirect materials but not indirect labor.
c. All manufacturing costs, except indirect materials and indirect labor.
d. All manufacturing costs, except direct materials and direct labor.
ANS: D
Factory overhead includes all manufacturing costs except direct materials and direct labor.
 PTS: 1 DIF: Easy REF: P. OBJ: 4
NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

34. A typical factory overhead cost is:

a. Freight out.
b. Stationery and printing.
c. Depreciation on machinery and equipment.
d. Postage.
ANS: C
Depreciation on machinery and equipment is a factory overhead cost because it is a manufacturing cost
that is not direct labor or direct material. The other three items are marketing or administrative
expenses.

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

35. Factory overhead would include:

a. Wages of office clerk.
b. Sales manager’s salary.
c. Supervisor’s salary.
d. Tax accountant’s salary.
ANS: C
The supervisor’s salary is considered indirect labor because the supervisor is required for the
manufacturing process, but does not work directly on the units being manufactured. Indirect labor is
included in factory overhead. The office clerk’s wages, sales manager’s salary and tax accountant’s
salary are marketing or administrative costs.

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

36. The term "prime cost" refers to:

a. The sum of direct labor costs and all factory overhead costs.
b. The sum of direct material costs and direct labor costs.
c. All costs associated with manufacturing other than direct labor costs and direct material
costs.
d. Manufacturing costs incurred to produce units of output.
ANS: B
The term "prime cost" refers to the sum of direct materials costs and direct labor costs.

PTS: 1 DIF: Easy REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

37. The following data are from Burton Corporation, a manufacturer, for the month of September:

Direct materials used $135,000

Supervisors’ salaries 6,000
Machine operators’ wages 200,000
Sales office rent and utilities 22,000
Machine depreciation 35,000
Secretary to the Chief Executive Officer salary 3,000
Factory insurance 15,000
 Compute the prime costs.

a. $344,000
b. $135,000
c. $335,000
d. $256,000
ANS: C
Prime costs include direct materials and direct labor. Of the salaries and wages listed, only the wages
of the machine operators would be considered direct labor as they are the only employees listed who
would actually work on the products themselves.

Direct materials used $135,000

Machine operators’ wages 200,000
Total prime costs $335,000

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

38. The term "conversion costs" refers to:

a. The sum of direct labor costs and all factory overhead costs.
b. The sum of direct material costs and direct labor costs.
c. All costs associated with manufacturing other than direct labor costs.
d. Direct labor costs incurred to produce units of output.
ANS: A
The term "conversion costs" refers to the sum of direct labor costs and all factory overhead costs.

PTS: 1 DIF: Easy REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

39. The following data are from Burton Corporation, a manufacturer, for the month of September:

Direct materials used $135,000

Supervisors’ salaries 6,000
Machine operators’ wages 200,000
Sales office rent and utilities 22,000
Machine depreciation 35,000
Secretary to the Chief Executive Officer salary 3,000
Factory insurance 15,000

Compute the conversion costs.

a. $335,000
b. $209,000
c. $281,000
d. $256,000
ANS: D
 Conversion costs include direct labor and factory overhead costs, including indirect labor. Of the
salaries and wages listed, only the machine operators are considered direct labor as they are the only
employees listed who would actually work on the products themselves. The supervisors are
considered factory overhead because their efforts are essential to the manufacturing process, however
they do not actually work on the products themselves. The sales office costs and the salary of the
secretary would be marketing and administrative expenses as they do not contribute to the
manufacturing process.

Machine operators’ wages $200,000

Supervisors’ salaries 6,000
Machine depreciation 35,000
Factory insurance 15,000
Total conversion costs $256,000

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

40. Payroll is debited and Wages Payable is credited to:

a. Pay the payroll taxes.
b. Record the payroll.
c. Pay the payroll.
d. Distribute the payroll.
ANS: B
When the payroll is recorded, Payroll is debited and Wages Payable is credited. When payroll taxes
are paid, the various liability accounts are debited and Cash is credited. When the payroll is paid,
Wages Payable is debited and Cash is credited. When the payroll is distributed, Work in Process,
Factory Overhead, and Selling and Administrative Expenses are debited and Payroll is credited.

PTS: 1 DIF: Moderate REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

41. Which of the following is not a cost that is accumulated in Work in Process?
a. Direct materials
b. Administrative expense
c. Direct labor
d. Factory overhead
ANS: B
Administrative expense is not a manufacturing cost, so it would not be included in Work in Process.

PTS: 1 DIF: Easy REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

42. At a certain level of operations, per unit costs and selling price are as follows: manufacturing costs,
$50; selling and administrative expenses, $10; selling price, $80. Given this information, the mark-on
percentage to manufacturing cost used to determine selling price must have been:
a. 40 percent.
b. 60 percent.
c. 33 percent.
d. 25 percent.
ANS: B

Selling price - Manufacturing costs = Mark-on percentage

 Manufacturing costs

$80 - $50
= 60%
$50

PTS: 1 DIF: Moderate REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

43. Mountain Company produced 20,000 blankets in June to be sold during the holiday season. The
manufacturing costs were:

Direct materials $125,000

Direct labor 55,000
Factory overhead 60,000
Selling expense 25,000
Administrative expense 30,000

The cost per blanket is:

a. $6.25.
b. $9.00.
c. $12.00.
d. $14.75.
ANS: C
Direct materials $125,000
Direct labor 55,000
Factory overhead 60,000
Total manufacturing costs $240,000

$240,000 / 20,000 units = $12.00 cost per unit

PTS: 1 DIF: Moderate REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

44. Mountain Company produced 20,000 blankets in June to be sold during the holiday season. The
manufacturing costs were:

Direct materials $125,000

Direct labor 55,000
Factory overhead 60,000

Management has decided that the mark-on percentage necessary to cover the product’s share of selling
and administrative expenses and to earn a satisfactory profit is 30%. The selling price per blanket
should be:

a. $12.00.
b. $15.60.
c. $23.60.
d. $31.20.
ANS: B
Direct materials $125,000
Direct labor 55,000
 Factory overhead 60,000
Total manufacturing costs $240,000

$240,000 / 20,000 units = $12.00 cost per unit

$12.00 x 30% = $3.60 + $12.00 = $15.60

PTS: 1 DIF: Hard REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

45. The statement of costs of goods manufactured shows:

a. Office supplies used in accounting office.
b. Deprecation of factory building.
c. Salary of sales manager.
d. Rent paid on finished goods warehouse.
ANS: B
The depreciation of the factory building is a cost necessary to manufacture goods. The office supplies,
sales manager’s salary and warehouse rent are marketing and administrative costs and would not be
included in the Statement of Cost of Goods Manufactured.

PTS: 1 DIF: Hard REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

46. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing
Company are presented below:

INVENTORIES
Beginning Ending
Materials $ 90 $ 85
Work in process 50 65
Finished goods 100 90
Other data:
Direct materials used $365
Total manufacturing costs charged to production during
the year (includes direct materials, direct labor, and factory
overhead) 680
Cost of goods available for sale 765
Selling and general expenses 250

Assuming Stanley does not use indirect materials, the cost of materials purchased during the year
amounted to:
a. $455.
b. $450.
c. $365.
d. $360.
ANS: D
Materials purchased added to Materials inventory at the beginning of the month results in the materials
available for use. During the year, the materials are used or they remain in the Materials inventory at
the end of the year, so the total of materials used and ending Materials inventory is also the total of the
amount of materials available. Therefore, the equation can be rearranged to compute the materials
purchases as follows:

Direct materials used $365

 Add ending inventory of materials 85
Materials available during the year $450
Less beginning inventory of materials 90
Purchases of materials during the year $360

PTS: 1 DIF: Hard REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

47. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing
Company are presented below:

INVENTORIES
Beginning Ending
Materials $ 90 $ 85
Work in process 50 65
Finished goods 100 90
Other data:
Direct materials used $365
Total manufacturing costs charged to production during
the year (includes direct materials, direct labor, and factory
overhead) 680
Cost of goods available for sale 765
Selling and general expenses 250

The cost of goods manufactured during the year was:

a. $735.
b. $710.
c. $665.
d. $705.
ANS: C
Beginning work in process inventory $ 50
Add total manufacturing costs during the year 680
Total $730
Less ending work in process inventory 65
Cost of goods manufactured during the year $665

PTS: 1 DIF: Moderate REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

48. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing
Company are presented below:

INVENTORIES
Beginning Ending
Materials $ 90 $ 85
Work in process 50 65
Finished goods 100 90
Other data:
Direct materials used $365
Total manufacturing costs charged to production during
the year (includes direct materials, direct labor, and factory
overhead) 680
Cost of goods available for sale 765
 Selling and general expenses 250

The cost of goods sold during the year was:

a. $730.
b. $775.
c. $675.
d. $765.
ANS: C
Beginning finished goods inventory $100
Add cost of goods manufactured during the year ($680 + $50 - $65) 665
Total cost of goods available for sale $765
Less ending finished goods inventory 90
Cost of goods sold during the year $675

PTS: 1 DIF: Hard REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

49. Which of the following production operations would be most likely to employ a job order system of
cost accounting?
a. Candy manufacturing
b. Crude oil refining
c. Printing text books
d. Flour Milling
ANS: C
Printing would be most likely to employ a job order system of cost accounting due to the number of
custom jobs involved. The manufacture of candy, the vulcanizing of rubber, and the refining of crude
oil would normally be a continuous process of producing like goods and would be accounted for under
the process cost system.

PTS: 1 DIF: Moderate REF: P. OBJ: 6

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

50. A law firm wanting to track the costs of serving different clients may use a:
a. process cost system.
b. job order cost system.
c. cost control system.
d. standard cost system.
ANS: B
Professional firms use job order cost systems to track the costs of serving different clients.

PTS: 1 DIF: Moderate REF: P. OBJ: 6

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

51. When should process costing techniques be used in assigning costs to products?
a. In situations where standard costing techniques should not be used
b. If products manufactured are substantially identical
c. When production is only partially completed during the accounting period
d. If products are manufactured on the basis of each order received
ANS: B
Process costing techniques should be used in assigning costs to products if the product is composed of
mass-produced units that are substantially identical.
 PTS: 1 DIF: Easy REF: P. OBJ: 6
NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

52. An industry that would most likely use process costing procedures is:
a. Beverage.
b. Home Construction.
c. Printing.
d. Shipbuilding.
ANS: A
Beverage production usually consists of continuous output of homogeneous products for which
process costing is used. The other three industries would utilize job order costing because each
product or group of products is made to order.

PTS: 1 DIF: Moderate REF: P. OBJ: 6

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

53. A standard cost system is one:

a. that provides a separate record of cost for each special-order product.
b. that uses predetermined costs to furnish a measurement that helps management make
decisions regarding the efficiency of operations.
c. that accumulates costs for each department or process in the factory.
d. where costs are accumulated on a job cost sheet.
ANS: B
A standard cost system uses predetermined standard costs to furnish a measurement that helps
management make decisions regarding the efficiency of operations.

PTS: 1 DIF: Moderate REF: P. OBJ: 6

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

54. In job order costing, the basic document for accumulating the cost of each job is the:
a. Job cost sheet.
b. Requisition sheet.
c. Purchase order.
d. Invoice.
ANS: A
In job order costing, the basic document to accumulate the cost of each job is the job cost sheet.

PTS: 1 DIF: Easy REF: P. OBJ: 7

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

55. Under a job order cost system of accounting, the entry to distribute payroll to the appropriate accounts
would be:
a. Debit-Payroll
Credit-Wages Payable

b. Debit-Work in Process
Debit-Factory Overhead
Debit-Selling and Administrative Expense
Credit-Payroll

c. Debit-Work in Process
 Debit-Finished Goods
Debit-Cost of Goods Sold
Credit-Payroll

d. Debit-Work in Process
Debit-Factory Overhead
Debit-Selling and Administrative Expense
Credit-Wages Payable

ANS: B
Payroll is credited when the amounts are distributed to the appropriate accounts. Those accounts
include Work in Process for direct labor, Factory Overhead for indirect labor and Selling and
Administrative Expense for salaries and wages incurred outside of the factory.

PTS: 1 DIF: Moderate REF: P. OBJ: 7

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

56. Under a job order system of cost accounting, the dollar amount of the entry to transfer inventory from
Work in Process to Finished Goods is the sum of the costs charged to all jobs:
a. In process during the period.
b. Completed and sold during the period.
c. Completed during the period.
d. Started in process during the period.
ANS: C
When jobs are completed during the period, Finished Goods is debited and Work in Process is credited
for the cost of the completed jobs.

PTS: 1 DIF: Moderate REF: P. OBJ: 7

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

57. Under a job order system of cost accounting, Cost of Goods Sold is debited and Finished Goods is
credited for a:
a. Transfer of materials to the factory.
b. Shipment of completed goods to the customer.
c. Transfer of completed production to the finished goods storeroom.
d. Purchase of goods on account.
ANS: B
When completed goods are shipped to customers, Cost of Goods Sold is debited and Finished Goods is
credited.

PTS: 1 DIF: Easy REF: P. OBJ: 7

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

58. The Institute of Management Accountants (IMA) Statement of Professional Practice includes all of the
following standards except:
a. Confidentiality.
b. Commitment.
c. Integrity.
d. Competence.
ANS: B
The four IMA Professional Standards are: Competence, Confidentiality, Integrity and Credibility.
 PTS: 1 DIF: Easy REF: Appendix OBJ: 2
NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

59. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional
Practice, performing professional duties in accordance with relevant laws, regulations and technical
standards is a component of which standard?
a. Competence
b. Confidentiality
c. Integrity
d. Credibility
ANS: A
Performing technical duties in accordance with relevant laws, regulations and technical standards is a
component of the competence standard.

PTS: 1 DIF: Moderate REF: Appendix OBJ: 2

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

60. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional
Practice, under the Integrity Standard, each member has the responsibility to:
a. Communicate information fairly and objectively.
b. Keep information confidential.
c. Mitigate actual conflicts of interest.
d. Maintain an appropriate level of professional competence.
ANS: C
Under the Integrity Standard, IMA members have the responsibility to mitigate actual conflicts of
interest and avoid apparent conflicts of interest.

PTS: 1 DIF: Moderate REF: Appendix OBJ: 2

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

61. Tom Jones, a management accountant, was faced with an ethical conflict at the office. According to
the Institute of Management Accountants’ Statement of Professional Practice, the first action Tom
should pursue is to:
a. follow his organization’s established policies on the resolution of such conflict.
b. contact the local newspaper.
c. contact the company’s audit committee.
d. consult an attorney.
ANS: A
When faced with ethical issues, one should follow the organization’s established policies on the
resolution of such conflict. If these policies do not resolve the ethical conflict, one should consider
discussing the matter with one’s supervisor or, if it appears he or she is involved, other internal
sources. It is not appropriate to contact parties outside the organization unless it is the authorities if
one believes there is a violation of the law.

PTS: 1 DIF: Moderate REF: Appendix OBJ: 2

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

PROBLEM
1. Prepare a performance report showing both month and year-to-date data for Post Manufacturing’s
Machining Department for February, 2011 using the following data:
January February
Budgeted Data:
Machinists’ wages $6,200 $5,600
Supplies 3,200 3,000
Depreciation 2,000 2,000
Utilities 1,500 1,400

Actual Data:
Machinists’ wages $6,120 $5,650
Supplies 3,300 3,180
Depreciation 2,000 2,000
Utilities 1,580 1,390

ANS:

Post Manufacturing - Machining Department

Performance Report
For Period Ended February 28, 2011

Expense Budget Actual Variance

Year-to- Year-to- Year-to-
February Date February Date February Date
Machinists’ wages $ 5,600 $11,800 $ 5,650 $11,700 $ 50 U $ 100 F
Supplies 3,000 6,200 3,180 6,480 180 U 280 U
Depreciation 2,000 4,000 2,000 4,000 -- --
Utilities 1,400 2,900 1,390 2,970 10 F 70 U
Total $12,000 $24,900 $12,220 $25,150 $ 220 U $ 250 U

PTS: 1 DIF: Hard REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

2. The following data were taken from the general ledger of Data Corp., a retailer of computers and
accessories:

Merchandise Inventory, August 1 $ 323,000

Merchandise Inventory, August 31 296,000
Purchases 1,684,000

Compute the cost of goods sold for the month of August.

ANS:
Merchandise Inventory, August 1 $ 323,000
Plus Purchases 1,684,000
Merchandise Available for Sale 2,007,000
Less Merchandise Inventory, August 31 296,000
Cost of Goods Sold $1,711,000

PTS: 1 DIF: Easy REF: P. OBJ: 2

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
3. The following data were taken from the general ledger and other data of Spargus Manufacturing on
May 31:

Work in Process, May 1 $ 75,000

Finished Goods, May 1 82,000
Materials purchased in May 122,000
Cost of goods manufactured in May 455,000
Marketing and administrative costs in May 64,000
Finished Goods, May 31 78,000
Work in Process, May 31 94,000

Compute the cost of goods sold for Spargus Manufacturing, selecting the appropriate items from the
list provided.

ANS:
Finished Goods Inventory, May 1 $ 82,000
Plus Cost of Goods Manufactured 455,000
Cost of Goods Available for Sale 537,000
Less Finished Goods Inventory, May 31 78,000
Cost of Goods Sold $459,000

PTS: 1 DIF: Moderate REF: P. OBJ: 2

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

4. The following data were taken from Middletown Merchandisers on July 31, for the first month of its
fiscal year:
Merchandise Inventory, July 31 $ 25,000
Purchases 735,000
Cost of Goods Sold 750,000

Compute the inventory at July 1.

ANS:
Cost of Goods Sold $750,000
Plus Merchandise Inventory, July 31 25,000
Equals Cost of Goods Available for Sale $775,000
Less Purchases 735,000
Equals Merchandise Inventory, July 1 $ 40,000

PTS: 1 DIF: Moderate REF: P. OBJ: 3

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

5. Campus Carriers Co. manufactures and sells backpacks to college students. Campus Carriers operates
a factory in Small Town and two stores in College Town and University City. Classify the following
costs incurred by Campus Carriers as Direct Materials, Direct Labor, Factory Overhead or Selling and
Administrative Expense.

a. Rent paid to lease the store in College Town.

b. Canvas fabric.

c. Wages paid to students distributing advertising fliers in University City.

 d. Sewing machine operator’s wages.

e. Building depreciation on the factory building.

f. Thread.

g. The cost of transporting the backpacks from the factory in Small Town to the
University City store.

h. Depreciation of the racks and shelves at the College Town Store.

i. Factory manager’s salary.

j. Security guard at the factory.

k. Store manager’s salary.

l. Electricity to power sewing machines.

m. Electricity to light the College Town store.

ANS:
a. Selling and administrative expense would include costs related to stores.
b. Direct material - canvas would be used to make back packs.
c. Selling and administrative expense would include advertising.
d. Direct labor - sewing machine operators are “touch” labor.
e. Factory overhead - depreciation is a factory expense that cannot be traced directly to the
products.
f. Factory overhead. While thread is included in the final product, the cost is
insignificant and would be accounted for as an indirect cost.
g. Selling and administrative expense. Transportation is incurred outside of the factory.
h. Selling and administrative expense would include costs relating to the stores.
i. Factory overhead - the factory manager’s salary is a factory cost that cannot be traced directly
to products.
j. Factory overhead - the security guard’s salary is a factory cost that cannot be traced directly to
products.
k. Selling and administrative expense would include all costs related to the stores.
l. Factory overhead - electricity to run the machines is a factory cost that cannot be traced
directly to products..
m. Selling and administrative expense would include all costs related to the stores.

PTS: 1 DIF: Moderate REF: P. OBJ: 4

NAT: IMA 2B - Cost Management TOP: AACSB - Reflective

6. The following inventory data relate to the Reta Company:

INVENTORIES
Beginning Ending
Finished goods $80,000 $100,000
Work in process 65,000 70,000
Direct materials 60,000 64,000

Revenues and costs for the period:

 Sales $740,000
Cost of goods available for sale 650,000
Total manufacturing costs 575,000
Factory overhead 154,000
Direct materials used 164,000
Selling and administrative expenses 51,000

Compute the following for the year:

a. Direct materials purchased
b. Direct labor costs incurred
c. Cost of goods sold
d. Gross profit

ANS:
(a)

Direct materials used during the period $164,000

Add inventory of direct materials at the end of the period 64,000
Direct materials available during the period $228,000
Less inventory of direct materials at the beginning of the period 60,000
Direct materials purchased during the period $168,000

(b)

Total manufacturing costs incurred during the period $575,000

Less: Direct materials used $164,000
Factory overhead incurred 154,000 318,000
Direct labor costs incurred during the period $257,000

(c)

Cost of goods available for sale $650,000

Less finished goods inventory at the end of the period 100,000
Cost of goods sold during the period $550,000

(d)

Sales $740,000
Cost of goods sold 550,000
Gross profit $190,000

PTS: 1 DIF: Hard REF: P. OBJ: 4,5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

7. The following inventory data relate to the Reta Company:

INVENTORIES
Beginning Ending
Finished goods $80,000 $100,000
Work in process 65,000 70,000
Direct materials 60,000 64,000

Revenues and costs for the period:

Sales $740,000
Cost of goods available for sale 650,000
Total manufacturing costs 575,000
Factory overhead 154,000
Direct materials used 164,000
Selling and administrative expenses 51,000

Prepare journal entries for the following, making any necessary computations:
a. Purchase of materials on account
b. Issuance of materials into production
c. Transfer the cost of completed work to Finished Goods
d. Record the sale of the goods on account and the related cost of goods sold.

ANS:
(a)

Direct materials used during the period $164,000

Add inventory of direct materials at the end of the period 64,000
Direct materials available during the period $228,000
Less inventory of direct materials at the beginning of the period 60,000
Direct materials purchased during the period $168,000

Materials 168,000
Accounts Payable 168,000

(b)
Work in Process 164,000
Materials 164,000

(c)
Work in Process Inventory, beginning of the period $ 65,000
Plus Total Manufacturing Costs 575,000
$640,000
Less Work in Process Inventory, end of the period 70,000
Cost of Goods Manufactured $570,000

Finished Goods 570,000

Work in Process 570,000

(d)
Finished Goods Inventory, beginning of the period $ 80,000
Plus Cost of Goods Manufactured 570,000
Cost of Goods Available for Sale $650,000
Less Finished Goods Inventory, end of the period 100,000
Cost of Goods Sold $550,000

Accounts Receivable 740,000

Sales 740,000

Cost of Goods Sold 550,000

Finished Goods 550,000
 PTS: 1 DIF: Hard REF: P. OBJ: 4,5
NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

8. Following is a list of costs incurred by the Sitka Products Co. during the month of June:

Direct materials used $12,000 Expired insurance $3,000

Indirect materials used 3,000 Utilities 800
Direct labor employed 20,000 Repairs 700
Indirect labor employed 4,500 Depreciation expense
Selling expenses 6,000 --Machinery and equipment 1,200

Prepare the journal entries necessary to record the issuance of materials, the distribution of labor cost,
the recording of factory overhead, and the entry transferring Factory Overhead to Work in Process.

ANS:

Work in Process (Direct Materials) 12,000

Factory Overhead (Indirect Materials) 3,000
Materials 15,000

Work in Process (Direct Labor) 20,000

Factory Overhead (Indirect Labor) 4,500
Payroll 24,500

Factory Overhead 5,700

Prepaid Insurance 3,000
Accounts Payable (Utilities) 800
Accounts Payable (Repairs) 700
Accumulated Depreciation (Machinery and Equipment) 1,200

Work in Process 13,200

Factory Overhead 13,200

PTS: 1 DIF: Moderate REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

9. The following data was taken from the general ledger and other records of Martinez Manufacturing
Co. at July 31, the end of the first month of operations in the current fiscal year:

Sales $50,000
Materials inventory (July 1) 15,000
Work in process inventory (July 1) 20,000
Finished goods inventory (July 1) 28,000
Materials purchased 21,000
Direct labor cost 12,500
Factory overhead (including $5,000 of indirect materials used and $2,500 of
indirect labor cost) 11,500
Selling and administrative expense 8,000
Inventories at July 31:
Materials 16,000
Work in process 18,000
Finished goods 30,000
 a. Prepare a statement of cost of goods manufactured.
b. Determine the cost of goods sold for the month.

ANS:
(a)

Martinez Manufacturing Co.

Statement of Cost of Goods Manufactured
For the Month Ended July 31, 20--
Direct Materials:
Inventory, July 1 $15,000
Purchases 21,000
Total cost of available materials $36,000
Less inventory, July 31 16,000
Cost of materials used $20,000
Less indirect materials used 5,000
Cost of direct materials used in production $15,000
Direct labor 12,500
Factory overhead:
Indirect materials $ 5,000
Indirect labor 2,500
Other 4,000
Total factory overhead 11,500
Total manufacturing cost $39,000
Add work in process inventory, July 1 20,000
Total $59,000
Less work in process inventory, July 31 18,000
Cost of goods manufactured during the month $41,000

(b)

Finished goods inventory, July 1 $28,000

Add cost of goods manufactured during July 41,000
Goods available for sale $69,000
Less finished goods inventory, July 31 30,000
Cost of goods sold $39,000

PTS: 1 DIF: Moderate REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

10. The following data was taken from the general ledger and other records of Marwick Manufacturing
Co. at January31, the end of the first month of operations in the current fiscal year:

Sales $650,000
Inventories at January 31:
Materials inventory 20,000
Work in process inventory 32,000
Finished goods inventory 54,000
Inventories at January 1:
Materials 25,000
Work in process 29,000
Finished goods 48,000
Materials purchased 154,000
Labor Costs:
Assembly workers’ wages 185,000
Supervisors’ salaries 30,000
Sales personnel salaries 52,000
Depreciation:
Factory building 73,000
Sales office 28,000
Indirect materials used 3,000
Factory utilities 67,000

a. Prepare a statement of cost of goods manufactured.

b. Determine the cost of goods sold for the month.

ANS:
(a)

Marwick Manufacturing Co.

Statement of Cost of Goods Manufactured
For the Month Ended January 31, 20--
Direct Materials:
Inventory, January 1 $25,000
Purchases 154,000
Total cost of available materials $179,000
Less inventory, July 31 20,000
Cost of materials used $159,000
Less indirect materials used 3,000
Cost of direct materials used in production $156,000
Direct labor 185,000
Factory overhead:
Indirect materials $ 3,000
Indirect labor (Supervisors) 30,000
Depreciation 73,000
Utilities 67,000
Total factory overhead 173,000
Total manufacturing cost $514,000
Add work in process inventory, January 1 29,000
Total $543,000
Less work in process inventory, January 31 32,000
Cost of goods manufactured during the month $511,000

(b)

Finished goods inventory, January 1 $48,000

Add cost of goods manufactured during July 511,000
Goods available for sale $559,000
Less finished goods inventory, January 31 54,000
Cost of goods sold $505,000

PTS: 1 DIF: Hard REF: P. OBJ: 5

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
11. Custom Cabinets Inc. manufactures goods on a job order basis. During the month of November, three
jobs were started. (There was no work in process at the beginning of the month.) Jobs 401 and 402
were completed and sold for $14,500 and $19,000, respectively, during the month; Job 403 was still in
process at the end of November.

The following data are taken from the job cost sheets for each job. Factory overhead charges include a
total of $900 of indirect materials and $600 of indirect labor. One work in process control account is
used.

Job 401 Job 402 Job 403

Direct materials $3,200 $3,800 $2,000
Direct labor 2,400 3,500 1,500
Factory overhead 1,250 2,000 850

Prepare a journal entry to record each of the following:

a. Materials used
b. Factory wages and salaries earned
c. Factory Overhead transferred to Work in Process
d. Jobs completed
e. Jobs sold

ANS:
(a)

Work in Process (3,200 + 3,800 + 2,000) 9,000

Factory Overhead 900
Materials 9,900

(b)

Work in Process (2,400 + 3,500 + 1,500) 7,400

Factory Overhead 600
Payroll 8,000

(c)

Work in Process (1,250 + 2,000 + 850) 4,100

Factory Overhead 4,100

(d)

Finished Goods 16,150

Work in Process* 16,150
* Jobs completed:
401 (3,200 + 2,400 + 1,250) $ 6,850
402 (3,800 + 3,500 + 2,000) 9,300
Total $16,150

(e)

Cost of Goods Sold 16,150

Finished Goods 16,150
Accounts Receivable (14,500 + 19,000) 33,500
 Sales 33,500

PTS: 1 DIF: Moderate REF: P. OBJ: 7

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic

12. The Shawshank Manufacturing Co. uses a job order cost system of accounting. The following
information was taken from the books of the company after all posting had been completed at the end
of January:

Jobs Direct Direct Factory Units

Completed Materials Cost Labor Cost Overhead Completed
101 $1,800 $2,000 $1,000 200
102 1,235 1,250 890 150
104 900 850 350 100

a. Prepare the journal entries to allocate the costs of materials, labor, and factory
overhead to each job and to transfer the costs of jobs completed to Finished Goods.
b. Compute the total production cost of each job.
c. Compute the unit cost of each job.
d. Compute the selling price per unit for each job, assuming a mark-on percentage of 40
percent.

ANS:
(a)

Work in Process--Job 101 1,800

Work in Process--Job 102 1,235
Work in Process--Job 104 900
Materials 3,935

Work in Process--Job 101 2,000

Work in Process--Job 102 1,250
Work in Process--Job 104 850
Payroll 4,100

Work in Process--Job 101 1,000

Work in Process--Job 102 890
Work in Process--Job 104 350
Factory Overhead 2,240

Finished Goods 10,275

Work in Process--Job 101 4,800
Work in Process--Job 102 3,375
Work in Process--Job 104 2,100

(b)

Total
Jobs Direct Direct Factory Production
Completed Materials Cost Labor Cost Overhead Cost
101 $1,800 $2,000 $1,000 $4,800
102 1,235 1,250 890 3,375
104 900 850 350 2,100
Total $3,935 $4,100 $2,240 $10,275
(c)

Unit Cost:
Job 101 ($4,800 / 200) $24.00
Job 102 ($3,375 / 150) $22.50
Job 104 ($2,100 / 100) $21.00

(d)

Selling Price Per Unit:

Job 101 ($24.00  40%) + $24.00 $33.60
Job 102 ($22.50  40%) + $22.50 $31.50
Job 104 ($21.00  40%) + $21.00 $29.40

PTS: 1 DIF: Hard REF: P. OBJ: 7

NAT: IMA 2B - Cost Management TOP: AACSB - Analytic