Mountain View College

School of Business & Accountancy

Practice Set

Chapter 2 Cost Concepts and Behavior

Test 1 True or False

Instructions: On the space provided before each number, write true if the statement is correct and false if
the statement is incorrect.

__________1. The cost of an item is the sacrifice made to acquire it.

Answer: True Difficulty: Simple Learning Objective: 1

AACSB: Analytic
__________2. In general, the term expense is used for managerial purposes, while the term cost refers to
external financial reports.

Answer: False Difficulty: Simple Learning Objective: 1

AACSB: Analytic
__________3. Net income will always be lower than operating income.

Answer: False Difficulty: Complex Learning Objective: 2

AACSB: Analytic

__________4.Transportation-in costs increase the total cost of goods purchased.

Answer: True Difficulty: Moderate Learning Objective: 2

AACSB: Analytic

__________5.Period costs are those costs assigned to units of production in the period in which they are
incurred.

Answer: False Difficulty: Complex Learning Objective: 2

AACSB: Analytic

___________6. Manufacturing overhead includes both indirect material costs and indirect labor costs.

Answer: True Difficulty: Simple Learning Objective: 2

AACSB: Analytic

___________7. The cost of shipping goods to customers is considered to be a marketing cost.

Answer: True Difficulty: Simple Learning Objective: 2

AACSB: Analytic

___________8. Total work-in-process during the period is the sum of the beginning work-in-process
inventory and the total manufacturing costs incurred during the period.

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 Answer: True Difficulty: Moderate Learning Objective: 4
AACSB: Analytic

___________9. In highly automated, capital intensive settings, direct labor is often classified as a fixed
cost.

Answer: True Difficulty: Simple Learning Objective: 5

AACSB: Analytic

__________10. Full absorption costs include only direct materials, direct labor, and manufacturing
overhead.

Answer: True Difficulty: Simple Learning Objective: 6

AACSB: Analytic

_________ 11. The primary goal of the cost accounting system is to provide managers with information to
prepare their annual financial statements.

Answer: False Difficulty: Simple Learning Objective: 7

AACSB: Analytic

Test 2 Multiple Choice

Instructions: Read carefully and analyze intelligently the given statements and problems. Show all
necessary computations in good form(if applicable).

1. Which of the following statements is (are) true?

(1). An asset is a cost that will be matched with revenues in a future accounting period.
(2). Opportunity costs are recorded as intangible assets in the current accounting period.

A) Only (1) is true.

B) Only (2) is true.
C) Both (1) and (2) are true.
D) Neither (1) or (2) are true.

Answer: A Difficulty: Simple Learning Objective: 1

AACSB: Analytic

2. Which of the following accounts would be a period cost rather than a product cost?
A) Depreciation on manufacturing machinery.
B) Maintenance on factory machines.
C) Production manager's salary.
D) Direct Labor.
E) Freightout.

Answer: E Difficulty: Moderate Learning Objective: 2

AACSB: Analytic

3. XYZ Company manufactures a single product. The product's prime costs consist of
A) direct material and direct labor.
B) direct material and factory overhead.

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 C) direct labor and factory overhead.
D) direct material, direct labor and factory overhead.
E) direct material, direct labor and variable factory overhead.

Answer: A Difficulty: Simple Learning Objective: 2

AACSB: Analytic

4. Property taxes on factory equipment are an element of

Conversion Cost Period Cost
A) No No
B) No Yes
C) Yes No
D) Yes Yes

Answer: C Difficulty: Complex Learning Objective: 2

AACSB: Analytic

5. A manufacturing company incurs direct labor costs as it transforms direct material into marketable
products. The cost of the direct labor will be treated as a period cost on the income statement when
the resulting:
A) payroll costs are paid.
B) payroll costs are incurred.
C) products are completed.
D) products are sold.

Answer: D Difficulty: Moderate Learning Objective: 4

AACSB: Analytic

6. Direct materials issued to production is found by

A) subtracting ending workinprocess from total work in process during the period.
B) adding beginning direct materials inventory and the delivered cost of direct materials.
C) subtracting ending direct materials from direct materials available for production.
D) adding delivered cost of materials, labor, and manufacturing overhead.
E) subtracting purchases discounts and purchases returns and allowances from purchases of direct
material plus freight-in.

Answer: C Difficulty: Simple Learning Objective: 4

AACSB: Analytic

7. The Work-in-Process Inventory of the Rapid Fabricating Corp. was $3,000 higher on December
31, 2005 than it was on January 1, 2005. This implies that in 2005
A) cost of goods manufactured was higher than cost of goods sold.
B) cost of goods manufactured was less than manufacturing costs.
C) manufacturing costs were higher than cost of goods sold.
D) manufacturing costs were less than cost of goods manufactured.
E) cost of goods manufactured was less than cost of goods sold.

Answer: B Difficulty: Complex Learning Objective: 4

AACSB: Analytic

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 8. How would property taxes paid on a factory building be classified in a manufacturing company?
A) Fixed, period cost.
B) Fixed, product cost.
C) Variable, period cost.
D) Variable, product cost.

Answer: B Difficulty: Moderate Learning Objective: 5

AACSB: Analytic

9. You have been asked to help a student health center determine which costs will vary with the
number of students who come to the health center. The health center employs one doctor, three
nurses, and several other employees. How would you classify (1) the nurse's salary and (2) film
and other materials used in radiology to give X-rays to students?

Film and Other Materials

Nurse’s Salaries Used in Radiology .
A) Fixed cost Fixed cost
B) Fixed cost Variable cost
C) Variable cost Fixed cost
D) Variable cost Variable cost
E) Mixed cost Mixed cost

Answer: B Difficulty: Simple Learning Objective: 5

AACSB: Analytic

11. Given the following information, what is the operating profit for the period?

Revenues $500,000
Marketing Expenses 80,000
Interest Expense 12,000
Administrative Expenses 60,000
Income Taxes 30,000
Extraordinary gain 10,000
Cost of goods sold 225,000

A) $275,000
B) $195,000
C) $135,000
D) $107,000
E) $105,000

Answer: C Difficulty: Moderate Learning Objective: 7

Response: $500,000 - 225,000 - 80,000 - 60,000 = $135,000
AACSB: Analytic

12. Compute the Cost of Goods Sold for 2008 using the following information:

Direct Materials, January 01, 2008 $40,000

Work-in-Process, December 31, 2008 69,000

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 Direct Labor 48,500
Finished Goods, December 31,2008 105,000
Finished Goods, January 01, 2008 128,000
Manufacturing Overhead 72,500
Direct Materials, December 31,2008 43,000
Work-in Process, January 01, 2008 87,000
Purchases of direct material 75,000

A) $244,000
B) $234,000
C) $211,000
D) $198,000
E) $188,000

Answer: B Difficulty: Moderate Learning Objective: 4

Response:
$40,000 + 75,000 - 43,000 = $72,000 (Direct materials used in production)
$87,000 + 72,000 + 48,500 + 72,500 - 69,000 = $211,000 (CoGM)
$128,000 + 211,000 - 105,000 = $234,000

Use the following to answer questions 13-15:

The estimated unit costs for a company to produce and sell a product at a level of 12,000 units per month
are as follows:

Cost Item Estimated

Unit Cost
Direct material $32
Direct labor 20
Variable manufacturing overhead 15
Fixed manufacturing overhead 6
Variable selling expenses 3
Fixed selling expenses 4

13. What are the estimated conversion costs per unit?

A) $35
B) $41
C) $44
D) $48
E) $67

Answer: B Difficulty: Simple Learning Objective: 2

Response: $20 + 15 + 6 = $41
AACSB: Analytic

14. What are the estimated prime costs per unit?

A) $73

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 B) $32
C) $67
D) $52
E) $76

Answer: D Difficulty: Simple Learning Objective: 2

Response: $32 + 20 = $52
AACSB: Analytic

15. What are the estimated variable costs per unit?

A) $70
B) $38
C) $67
D) $52
E) $18

Answer: A Difficulty: Simple Learning Objective: 5

Response: $32 + 20 + 15 + 3 = $70
AACSB: Analytic

16. Calculate the conversion costs from the following information:

Fixed manufacturing overhead $2,000

Variable manufacturing overhead 1,000
Direct materials 2,500
Direct labor 1,500

A) $3,000
B) $4,000
C) $4,500
D) $5,000
E) $7,000

Answer: C Difficulty: Simple Learning Objective: 2

Response:
$1,500 + 1,000 + 2,000 = $4,500
AACSB: Analytic

Use the following to answer questions 17-22:

Each question is based on the production and sale of 2,000 units.

Sales price per unit $ 800 per unit

Fixed costs:
Marketing and administrative $400,000 per period
Manufacturing overhead $200,000 per period
Variable costs:
Marketing and administrative $ 50 per unit
Manufacturing overhead $ 80 per unit
Direct labor $ 100 per unit
Direct materials $ 200 per unit

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17. What is the variable manufacturing cost per unit?
A) $380
B) $430
C) $480
D) $730
E) Some other answer __________.

Answer: A Difficulty: Simple Learning Objective: 6

Response: $200 + 100 + 80 = $380
AACSB: Analytic

18. What is the total manufacturing cost per unit?

A) $380
B) $430
C) $480
D) $730
E) Some other answer __________.

Answer: C Difficulty: Simple Learning Objective: 6

Response: $200 + 100 + 80 + ($200,000/2,000) = $480
AACSB: Analyti

19. What is the full cost per unit of making and selling the product?
A) $430
B) $480
C) $530
D) $730
E) Some other answer __________.

Answer: D Difficulty: Moderate Learning Objective: 6

Response: $200 + 100 + 80 + ($200,000/2,000) + 50 + ($400,000/2,000) = $730
AACSB: Analytic

20. What is the contribution margin per unit?

A) $ 70
B) $320
C) $370
D) $430
E) Some other answer __________.

Answer: C Difficulty: Simple Learning Objective: 7

Response: $800 - 200 - 100 - 80 - 50 = $370
AACSB: Analytic

21. What is the conversion cost per unit?

A) $100

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 B) $180
C) $280
D) $380
E) Some other answer __________.

Answer: C Difficulty: Moderate Learning Objective: 2

Response: $100 + 80 + ($200,000/2,000) = $280
AACSB: Analytic

22. What is the prime cost per unit?

A) $100
B) $280
C) $300
D) $480
E) Some other answer __________.

Answer: C Difficulty: Simple Learning Objective: 2

Response: $200 + 100 = $300
AACSB: Analytic

23. The difference between variable costs and fixed costs is (CMA adapted)
A) Unit variable costs fluctuate and unit fixed costs remain constant.
B) Unit variable costs are fixed over the relevant range and unit fixed costs are variable.
C) Total variable costs are constant over the relevant range, while fixed costs change in the long-
term.
D) Total variable costs are variable over the relevant range but fixed in the long-term, while fixed
costs never change.
E) Unit variable costs change in varying increments, while unit fixed costs change in equal
increments.

Answer: B Difficulty: Moderate Learning Objective: 1

AACSB: Analytic

24. The following cost data for the month of May were taken from the records of the Paducah
Manufacturing Company: (CIA adapted)

Depreciation on factory equipment $1,000

Depreciation on sales office 500
Advertising 7,000
Freight-in (shipping) 3,000
Wages of production workers 28,000
Raw materials used 47,000
Sales salaries and commissions 10,000
Factory rent 2,000
Factory insurance 500
Materials handling 1,500
Administrative salaries 2,000

Based upon this information, the manufacturing cost incurred during the month was:
A) $78,500.
B) $80,000.
C) $80,500.

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 D) $83,000.
E) Some other answer _______________.

Answer: C Difficulty: Moderate Learning Objective: 1

Response: $1,000 + 28,000 + 47,000 + 2,000 + 500 + 1,500 = $80,000
AACSB: Analytic

25. The Southeastern Company's manufacturing costs for the third quarter of 2008 were as follows:
(CPA adapted)

Direct materials and direct labor $700,000

Other variable manufacturing costs 100,000
Depreciation of factory building and manufacturing equipment 80,000
Other fixed manufacturing costs 18,000

What amount should be considered product costs for external reporting purposes?
A) $700,000
B) $800,000
C) $880,000
D) $898,000
E) some other answer _______________

Answer: D Difficulty: Simple Learning Objective: 1

Response: $700,000 + 100,000 + 80,000 + 18,000 = $898,000
AACSB: Analytic

Use the following to answer questions 26-30:

Mukwonago Industries has developed two new products but has only enough plant capacity to introduce
one product during the current year. The following data will assist management in deciding which product
should be selected.

Mukwonago's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries.
Selling and administrative expenses are not allocated to individual products.

Product L Product W

Direct materials $ 44 $36

Machining ($12/hour) 18 15
Assembly ($10/hour) 30 10
Variable overhead ($8/hour) 36 18
Fixed overhead ($4/hour) 18 9
Total Merit cost $146 $88

Estimated selling price per unit $ 170 $ 100

Actual research and development costs $240,000 $175,000
Estimated advertising costs $500,000 $350,000

26. For Mukwonago's Product L, the costs for direct material, machining, and assembly represent

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 A) Conversion costs.
B) Period costs.
C) Prime costs.
D) Common costs.
E) Fixed costs.

Answer: C Difficulty: Simple Learning Objective: 1

AACSB: Analytic

27. The difference between the $100 estimated selling price for Product W and its total unit cost of
$88 represents
A) Contribution margin per unit.
B) Gross margin per unit.
C) Variable cost per unit.
D) Operating profit per unit.
E) Net income per unit.

Answer: B Difficulty: Simple Learning Objective: 1

AACSB: Analytic

28. The total overhead cost of $27 for Mukwonago's Product W is a

A) Sunk cost.
B) Opportunity cost.
C) Variable cost.
D) Mixed cost.
E) Fixed cost.

Answer: D Difficulty: Simple Learning Objective: 1

AACSB: Analytic

29. Research and development costs for Mukwonago's two new products are
A) Prime costs.
B) Conversion costs.
C) Opportunity costs.
D) Sunk costs.
E) Avoidable costs.

Answer: D Difficulty: Simple Learning Objective: 1

AACSB: Analytic

30. The advertising costs for the product selected by Mukwonago will be
A) Prime costs.
B) Conversion costs.
C) Discretionary costs.
D) Opportunity costs.
E) Product costs.

Answer: C Difficulty: Simple Learning Objective: 1

AACSB: Analytic

Test 3 Problem Solving

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Instructions: Carefully analyze the given problems and answer it intelligently as per requirement. Show all
computations in good form.

1. The following information is available for the Cyberspace Consulting Company for the fiscal year
ended December 31, 2008.

Gross margin $170,000

Operating profit $ 65,500
Revenues $809,000
Income tax rate 34%

Required:
(a) Compute the cost of services sold.
(b) Compute the total marketing and administrative costs.
(c) Compute net income.
Difficulty: Simple Learning Objective: 2

Answer:
(a) $809,000 – x = $170,000; x = $639,000
Annual audit and tax return fees
Cafeteria costs for the factory personnel
Direct materials purchased
Travel costs for the company’s president

(b) $170,000 – x = $65,500; x = $104,500

(c) $$65,500 – [(.34($65,500)] = x; x = $43,230
AACSB: Analytic

2. Required:
For each of the following costs incurred in a manufacturing company, indicate whether the costs
are (a) fixed or variable and (b) product costs or period costs.

Cost Item Fixed Variable Product Period

0 X X
1
2
3
4 Depreciation of factory machinery*
5 Property taxes on the factory
6 Insurance premiums on delivery vans
7 Overtime pay for factory custodians
8 Sales commissions
9 Rent paid for corporate jet
10 Transportation-in costs for indirect
material
* Depends on depreciation method used.
Difficulty: Simple Learning Objective: 4,5
Answer:

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 Cost Item Fixed Variable Product Period
1 Cafeteria costs for the factory personnel X X
2 Direct materials purchased X X
3 Travel costs for the company’s president X X
4 Depreciation of factory machinery X X X
5 Property taxes on the factory X X
6 Insurance premiums on delivery vans X X
7 Overtime pay for factory custodians X X
8 Sales commissions X X
9 Rent paid for corporate jet X X
10 Transportation-in costs for indirect X X
material
AACSB: Analytic

3. The following cost and inventory data were taken from the records of the Beca Company for the
year 2008:

Costs incurred:

Depreciation, factory equipment $30,000

Depreciation, office equipment 7,000
Supplies, factory 1,500
Maintenance, factory equipment 20,000
Utilities, factory 8,000
Sales commissions 30,000
Indirect labor 54,500
Rent, factory building 70,000
Purchases of direct materials (net) 124,000
Direct labor cost 80,000
Advertising expense 90,000

Inventories:

January 1, 2008 December

31,2008
Direct Materials $9,000 $11,000
Work in Process 6,000 21,000
Finished goods 69,000 24,000

Required:
(a) Compute the cost of goods manufactured for 2008.
(b) Prepare a cost of goods sold statement for 2008.
Difficulty: Moderate Learning Objective: 3

Answer:
(a.)

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 B e g in n in g w o rk in p ro c e s s in v e n to ry $ 6 ,0 0 0
M a n u fa c tu rin g c o s ts d u rin g th e y e a r:
D ire c t m a te ria ls :
B e g in n in g in v e n to ry $ 9 ,0 0 0
P u rc h a s e s (n e t) 1 2 4 ,0 0 0
D ire c t m a te ria ls a v a ila b le 1 3 3 ,0 0 0
E n d in g in v e n to ry ( 1 1 ,0 0 0 )
D ire c t m a te ria ls p u t in to p ro d u c tio n 1 2 2 ,0 0 0
D ire c t la b o r 8 0 ,0 0 0
M a n u fa c tu rin g o v e rh e a d :
D e p re c ia tio n $ 3 0 ,0 0 0
S u p p lie s 1 ,5 0 0
M a in te n a n c e 2 0 ,0 0 0
U tilitie s 8 ,0 0 0
In d ire c t la b o r 5 4 ,5 0 0
R ent 7 0 ,0 0 0
T o ta l m a n u fa c tu rin g o v e rh e a d 1 8 4 ,0 0 0
T o ta l m a n u fa c tu rin g c o s ts in c u rre d 3 8 6 ,0 0 0
T o ta l w o rk in p ro c e s s d u rin g th e y e a r 3 9 2 ,0 0 0
E n d in g w o rk in p ro c e s s in v e n to ry ( 2 1 ,0 0 0 )
C o s t o f g o o d s m a n u fa c tu re d $ 3 7 1 ,0 0 0

(b)
B e g in n in g fin is h e d g o o d s in v e n to ry $ 6 9 ,0 0 0
C o s t o f g o o d s m a n u fa c tu re d 3 7 1 ,0 0 0
C o s t o f g o o d s a v a ila b le fo r s a le 4 4 0 ,0 0 0
E n d in g fin is h e d g o o d s in v e n to ry ( 2 4 ,0 0 0 )
C o s t o f g o o d s s o ld $ 4 1 6 ,0 0 0
AACSB: Analytic

4. The cost accountant for the Larsen Manufacturing Company has provided you with the following
information for the month of July 2008:

Variable Costs per Unit Total Fixed Costs

Direct labor $27.50
Direct materials $84.75
Manufacturing overhead $14.25 $120,000
Marketing costs $ 5.30 $ 50,000
Administrative costs $ 2.90 $ 75,000

Required: Compute the following per unit items, assuming the company produced 6,000 units and
sold 5,000 units at a price of $210.00 per unit.
(a) Total variable cost
(b) Variable inventoriable cost
(c) Full absorption cost
(d) Full cost
(e) Contribution margin
(f) Gross margin
(g) Profit margin

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 Difficulty: Moderate Learning Objective: 4,5

Answer:
(a) $84.75 + 27.50 + 14.25 + 5.30 + 2.90 = x; x = $134.70
(b) $84.75 + 27.50 + 14.25 = x; x = $126.50
(c) $84.75 + 27.50 + 14.25 = ($120,000/6,000) = x; x = $146.50
(d) $84.75 + 27.50 + 14.25 + 5.30 + 2.90 + [(120,000 + 50,000 + 75,000)/6,000] = x; = $175.53
(e) $210.00 – (84.75 + 27.50 + 14.25 + 5.30 + 2.90) = x; x = $75.30
(f) $210.00 – [84.75 + 27.50 + 14.25 + (120,000/6,000)] x; x = $63.50
(g) $210.00 - $84.75 + 27.50 + 14.25 + 5.30 + 2.90 + [(120,000 + 50,000 + 75,000)/5,000] = x;
x = $30.30

AACSB: Analytic

5. Schuh Enterprises manufactures baseballs and identified the following costs associated with their
manufacturing activity (V = Variable; F = Fixed). The following information is available for the
month of June 2008 when 25,000 baseballs were produced, but only 23,500 baseballs were sold.

Power to run plant equipment (V) $ 25,000

Other selling costs (V) $149,150
Indirect labor (F) $ 50,000
Property taxes on building (F) $ 12,500
Marketing costs (V) $ 30,000
Factory Supervisor salaries (F) $125,000
Direct materials used (V) $500,000
Depreciation on plant equipment (F) $ 68,000
Shipping costs to customer (V) $ 48,800
Indirect material and supplies (V) $ 37,500
Direct labor (V) $250,000
Administrative salaries (F) $300,000
Insurance on factory building (F) $ 62,500
Utilities, factory (V) $ 50,000
General office costs (F) $ 48,000

Required: Compute the following amounts for July 2008, assuming 30,000 baseballs were
produced and sold:
(a) Total manufacturing costs.
(b) Total conversion costs.
(c) Period costs per unit.
(d) Full costs per unit.
Difficulty: Complex Learning Objective: 3,4,5

Answer:
(a) [($500,000 + 250,000 + 25,000 + 37,500 + 50,000)/25,000] = Variable costs per unit
Variable cost per unit = $34.50
($34.50 x 30,000) + (50,000 + 12,500 + 125,000 + 68,000 + 62,500) = Total mfg. costs
Total manufacturing costs = $1,035,000 + 318,000 = $1,353,000

(b) [($250,000 + 25,000 + 37,500 + 50,000)/25,000] = Conversion costs per unit

Conversion costs per unit = $14.50
(14.50 x 30,000) + (50,000 + 12,500 + 125,000 + 68,000 + 62,500) = Total costs

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Total conversion costs = $435,000 + 318,000 = $753,000

(c) ($149,150 + 30,000 + 48,800)/23,500 = Period costs per unit

Period costs per unit = $9.70
($9.70 x 30,000) + (300,000 + 48,000) = Total period costs
Total period costs = $639,000
$639,000/30,000 = Period costs per unit
Period costs per unit = $21.30
(d) ($1,353,000/30,000) + $21.30 = Full costs per unit
Full costs per unit = $66.40
AACSB: Analytic

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