Chapter 2

Cost Terms, Concepts, and Classifications

True/False

1. All costs incurred in a merchandising firm are considered to be period costs.

F
Easy

2. Depreciation is always considered a product cost for external financial reporting purposes in a
F manufacturing firm.
Medium

3. In external financial reports, factory utilities costs may be included in an asset account on the
T balance sheet at the end of the period.
Medium

4. Advertising costs are considered product costs for external financial reports since they are
F incurred in order to promote specific products.
Medium

5. Property taxes and insurance premiums paid on a factory building are examples of
T manufacturing overhead.
Easy

6. Manufacturing overhead combined with direct materials is known as conversion cost.

F
Easy

7. If the ending inventory of finished goods is understated, net income will be overstated.
F
Medium

8. In a manufacturing company, goods available for sale equals the sum of the cost of goods
T manufactured and the beginning finished goods inventory.
Medium

9. Variable costs are costs whose per unit costs vary as the activity level rises and falls.
F
Easy

10. On a per unit basis, a fixed cost varies inversely with the level of activity.
T
Easy

11. The following would typically be considered indirect costs of manufacturing a particular
F Boeing 747 to be delivered to Singapore Airlines: electricity to run production equipment, the
Easy factory manager's salary, and the cost of the General Electric jet engines installed on the
aircraft.

Managerial Accounting, 9/e 11

12. The following costs should be considered direct costs of providing delivery room services to a
F particular mother and her baby: the costs of drugs administered in the operating room, the
Hard attending physician's fees, and a portion of the liability insurance carried by the hospital to
cover the delivery room.

13. The following costs should be considered by a law firm to be indirect costs of defending a
T particular client in court: rent on the law firm's offices, the law firm's receptionist's wages, the
Hard costs of heating the law firm's offices, and the depreciation on the personal computer in the
office of the attorney who has been assigned the client.

14. A cost that differs from one month to another is known as a differential cost.
F
Easy

15. (Appendix) Some companies classify labor fringe benefits for direct labor workers as part of the
T direct labor cost and some classify these costs as manufacturing overhead.
Easy

Multiple Choice

16. The corporate controller’s salary would be considered a(n):

C a. manufacturing cost.
Easy b. product cost.
c. administrative cost.
d. selling expense.

17. The cost of fire insurance for a manufacturing plant is generally considered to be a:
A a. product cost.
Medium b. period cost.
c. variable cost.
d. all of the above.

18. The cost of rent for a manufacturing plant is generally considered to be a:

A
Medium Prime cost Product cost
CPA adapted a. No Yes
b. No No
c. Yes No
d. Yes Yes

19. Each of the following would be a period cost except:

C a. the salary of the company president's secretary.
Easy b. the cost of a general accounting office.
c. depreciation of a machine used in manufacturing.
d. sales commissions.

20. For a manufacturing company, which of the following is an example of a period rather than a
B product cost?
Easy a. Depreciation of factory equipment.
CPA adapted b. Wages of salespersons.
c. Wages of machine operators.
d. Insurance on factory equipment.

21. Which of the following would be considered a product cost for external financial reporting
D purposes?

Managerial Accounting, 9/e 12

Medium a. Cost of a warehouse used to store finished goods.
b. Cost of guided public tours through the company's facilities.
c. Cost of travel necessary to sell the manufactured product.
d. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

22. Which of the following would NOT be treated as a product cost for external financial reporting
D purposes?
Easy a. Depreciation on a factory building.
b. Salaries of factory workers.
c. Indirect labor in the factory.
d. Advertising expenses.

23. Transportation costs incurred by a manufacturing company to ship its product to its customers
C would be classified as which of the following?
Easy a. Product cost
b. Manufacturing overhead
c. Period cost
d. Administrative cost

24. The salary of the president of a manufacturing company would be classified as which of the
B following?
Easy a. Product cost
b. Period cost
c. Manufacturing overhead
d. Direct labor

25. Micro Computer Company has set up a toll-free telephone line for customer inquiries regarding
D computer hardware produced by the company. The cost of this toll-free line would be classified
Easy as which of the following?
a. Product cost
b. Manufacturing overhead
c. Direct labor
d. Period cost

26. The wages of factory maintenance personnel would usually be considered to be:
C
Medium Indirect labor Manufacturing overhead
a. No Yes
b. Yes No
c. Yes Yes
d. No No

27. Direct materials are a part of:

C
Medium Conversion cost Manufacturing cost Prime cost
CPA adapted a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
d. No No No

28. Manufacturing overhead consists of:

B a. all manufacturing costs.
Medium b. all manufacturing costs, except direct materials and direct labor.
CPA adapted c. indirect materials but not indirect labor.
d. indirect labor but not indirect materials.

Managerial Accounting, 9/e 13

29. Which of the following should NOT be included as part of manufacturing overhead at a
A company that makes office furniture?
Medium a. sheet steel in a file cabinet made by the company.
b. manufacturing equipment depreciation.
c. idle time for direct labor.
d. taxes on a factory building.

30. Rossiter Company failed to record a credit sale at the end of the year, although the reduction in
D finished goods inventories was correctly recorded when the goods were shipped to the
Hard customer. Which one of the following statements is correct?
CMA adapted a. Accounts receivable was not affected, inventory was not affected, sales were understated,
and cost of goods sold was understated.
b. Accounts receivable was understated, inventory was overstated, sales were understated, and
cost of goods sold was overstated.
c. Accounts receivable was not affected, inventory was understated, sales were understated,
and cost of goods sold was understated.
d. Accounts receivable was understated, inventory was not affected, sales were understated,
and cost of goods sold was not affected.

31. If the cost of goods sold is greater than the cost of goods manufactured, then:
D a. work in process inventory has decreased during the period.
Hard b. finished goods inventory has increased during the period.
c. total manufacturing costs must be greater than cost of goods manufactured.
d. finished goods inventory has decreased during the period.

32. Last month, when 10,000 units of a product were manufactured, the cost per unit was $60. At
D this level of activity, variable costs are 50% of total unit costs. If 10,500 units are
Medium manufactured next month and cost behavior patterns remain unchanged the:
a. total variable cost will remain unchanged.
b. fixed costs will increase in total.
c. variable cost per unit will increase.
d. total cost per unit will decrease.

33. Variable cost:

B a. increases on a per unit basis as the number of units produced increases.
Easy b. remains constant on a per unit basis as the number of units produced increases.
c. remains the same in total as production increases.
d. decreases on a per unit basis as the number of units produced increases.

34. Within the relevant range, the difference between variable costs and fixed costs is:
B a. variable costs per unit fluctuate and fixed costs per unit remain constant.
Medium b. variable costs per unit are constant and fixed costs per unit fluctuate.
c. both total variable costs and total fixed costs are constant.
d. both total variable costs and total fixed costs fluctuate.

35. Which of the following statements regarding fixed costs is incorrect?

A a. Expressing fixed costs on a per unit basis usually is the best approach for decision making.
Medium b. Fixed costs expressed on a per unit basis will react inversely with changes in activity.
c. Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept
of the relevant range.
d. Fixed costs frequently represent long-term investments in property, plant, and equipment.

Managerial Accounting, 9/e 14

36. An opportunity cost is:
B a. the difference in total costs which results from selecting one alternative instead of another.
Easy b. the benefit forgone by selecting one alternative instead of another.
c. a cost which may be saved by not adopting an alternative.
d. a cost which may be shifted to the future with little or no effect on current operations.

37. The term differential cost refers to:

A a. a difference in cost which results from selecting one alternative instead of another.
Medium b. the benefit forgone by selecting one alternative instead of another.
c. a cost which does not entail any dollar outlay but which is relevant to the decision-making
process.
d. a cost which continues to be incurred even though there is no activity.

38. Which of the following costs is often important in decision making, but is omitted from
C conventional accounting records?
Easy a. Fixed cost.
b. Sunk cost.
c. Opportunity cost.
d. Indirect cost.

39. When a decision is made among a number of alternatives, the benefit that is lost by choosing
B one alternative over another is the:
Easy a. realized cost.
CMA adapted b. opportunity cost.
c. conversion cost.
d. accrued cost.

40. Conversion cost consists of which of the following?

D a. Manufacturing overhead cost.
Easy b. Direct materials and direct labor cost.
c. Direct labor cost.
d. Direct labor and manufacturing overhead cost.

41. Prime cost consists of direct materials combined with:

A a. direct labor.
Easy b. manufacturing overhead.
c. indirect materials.
d. cost of goods manufactured.

42. Which one of the following costs should NOT be considered a direct cost of serving a
C particular customer who orders a customized personal computer by phone directly from the
Hard manufacturer?
a. the cost of the hard disk drive installed in the computer.
b. the cost of shipping the computer to the customer.
c. the cost of leasing a machine on a monthly basis that automatically tests hard disk drives
before they are installed in computers.
d. the cost of packaging the computer for shipment.

43. Which one of the following costs should NOT be considered an indirect cost of serving a
A particular customer at a Dairy Queen fast food outlet?
Medium a. the cost of the hamburger patty in the burger they ordered.
b. the wages of the employee who takes the customer's order.
c. the cost of heating and lighting the kitchen.
d. the salary of the outlet's manager.

Managerial Accounting, 9/e 15

44. Green Company's costs for the month of August were as follows: direct materials, $27,000;
D direct labor, $34,000; sales salaries, $14,000; indirect labor, $10,000; indirect materials,
Medium $15,000; general corporate administrative cost, $12,000; taxes on manufacturing facility,
$2,000; and rent on factory, $17,000. The beginning work in process inventory was $16,000
and the ending work in process inventory was $9,000. What was the cost of goods
manufactured for the month?
a. $105,000
b. $132,000
c. $138,000
d. $112,000

45. A manufacturing company prepays its insurance coverage for a three-year period. The premium
D for the three years is $2,700 and is paid at the beginning of the first year. Eighty percent of the
Medium premium applies to manufacturing operations and 20% applies to selling and administrative
activities. What amounts should be considered product and period costs respectively for the first
year of coverage?

Product Period
a. $2,700 $ 0
b. $2,160 $ 540
c. $1,440 $ 360
d. $ 720 $ 180

46. Using the following data, calculate the beginning work in process inventory.
D
Hard Cost of goods sold .......... $70
Direct labor ................ $20
Direct materials ............ $15
Cost of goods manufactured .. $80
Work in process ending ...... $10
Finished goods ending ....... $15
Manufacturing overhead ...... $30

The beginning work in process inventory is:

a. $20.
b. $15.
c. $55.
d. $25.

47. During the month of May, Bennett Manufacturing Company purchased $43,000 of raw
A materials. The manufacturing overhead totaled $27,000 and the total manufacturing costs were
Hard $106,000. Assuming a beginning inventory of raw materials of $8,000 and an ending inventory
of raw materials of $6,000, direct labor must have totaled:
a. $34,000.
b. $38,000.
c. $36,000.
d. $45,000.

Managerial Accounting, 9/e 16

48. Using the following data for January, calculate the cost of goods manufactured:
B
Medium Direct materials ....................... $38,000
Direct labor ........................... $24,000
Manufacturing overhead ................. $17,000
Beginning work in process inventory .... $10,000
Ending work in process inventory ....... $11,000

The cost of goods manufactured was:

a. $89,000.
b. $78,000.
c. $79,000.
d. $80,000.

Managerial Accounting, 9/e 17

49. During the month of June, Reardon Company incurred $17,000 of direct labor, $8,500 of
C manufacturing overhead and purchased $15,000 of raw materials. Between the beginning and
Hard the end of the month, the raw materials inventory increased by $2,000, the finished goods
inventory increased by $1,500, and the work in process inventory decreased by $3,000. The
cost of goods manufactured would be:
a. $38,500.
b. $40,500.
c. $41,500.
d. $43,500.

50. Mueller Company reported the following data for the year just ended:
B
Hard Raw materials used in production ......... $ 800,000
Direct labor ............................. 700,000
Total overhead costs ..................... 900,000
Ending work in process inventory ......... 400,000
Cost of goods manufactured ............... 2,500,000

The beginning work in process inventory was:

a. $300,000.
b. $500,000.
c. $1,300,000.
d. $100,000.

51. Williams Company’s direct labor cost is 25% of its conversion cost. If the Manufacturing
A overhead cost for the last period was $45,000 and the direct materials cost was $25,000, the
Hard direct labor cost was:
a. $15,000.
b. $60,000.
c. $33,333.
d. $20,000.

52. The Lyons Company's cost of goods manufactured was $120,000 when its sales were $360,000
B and its gross margin was $220,000. If the ending inventory of finished goods was $30,000, the
Hard beginning inventory of finished goods must have been:
a. $ 20,000.
b. $ 50,000.
c. $110,000.
d. $150,000.

53. The gross margin for Cushing Company for the first quarter of last year was $325,000 when
C sales were $700,000. The beginning inventory of finished goods was $60,000 and the ending
Hard inventory of finished goods was $85,000. The cost of goods manufactured for the first quarter
would have been:
a. $375,000.
b. $350,000.
c. $400,000.
d. $385,000.

54. Last month a manufacturing company had the following operating results:
B
Hard Beginning finished goods inventory ..... $ 74,000
Ending finished goods inventory ........ $ 73,000
Sales .................................. $464,000

Managerial Accounting, 9/e 18

 Gross margin ........................... $ 52,000

What was the cost of goods manufactured for the month?

a. $413,000
b. $411,000
c. $412,000
d. $463,000

55. The following information was provided by Wilson Company for the year just ended:
A
Hard Beginning finished goods inventory ... $150,750
Ending finished goods inventory ...... 140,475
Sales ................................ 475,000
Gross margin ......................... 150,000

The cost of goods manufactured for the year was:

a. $314,725.
b. $335,275.
c. $325,000.
d. $335,275.

56. The following information was provided by Grand Company for the year just ended:
A
Hard Beginning finished goods inventory ..... $130,425
Ending finished goods inventory ........ 125,770
Sales .................................. 500,000
Gross margin ........................... 100,000

The cost of goods manufactured for the year was:

a. $395,345.
b. $95,345.
c. $104,655.
d. $404,655.

57. The following inventory valuation errors were discovered by Knox Corporation's new
B controller just after the annual financial statements were published at the end of Year 3.
Hard
CMA adapted > The Year 3 ending inventory was understated by $17,000.
> The Year 2 ending inventory was understated by $61,000.
> The Year 1 ending inventory was overstated by $23,000.

The net income for Knox in each of these years was:

Year 3 Year 2 Year 1

Net income $168,000 $254,000 $138,000

Assuming there were no income taxes, the net income in each year should be adjusted to:

Year 3 Year 2 Year 1

a. $212,000 $170,000 $161,000
b. $124,000 $338,000 $115,000
c. $ 90,000 $338,000 $161,000
d. $124,000 $170,000 $115,000

58. Delta Merchandising, Inc., has provided the following information for the year just ended:

Managerial Accounting, 9/e 19

C
Hard Net sales .................. $128,500
Beginning inventory ........ 24,000
Purchases .................. 80,000
Gross margin ............... 38,550

The ending inventory for the company at year end was:

a. $65,450.
b. $24,500.
c. $14,050.
d. $9,950.

59. The beginning balance of the Raw Materials inventory account for May was $27,500. The
C ending balance for May was $28,750 and $128,900 of raw materials were used during the
Medium month. The materials purchased during the month cost:
CMA adapted a. $131,300.
b. $127,650.
c. $130,150.
d. $157,650.

60. Gabel Inc. is a merchandising company. Last month the company's merchandise purchases
D totaled $63,000. The company's beginning merchandise inventory was $13,000 and its ending
Easy merchandise inventory was $15,000. What was the company's cost of goods sold for the
month?
a. $91,000
b. $63,000
c. $65,000
d. $61,000

61. Haack Inc. is a merchandising company. Last month the company's cost of goods sold was
B $84,000. The company's beginning merchandise inventory was $20,000 and its ending
Medium merchandise inventory was $18,000. What was the total amount of the company's merchandise
purchases for the month?
a. $86,000
b. $82,000
c. $84,000
d. $122,000

62. During January, the cost of goods manufactured was $93,000. The beginning finished goods
B inventory was $16,000 and the ending finished goods inventory was $20,000. What was the
Easy cost of goods sold for the month?
a. $129,000
b. $89,000
c. $93,000
d. $97,000

63. (Appendix) Sally Smith is employed in the production of various electronic products, and
B earns $8 per hour. She is paid time-and-a-half for work in excess of 40 hours per week. During
Medium a given week she worked 45 hours and had no idle time. How much of her week's wages
would be charged to manufacturing overhead?
a. $60
b. $20
c. $40
d. $0

Managerial Accounting, 9/e 20

64. (Appendix) During the first week of April, Gillian worked a total of 50 hours assembling
C products and had no idle time. Gillian is paid $15 per hour for regular time, and is paid time-
Medium and-a-half for all hours in excess of a 40 hour week. The amount of Gillian's wages that should
be charged to direct labor for the week is:
a. $600.
b. $225.
c. $750.
d. $975.

65. (Appendix) Robert Smith earns $6 per hour assembling products. For each hour over 40 he
C works, he is paid time-and-a-half. During a given week he worked 45 hours and had no idle
Medium time. How much of his weekly wages would be charged to the manufacturing overhead
account?
a. $30
b. $45
c. $15
d. $0

Reference: 2-1
NOTE TO THE INSTRUCTOR: Questions 66 to 69, 70 to 73, and 74 to 77 are different versions of the same
question.
The following data (in thousands of dollars) have been taken from the accounting records of Karling Corporation
for the just completed year.

Sales ................................... $990

Raw materials inventory, beginning ...... $ 40
Raw materials inventory, ending ......... $ 70
Purchases of raw materials .............. $120
Direct labor ............................ $200
Manufacturing overhead .................. $230
Administrative expenses ................. $150
Selling expenses ........................ $140
Work in process inventory, beginning .... $ 70
Work in process inventory, ending ....... $ 50
Finished goods inventory, beginning ..... $120
Finished goods inventory, ending ........ $160

Use these data to answer the following series of questions.

66. The cost of the raw materials used in production during the year (in thousands of dollars) was:
B a. $190.
Medium b. $90.
Refer To: 2-1 c. $150.
d. $160.

67. The cost of goods manufactured (finished) for the year (in thousands of dollars) was:
A a. $540.
Medium b. $500.
Refer To: 2-1 c. $570.
d. $590.

68. The cost of goods sold for the year (in thousands of dollars) was:
B a. $700.
Medium b. $500.
Refer To: 2-1 c. $660.

Managerial Accounting, 9/e 21

 d. $580.

69. The net income for the year (in thousands of dollars) was:
B a. $150.
Medium b. $200.
Refer To: 2-1 c. $490.
d. $250.

Reference: 2-2
NOTE TO THE INSTRUCTOR: Questions 66 to 69, 70 to 73, and 74 to 77 are different versions of the same
question.
The following data (in thousands of dollars) have been taken from the accounting records of Karlana Corporation
for the just completed year.

Sales ................................... $910

Raw materials inventory, beginning ...... $ 80
Raw materials inventory, ending ......... $ 20
Purchases of raw materials .............. $100
Direct labor ............................ $130
Manufacturing overhead .................. $200
Administrative expenses ................. $160
Selling expenses ........................ $140
Work in process inventory, beginning .... $ 40
Work in process inventory, ending ....... $ 10
Finished goods inventory, beginning ..... $130
Finished goods inventory, ending ........ $150

Use these data to answer the following series of questions.

70. The cost of the raw materials used in production during the year (in thousands of dollars) was:
D a. $180.
Medium b. $40.
Refer To: 2-2 c. $120.
d. $160.

71. The cost of goods manufactured (finished) for the year (in thousands of dollars) was:
B a. $530.
Medium b. $520.
Refer To: 2-2 c. $500.
d. $460.

72. The cost of goods sold for the year (in thousands of dollars) was:
B a. $670.
Medium b. $500.
Refer To: 2-2 c. $540.
d. $650.

73. The net income for the year (in thousands of dollars) was:
B a. $410.
Medium b. $110.
Refer To: 2-2 c. $40.
d. $180.

Managerial Accounting, 9/e 22

Reference: 2-3
NOTE TO THE INSTRUCTOR: Questions 66 to 69, 70 to 73, and 74 to 77 are different versions of the same
question.
The following data (in thousands of dollars) have been taken from the accounting records of Karlist Corporation
for the just completed year.

Sales ................................... $800

Raw materials inventory, beginning ...... $ 60
Raw materials inventory, ending ......... $ 70
Purchases of raw materials .............. $180
Direct labor ............................ $100
Manufacturing overhead .................. $190
Administrative expenses ................. $110
Selling expenses ........................ $150
Work in process inventory, beginning .... $ 70
Work in process inventory, ending ....... $ 80
Finished goods inventory, beginning ..... $120
Finished goods inventory, ending ........ $160

Use these data to answer the following series of questions.

74. The cost of the raw materials used in production during the year (in thousands of dollars) was:
C a. $240.
Medium b. $190.
Refer To: 2-3 c. $170.
d. $250.

75. The cost of goods manufactured (finished) for the year (in thousands of dollars) was:
A a. $450.
Medium b. $470.
Refer To: 2-3 c. $530.
d. $540.

76. The cost of goods sold for the year (in thousands of dollars) was:
B a. $610.
Medium b. $410.
Refer To: 2-3 c. $490.
d. $570.

77. The net income for the year (in thousands of dollars) was:
B a. $390.
Medium b. $130.
Refer To: 2-3 c. $70.
d. $190.

Reference: 2-4
The following data pertain to Harriman Company's operations during July:

July 1 July 31
Raw materials inventory ..... 0 $5,000
Work in process inventory ... ? 4,000
Finished goods inventory .... $12,000 ?

Other data:

Managerial Accounting, 9/e 23

 Cost of goods manufactured ........ $105,000
Raw materials used ................ 40,000
Manufacturing overhead costs ...... 20,000
Direct labor costs ................ 39,000
Gross profit ...................... 100,000
Sales ............................. 210,000

78. The beginning work in process inventory was:

A a. $10,000.
Hard b. $14,000.
Refer To: 2-4 c. $1,000.
d. $4,000.

79. The ending finished goods inventory was:

C a. $17,000.
Hard Refer b. $12,000.
To: 2-4 c. $7,000.
d. $2,000.

Reference: 2-5
Bergeron Inc. reported the following data for last year:

Work in process inventory, beginning .. $100

Work in process inventory, ending ..... $150
Finished goods inventory, beginning ... $180
Finished goods inventory, ending ...... $200
Direct labor cost ..................... $300
Direct materials cost ................. $500
Manufacturing overhead cost ........... $400

80. The prime cost is:

B a. $900.
Easy b. $800.
Refer To: 2-5 c. $500.
d. $700.

81. The conversion cost is:

A a. $700.
Easy b. $800.
Refer To: 2-5 c. $900.
d. $500.

82. The cost of goods manufactured is:

D a. $1,250.
Medium b. $1,180.
Refer To: 2-5 c. $1,220.
d. $1,150.

Reference: 2-6
Geneva Steel Corporation produces large sheets of heavy gauge steel. The company showed the following amounts
relating to its production for the year just completed:

Direct materials used in production ... $110,000

Managerial Accounting, 9/e 24

 Direct labor costs for the year ....... 55,000
Work in process, beginning ............ 22,000
Finished goods, beginning ............. 45,000
Cost of goods available for sale ...... 288,000
Cost of goods sold .................... 238,000
Work in process, ending ............... 16,000

83. The balance of the finished goods inventory at the end of the year was:
B a. $95,000.
Hard b. $50,000.
Refer To: 2-6 c. $193,000.
d. $45,000.

84. Manufacturing overhead cost for the year was:

D a. $84,000.
Hard b. $78,000.
Refer To: 2-6 c. $56,000.
d. $72,000.

85. Cost of goods manufactured for the year was:

C a. $171,000.
Hard b. $160,000.
Refer To: 2-6 c. $243,000.
d. $244,000.

Managerial Accounting, 9/e 25

Reference: 2-7
Boardman Company reported the following data for the month of January:

Inventories: 1/1 1/31

Raw materials ................. $32,000 $31,000
Work in process ............... $18,000 $12,000
Finished goods ................ $30,000 $35,000

Additional information:
Sales revenue ................. $210,000
Direct labor costs ............ 40,000
Manufacturing overhead costs .. 70,000
Selling expenses .............. 25,000
Administrative expenses ....... 35,000

86. If raw materials costing $35,000 were purchased during January, the total manufacturing costs
D for the month would be:
Medium a. $145,000.
Refer To: 2-7 b. $144,000.
c. $151,000.
d. $146,000.

87. Assume that cost of goods sold for January was $124,000. The net income for January would be:
B a. $61,000.
Medium b. $26,000.
Refer To: 2-7 c. $51,000.
d. $25,000.

88. Boardman Company’s total conversion cost for January would be:
A a. $110,000.
Medium b. $170,000.
Refer To: 2-7 c. $135,000.
d. $130,000.

89. Assume that cost of goods sold for Boardman Company for January was $140,000. What would
C be the cost of goods manufactured for the month?
Medium a. $140,000
Refer To: 2-7 b. $135,000
c. $145,000
d. $139,000

Reference: 2-8
At a sales volume of 32,000 units, CD Company’s total fixed costs are $64,000 and total variable costs are
$60,000. The relevant range is 30,000 to 55,000 units.

Managerial Accounting, 9/e 26

90. If CD Company were to sell 43,000 units, the total expected cost would be:
C a. $146,000.
Medium b. $166,625.
Refer To: 2-8 c. $144,625.
d. $124,000.

91. If CD Company were to sell 50,000 units, the total expected cost per unit (rounded to the nearest
D cent) would be:
Medium a. $3.20.
Refer To: 2-8 b. $2.48.
c. $3.88.
d. $3.16.

Essay

92. Stony Electronics Corporation manufactures a portable radio designed for mounting on the wall
Easy of the bathroom. The following list represents some of the different types of costs incurred in the
manufacture of these radios:

1. The plant manager’s salary.

2. The cost of heating the plant.
3. The cost of heating executive offices.
4. The cost of printed circuit boards used in the radios.
5. Salaries and commissions of company salespersons.
6. Depreciation on office equipment used in the executive offices.
7. Depreciation on production equipment used in the plant.
8. Wages of janitorial personnel who clean the plant.
9. The cost of insurance on the plant building.
10. The cost of electricity to light the plant.
11. The cost of electricity to power plant equipment.
12. The cost of maintaining and repairing equipment in the plant.
13. The cost of printing promotional materials for trade shows.
14. The cost of solder used in assembling the radios.
15. The cost of telephone service for the executive offices.

Required:

Classify each of the items above as product (inventoriable) cost or period (noninventoriable)
costs for the purpose of preparing external financial statements.

Answer:
1. Product.
2. Product.
3. Period.
4. Product.
5. Period.
6. Period.
7. Product.
8. Product.
9. Product.
10. Product.
11. Product.
12. Product.

Managerial Accounting, 9/e 27

 13. Period.
14. Product.
15. Period.

93. Bill Pope has developed a new device that is so exciting he is considering quitting his job in
Medium order to produce and market it on a large-scale basis. Bill will rent a garage for $300 per month
for production purposes. Utilities will cost $40 per month. Bill has already taken an industrial
design course at the local community college to help prepare himself for this venture. The
course cost $300. Bill will rent production equipment at a monthly cost of $800. He estimates
the material cost per unit will be $5, and the labor cost will be $3. He will hire workers and
spend his time promoting the product. To do this he will quit his job which pays $3,000 per
month. Advertising and promotion will cost $900 per month.

Required:
Complete the chart below by placing an “X” under each heading that helps to identify the cost
involved. There can be “Xs” placed under more than one heading for a single cost, e.g., a cost
might be a sunk cost, an overhead cost and a product cost; there would be an “X” placed under
each of these headings opposite the cost.

Oppor- Vari- Mfg. Differ-

tunity Sunk able Fixed Over- Product Selling ential
Cost Cost Cost Cost Head Cost Cost Cost*
Garage rent

Utilities

Cost of the
industrial
design
course

Equipment
rented

Material
cost

Labor cost

Present
salary

Advertising

* Between the alternatives of going into business to make the device or not going into business to make the
device.
Answer:

Oppor- Vari- Mfg. Differ-

tunity Sunk able Fixed Over- Product Selling ential
Cost Cost Cost Cost Head Cost Cost Cost*

Managerial Accounting, 9/e 28

Garage rent X X X X

Utilities X X X X

Cost of the X
industrial
design
course

Equipment X X X X
rented

Material X X X
cost

Labor cost X X X

Present X X
salary

Advertising X X X

94. Logan Products, a small manufacturer, has submitted the items below concerning last year's
Hard operations. The president's secretary, trying to be helpful, has alphabetized the list.

Administrative salaries ................ $ 2,400

Advertising expense .................... 1,200
Depreciation -- factory building ....... 800
Depreciation -- factory equipment ...... 1,600
Depreciation -- office equipment ....... 180
Direct labor cost ...................... 21,900
Raw materials inventory, beginning ..... 2,100
Raw materials inventory, ending ........ 3,200
Finished goods inventory, beginning .... 46,980
Finished goods inventory, ending ....... 44,410
General liability insurance expense .... 240
Indirect labor cost .................... 11,800
Insurance on factory ................... 1,400
Purchases of raw materials ............. 14,600
Repairs and maintenance of factory ..... 900
Sales salaries ......................... 2,000
Taxes on factory ....................... 450
Travel and entertainment expense ....... 1,410
Work in process inventory, beginning ... 1,670
Work in process inventory, ending ...... 1,110

Managerial Accounting, 9/e 29

 Required:

a. Prepare a schedule of Cost of Goods Manufactured in good form for the year.

b. Determine the Cost of Goods Sold for the year.

Answer:
a.
LOGAN COMPANY
Schedule of Cost of Goods Manufactured

Raw materials used:

Beginning inventory................... $ 2,100
Purchases............................. 14,600
Available........................... 16,700
Less ending inventory................. 3,200 $13,500
Direct labor............................ 21,900
Manufacturing overhead:
Depreciation -- factory building...... 800
Depreciation -- factory equipment..... 1,600
Indirect labor cost................... 11,800
Insurance on factory.................. 1,400
Repairs and maintenance............... 900
Taxes on factory...................... 450 16,950
Total manufacturing cost.......... 52,350
Add work in process inventory, beginning 1,670
54,020
Less work in process inventory, ending.. 1,110
Cost of goods manufactured.............. $52,910

b.
Finished goods inventory, beginning..... $46,980
Cost of goods manufactured (above)...... 52,910
Available for sale.................... 99,890
Less finished goods inventory, ending.. 44,410
Cost of goods sold...................... $55,480

95. Laco Company acquired its factory building about 20 years ago. For a number of years the
Medium company has rented out a small, unused part of the building. The renter's lease will expire
soon. Rather than renewing the lease, Laco Company is considering using the space itself to
manufacture a new product. Under this option, the unused space will continue to be
depreciated on a straight-line basis, as in past years.

Direct materials and direct labor cost for the new product would be $50 per unit. In order to
have a place to store finished units of the new product, the company would have to rent a small
warehouse nearby. The rental cost would be $2,000 per month. It would cost the company an
additional $4,000 each month to advertise the new product. A new production supervisor
would be hired to oversee production of the new product who would be paid $3,000 per
month. The company would pay a sales commission of $10 for each unit of product that is
sold.
Required:

Complete the chart below by placing an "X" under each column heading that helps to identify
the costs listed to the left. There can be "X’s" placed under more than one heading for a single
cost. For example, a cost might be a product cost, an opportunity cost, and a sunk cost; there
would be an "X" placed under each of these headings on the answer sheet opposite the cost.

Managerial Accounting, 9/e 30

 Oppor- Vari-able Selling & Differ-
tunity Sunk Cost Fixed Product Admin ential
Cost Cost Cost Cost Cost Cost*
Rent on
unused
factory
space

Depreciation
on the
factory
space

Direct
material
and direct
labor

Rental cost
of the small
warehouse

Advertising
cost

Production
supervisor’s
salary

Sales
commissions

* Between the alternatives of (1) renting the space out again or (2) using the space to produce the new product.

Managerial Accounting, 9/e 31

Answer:

Oppor- Vari- Selling & Differ-

tunity Sunk able Fixed Product Admin ential
Cost Cost Cost Cost Cost Cost Cost*
Rent on X §
unused
factory
space

Depreciation X X X
on the
factory
space

Direct X X X
material
and direct
labor

Rental cost X X X
of the small
warehouse

Advertising X X X
cost

Production X X X
supervisor’s
salary

Sales X X X
commissions

§ We suggest you allow either answer (a blank or an X) in this cell. Some experts would consider an opportunity
cost to be a differential cost and others would not. It is all a matter of definition and the definitions given in the
text do not really cover this contingency.

Managerial Accounting, 9/e 32

96. A list of accounts for a manufacturing company for an accounting period is given below. Find
Hard the unknown amounts indicated by question marks.

Sales ..................................... $39,000

Cost of goods sold ........................ ?
Purchases of direct materials ............. 11,000
Direct labor .............................. 5,000
Finished goods inventory, beginning ....... 5,000
Work in process, beginning ................ 800
Work in process, ending ................... 3,000
Gross margin .............................. 11,700
Finished goods inventory, ending .......... ?
Accounts payable, beginning ............... 4,000
Accounts payable, ending .................. 2,800
Direct materials inventory, beginning ..... 1,000
Direct materials inventory, ending ........ 3,000
Indirect labor ............................ 2,000
Indirect materials used ................... 4,000
Utilities expense, factory ................ 3,000
Depreciation on factory equipment ......... 7,000

Answer:
Cost of goods sold = 39,000 – 11,700 = 27,300.
Direct materials used = 1,000 + 11,000 – 3,000 = 9,000.
Cost of goods manufactured = 9,000 + 5,000 + (2,000 + 4,000 +
3,000 + 7,000) + 800 – 3,000 =
27,800.
Finished goods inventory, ending = 5,000 + 27,800 – 27,300 =
5,500.

97. Use the following information to determine the gross margin for Pacific States Manufacturing for
Hard the year just ended (all amounts are in thousands ($000) of dollars:

Sales ..................................... $31,800

Purchases of direct materials ............. 7,000
Direct labor .............................. 5,000
Work in process inventory, 1/1 ............ 800
Work in process inventory, 12/31 .......... 3,000
Finished goods inventory, 1/1 ............. 4,000
Finished goods inventory, 12/31 ........... 5,300
Accounts payable, 1/1 ..................... 1,700
Accounts payable, 12/31 ................... 1,500
Direct materials inventory, 1/1 ........... 6,000
Direct materials inventory, 12/31 ......... 1,000
Indirect labor ............................ 600
Indirect materials used ................... 500
Utilities expense, factory ................ 1,900
Depreciation on factory equipment ......... 3,500

Answer:
Direct materials used = 6,000 + 7,000 – 1,000 = 12,000.

Managerial Accounting, 9/e 33

 Cost of goods manufactured = 12,000 + 5,000 + (600 + 500 +
1,900 + 3,500) + 800 – 3,000 =
21,300.
Cost of goods sold = 4,000 + 21,300 – 5,300 = 20,000.
Gross margin = 31,800 - 20,000 = 11,800

98. The following information is from Marchant Manufacturing Co. for September:
Hard
Direct materials used in production .. $ 95,000
Direct labor ......................... 67,000
Total manufacturing cost ............. 234,000
Raw materials inventory, Sept. 1 ..... 24,000
Work in process inventory, Sept. 1 ... 6,000
Finished goods inventory, Sept. 1 .... 101,000
Purchases of raw materials ........... 102,000
Cost of goods manufactured ........... 233,000
Administrative expense ............... 41,000
Selling expense ...................... 56,000
Sales ................................ 344,000
Gross margin ......................... 127,000
Net income ........................... 30,000

Required:

a. Compute the Cost of Goods Sold.

b. Compute the balance in Finished Goods Inventory at September 30.

c. Compute the balance in Work in Process Inventory at September 30.

d. Compute the balance in Raw Materials Inventory at September 30.

e. Compute the total manufacturing overhead.

(Hint: The easiest method of solving this problem is to sketch out the income statement and
the schedule of cost of goods manufactured, enter the given amounts, and then enter the
unknowns as plug figures.)

Managerial Accounting, 9/e 34

 Answer:
MARCHANT MANUFACTURING
Schedule of Cost of Goods Manufactured

Direct materials used:

Inventory, Sept. 1.................... $ 24,000
Purchases............................. 102,000
126,000
Inventory, Sept. 30 (d) -- plug....... 31,000
Direct materials used -- given.... 95,000
Direct labor............................ 67,000
Manufacturing overhead (e) -- plug...... 72,000
Total manufacturing cost – given.. 234,000
Inventory of work in process, Sept 1.... 6,000
240,000
Inventory of work in process, Sept 30
(c) -- plug............................ 7,000
Cost of goods manufactured -- given..... $233,000

MARCHANT MANUFACTURING
Income Statement

Sales................................... $344,000
Cost of goods sold:
Finished goods, Sept 1................ $101,000
Cost of goods manufactured -- above... 233,000
Available for sale................. 334,000
Finished goods, Sept 30 (b) -- plug... 117,000
Cost of goods sold (a) -- plug..... 217,000
Gross margin -- given................... 127,000
Operating expenses:
Administrative expenses............... 41,000
Selling expenses...................... 56,000 97,000
Net income -- given..................... $ 30,000

99. NOTE TO THE INSTRUCTOR: Questions 99, 100 and 101 are different versions of the same
Medium question.
The following data (in thousands of dollars) have been taken from the accounting records of
Larsen Corporation for the just completed year.

Sales ..................................... $860

Purchases of raw materials ................ $150
Direct labor .............................. $110
Manufacturing overhead .................... $210
Administrative expenses ................... $130
Selling expenses .......................... $180
Raw materials inventory, beginning ........ $ 40
Raw materials inventory, ending ........... $ 80
Work in process inventory, beginning ...... $ 20
Work in process inventory, ending ......... $ 80
Finished goods inventory, beginning ....... $ 80
Finished goods inventory, ending .......... $150

Required:

Managerial Accounting, 9/e 35

 a. Prepare a Schedule of Cost of Goods Manufactured in good form.

b. Compute the Cost of Goods Sold.

c. Using data from your answers above as needed, prepare an Income Statement in good form.

Answer:
a. Schedule of cost of goods manufactured

Direct materials:
Raw materials inventory, beginning ........ $ 40
Add: Purchases of raw materials ........... $150
Raw materials available for use ........... $190
Deduct: Raw materials inventory, ending ... $ 80
Raw materials used in production .......... $110
Direct labor .............................. $110
Manufacturing overhead .................... $210
Total manufacturing cost .................. $430
Add: Work in process inventory, beginning . $ 20
$450
Deduct: Work in process inventory, ending . $ 80
Cost of goods manufactured ................ $370

b. Computation of cost of goods sold

Finished goods inventory, beginning ......... $ 80

Add: Cost of goods manufactured ............. $370
Goods available for sale .................... $450
Deduct: Finished goods inventory, ending .... $150
Cost of goods sold .......................... $300

c. Income statement
Sales ....................................... $860
Less: Cost of goods sold .................... $300
Gross margin ................................ $560
Less: Administrative expenses ............... $130
Less: Selling expenses ...................... $180
Net income .................................. $250

Managerial Accounting, 9/e 36

100. NOTE TO THE INSTRUCTOR: Questions 99, 100 and 101 are different versions of the same
Medium question.
The following data (in thousands of dollars) have been taken from the accounting records of
Larner Corporation for the just completed year.

Sales ..................................... $870

Purchases of raw materials ................ $110
Direct labor .............................. $130
Manufacturing overhead .................... $200
Administrative expenses ................... $160
Selling expenses .......................... $140
Raw materials inventory, beginning ........ $ 30
Raw materials inventory, ending ........... $ 60
Work in process inventory, beginning ...... $ 50
Work in process inventory, ending ......... $ 10
Finished goods inventory, beginning ....... $150
Finished goods inventory, ending .......... $140

Required:

a. Prepare a Schedule of Cost of Goods Manufactured in good form.

b. Compute the Cost of Goods Sold.

c. Using data from your answers above as needed, prepare an Income Statement in good form.

Managerial Accounting, 9/e 37

 Answer:
a. Schedule of cost of goods manufactured

Direct materials:
Raw materials inventory, beginning ........ $ 30
Add: Purchases of raw materials ........... $110
Raw materials available for use ........... $140
Deduct: Raw materials inventory, ending ... $ 60
Raw materials used in production .......... $ 80
Direct labor .............................. $130
Manufacturing overhead .................... $200
Total manufacturing cost .................. $410
Add: Work in process inventory, beginning . $ 50
$460
Deduct: Work in process inventory, ending . $ 10
Cost of goods manufactured ................ $450

b. Computation of cost of goods sold

Finished goods inventory, beginning ......... $150

Add: Cost of goods manufactured ............. $450
Goods available for sale .................... $600
Deduct: Finished goods inventory, ending .... $140
Cost of goods sold .......................... $460

c. Income statement
Sales ....................................... $870
Less: Cost of goods sold .................... $460
Gross margin ................................ $410
Less: Administrative expenses ............... $160
Less: Selling expenses ...................... $140
Net income .................................. $110

Managerial Accounting, 9/e 38

101. NOTE TO THE INSTRUCTOR: Questions 99, 100 and 101 are different versions of the same
Medium question.
The following data (in thousands of dollars) have been taken from the accounting records of
Larmont Corporation for the just completed year.

Sales ..................................... $990

Purchases of raw materials ................ $100
Direct labor .............................. $240
Manufacturing overhead .................... $210
Administrative expenses ................... $100
Selling expenses .......................... $140
Raw materials inventory, beginning ........ $ 20
Raw materials inventory, ending ........... $ 80
Work in process inventory, beginning ...... $ 50
Work in process inventory, ending ......... $ 30
Finished goods inventory, beginning ....... $160
Finished goods inventory, ending .......... $150

Required:

a. Prepare a Schedule of Cost of Goods Manufactured in good form.

b. Compute the Cost of Goods Sold.

c. Using data from your answers above as needed, prepare an Income Statement in good form.

Answer:
a. Schedule of cost of goods manufactured

Direct materials:
Raw materials inventory, beginning ........ $ 20
Add: Purchases of raw materials ........... $100
Raw materials available for use ........... $120
Deduct: Raw materials inventory, ending ... $ 80
Raw materials used in production .......... $ 40
Direct labor .............................. $240
Manufacturing overhead .................... $210
Total manufacturing cost .................. $490
Add: Work in process inventory, beginning . $ 50
$540
Deduct: Work in process inventory, ending . $ 30
Cost of goods manufactured ................ $510

b. Computation of cost of goods sold

Finished goods inventory, beginning ......... $160

Add: Cost of goods manufactured ............. $510
Goods available for sale .................... $670
Deduct: Finished goods inventory, ending .... $150
Cost of goods sold .......................... $520

Managerial Accounting, 9/e 39

 c. Income statement
Sales ....................................... $990
Less: Cost of goods sold .................... $520
Gross margin ................................ $470
Less: Administrative expenses ............... $100
Less: Selling expenses ...................... $140
Net income .................................. $230

102. The following costs relate to one month's activity in Martin Company:
Medium
Indirect materials ........................ $ 300
Rent on factory building .................. 500
Maintenance of equipment .................. 50
Direct material used ...................... 1,200
Utilities on factory ...................... 250
Direct labor .............................. 1,500
Selling expense ........................... 500
Administrative expense .................... 300
Work in process inventory, beginning ...... 600
Work in process inventory, ending ......... 800
Finished goods inventory, beginning ....... 500
Finished goods inventory, ending .......... 250

Required:

a. Prepare a Schedule of Cost of Goods Manufactured in good

form.

b. Determine the Cost of Goods Sold.

Answer:
a. Direct materials...................... 1,200
Direct labor.......................... 1,500
Manufacturing overhead:
Indirect materials........ $300
Rent...................... 500
Maintenance............... 50
Utilities................. 250 1,100
Total manufacturing costs............. 3,800
Add: WIP, beginning................... 600
4,400
Deduct: WIP, ending................... 800
Cost of goods manufactured............ $3,600

b. Finished goods, beginning............. $ 500

Add: Cost of goods manufactured....... 3,600
Goods available for sale.............. 4,100
Finished goods, ending................ 250
Cost of goods sold.................... $3,850

Managerial Accounting, 9/e 40

103. (Appendix) Brooke Foster is employed by Wong Laboratories, Inc., and is directly involved in
Hard preparing and packaging the company’s leading sleep aid, RestWell. Brooke’s basic wage rate is
$15 per hour, and she is paid time and a half for any work in excess of 40 hours per week.
Additionally, Wong Laboratories provides a fringe benefit package that costs the company $5 for
each hour of employee time (regular or overtime). During a recent week, Brooke worked 49
hours but was idle for 3 hours due to materials shortages.

Required:

a. Assume that Wong Laboratories treats all fringe benefits as

part of manufacturing overhead. Compute Brooke’s total wages
and fringe benefits for the week and indicate how much of her
wages and fringe benefits for the week would be allocated to
direct labor and how much would be allocated to manufacturing
overhead.

b. Assume that Wong Laboratories treats the part of fringe

benefits related to direct labor as a component of direct
labor cost. Compute Brooke’s total wages and fringe benefits
for the week and indicate how much of her wages and fringe
benefits would be allocated to direct labor and how much
would be allocated to manufacturing overhead.

Answer:
a.
Regular time: ................. 40 hours x $15 = $ 600.00
Overtime: ..................... 9 hours x $22.50 = 202.50
Fringe benefits: .............. 49 hours x $5 = 245.00
Total wages and fringe benefits $1,047.50

Allocation of wages and fringe benefits:

Direct labor: ............... 46 hrs. x $15 = $ 690.00
Manufacturing overhead:
Idle time: .................... 3 hrs. x $15 = 45.00
Overtime premium: ............. 9 hrs. x $7.50 = 67.50
Fringe benefit: ............... 49 hrs. x $5 = 245.00
Total wages and fringe benefits $1,047.50

b. Total wages and fringe benefits would be $1,047.50 as shown

above.

Allocation of wages and fringe benefits:

Direct labor:
Wage cost: .................... 46 hrs. x $15 = $ 690.00
Fringe benefit: ........... 46 hrs. x $5 = 230.00
Total direct labor ........ $ 920.00
Manufacturing overhead:
Idle time: ................ 3 hrs. x $15 = $ 45.00
Overtime premium: 9 x $7.50 = 67.50
Fringe benefits: .......... 3 hrs. x $5 = 15.00
Total manufacturing overhead $127.50
Total wages and fringe benefits $1,047.50

Managerial Accounting, 9/e 41

104. (Appendix) Fred Adams is employed by the Cedar Manufacturing Company on their assembly
Medium line. Fred is paid $15 per hour for regular time, and time and a half for all work in excess of 40
hours per week. During the two weeks of the pay period just completed Fred reported the
following:

Week 1:
Idle time due to machine breakdowns .... 3 hours
Idle time due to material shortages .... 2 hours
Overtime ............................... None

Week 2:
Idle time .............................. None
Overtime ............................... 9 hours

Required:

Compute Fred’s wages for each week and allocate Fred’s wages for each week between direct
labor cost and manufacturing overhead.

Answer:
Week 1:
Fred’s wages equal 40 hours x $15 per hour, or $600.
Fred’s wages would be allocated between direct labor and
manufacturing overhead as follows:

Direct labor cost: 35 hours x $15 = ........ $525.00

Manufacturing overhead: 5 hours x $15 = .... 75.00
Total ...................................... $600.00

Week 2:
Fred’s wages equal:
40 hours x $15 per hour = ................ $600.00
9 hours x $22.50 per hour = ............. 202.50
Total wages for Week 2 ..................... $802.50

Fred’s wages would be allocated between direct labor and

manufacturing overhead as follows:

Direct labor cost: 49 hours x $15 per hour = $735.00

Manufacturing overhead: 9 hours x $7.50 = 67.50
Total ..................................... $802.50

Managerial Accounting, 9/e 42