B1-3 Flashcards
The following information was extracted from the accounting records of Taft Manufacturing Company:
Direct materials purchased $90,000
Direct materials used 86,000
Direct manufacturing labor costs 20,000
Indirect manufacturing labor costs 22,000
Sales salaries 14,000
Other factory expenses 32,000
Selling and administrative expenses 20,000
What was the cost of goods manufactured?
a.
128,000
b.
198,000
c.
160,000
d.
164,000
Choice “c” is correct. The cost of goods manufactured is calculated as indicated below:
Direct materials used $ 86,000
Direct manufacturing labor costs 20,000
Indirect manufacturing labor costs 22,000
Other factory expenses 32,000
$ 160,000
Note that purchases (additions to inventory) are excluded from the cost of goods manufactured computation since they would be included in the computation of direct materials used and that both sales salaries and selling and administrative expenses (period costs) are excluded from the computation of costs of goods manufactured as well.
Choice “a” is incorrect. The proposed solution excludes other factory expense in error.
Choice “d” is incorrect. The proposed solution values materials at the purchase amount and not the amount used in error.
Choice “b” is incorrect. The proposed solution includes a combination of purchase costs, product costs, and period costs in error.
A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis?
a.
$240,000
b.
$260,000
c.
$200,000
d.
$300,000
Choice “d” is correct. Using a physical quantity basis with no additional processing costs after the split-off point, product X is 240,000 gallons and product Y is 160,000 gallons, for a total of 400,000 gallons. That means that product X is allocated 60% (240,000 / 400,000) of the joint costs and product Y is allocated 40% (160,000 / 400,000) of the joint costs. Product X is thus allocated 60% of the $500,000 joint costs, or $300,000. The data about selling costs is a distracter because the joint costs are allocated on a physical quantity basis.
Choice “c” is incorrect. $200,000 is the amount of the joint cost that is allocated to product Y, not product X.
Choice “a” is incorrect, per the above calculation. [$240,000 is $1 for each gallon of product X. However, it is difficult to determine where the $1 comes from.]
Choice “b” is incorrect, per the above calculation. [$260,000 is a nice round number, and $260,000 plus the $240,000 adds to the $500,000 joint cost. However, that is about all it is worth.]
Conversion costs do not include:
a.
Indirect materials.
b.
Indirect labor.
c.
Direct materials.
d.
Direct labor.
Choice “c” is correct. Conversion costs consist of direct labor and overhead. Accordingly, conversion costs include all product costs except direct materials.
Choice “b” is incorrect. Indirect labor is overhead.
Choice “a” is incorrect. Indirect materials is overhead.
Choice “d” is incorrect. Conversion costs include direct labor.
Boyle, Inc. makes two products, X and Y that require allocation of indirect manufacturing costs. The following data was compiled by the accountant before making any allocations:
Product X Product Y
Quantity produced 10,000 20,000
Direct manufacturing labor hours 15,000 5,000
Setup hours 500 1,500
The total cost of setting up manufacturing processes and equipment is $400,000. The company uses a job-costing system with a single indirect cost rate. Under this system, allocated costs were $300,000 and $100,000 for X and Y, respectively. If an activity-based system is used, what would be the allocated costs for each product?
~Product X
~Product Y
a.
$200,000
$200,000
b.
$250,000
$150,000
c.
$150,000
$250,000
d.
$100,000
$300,000
Choice “d” is correct. The setup hours are used because neither quantity produced nor direct manufacturing hours are activities. The calculation is as follows:
Setup Hours % of Setup Hours Allocation
Product X
500 500 / 2,000 = 25% $100,000
Product Y
1,500 1,500 / 2,000 = 75% $300,000
Total
2,000 100% $400,000
Choices “c”, “a”, and “b” are incorrect, based on the above explanation.
Mighty, Inc. processes chickens for distribution to major grocery chains. The two major products resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000 pounds of legs. Each pound of white breast meat sells for $2 and each pound of legs sells for $1. If there are no further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the white breast meat on a relative sales value basis?
a.
$480,000
b.
$400,000
c.
$200,000
d.
$120,000
Choice “a” is correct.
Joint costs allocated based upon relative sales value at split off are allocated based upon the ratio of individual sales values to sales value at split off. The ratio is computed at 80% and 20% and applied to the $600,000 in joint cost to arrive at the joint cost allocation below. Be careful of the question. This question asks for the amount of allocated joint costs, but others may ask for total costs. In those instances, you would add the allocated costs to the direct costs that can be traced to the product prior to split off.
Choice “d” is incorrect. This selection represents the allocation to legs.
Choice “c” is incorrect. This selection represents the relative sales value of white breast meat at split off.
Choice “b” is incorrect, per the above computation.
The following is selected information from the records of Ray, Inc.:
Purchases of raw materials
$ 6,000
Raw materials, beginning
500
Raw materials, ending
800
Work-in-process, beginning
0
Work-in-process, ending
0
Cost of goods sold
12,000
Finished goods, beginning
1,200
Finished goods, ending
1,400
What is the total amount of conversion costs?
a.
$6,100
b.
$6,500
c.
$5,900
d.
$5,500
Choice “b” is correct. Conversion costs (labor and overhead) are equal to $6,500 and are derived from the relationship between the finished goods and work in process inventory.
Beginning ($1,200) and ending ($1,400) finished goods inventory and cost of goods sold ($12,000) are used to squeeze costs of goods manufactured of $12,200
Cost of goods manufactured ($12,200) is then used in combination with beginning and ending WIP inventories of $0 to derive total costs incurred ($12,200) and then, in combination with materials ($5,700) the conversion costs of $6,500 as follows:
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Choices “d”, “c”, and “a” are incorrect, per the above calculation.
Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:
a.
A company’s manufacturing operations are basically labor based.
b.
Manufacturing overhead is the largest cost component of its product cost.
c.
A company’s manufacturing operations are all highly automated.
d.
The manufactured products differ in the resources consumed from the individual departments in the plant.
Choice “d” is correct. Generally, individual departmental rates (rather than a plant-wide rate for applying overhead) would be used if the manufactured products differ in the resources consumed from the individual departments in the plant.
Choice “c” is incorrect. Plant-wide rates would probably be used if a company’s manufacturing operations are all highly automated.
Choice “a” is incorrect. Plant-wide rates would probably be used if a company’s manufacturing operations are basically labor based.
Choice “b” is incorrect. Plant-wide rates would probably be used if manufacturing overhead is the largest cost component of its product cost.
In allocating factory service department costs to producing departments, which one of the following items would most likely be used as an activity base?
a.
Salary of service department employees.
b.
Direct materials usage.
c.
Units of product sold.
d.
Units of electrical power consumed.
Choice “d” is correct. Units of electrical power consumed would be a good indication of producing departments’ demand on the service department.
Choice “c” is incorrect. Units sold is not a good base with which to allocate to production departments. It relates more to a sales department.
Choice “a” is incorrect. The salaries of service department employees represent the costs to be allocated, not the activity base on which to base the allocation.
Choice “b” is incorrect. Although direct materials are used in production, they may not be the best base for allocation because they do not always have a direct relationship to the incurrence of service department costs.
The steps that a company, using a traditional cost system, would take to implement activity-based costing include:
I.
Evaluation of the existing system to assess how well the system supports the objective of an activity-based cost system.
II.
Identification of the activities for which cost information is needed with differentiation between value adding and non-value adding activities.
a.
Neither I nor II.
b.
Only I.
c.
Only II.
d.
Both I and II.
Choice “d” is correct. Both steps are essential to implementing activity-based costing.
A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?
a.
Electricity expense.
b.
Repair and maintenance expense.
c.
Depreciation expense.
d.
Employee benefits expense.
Choice “d” is correct. Activity-based costing seeks to assign overhead costs in a manner that identifies consumption of resources. Employee salaries or even head count are more appropriate cost drivers than machine hours for employee benefits expense. Machine hours would be more likely identified as cost drivers for electric, repairs and maintenance, and depreciation expense.
Choice “a” is incorrect. Machine hours are likely an appropriate cost driver for electricity expense.
Choice “b” is incorrect. Machine hours are likely an appropriate cost driver for repairs and maintenance expense.
Choice “c” is incorrect. Machine hours are likely an appropriate cost driver for depreciation expense.
A cost that bears an observable and known relationship to a quantifiable activity base is a(n):
a.
Engineered cost.
b.
Indirect cost.
c.
Target cost.
d.
Fixed cost.
Choice “a” is correct. An engineered cost bears an observable and known relationship to a quantifiable activity base.
Choice “b” is incorrect. Indirect costs (overhead costs) are all manufacturing costs other than direct material and direct labor.
Choice “c” is incorrect. A target cost is carefully predetermined standard cost that should be attained.
Choice “d” is incorrect. Fixed costs are all those organization and plant costs that continue to be incurred and cannot be reduced without damaging the organization’s ability to meet long-range goals.
The benefit that management can expect from traditional costing includes which of the following:
a.
Streamlines production processes by reducing non-value adding activities, e.g., reduced set-up times, optimal plant layout, and improved quality.
b.
Provides management with a more thorough understanding of product costs and product profitability for strategies and pricing decisions.
c.
Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.
d.
Leads to a more competitive position by evaluating cost drivers, i.e., costs associated with the complexity of the transaction rather than the production volume.
Choice “c” is correct. The benefit that management can expect from traditional costing includes using a common departmental or factory wide measure of activity, such as direct labor hours or dollars, to distribute manufacturing overhead to products.
Choices “d”, “a”, and “b” are incorrect. They are characteristics of activity-based costing.
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:
a.
Total costs.
b.
Joint costs.
c.
Sales price less a normal profit margin at point of sale.
d.
Relative sales value at split-off.
Choice “d” is correct. Sales price less the cost to complete is defined as the relative sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.
Choice “a” is incorrect. Sales price at point of sale reduced by cost to complete is the additional contribution to income generated by completing the product. It is not equal to total costs.
Choice “b” is incorrect. Sales price at point of sale reduced by cost to complete is the additional contribution to income generated by completing the product. It is not equal to joint costs. (If it were, this would be a zero profit situation.)
Choice “c” is incorrect. Selling price less a normal profit margin is generally a cost figure. It is not equal to sales price less the cost to complete, which is the additional contribution to income generated by completing the product. (If it were, this would be a zero profit situation.)
Costs are allocated to cost objectives in many ways and for many reasons. Which one of the following is a purpose of cost allocation?
a.
Aiding in variable costing for internal reporting.
b.
Measuring income and assets for external reporting.
c.
Evaluating revenue center performance.
d.
Implementing activity-based costing.
Choice “b” is correct. Cost allocation is essential for measuring income and assets for external reporting.
Choice “c” is incorrect. Revenue centers are responsible for revenues only. Cost allocation is not relevant.
Choice “a” is incorrect. Variable costing matches costs directly variable with volume to the items produced or sold. Costs are not allocated as it is clear to which items they relate.
Choice “d” is incorrect. Cost allocation will not aid in implementing ABC. ABC requires determining the cost drivers (cause) and cost (effect).
Arbor Corporation uses a water cooling system in its manufacturing operations. Gallons of water purchased for engine cooling increases with manufacturing production. Water and sewer utility costs recorded by the Arbor Corporation are billed to the company based on a minimum charge plus a rate for utilization beyond the minimum charge for 5,000 gallons of usage. Arbor would most likely classify its utility costs as:
a.
Semivariable costs.
b.
Variable costs.
c.
Fixed costs.
d.
Non diversifiable.
Choice “a” is correct. Utility costs are semivariable. Utility costs share the characteristics of both fixed and variable costs over the relevant range. They are unchanged for the first 5,000 gallons (fixed) and then increase per gallon used in excess of 5,000 gallons after the threshold (variable).
Choice “b” is incorrect. Variable costs change in proportion to production over the relevant range. Costs for water and sewer utilization are unchanged up to 5,000 gallons of consumption and only increase as consumption exceeds 5,000 gallons. Costs do not change in proportion to volume in the relevant range, they are not variable.
Choice “c” is incorrect. Fixed costs do not change over the relevant range. Costs for water and sewer utilization are unchanged only up to 5,000 gallons of consumption but increase as consumption exceeds 5,000 gallons. Costs change in the relevant range, they are not fixed.
Choice “d” is incorrect. Nondiversifiable classifications generally relate to portfolio risks, not costs.
Which of the following is true about activity-based costing?
a.
It should not be used with process or job costing.
b.
It can be used with either process or job costing.
c.
It can be used only with job costing.
d.
It can be used only with process costing.
Choice “b” is correct. Activity-based costing (ABC) assumes that the resource-consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing.
Choices “a”, “d”, and “c” are incorrect. Activity-based costing (ABC) assumes that the resource consuming activities of an enterprise that generate costs are activities and not outputs. ABC is appropriate for all types of cost accumulation systems, including both job order and process costing. It is inappropriate to state that it should not be used with either system.
Weighted-average and first in, first out (FIFO) equivalent units would be the same in a period when which of the following occurs?
a.
No beginning inventory exists.
b.
Beginning inventory equivalent units are less than 50% complete.
c.
Beginning inventory equivalent units exceed 50% complete.
d.
No ending inventory exists.
Choice “a” is correct. FIFO and weighted average produce the same equivalent units when there is no beginning inventory. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO.
Choice “d” is incorrect. Treatment of ending inventory by the FIFO and weighted-average methods is identical. Elimination of ending inventory alone would not cause FIFO and weighted-average method equivalent unit computations to be identical.
Choice “c” is incorrect. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO. Even if there is no change in inventory, the treatment of beginning inventory will cause FIFO to be different from weighted average.
Choice “b” is incorrect. FIFO is a three-step process, while weighted average is a two-step process. The major difference between the two methods is consideration of beginning inventory amounts by FIFO. The treatment of beginning inventory will cause FIFO to be different from weighted average.
A cost that is fixed per unit is an example of a:
a.
Direct cost.
b.
Fixed cost.
c.
Mixed cost.
d.
Variable cost.
Choice “d” is correct. A variable cost is one that varies in total but is fixed per unit. For example, if a starter is needed in the manufacture of an automobile, the cost of starters varies with the number of automobiles. The more automobiles, the greater the cost of starters. However, the cost for each starter remains constant.
Choice “b” is incorrect. A fixed cost is one that is fixed in total but varies per unit.
Choice “c” is incorrect. A mixed cost is one that contains both fixed and variable costs.
Choice “a” is incorrect. A direct cost can be either fixed or variable.
A cost driver is defined as:
a.
A causal factor that increases the total cost of a cost objective.
b.
The significant factor in the development of a new product.
c.
The largest cost in a manufacturing process.
d.
An indirect cost that cannot be traced to a particular cost objective but is essential to the business.
Choice “a” is correct. A cost driver is a causal factor (the cause) that increases the cost (the effect) of a cost objective.
Choices “c”, “b”, and “d” are incorrect, per the above definition.
A CPA would recommend implementing an activity-based costing system under which of the following circumstances?
a.
The client produced products that heterogeneously consume resources.
b.
The client is a single-product manufacturer.
c.
The client produced many different products that homogeneously consume resources.
d.
Most of the client’s costs currently are classified as direct costs.
Choice “a” is correct. ABC costing is recommended when more than one product is produced and those products do not uniformly consume indirect resources (heterogeneous consumption).
Example: Suppose 50 kilowatts of electricity are used to produce a single unit of item A and 500 kilowatts of electricity are used to produce a single unit of item B. To assign the cost of electricity (an indirect cost) based on the number of items produced would not reflect the true costs of producing the items.
Choice “b” is incorrect. ABC costing is most beneficial when multiple products are produced.
Choice “d” is incorrect. ABC costing is used to assign indirect costs based on the product’s demands for resource-consuming activities. If the majority of the costs are direct, then ABC costing would not be recommended.
Choice “c” is incorrect. If resources are consumed in a homogeneous or uniform manner, ABC costing is not needed. A traditional cost system that uses a single cost driver would be appropriate in this situation.
If a product required a great deal of electricity to produce, and crude oil prices increased, which of the following costs most likely increased?
a.
Conversion costs.
b.
Direct materials.
c.
Direct labor.
d.
Prime costs.
Choice “a” is correct. Conversion costs include both direct labor and overhead. Increases in crude oil prices are likely to impact the cost of generating electricity (and, by extension, the rate for electricity). Electricity is significant in manufacture of the product in the fact pattern and would likely increase the overhead costs of the manufacturer.
Choice “b” is incorrect. Electricity is not included in direct materials. Direct material costs would likely not increase.
Choice “c” is incorrect. Electricity is not included in direct labor. Direct labor costs would likely not increase.
Choice “d” is incorrect. Prime costs are the sum of direct materials and direct labor. Electricity is not included in prime costs. Prime costs would likely not increase.
