Cost Accounting

Question 1

Answer 1

Question 2

Under the FIFO method, Albany Mining’s equivalent units of production (EUP) with respect to conversion costs are

A. 171,200 units.
B. 184,000 units.
C. 196,800 units.
D. 177,600 units.

Answer 2

C. 196,800 units.

Under the FIFO method, EUP are determined based only on work performed during the current period. Thus, units in beginning work-in-process must be excluded.

Question 3

Hoyt Co. manufactured the following units:

Manufacturing costs totaled $99,000. What amount should Hoyt debit to finished goods?
A. $95,400
B. $93,600
C. $90,000
D. $99,000

Answer 3

B. $93,600

Normal spoilage occurs under normal operating conditions and should be treated as a product cost. However, abnormal spoilage is not expected to occur and should be treated as a period cost because of its unusual nature. Consequently, the cost of abnormal spoilage is removed from the manufacturing costs based on the relative number of units spoiling abnormally. Thus, the amount debited to finished goods is $93,600 {$99,000 – [300 ÷ (5,000 + 200 + 300) × $99,000]}.

Question 4

Fleet, Inc., manufactured 700 units of Product A, a new product, during the year. Product A’s variable and fixed manufacturing costs per unit were $6.00 and $2.00, respectively. The inventory of Product A on December 31 consisted of 100 units. There was no inventory of Product A on January 1. What would be the change in the dollar amount of inventory on December 31 if variable costing were used instead of absorption costing?

A. $800 decrease.
B. $200 increase.
C. $0
D. $200 decrease.

Answer 4

D. $200 decrease.

Given an inventory increase of 100 units during the year and the fixed manufacturing cost per unit of $2.00, $200 (100 units × $2.00) of overhead would be deferred using absorption costing but expensed immediately using variable costing. Thus, variable-costing inventory would be $200 less than absorption costing.

Question 5

In computing the current period’s manufacturing cost per equivalent unit of production (EUP), the FIFO method of process costing considers current period costs

A. Less cost of beginning work-in-process (BWIP) inventory.
B. Only.
C. Plus cost of ending work-in-process (EWIP) inventory.
D. Plus cost of beginning work-in-process (BWIP) inventory.

Answer 5

B. Only.

An EUP is a set of inputs required to manufacture one physical unit. Calculating EUP for each factor of production facilitates measurement of output and cost allocation when work-in-process exists. Under the FIFO assumption, only current-period costs are allocated between cost of goods manufactured and ending work in process because FIFO maintains beginning inventory costs completely separable from current-period costs. The cost per EUP considers only current-period costs.

Question 6

The primary difference between absorption and variable costing is that variable costing treats

A. Direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of fixed manufacturing overhead as product costs.
B. Only direct materials and direct labor as product cost.
C. Only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable portion of selling and administrative expenses as product cost.
D. Only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

Answer 6

D. Only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

Variable costing treats only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.

Question 7

Based on the following data, what is the gross profit for the company?

A. $600,000
B. $200,000
C. $400,000
D. $900,000

Answer 7

A. $600,000

Question 8

In the computation of manufacturing cost per equivalent unit, the weighted-average method of process costing considers

A. Current costs plus cost of beginning work-in-process inventory.
B. Current costs only.
C. Current costs minus cost of beginning work-in-process inventory.
D. Current costs plus cost of ending work-in-process inventory.

Answer 8

A. Current costs plus cost of beginning work-in-process inventory.

The weighted-average method of process costing combines the costs of work done in the previous period and the current period. Thus, the cost of the EUP is equal to the current cost (current period) plus the cost of BWIP (previous period).

Question 9

Wages earned by machine operators in producing the firm’s product should be categorized as

Answer 9

B.

Question 10

Fact Pattern: At the end of its fiscal year, C.G. Manufacturing recorded the data below:

Using absorption (full) costing, C.G.’s inventoriable costs are

A. $1,080,000
B. $1,060,000
C. $800,000
D. $900,000

Answer 10

B. $1,060,000

Absorption costing is required by GAAP. It charges all costs of production to inventories. The prime costs ($800,000), variable manufacturing overhead ($100,000), and the fixed manufacturing overhead ($160,000) are included. They total $1,060,000.

Question 11

A company with three products classifies its costs as belonging to five functions: design, production, marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to the three products. The direct costs of each of the five functions are traced directly to the three products. The indirect costs of each of the five business functions are collected into five separate cost pools and then assigned to the three products using appropriate allocation bases. The allocation base that will most likely be the best for allocating the indirect costs of the distribution function is

A. Number of shipments.
B. Number of customer phone calls.
C. Dollar sales volume.
D. Number of sales persons.

Answer 11

A. Number of shipments.

Distribution is the transfer of goods from producers to customers or from distribution centers to merchandisers. Thus, distribution manages outflows, and purchasing manages inflows. Among the interrelated issues involved in distribution are (1) selection of distribution channels, (2) inventory placement, (3) means of transportation, (4) shipment schedules, (5) routes, and (6) carriers. Accordingly, the number of shipments is the cost driver most highly correlated with the incurrence of the indirect costs of distribution.

Question 12

Fact Pattern: Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.

Concerning AM-12, which one of the following alternatives is most advantageous?

A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.
B. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.
C. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.25, which maintains the same gross profit percentage.
D. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $3.00, which covers the joint costs.

Answer 12

A. Whitehall should process further and sell to Flank if the total selling price per unit after further processing is greater than $5.00.

The unit price of the product at the split-off point is known to be $3.50, so the joint costs are irrelevant. The additional unit cost of further processing is $1.50 ($90,000 ÷ 60,000 units). Consequently, the unit price must be at least $5.00 ($3.50 opportunity cost + $1.50).
B. Whitehall should continue to sell at split-off unless Flank offers at least $4.50 per unit after further processing, which covers Whitehall’s total costs.

Question 13

In the application of variable costing as a cost-allocation process in manufacturing,

A. Variable indirect costs are treated as product costs.
B. Nonvariable indirect costs are treated as product costs.
C. Variable direct costs are treated as period costs.
D. Nonvariable direct costs are treated as product costs.

Answer 13

A. Variable indirect costs are treated as product costs.

Variable costing considers only variable manufacturing costs to be product costs. Variable indirect costs included in variable overhead are therefore treated as inventoriable. Fixed costs are considered period costs and are expensed as incurred.

Question 14

An entity develops computer programs to meet customers’ special requirements. How should the entity categorize payments to employees who develop these programs?

Answer 14

B.

Question 15

During the month just ended, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing process. The cost of units produced includes

A. Normal spoilage, but neither scrap nor abnormal spoilage.
B. Scrap, but not spoilage.
C. Scrap and normal spoilage, but not abnormal spoilage.
D. Scrap, normal spoilage, and abnormal spoilage.

Answer 15

C. Scrap and normal spoilage, but not abnormal spoilage.

Scrap consists of direct material left over from the production process. It can either be sold, in which case it reduces factory overhead, or discarded, in which case it is absorbed into the cost of the good output. Normal spoilage occurs under normal operating conditions. Because it is expected under efficient operations, it is treated as a product cost. It is absorbed into the cost of the good output. Abnormal spoilage is not expected to occur under normal, efficient operating conditions. Abnormal spoilage is typically treated as a period cost (a loss).

Question 16

The following information pertains to Syl Co.:

What is Syl’s breakeven point in sales dollars?

A. $160,000
B. $200,000
C. $50,000
D. $40,000

Answer 16

C. $50,000

The breakeven point in sales dollars is the fixed costs divided by the contribution margin ratio. Variable costs equal 20% of sales ($160,000 ÷ $800,000). Thus, the contribution margin ratio is 80%, and the breakeven point in dollars is $50,000 ($40,000 FC ÷ 80%).

Question 17

A company has considerable excess manufacturing capacity. A special job order’s cost sheet includes the following applied manufacturing overhead costs:

The fixed costs include a normal $3,700 allocation for in-house design costs, although no in-house design will be done. Instead, the job will require the use of external designers costing $7,750. What is the total amount to be included in the calculation to determine the minimum acceptable price for the job?

A. $58,050
B. $54,000
C. $40,750
D. $36,700

Answer 17

C. $40,750

Given excess capacity, neither increased fixed costs nor opportunity costs are incurred by accepting the special order. Thus, the marginal cost of the order (the minimum acceptable price) is $40,750 ($33,000 variable costs + $7,750 cost of external design).

Question 18

Information for the month of January concerning Department A, the first stage of Ogden Corporation’s production cycle, is as follows:

Materials are added at the beginning of the process. The ending work-in-process is 50% complete as to conversion costs. How would the total costs accounted for be distributed, using the weighted-average method?

Answer 18

C.

Question 19

Fact Pattern: Regis Company manufactures plugs used in its manufacturing cycle at a cost of $36 per unit that includes $8 of fixed overhead. Regis needs 30,000 of these plugs annually, and Orlan Company has offered to sell these units to Regis at $33 per unit. If Regis decides to purchase the plugs, $60,000 of the annual fixed overhead applied will be eliminated, and the company may be able to rent the facility previously used for manufacturing the plugs.

If Regis Company purchases the plugs but does not rent the unused facility, the company would

A. Save $2.00 per unit.
B. Save $3.00 per unit.
C. Lose $3.00 per unit.
D. Lose $6.00 per unit.

Answer 19

C. Lose $3.00 per unit.

Exclusive of the fixed overhead, the unit cost of making the plugs is $28 ($36 total cost – $8 fixed OH). Purchasing the plugs will avoid $2 per unit of fixed overhead ($60,000 OH applied ÷ 30,000 units). Accordingly, $6 per unit of fixed overhead is unavoidable, and the relevant (avoidable) unit cost of making the plugs is $30 [$36 total cost – ($8 fixed OH – $2 avoidable cost)]. The purchase option therefore results in a $3-per-unit loss ($33 purchase price – $30 relevant cost).

Question 20

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. $260,000
B. $300,000
C. $200,000
D. $240,000

Answer 20

B. $300,000

The company produces products X and Y in each production run at a joint cost of $500,000. No additional processing costs are incurred. To allocate the common cost on a physical-quantity basis means to distribute the costs based on each product’s pro-rata share of the total units produced. A production run produces 240,000 gallons of product X and 160,000 gallons of product Y, resulting in 400,000 total units. Thus, product X is allocated $300,000 of the cost [$500,000 × (240,000 ÷ 400,000)]. Product Y is allocated $200,000 [$500,000 × (160,000 ÷ 400,000)].

Question 21

Indirect labor is a

A. Period cost.
B. Prime cost.
C. Conversion cost.
D. Nonmanufacturing cost.

Answer 21

C. Conversion cost.

Conversion costs include direct labor and manufacturing overhead. Because indirect labor is a component of manufacturing overhead, indirect labor is a conversion cost.

Question 22

Under a costing system that allocates overhead on the basis of direct labor hours, Zeta’s materials handling costs allocated to one unit of wall mirrors would be

A. $1,000
B. $5,000
C. $2,000
D. $500

Answer 22

A. $1,000

If direct labor hours are used as the allocation base, the $50,000 of costs is allocated over 400 hours of direct labor. Multiplying the 25 units of each product times 200 hours results in 5,000 labor hours for each product, or a total of 10,000 hours. Dividing $50,000 by 10,000 hours results in a cost of $5 per direct labor hour. Multiplying 200 hours times $5 results in an allocation of $1,000 of overhead per unit of product.

Question 23

Dahl Co. uses a standard costing system in connection with the manufacture of a “one size fits all” article of clothing. Each unit of finished product contains 2 yards of direct materials. However, a 20% direct materials spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct materials is $3 per yard. The standard direct materials cost per unit of finished product is

A. $7.50
B. $7.20
C. $6.00
D. $4.80

Answer 23

A. $7.50

If 2 yards remain in each unit after spoilage of 20% of the direct materials input, the total per unit input must have been 2.5 yards (2.0 ÷ 80%). The standard unit direct materials cost is therefore $7.50 (2.5 yards × $3).

Question 24

Snyder Co. manufactures fans with direct material costs of $10 per unit and direct labor of $7 per unit. A local carrier charges Snyder $5 per unit to make deliveries. Sales commissions are paid at 10% of the selling price. Fans are sold for $100 each. Indirect factory costs and administrative costs are $6,800 and $37,200 per month, respectively. How many fans must Snyder produce to break even?

A. 648
B. 530
C. 564
D. 1,375

Answer 24

A. 648

The breakeven point in units is derived by dividing fixed costs by the unit contribution margin. Snyder has fixed costs of $44,000 per month ($6,800 indirect factory costs + $37,200 administrative costs). The unit contribution margin is $100 – $10 – $7 – $5 – ($100 × 10%) = $68. The breakeven point is therefore $44,000 ÷ $68 = 647.06 units. However, Snyder cannot make a fractional unit, so it must produce 648 units.

Question 25

Fact Pattern: Whitehall Corporation produces chemicals used in the cleaning industry. During the previous month, Whitehall incurred $300,000 of joint costs in producing 60,000 units of AM-12 and 40,000 units of BM-36. Whitehall uses the units-of-production method to allocate joint costs. Currently, AM-12 is sold at split-off for $3.50 per unit. Flank Corporation has approached Whitehall to purchase all of the production of AM-12 after further processing. The further processing will cost Whitehall $90,000.

Assume that Whitehall Corporation agreed to sell AM-12 to Flank Corporation for $5.50 per unit after further processing. During the first month of production, Whitehall sold 50,000 units with 10,000 units remaining in inventory at the end of the month. With respect to AM-12, which one of the following statements is true?

A. The operating profit last month was $200,000, and the inventory value is $30,000.
B. The operating profit last month was $125,000, and the inventory value is $30,000.
C. The operating profit last month was $50,000, and the inventory value is $45,000.
D. The operating profit last month was $50,000, and the inventory value is $15,000.

Answer 25

C. The operating profit last month was $50,000, and the inventory value is $45,000.

Joint costs are allocated based on units of production. Accordingly, the unit joint cost allocated to AM-12 is $3.00 [$300,000 ÷ (60,000 units of AM-12 + 40,000 units of BM-36)]. The unit cost of AM-12 is therefore $4.50 [$3.00 joint cost + ($90,000 additional cost ÷ 60,000 units)]. Total inventory value is $45,000 (10,000 units × $4.50), and total operating profit is $50,000 [50,000 units sold × ($5.50 unit price – $4.50 unit cost)].

Question 26

Which of the following must be known about a production process to institute a variable costing system?

A. Standard production rates and times for all elements of production.
B. Contribution margin and breakeven point for all goods in production.
C. The controllable and noncontrollable components of all costs related to production.
D. The variable and fixed components of all costs related to production.

Answer 26

D. The variable and fixed components of all costs related to production.

Variable costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are treated as period costs. Thus, one need only be able to determine the variable and fixed manufacturing costs to institute a variable costing system.

Question 27

When a firm prepares financial reports by using absorption costing,

A. Profits may decrease with increased sales even if there is no change in selling prices and costs.
B. Profits will always decrease with decreases in sales.
C. Decreased output and constant sales result in increased profits.
D. Profits will always increase with increases in sales.

Answer 27

A. Profits may decrease with increased sales even if there is no change in selling prices and costs.

In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed production, more overhead is expensed under absorption costing because fixed overhead is carried over from the prior inventory. If sales exceed production, more than one period’s fixed overhead is recognized as expense. Accordingly, if the increase in fixed overhead expensed is greater than the contribution margin of the increased units sold, less profit may result from an increased level of sales.

Question 28

Fact Pattern: Peterson Company’s records for the year ended December 31 show that no finished goods inventory existed at January 1 and no work was in process at the beginning or end of the year.

Under the absorption costing method, Peterson’s operating income for the year is

A. $217,000
B. $307,000
C. $352,000
D. $374,500

Answer 28

C. $352,000

In absorption costing, the unit costs include both fixed and variable manufacturing costs. Fixed manufacturing costs are given as $315,000. For the 70,000 units produced, unit cost was $13.50 [($630,000 + $315,000) ÷ 70,000].

Question 29

Cay Co.’s fixed manufacturing overhead costs for the month just ended totaled $100,000, and variable selling costs totaled $80,000. Under variable costing, how should these costs be classified?

Answer 29

C. $180,000 $0

Question 30

In its first year of operations, Magna Manufacturers had the following costs when it produced 100,000 units and sold 80,000 units of its only product:

How much lower would Magna’s net income be if it used variable costing instead of full absorption costing?
A. $54,000
B. $36,000
C. $94,000
D. $68,000

Answer 30

B. $36,000

Full absorption costing includes fixed manufacturing costs in finished goods inventory. Variable costing treats these costs as period costs. Thus, under full absorption costing, the fixed manufacturing cost is a product cost that must be assigned to the units produced during the period. Fixed manufacturing cost per unit is $1.80 ($180,000 ÷ 100,000 units), so the amount inventoried is $36,000 [(100,000 units produced – 80,000 units sold) × $1.80]. Because this amount would be expensed under variable costing, it equals the excess of pretax full absorption-costing net income over pretax variable-costing net income.

Question 31

Fact Pattern: At the end of its fiscal year, C.G. Manufacturing recorded the data below:

If C.G. uses variable costing, the inventoriable costs for the fiscal year are

A. $900,000
B. $1,060,000
C. $800,000
D. $980,000

Answer 31

A. $900,000

The only costs capitalized are the variable costs of manufacturing.

Question 32

Lynn Manufacturing Co. prepares income statements using both standard absorption and standard variable costing methods. For the month just ended, unit standard costs were unchanged from the previous month. In the month just ended, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn’s ratios using absorption costing compare with those using variable costing?

Answer 32

A. Greater Smaller

Question 33

The Cutting Department is the first stage of Mark Company’s production cycle. BWIP for this department was 80% complete as to conversion costs. EWIP was 50% complete. Conversion costs in the Cutting Department for the month just ended were as follows:

Using the FIFO method, what was the conversion cost of ending WIP in the Cutting Department?

A. $33,000
B. $22,000
C. $39,000
D. $78,000

Answer 33

C. $39,000

Under the FIFO method, EUP for a period include only the work done that period and exclude any work done in a prior period. EWIP is 60,000 units (25,000 units BWIP + 135,000 units started – 100,000 units completed). Units started and completed equal 75,000 (100,000 completed units – 25,000 units BWIP). The total of conversion cost EUP for the period is calculated below.

The total of the conversion costs for the period is given as $143,000. Dividing by total EUP of 110,000 gives a unit cost of $1.30. Thus, the conversion cost of the EWIP inventory is $39,000 (30,000 EUP in EWIP × $1.30).

Question 34

Quo Co. rented a building to Hava Fast Food. Each month Quo receives a fixed rental amount plus a variable rental amount based on Hava’s sales for that month. As sales increase, so does the variable rental amount but at a reduced rate. Which of the following curves reflects the monthly rentals under the agreement?

A. II
B. IV
C. III
D. I

Answer 34

D. I

Fixed cost remains unchanged within the relevant range for a given period despite fluctuations in activity, but variable costs vary directly with the activity. Because a portion of the rental revenue is a fixed cost, it will never be zero regardless of sales. Because the total variable cost increases at a reduced rate as sales increase, the per-unit variable cost decreases. Furthermore, as sales increase over time, the rental revenue increases at a diminishing amount as represented by Curve I.

Question 35

Assuming no beginning work-in-process inventory, and that the ending work-in-process inventory is 100% complete as to materials costs, the number of equivalent units as to materials costs is

A. The same as the units completed.
B. Less than the units placed in process.
C. Less than the units completed.
D. The same as the units placed in process.

Answer 35

D. The same as the units placed in process.

Given no BWIP, whether the FIFO or weighted-average method is used is immaterial. Because EWIP is 100% complete as to materials costs, the EUP for materials costs are equal to the number of units placed in process (Units in EWIP + Units transferred to finished goods).

Question 36

During the month just ended, Vane Co. produced and sold 10,000 units of a product. Manufacturing and selling costs incurred were as follows:

The product’s unit cost under variable (direct) costing was

A. $52
B. $51
C. $50
D. $49

Answer 36

D. $49

Variable (direct) costing includes variable manufacturing costs only: direct materials, direct labor, and variable manufacturing overhead. Fixed manufacturing overhead and selling expenses are treated as period costs. Thus, the unit cost is $49 [($400,000 + $90,000) ÷ 10,000 units].

Question 37

Which of the following statements is true for a firm that uses variable costing?

A. Profits fluctuate with sales.
B. The cost of a unit of product changes because of changes in number of units manufactured.
C. Product costs include variable administrative costs.
D. An idle facility variation is calculated.

Answer 37

A. Profits fluctuate with sales.

In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are expensed in the period incurred. Because changes in the relationship between production levels and sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more directly follow the trends in sales.

Question 38

Last year a company had sales of 75,000 units and production of 100,000 units. Other information for the year is shown below.

Assuming no beginning inventory, what is the total value of ending finished goods inventory under absorption costing?

A. $184,375
B. $159,375
C. $209,375
D. $279,175

Answer 38

B. $159,375

With no beginning inventory, cost of goods manufactured is simply the sum of direct labor, direct materials, variable overhead, and fixed overhead, or $637,500 ($187,500 + $100,000 + $150,000 + $200,000). The cost of the ending inventory is equal to $159,375 [$637,500 × (25,000 units ÷ 100,000 units)].

Question 39

Fact Pattern: Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows:

Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000.

Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the 10 units from Simpson Castings, Richardson’s monthly cost for T305 would

A. Increase $96,000.
B. Decrease $14,000.
C. Decrease $64,000.
D. Increase $46,000.

Answer 39

D. Increase $46,000.

The out-of-pocket cost of making the part equals the total manufacturing cost minus the fixed overhead, or $26,400 {$42,400 – [(2 ÷ 3) × $24,000]}. The cost of the component consists of the $30,000 purchase price plus the $6,000 (20% of cost) of variable receiving costs, or a total of $36,000. Thus, unit out-of-pocket cost would increase by $9,600 if the components were purchased. For 10 components, the total cost increase would be $96,000, but the $50,000 rental would reduce the net increase to $46,000.

Question 40

In a process cost system, the application of manufacturing overhead usually is recorded as an increase in

A. Cost of goods sold.
B. Work-in-process inventory control.
C. Finished goods inventory control.
D. Manufacturing overhead control.

Answer 40

B. Work-in-process inventory control.

The principal distinction between process costing and job costing is that the latter uses subsidiary WIP and finished goods ledgers to account for separate jobs. However, the same general ledger accounts are used in both systems, and cost flow among accounts also is the same. Both systems increase (debit) work-in-process (a general ledger account) to record applied overhead and other production costs.

Question 41

As required by GAAP, the fixed portion of the semivariable cost of electricity for a manufacturing plant is a

Answer 41

D. No Yes

Question 42

A decrease in production levels within a relevant range

A. Decreases variable cost per unit.
B. Increases variable cost per unit.
C. Increases total fixed costs.
D. Decreases total costs.

Answer 42

D. Decreases total costs.

When production levels decrease within a relevant range, the total costs will decrease. Although the total fixed costs will remain constant, fixed costs per unit will increase because fewer units are available to absorb the constant amount of total fixed costs. Furthermore, total variable costs decrease assuming the unit variable costs remain constant.

Question 43

A manufacturing company is contemplating switching from their current costing approach, variable costing, to absorption costing. Relevant data for the company in January 20X2 is as follows.

A manufacturing company is contemplating switching from their current costing approach, variable costing, to absorption costing. Relevant data for the company in January 20X2 is as follows.

A. $345,000
B. $305,000
C. $295,000
D. $335,000

Answer 43

A. $345,000

Absorption costing (also called full costing or full absorption costing) treats all manufacturing costs as product costs. Thus, direct materials, direct labor, variable overhead, and fixed overhead are all treated as product costs and will be expensed as cost of goods sold. During the period, 30,000 units were sold. Thus, operating income is calculated as follows:

Question 44

A corporation had the following unit costs for the recently concluded calendar year:

Inventory for the sole product totaled 6,000 units on January 1 and 5,200 units on December 31. When compared to variable costing income, absorption costing income is

A. $6,800 higher.
B. $2,400 lower.
C. $2,400 higher.
D. $6,800 lower.

Answer 44

B. $2,400 lower.

Since beginning inventory was 6,000 and ending inventory was 5,200, inventory decreased by 800 units which means sales exceeded production. If production is less than sales, operating income is higher under variable costing. It follows that income is lower under absorption costing.

Question 45

Nil Co. uses a predetermined factory overhead application rate based on direct labor cost. For the year ended December 31, Nil’s budgeted factory overhead was $600,000, based on a budgeted volume of 50,000 direct labor hours, at a standard direct labor rate of $6 per hour. Actual factory overhead amounted to $620,000, with actual direct labor cost of $325,000. For the year, overapplied factory overhead was

A. $50,000
B. $25,000
C. $30,000
D. $20,000

Answer 45

C. $30,000

Nil Co. applies factory overhead using a predetermined overhead rate, based on direct labor cost. Overhead was budgeted for $600,000 based on a budgeted labor cost of $300,000 ($6 × 50,000 hrs.). Thus, $2 of overhead was applied for each $1 of labor. Given actual labor cost of $325,000, $650,000 ($2 × $325,000) of overhead was applied during the period. Actual overhead was $620,000, so $30,000 ($650,000 – $620,000) was overapplied.

Question 46

The management of a company computes net income using both absorption and variable costing. This year, the net income under the variable-costing approach was greater than the net income under the absorption-costing approach. This difference is most likely the result of

A. Sales volume exceeding production volume.
B. An increase in the finished goods inventory.
C. A decrease in the variable marketing expenses.
D. Inflationary effects on overhead costs.

Answer 46

A. Sales volume exceeding production volume.

Absorption costing (full costing) is the accounting method that considers all manufacturing costs as product costs. These costs include variable and fixed manufacturing costs, whether direct or indirect. However, variable costing treats fixed manufacturing overhead as a period cost instead of charging it to the product (inventory). Thus, when sales exceed production, the absorption costing method recognizes fixed manufacturing overhead inventoried in a prior period. Direct costing does not. Accordingly, net income under variable costing is greater than net income under absorption costing.

Question 47

During the first month of its operations, a company manufactured a product with variable production costs of $50 per unit. Fixed manufacturing overhead totaled $1,800,000 and is allocated based upon units produced. During the month, the company completed 15,000 units, sold 12,000 units, and incurred no variances. If the company’s operating income under absorption costing was $400,000, its operating income (loss) under variable costing was

A. $(50,000)
B. $40,000
C. $(110,000)
D. $760,000

Answer 47

B. $40,000

The key difference between variable costing and absorption costing in this circumstance is the treatment of fixed overhead. Absorption costing treats all manufacturing costs as product costs, while variable costing considers only variable manufacturing costs to be product costs. Under absorption costing, only $1,440,000 [($1,800,000 ÷ 15,000 units produced) × 12,000 units sold] of fixed overhead costs are recognized in the period; under variable costing, all $1,800,000 of fixed overhead costs are recognized. Thus, there is an increase in cost and a resulting decrease in operating income of $360,000 ($1,800,000 – $1,440,000), which leads to an operating income under variable costing of $40,000.

Question 48

Which of the following labor costs for a manufacturing company is deducted from revenues in order to determine gross margin but is not deducted from revenues to determine contribution margin?

A. Salesperson’s commissions.
B. Manufacturing floor manager’s salary.
C. Office manager’s salary.
D. Hourly assembly worker’s wages.

Answer 48

B. Manufacturing floor manager’s salary.

Gross margin is the excess of sales over cost of goods sold that consists of variable and fixed manufacturing costs. Only costs directly associated with manufacturing the product may be subtracted to arrive at gross margin. Contribution margin is the excess of sales over the sum of variable manufacturing and selling and administrative costs. The manufacturing floor manager’s salary is an indirect labor cost (fixed manufacturing cost), so it should therefore be deducted from revenues to determine gross margin but not deducted from revenues to determine contribution margin.

Question 49

A company manufactures two types of engineering diagnostic equipment used in construction. The two products are based on different technologies, x-ray and ultrasound, but are manufactured in the same factory. The manufacturer has computed the manufacturing cost of the x-ray and ultrasound products by adding together direct materials, direct labor, and overhead cost applied based on the number of direct labor hours. The factory has three overhead departments that support the single production line that makes both products. Budgeted overhead spending for the departments is as follows:

The budgeted cost to manufacture one ultrasound machine using the activity-based costing method is

A. $293
B. $305
C. $225
D. $264

Answer 49

D. $264

Charges for direct materials and direct labor are traceable to each type of machine ($8,000 and $12,000 respectively for the ultrasound). The departmental costs must be allocated based on each machine’s proportional driver level. Engineering design costs can be allocated to the ultrasound machine at a rate of 33.3% [1 ÷ (1 + 2)], material handling at a rate of 60% [600 ÷ (600 + 400)], and setup at a rate of 46.7% [7 ÷ (7 + 8)]. The cost for a single ultrasound machine can thus be calculated as follows:

Question 50

Johnson Co., distributor of candles, has reported the following budget assumptions for Year 1: No change in candles inventory level; cash disbursement to candle manufacturer, $300,000; target accounts payable ending balance for Year 1 is 150% of accounts payable beginning balance; and sales price is set at a markup of 20% of candle purchase price. The candle manufacturer is Johnson’s only vendor, and all purchases are made on credit. The accounts payable has a balance of $100,000 at the beginning of Year 1. What is the budgeted gross margin for Year 1?

A. $75,000
B. $70,000
C. $60,000
D. $90,000

Answer 50

B. $70,000

The budgeted payment to the vendor is $300,000. Of this amount, $100,000 is to settle the beginning balance of accounts payable. Accordingly, the inventory purchases for Year 1 equal $350,000 [($300,000 cash paid – $100,000 beginning accounts payable) + ($100,000 × 150%) ending accounts payable]. The cost of goods sold for a retailer equals purchases adjusted for the change in inventory. Given the budget assumptions, purchases is also the cost of goods sold because beginning and ending inventory are the same. Sales are therefore $420,000 ($350,000 purchases × 120%), and the budgeted gross margin is $70,000 ($420,000 sales – $350,000 COGS).

Question 51

Waldo Company produces one product. The following are the data for the current month:

The contribution margin is

A. $180,000
B. $46,000
C. $226,000
D. $207,000

Answer 51

A. $180,000

The contribution margin equals sales revenue minus all variable costs. Fixed costs are subtracted from variable costs to determine operating income. Waldo’s unit variable cost is $34 ($21 + $10 + $3). Thus, its contribution margin is calculated as follows: