Cost Accounting Chapter 2

Question 1

Materials control

Answer 1

includes physical control of materials and control over the investment in materials.

Question 2

Effective physical control of materials

Answer 2

1) Involves limiting the access to stored materials 2) segregating the duties of employees who handle materials and materials reports 3) establishing an accurate recording system for materials purchases and issues 4) Only authorized personnel should be permitted in material storage areas 5) procedures for moving materials into and out of these areas should be well established

Question 3

The following functions of materials control should be segregated to minimize opportunities for employee misappropriation:

Answer 3

Purchasing Receiving Storage Use recording

Question 4

To ensure the accurate recording of purchases and materials issues

Answer 4

a) Inventory records should document the determination of inventory quantities on hand, and b) Cost records should provide the data needed to assign a cost to inventories to be used in the preparation of financial statements.

Question 5

Order point →

Answer 5

The point at which the predetermined minimum level of inventory is reached, requiring the item to be ordered, is called the Calculating the order point is based on the following:

Question 6

Usage

Answer 6

—The anticipated rate at which the materials will be used.

Question 7

Lead time

Answer 7

—The estimated time interval between placing the order and receiving the materials ordered.

Question 8

Safety stock

Answer 8

The estimated minimum level of inventory needed to protect against stockouts.

Question 9

The order point can be calculated as follows:

Answer 9

(Expected Daily Usage × Lead Time) + Safety Stock

Question 10

Economic order quantity (EOQ) →

Answer 10

The optimal quantity of materials to order at one time is the order size that minimizes the total costs of placing orders and of carrying inventory in stock.

**The economic order quantity is the point where total order costs equal total carrying costs, unless there is a provision for safety stock.

Question 11

EOQ Formula -

Answer 11

Question 12

Order costs →

Answer 12

include purchasing, receiving and inspection salaries and wages, communication costs, and record keeping.

Question 13

Carrying costs →

Answer 13

include::: storage and handling interest insurance, and property taxes on inventories; losses due to theft, spoilage, or obsolescence.

Question 14

Annual order costs decrease when order size increases

Answer 14

while annual carrying costs increase with increases in order size.

Question 15

Materials control personnel include:

Answer 15

(a) purchasing agent who is responsible for purchasing the materials needed at the most economical price

(b) receiving clerk who is responsible for supervising incoming shipments of material;

(c) storeroom keeper who is responsible for storing and maintaining the goods received
(d) production department supervisor who is responsible for supervising the operations of a particular department and who prepares or approves material requisitions.

Question 16

purchasing agent

Answer 16

who is responsible for purchasing the materials needed at the most economical price

Question 17

receiving clerk

Answer 17

who is responsible for supervising incoming shipments of material;

Question 18

storeroom keeper

Answer 18

who is responsible for storing and maintaining the goods received

Question 19

Production department supervisor

Answer 19

who is responsible for supervising the operations of a particular department and who prepares or approves material requisitions.

Question 20

The supporting documents used in the procurement process include:

Answer 20

(a) Purchase requisition
(b) Purchase order
(c) Vendor’s invoice
(d) Receiving report
(e) Debit-credit memorandum

return shipping order.

Question 21

Purchase requisition →

Answer 21

which is prepared by the storeroom keeper to notify the purchasing agent that additional materials should be ordered

Question 22

Purchase order →

Answer 22

which is prepared by the purchasing agent describing the materials ordered, stating terms and prices, and fixing the date and method of delivery

Question 23

Vendor’s invoice→

Answer 23

which the purchasing agent compares to the purchase order to verify description of materials, price, terms of payment, method of shipment, and delivery date

Question 24

Receiving report →

Answer 24

which is prepared by the receiving clerk who counts and identifies the materials received and records the shipper, the date of receipt, the materials received, and the number of the purchase order identifying the shipment

Question 25

Debit-credit memorandum→

Answer 25

which is prepared when the type, quantity, or quality of goods ordered differs from that which was shipped and adjustments must be made to the vendor’s invoice.

If goods are to be returned, the purchasing agent will prepare a return shipping order.

Question 26

materials requisition →

Answer 26

Materials should not be issued from the storeroom without written authorization in the form of a properly approved materials requisition. It should identify the specific job or department to which the materials are issued.

Question 27

Returned materials report →

Answer 27

Returned materials should be accompanied by a returned materials report. Occasionally materials are returned to the storeroom because, for example, more materials were requisitioned than were actually needed for production or perhaps the wrong type of material was issued.

Question 28

All purchases of material should be recorded in the general ledger as a

Answer 28

debit to Materials.

Question 29

The materials account is a control account supported by →

Answer 29

Subsidiary materials ledger.

Question 30

The individual accounts in the materials ledger are designed to show →

Answer 30

The quantity of each material on hand and its cost.

Question 31

When materials receipts and issues are posted to the materials ledger accounts

Answer 31

the balance is extended after each entry so that it may be determined when stock is falling below minimum requirements.

Question 32

first-in, first-out (FIFO) →

Answer 32

the materials issued are costed at the earliest prices paid for the materials in stock, and the ending inventories are costed at the most recent purchase prices (LIFO)

The FIFO method is simpler and less expensive clerically and fairly depicts profits under stable price conditions.

Question 33

Last-in, first-out (LIFO) →

Answer 33

method of costing, the materials issued are costed at the most recent purchase prices, and the ending inventories are costed at the prices paid for the earliest purchases (FIFO).

Under conditions of rising prices, the LIFO method is sometimes selected→ because the higher priced materials are charged against the increasingly higher sales revenue, resulting in a more representative earnings picture and a lower income tax liability.

Question 34

Moving average method →

Answer 34

an average unit price is computed each time a new lot of materials is received, and the new unit price is used to cost all issues until another lot is received and a new unit price is computed.

**Many companies have adopted the middle-of-the-road position represented by the moving average method, especially now that computer programs do the computations.

Question 35

summary of materials issued and returned→

Answer 35

All materials issued to production and those returned to stock during a period are recorded on a summary of materials issued and returned.

At the end of the period, the summary provides the information necessary to record the cost of materials.

Question 36

The total cost of direct materials requisitioned is recorded by →

Answer 36

Work in Process XXX

                        Materials XXX

Question 37

The total cost of indirect materials requisitioned is recorded by→

Answer 37

(appropriate) factory overhead account XXX

                                                      Materials XXX

Question 38

Unused materials returned from the factory to the storeroom are recorded by→

Answer 38

(direct materials)

          Materials XXX

                               Work in Process  XXX

(indirect materials)

         Materials XXX

                               Factory Overhead  XXX

Question 39

Any materials returned to vendors should be recorded by →

Answer 39

Accounts Payable XXX

                              Materials XXX

Question 40

just-in-time inventory (JIT) system, (AKA) lean production system →

Answer 40

significantly reduces inventory-carrying costs by requiring that raw materials be delivered only when they are ready to be used and by eliminating inventory buffers of raw materials between manufacturing cells.

Question 41

work centers and manufacturing cells

Answer 41

Many manufacturing functions that were performed in individual departments in a traditional manufacturing system **are combined into work centers and manufacturing cells in a JIT system. **

Question 42

throughput time→

Answer 42

the time that it takes a unit of product to make it through the manufacturing process, and increase velocity,

Question 43

A JIT system can significantly reduce

Answer 43

throughput time,

Question 44

velocity→

Answer 44

the speed with which units are produced in the system.

Question 45

Scrap or waste materials may result from the production process.

Answer 45

If the expected sales revenue from scrap is small, no entry is made for the scrap material until it is sold.

Question 46

Revenue from scrap is expected to be substantial and the market value is known, then you want the Scrap inventoried:

Answer 46

Scrap Material XX

          Scrap Revenue XX

Question 47

Scrap at time of sale Sold for Cash:

Answer 47

Cash XX

                        Scrap Revenue

                        OR Work in Process,

                        OR  Factory Overhead

(depending on whether or not the scrap can be identified with a specific job or department. )

Question 48

Scrap at time of sale Sold On account:

Answer 48

Accounts Receivable XX

                           Scrap Revenue

                           OR Work in Process,

                           OR  Factory Overhead

(depending on whether or not the scrap can be identified with a specific job or department. )

Question 49

Spoiled units →

Answer 49

are imperfect units of the primary product and have a defect that cannot be economically corrected.

The spoiled goods should be recorded in an inventory account at the expected sales value

Question 50

If charging the loss due to spoilage to a specific job

Answer 50

Spoiled Goods Inventory XX

                    Work in Process (JOB NAME)            XX

Question 51

If charging the unrecovered costs of spoilage to factory overhead.

Answer 51

Spoiled Goods Inventory XX

    Factory Overhead        XX

                                 Work in Process            XXXX

Question 52

Defective units

Answer 52

have an imperfection that is considered correctable at an additional cost. When defective work results from regular production, the costs of correcting the defects are charged to factory overhead, but when defective work results from special orders, the rework cost is charged to the order.

Question 53

When the cost of the defects results from regularly produced goods.

Answer 53

Factory Overhead XXXX

          Materials            XX

          Payroll            XX

          Factory Overhead            XX

Question 54

When the defects result from a specific order.

Answer 54

Work in Process XXXX

                  Materials            XX

                  Payroll            XX

                  Factory Overhead            XX

Question 55

Transfer of scarp to inventory

Answer 55

Scrap materials XXX

             Factory Overhead  XXX

Question 56

In JIT (Backflush) Requisitioned raw materials into production

Answer 56

NO ENTRY

Question 57

In JIT (Backflush) Completed and sold all units

Answer 57

No Entry