Exam 2

Question 1

What are the similarities between job-order and process costing?

Answer 1

1. Both systems assign material, labor, and overhead costs to products, and they provide a mechanism for computing unit product costs.
2. Both systems use the same manufacturing accounts, including Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods.
3. The flow of costs through the manufacturing accounts is basically the same in both systems.

Question 2

What are the differences between job-order and process costing?

Answer 2

Job-Order Costing
- Many different jobs are worked on during each period, with each job having unique production requirements.

• Costs are accumulated by individual job.
• Unit costs are computed by job on the job cost sheet.
• e.g. Business card printing

Process Costing
- A single product is produced either on a continuous basis or for long periods of time.
All units of product are identical.

• Costs are accumulated by department.
• Unit costs are computed by department.
• e.g. P&G

Question 3

Process costing is used for products that are:
a. Different and produced continuously.
b. Similar and produced continuously.
c. Individual units produced to customer specifications.
d. Purchased from vendors.

Answer 3

Similar and produced continuously

Question 4

What is processing department?

Answer 4

Any unit in an organization where materials, labor, or overhead are added to the product.

1. The activities performed in a processing department are performed uniformly on all units of production.
2. Furthermore, the output of a processing department must be homogeneous.
3. Products in a process costing environment typically flow in a sequence from one department to another.

Question 5

What are transferred-in costs?

Answer 5

Material, labor, and overhead costs transferred from one dept’s Work in Process to another dept’s Work in Process account.

Example: The transferred-in costs from Department A are added to the manufacturing costs incurred in Department B.

Question 6

What is the flow of Manufacturing Overhead Costs in journal entry form?

Answer 6

In process costing, as in job-order costing, predetermined overhead rates are usually used. Manufacturing overhead cost is applied according to the amount of the allocation base that is incurred in the department.

• In process costing, labor costs are traced to departments—not to individual jobs.
• In process costing, as in job-order costing, predetermined overhead rates are usually used. Manufacturing overhead cost is applied according to the amount of the allocation base that is incurred in the department.
• Once processing has been completed in a department, the units are transferred to the next department for further processing.
• After processing has been finished in Department B, the costs of the completed units are transferred to the Finished Goods inventory account.
• Finally, when a customer’s order is filled and units are sold, the cost of the units is transferred to Cost of Goods Sold.

Question 7

In process costing, what 2 numbers do each department need to calculate for financial reporting purposes?

Answer 7

The cost of its ending work in process inventory and the cost of its completed units that were transferred to the next stage

• The key to deriving these two numbers is calculating unit costs within each department.

Question 8

What two methods are used to perform process costing computations?

Answer 8

Weighted-average and FIFO

Question 9

What process costing method calculates unit costs by combining costs and outputs from the current and prior periods?

Answer 9

Weighted-Average

Question 10

What are the characteristics of the weighted-average method?

Answer 10

1. This method makes no distinction between work done in the prior and current periods. It blends units and costs from the prior and current periods.
2. The equivalent units of production for a department are the number of units transferred to the next department (or finished goods) plus the equivalent units in the department’s ending work-in-process inventory.

Question 11

What process costing method calculates unit costs based solely on the costs and outputs from the current period?

Answer 11

FIFO

Question 12

What are equivalent units?

Answer 12

The product of the number of partially completed units and the percentage completion of those units.

• 2. Equivalent units need to be calculated because a department usually has some partially completed units in its beginning and ending inventories. These partially completed units complicate the determination of a department’s output for a given period and the unit cost that should be assigned to that output.

Question 13

What are conversion costs?

Answer 13

The combination of direct labor and manufacturing overhead

Question 14

For the current period, Jones started 15,000 units and completed 10,000 units, leaving 5,000 units in process 30% complete. How many equivalent units of production did Jones have for the period?
a. 10,000.
b. 11,500.
c. 13,500.
d. 15,000.

Answer 14

11,500

Question 15

What do equivalent units of production always equal?

Answer 15

Units completed and transferred
+ Equivalent units remaining in work in process

Question 16

What is operation costing?

Answer 16

Hybrid of job-order and process costing because it possesses attributes of both approaches.

• commonly used when batches of many different products pass through the same processing department.

Question 17

When computing the cost per equivalent unit, the weighted-average method of process costing considers:

a. costs incurred during the current period only.

b.costs incurred during the current period plus cost of ending work in process inventory.

c.costs incurred during the current period plus cost of beginning work in process inventory.

d.costs incurred during the current period less cost of beginning work in process inventory.

Answer 17

costs incurred during the current period plus cost of beginning work in process inventory.

Question 18

In the cost reconciliation report under the weighted-average method, the “Total cost accounted for” equals:

a.Cost of beginning work in process inventory + Cost of units transferred out

b.Cost of beginning work in process inventory + Cost of units transferred in

c.Cost of ending work in process inventory + Cost of units transferred out

d.Cost of ending work in process inventory + Cost added to production during the period

Answer 18

Cost of ending work in process inventory + Cost of units transferred out

Question 19

All of the following statements are correct when referring to process costing except:

a.Process costing would be appropriate for a jeweler who makes custom jewelry to order.

b.A process costing system has the same basic purposes as a job-order costing system.

c.Units produced are indistinguishable from each other.

d.Costs are accumulated by department.

Answer 19

Process costing would be appropriate for a jeweler who makes custom jewelry to order.

Question 20

The Richmond Corporation uses the weighted-average method in its process costing system. The company has only a single processing department. The company’s ending work-in-process inventory on August 31 consisted of 18,800 units. The units in the ending work-in-process inventory were 100% complete with respect to materials and 60% complete with respect to labor and overhead. If the cost per equivalent unit for August was $2.95 for materials and $4.45 for labor and overhead, the total cost assigned to the ending work in process inventory was:

a.$139,120
b.$83,472
c.$88,924
d.$105,656

Answer 20

$105,656

Question 21

To simplify CVP calculations, managers typically adopt the following assumptions with respect to these factors:

• Selling price is _________. The price of a product or service will not change as volume changes.
• Costs are ________ and can be accurately divided into variable and fixed components. The variable costs are constant per unit and the fixed costs are constant in total over the entire relevant range.
• In multiproduct companies, the mix of products sold remains ___________.

Answer 21

Constant; Linear; Constant

Question 22

What is contribution margin (CM)?

Answer 22

the amount remaining from sales revenue after variable expenses have been deducted.

• CM is used first to cover fixed expenses.
• Any remaining C M contributes to net operating income.

Question 23

What is break even?

Answer 23

The level of sales at which profit is 0
- Once the break-even point has been reached, the net operating income will increase by the amount of the unit CM for each additional unit sold.

Question 24

The contribution format income statement can be expressed in the following equation:

Answer 24

Profit = (Sales − Variable expenses) − Fixed expenses

Question 25

When a company has only one product, we can further refine this equation Profit = (Sales − Variable expenses) − Fixed expenses

Answer 25

Profit = (P×Q − V×Q) − Fixed expenses

Question 26

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the C M ratio for Coffee Klatch? a. 1.319. b. 0.758. c. 0.242. d. 4.139.

Answer 26

0.758

Question 27

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales dollars? a. $1,300. b. $1,715. c. $1,788. d. $3,129.

Answer 27

$1,715

Question 28

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the break-even sales in units? a. 872 cups. b. 3,611 cups. c. 1,200 cups. d. 1,150 cups.

Answer 28

1,150 Cups

Question 29

What is *target profit* *analysis*?

Answer 29

In target profit analysis, we estimate what sales volume is needed to achieve a specific target profit.

Question 30

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine how many cups of coffee would have to be sold to attain a target profit of $2,500 per month. a. 3,363 cups. b. 2,212 cups. c. 1,150 cups. d. 4,200 cups.

Answer 30

3,363 Cups

Question 31

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. Use the formula method to determine the sales dollars that must be generated to attain a target profit of $2,500 per month. a. $2,550. b. $5,013. c. $8,458. d. $10,555.

Answer 31

$5,013

Question 32

What is the Margin of Safety

Answer 32

the excess of budgeted or actual sales dollars over the break-even volume of sales dollars Margin of safety in dollars = Total sales − Break-even sales

Question 33

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the margin of safety expressed in cups? a. 3,250 cups. b. 950 cups. c. 1,150 cups. d. 2,100 cups.

Answer 33

950 Cups

Question 34

What is Core Structure?

Answer 34

the relative proportion of fixed and variable costs in an organization. - Managers often have some latitude in determining their organization’s cost structure.

Question 35

There are advantages and disadvantages to high fixed cost (or low variable cost) and low fixed cost (or high variable cost) structures.

Answer 35

- An advantage of a high fixed cost structure is that income will be higher in good years compared to companieswith a lower proportion of fixed costs. - A disadvantage of a high fixed cost structure is that income will be lower in bad years compared to companies with a lower proportion of fixed costs. - Companies with low fixed cost structures enjoy greater stability in income across good and bad years.

Question 36

What is Operating Leverage?

Answer 36

a measure of how sensitive net operating income is to percentage changes in sales. - It is a measure, at any given level of sales, of how a percentage change in sales volume will affect profits.

Question 37

Coffee Klatch is an espresso stand in a downtown office building. The average selling price of a cup of coffee is $1.49, and the average variable expense per cup is $0.36. The average fixed expense per month is $1,300. An average of 2,100 cups are sold each month. What is the operating leverage? a. 2.21. b. 0.45. c. 0.34. d. 2.92.

Answer 37

2.21

Question 38

At Coffee Klatch, the average selling price of a cup of coffee is $1.49, the average variable expense per cup is $0.36, the average fixed expense per month is $1,300, and an average of 2,100 cups are sold each month. If sales increase by 20%, by how much should net operating income increase? a. 30.0%. b. 20.0%. c. 22.1%. d. 44.2%.

Answer 38

44.2%

Question 39

What is Sales Mix?

Answer 39

the relative proportion in which a company’s products are sold. Different products have different selling prices, cost structures, and contribution margins. When a company sells more than one product, break-even analysis becomes more complex as the following example illustrates.

Question 40

If the contribution margin is not sufficient to cover fixed expenses: a. total profit equals total expenses. b. contribution margin is negative. c. a loss occurs. d. variable expenses equal contribution margin.

Answer 40

a loss occurs.

Question 41

Which of the following is true regarding the contribution margin ratio of a company that produces only a single product? a. As fixed expenses decrease, the contribution margin ratio increases. b. The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit. c. The contribution margin ratio will decline as unit sales decline. d. The contribution margin ratio equals the selling price per unit less the variable expense ratio.

Answer 41

The contribution margin ratio multiplied by the selling price per unit equals the contribution margin per unit.

Question 42

If a company increases its selling price by $2 per unit due to an increase in its variable labor cost of $2 per unit, the break-even point in units will: a. decrease. b. increase. c. not change. d. change but direction cannot be determined.

Answer 42

not change.

Question 43

Which of the following would not affect the break-even point? a. number of units sold b. variable expense per unit c. total fixed expense d. selling price per unit

Answer 43

number of units sold

Question 44

If the degree of operating leverage is 4, then a one percent change in quantity sold should result in a four percent change in: a. unit contribution margin. b. revenue. c. variable expense. d. net operating income.

Answer 44

net operating income.

Question 45

Bendel Incorporated has an operating leverage of 5.3. If the company's sales volume increases by 11%, its net operating income should increase by about: a. 58.3% b. 2.1% c. 11.0% d. 45.7%

Answer 45

58.3%

Question 46

Product Y sells for $15 per unit, and has variable expenses of $9 per unit. Fixed expenses total $300,000 per year. How many units of Product Y must be sold each year to yield an annual profit of $90,000? a. 50,000 units b. 65,000 units c. 15,000 units d. 43,333 units

Answer 46

65,000 units

Question 47

What are the product and period costs in *variable costing*?

Answer 47

Product Costs - Direct Materials - Direct Labor - Variable Manufacturing Overhead Period Costs: - Fixed Manufacturing Overhead - Variable Selling and Administrative Expenses - Fixed Selling and Administrative Expenses

Question 48

What are the product and period costs in *absorption costing*?

Answer 48

Product Costs - Direct Materials - Direct Labor - Variable Manufacturing Overhead - Fixed Manufacturing Overhead Period Costs - Variable Selling and Administrative Expenses - Fixed Selling and Administrative Expenses

Question 49

Which method will produce the highest values for work in process and finished goods inventories? a. Absorption costing. b. Variable costing. c. They produce the same values for these inventories. d. It depends.

Answer 49

Absorption costing.

Question 50

How is unit product cost determined under absorption costing?

Answer 50

Under absorption costing, all production costs, variable and fixed, are included when determining unit product cost.

Question 51

How is unit product cost determined under variable costing?

Answer 51

Under variable costing, only the variable production costs are included in product costs.

Question 52

What is the CVP analysis for variable costing?

Answer 52

costing categorizes costs as variable and fixed so it is much easier to use this income statement format for C V P analysis.

Question 53

What is the CVP analysis for absorption costing?

Answer 53

costing assigns fixed manufacturing overhead costs to units produced, a portion of fixed manufacturing overhead resides in inventory when units remain unsold.

Question 54

What changes occur in net operating income when using variable costing?

Answer 54

costing income is only affected by changes in unit sales. It is not affected by the number of units produced. As a general rule, when sales go up, net operating income goes up, and vice versa.

Question 55

What changes occur in net operating income when using absorption costing?

Answer 55

costing income is influenced by changes in unit sales and units of production. Net operating income can be increased simply by producing more units even if those units are not sold.

Question 56

What decision-making occurs with variable costing?

Answer 56

costing correctly identifies the additional variable costs incurred to make one more unit ($10 per unit for Harvey Company). It also emphasizes the impact of total fixed costs on profits.

Question 57

What decision-making occurs with absorption costing?

Answer 57

costing assigns fixed manufacturing overhead costs to units produced, it gives the impression that fixed manufacturing overhead is variable with respect to the number of units produced, but it is not. The result can be inappropriate pricing decisions and product discontinuation decisions

Question 58

What is a segment??

Answer 58

any part or activity of an organization about which a manager seeks cost, revenue, or profit data.

Question 59

What are 2 keys to building segmented income statements?

Answer 59

- A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. - Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

Question 60

What are traceable fixed costs?

Answer 60

costs that arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared. - It is important to realize that the traceable fixed costs of one segment may be a common fixed cost of another segment. Examples: - The salary of the Fritos product manager at PepsiCo is a traceable fixed cost of the Fritos business segment of PepsiCo. - The maintenance cost for the building in which Boeing 747s are assembled is a traceable fixed cost of the 747 business segment of Boeing.

Question 61

What are common fixed costs?

Answer 61

costs that arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. Examples: - The salary of the C E O of General Motors is a common fixed cost of the various divisions of General Motors. - The cost of heating a Safeway or Kroger grocery store is a common fixed cost of the various departments.

Question 62

What is the segment margin?

Answer 62

computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the *best gauge* of the long-run profitability of a segment.

Question 63

How is break-even analysis calculated in segmented income statements?

Answer 63

A business segment’s break-even point is computed by dividing its traceable fixed expenses by its contribution margin ratio.

Question 64

What are the inappropriate methods of allocating costs among segments?

Answer 64

- *Failure to trace costs directly*: Costs that can be traced directly to specific segments of a company should not be allocated to other segments. - *Inappropriate allocation base*: Some companies allocate costs to segments using arbitrary bases. Costs should be allocated to segments only when the allocation base actually drives the cost being allocated.

Question 65

What are the 2 reasons why shouldn't common costs be arbitrarily allocated to segments based on the rationale that “someone has to cover the common costs” ?

Answer 65

- This practice may make a profitable business segment appear to be unprofitable. - Allocating common fixed costs forces managers to be held accountable for costs they cannot control.

Question 66

How much of the common fixed expense of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it.

Answer 66

None of it.

Question 67

Suppose square feet is used as the basis for allocating the common fixed expense of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000. b. $30,000. c. $40,000. d. $50,000.

Answer 67

$20,000.

Question 68

Does this apply to absorption or variable costing? Fixed manufacturing costs must be assigned to products to properly match revenues and costs.

Answer 68

Absorption Costing

Question 69

Does this apply to absorption or variable costing? Fixed manufacturing costs are capacity costs and will be incurred even if nothing is produced.

Answer 69

Variable Costing

Question 70

Who require publicly traded companies to include segmented financial data in their annual reports?

Answer 70

U.S. GAAP and IFRS

Question 71

Which of the following costs at a manufacturing company would be treated as a product cost under variable costing? a. direct material cost b. property taxes on the factory building c. sales manager's salary d. sales commissions

Answer 71

direct material cost

Question 72

When using data from a segmented income statement, the dollar sales for a segment to break even is equal to: a. Traceable fixed expenses ÷ Segment CM ratio b. Common fixed expenses ÷ Segment CM ratio c. (Traceable fixed expenses + Common fixed expenses) ÷ Segment CM ratio d. Non-traceable fixed expenses ÷ Segment CM ratio

Answer 72

Traceable fixed expenses ÷ Segment CM ratio

Question 73

Allocating common fixed expenses to business segments: a. may cause managers to erroneously discontinue business segments. b. may cause managers to erroneously keep business segments that should be dropped. c. ensures that all costs are covered. d. helps managers make good decisions.

Answer 73

may cause managers to erroneously discontinue business segments.

Question 74

A company produces a single product. Variable production costs are $13.20 per unit and variable selling and administrative expenses are $4.20 per unit. Fixed manufacturing overhead totals $48,000 and fixed selling and administration expenses total $52,000. Assuming a beginning inventory of zero, production of 5,200 units and sales of 4,200 units, the dollar value of the ending inventory under variable costing would be: a. $13,200 b. $22,200 c. $17,400 d. $9,000

Answer 74

$13,200

Question 75

Ieso Corporation has two stores: J and K. During November, Ieso Corporation reported a net operating income of $30,000 and sales of $450,000. The contribution margin in Store J was $100,000, or 40% of sales. The segment margin in Store K was $30,000, or 15% of sales. Traceable fixed expenses are $60,000 in Store J, and $40,000 in Store K. Sales in Store J totaled: a. $400,000 b. $250,000 c. $150,000 d. $100,000

Answer 75

$250,000