Saturday, 5 November 2016

Test Bank Managerial Accounting Creating Value in a Dynamic Business Environment 9th Edition - Hilton -



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Appendix I
The Sarbanes-Oxley Act, Internal Controls, Management Accounting

Multiple Choice Questions
  1. The Sarbanes-Oxley Act:
    A. arose because of several accounting scandals that rocked the public's confidence in published financial statements.
    B. was enacted, in part, to bring about reform in companies' financial reporting processes.
    C. has distinct guidelines for reporting on an organization's internal control practices.
    D. contains provisions whereby the chief executive officer (CEO) and chief financial officer (CFO) can be held criminally responsible if their firm's financial statements are found to be fraudulent in nature.
    E. touches on all of these areas.

  1. Internal controls focus on all of the following except:
    A. effectiveness of operations.
    B. reliability of financial reporting.
    C. compliance with applicable laws and regulations.
    D. maximization of profit and cash flows.
    E. efficiency of operations.

  1. Which of the following is a typical internal control?
    A. The use of password-protected computers and software.
    B. The requirement that separate individuals authorize cash disbursements and sign checks.
    C. The use of physical controls over inventories to prevent loss from theft.
    D. A physical count of inventory at year-end to verify amounts shown on the company's accounting records.
    E. All of these are typical internal controls.

  1. The Sarbanes-Oxley Act established the:
    A. Securities and Exchange Commission (SEC).
    B. Public Company Accounting Oversight Board (PCAOB).
    C. Financial Accounting Standards Board (FASB).
    D. Institute of Management Accountants (IMA).
    E. American Accounting Association (AAA).


  1. Which of the following bodies oversees audits and auditors, and sanctions firms and individuals for violations of laws and regulations?
    A. American Institute of Certified Public Accountants (AICPA).
    B. American Accounting Association (AAA).
    C. Public Company Accounting Oversight Board (PCAOB).
    D. Financial Accounting Standards Board (FASB).
    E. Accounting Principles Board (APB).

  1. Which of the following is not a provision of (nor an outgrowth of) the Sarbanes-Oxley Act?
    A. A public company's annual report must contain a separate disclosure that assesses the company's internal controls.
    B. Management is essentially responsible for establishing and maintaining internal controls.
    C. A company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO) can be held criminally responsible if their firm's financial statements are fraudulent.
    D. A company must prepare a balance sheet, an income statement, a statement of stockholders' equity, and a statement of cash flows.
    E. A new body, the Public Company Accounting Oversight Board, oversees and investigates the audits and auditors of public companies.

  1. Which of the following statements regarding the Sarbanes-Oxley Act is (are) true?
    A. Management must establish and maintain a system of internal controls over financial reporting.
    B. Management must periodically assess a company's system of internal controls over financial reporting.
    C. Management must include in the company's annual report a separate report that assesses internal controls.
    D. A company's auditors are required to report on management's assessment of internal controls.
    E. All of these statements are true.


  1. The provisions of sections 302 and 404 of the Sarbanes-Oxley Act (as originally enacted) have proved especially troublesome for:
    A. Small businesses.
    B. Private universities.
    C. Cities and municipalities.
    D. Healthcare providers.
    E. Individual taxpayers.

  1. The provisions of section 302 of the Sarbanes-Oxley Act (as originally enacted) require the signing officers of a company to do all of the following except:
    A. Audit the internal controls over financial reporting.
    B. Establish the internal controls over financial reporting.
    C. Maintain the internal controls over financial reporting.
    D. Evaluate the internal controls over financial reporting.
    E. Disclose material weaknesses in the internal controls over financial reporting.

  1. Section 404 of the Sarbanes-Oxley Act, Management Assessment of Internal Controls, includes all of the following except:
    A. A statement of management's responsibility for establishing the internal control structure.
    B. A waiver of auditor responsibility for assessing management's report on internal controls.
    C. An assessment of the effectiveness of internal controls by management.
    D. An assessment of the effectiveness of procedures for financial reporting by management.
    E. A requirement that management include in its annual report an internal control report.

  1. To achieve the objectives of sections 302 and 404 of the Sarbanes-Oxley Act, management and independent auditors should:
    A. Disclose the minutia of the internal control structure.
    B. Conduct a cost-benefit analysis prior to deciding whether or not to adopt these sections.
    C. Emphasize those areas where the greatest risk of fraud or material misstatement is likely to occur.
    D. Analyze all financial transactions that are included in the reported financial statements.
    E. Work together to design the most effective internal control system.


  1. Most of the Sarbanes-Oxley Act relates primarily to:
    A. Corporate governance.
    B. Financial accounting.
    C. Auditing.
    D. Court-invoked penalties for violating the law.
    E. All of these.

  1. Which of the following statements is false concerning computerized accounting systems?
    A. Safeguards exist to make sure that controls are working properly.
    B. There is no need for controls over human operators of computerized systems.
    C. Computerized accounting systems are not 100% reliable.
    D. Limits should be placed on who can access a computerized system.
    E. Many internal control procedures are automated.

  1. Under section 404 of the Sarbanes-Oxley Act, auditors are required to:
    A. Attest to and report on management's assessment of internal controls.
    B. Establish and maintain internal controls for audited companies.
    C. Advise management on its preparation of the Report on Internal Controls.
    D. Evaluate the company's internal control system periodically throughout the year.
    E. All of these.

Appendix II
Compound Interest and the Concept of Present Value

Multiple Choice Questions
  1. The main idea behind the time value of money is that:
    A. cash flows received in the distant future are less valuable than cash flows received in the near-term future.
    B. cash received in year 3, say, $80,000, has the same value as $40,000 received in year 3 plus $40,000 received in year 4.
    C. cash flows received in different years are treated as equal in value.
    D. cash payments made in the future have the same value as payments made today.
    E. timing considerations of cash flows have little value in decision making.

  1. The procedure used to compute the future value of a series of cash flows is known as:
    A. compounding.
    B. the annuity method.
    C. discounting.
    D. the future-cost approach.
    E. indexing.

  1. Norton Company has a 12% compound annual interest rate. If the firm invests $60,000 today, how much will have accumulated by the end of eight years?
    A. $117,600.
    B. $148,560.
    C. $298,080.
    D. $738,000.
    E. Some other amount.

  1. Lawson Company invests $60,000 today and has $148,560 by the end of eight years. What is the firm's compound annual interest rate?
    A. 10.00%.
    B. 12.00%.
    C. 18.45%.
    D. 40.39%.
    E. None of these.


  1. The procedure used to compute the present value of a series of cash flows is known as:
    A. compounding.
    B. the annuity method.
    C. discounting.
    D. the present-cost approach.
    E. indexing.

  1. All other things being equal, which of the following would be the most attractive to an investor?
    A. A cash inflow of $10,000 in five years.
    B. A cash inflow of $2,000 each year for the next five years.
    C. A cash inflow of $5,000 in year 1 and $5,000 in year 5.
    D. A cash inflow of $10,000 today.
    E. All of these would be equally attractive to an investor.

  1. All other things being equal, which of the following would be most attractive to an investor?
    A. A cash outflow of $60,000 in six years.
    B. A cash outflow of $10,000 each year for the next six years.
    C. A cash outflow of $30,000 in year 1 and $30,000 in year 6.
    D. A cash outflow of $60,000 today.
    E. All of these would be equally attractive to an investor.

  1. A series of equal cash flows is called a(n):
    A. ongoing cash flow.
    B. payback.
    C. accrual.
    D. cash accumulation.
    E. annuity.


  1. The sum of the discount factors applicable to individual cash flows in a series of equal cash flows is called the:
    A. single-sum, present-value factor.
    B. total discount factor.
    C. annuity discount factor.
    D. compound discount factor.
    E. internal rate discount factor.

  1. Consider the following items of information:
    I. The target recovery period.
    II. The discount rate.
    III. The timing (i.e., year) of a cash flow.
    Which of the above items would be needed to calculate the present value of a cash flow?
    A. I only.
    B. II only.
    C. I and II.
    D. II and III.
    E. I, II, and III.

  1. You desire to invest $3,000 at the end of each year for the next five years to accumulate the funds needed for a down payment on a home. Which table factor(s) should be used to most efficiently determine the amount accumulated by the end of the five-year period?
    A. Future value of $1.
    B. Future value of a $1 annuity.
    C. Present value of $1.
    D. Present value of a $1 annuity.
    E. Both "A" and "B."

  1. Uncle Roscoe, a wealthy relative, has given you a choice of receiving $10,000 today or $3,000 at the end of each year for the next four years. Which table factor(s) should be used to most efficiently determine the "value" of the $3,000 cash-flow stream?
    A. Future value of $1.
    B. Future value of a $1 annuity.
    C. Present value of $1.
    D. Present value of a $1 annuity.
    E. Both "C" and "D."

Appendix III
Inventory Management


Multiple Choice Questions
  1. Inventory holding costs typically include:
    A. clerical costs of purchase-order preparation.
    B. costs of deterioration, theft, or spoilage.
    C. costs associated with lost sales to customers.
    D. forgone interest on money tied up in inventory.
    E. items "B" And "D" above.

  1. Inventory holding costs would typically include all of the following except:
    A. insurance.
    B. theft.
    C. transportation.
    D. obsolescence.
    E. warehouse rent.

  1. Which of the following is classified as an inventory shortage cost?
    A. Purchase order preparation.
    B. Production disruption.
    C. Lost sales and lost customers.
    D. Spoilage.
    E. Both "B" and "C" above.

  1. At the economic order quantity:
    A. total annual inventory costs, holding costs, and ordering costs are all minimized.
    B. total annual inventory costs and holding costs are minimized.
    C. total annual inventory costs are minimized, and holding costs equal ordering costs.
    D. total annual inventory costs are minimized, and holding costs exceed ordering costs.
    E. total annual inventory costs are minimized, and ordering costs exceed holding costs.


  1. Burgoon uses an economic order quantity model and has determined an optimal order size of 500 units. Annual demand is 10,000 units, ordering costs are $50 per order, and holding costs are $4 per unit. The company's annual ordering and holding costs total:
    A. $2,000.
    B. $3,000.
    C. $21,000.
    D. $41,000.
    E. some other amount.

  1. The economic order quantity is approximately:
    A. 203 packages.
    B. 225 packages.
    C. 228 packages.
    D. 565 packages.
    E. 631 packages.

  1. The reorder point is:
    A. 25 packages.
    B. 50 packages.
    C. 100 packages.
    D. 203 packages.
    E. 225 packages.

  1. When comparing EOQ and JIT inventory systems, which of the following statements is false?
    A. The EOQ approach takes the viewpoint that some inventory is necessary.
    B. The EOQ system assumes a constant order quantity.
    C. JIT argues that inventory investments should be minimized.
    D. The EOQ system focuses on acquisition and holding costs.
    E. JIT argues that safety stocks are necessary to reduce the probability of a stock shortage.


  1. Which of the following does not minimize ordering costs when using JIT purchasing?
    A. Reducing the number of vendors.
    B. Negotiating long-term supply agreements.
    C. Making less frequent payments.
    D. Maintaining a safety stock.
    E. Eliminating inspections.

  1. When graphing the EOQ, which of the following statements is false?
    A. Holding costs are a downward sloping line to the right.
    B. The EOQ is represented by the minimum total cost.
    C. Ordering costs are a downward sloping line to the right.
    D. Average inventory on hand results in higher holding costs.
    E. As order size increases, so does average inventory on hand.

  1. When considering safety stock and its effect on EOQ, which of the following statements is false?
    A. Safety stock is equal to the potential excess usage of an input.
    B. The reorder point is affected by the existence of safety stock.
    C. Safety stock decreases inventory holding costs.
    D. Safety stock decreases the potential costs caused by inventory shortages.
    E. Fluctuations in monthly usage of a material indicate the desirability of a safety stock.



Essay Questions
  1. Economic Order Quantity, timing of orders and safety stock are three important considerations in inventory management.
    Required:
    A. Explain each of these considerations.
    B. How is EOQ affected by the timing of orders and safety stock? 





  1. Shields carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit. The company is considering the implementation of an economic order quantity model in an effort to better manage its inventories.
    Required:
    A. Compute the economic order quantity.
    B. Compute total annual inventory costs if Shields follows the EOQ policy. 




  1. Shields carries a part that is popular in the manufacture of automatic sprayers. Demand for this part is 4,000 units per year; order costs amount to $30 per order, and holding costs total $1.50 per unit.
    The company, which currently places four orders per year with its suppliers, is considering the implementation of an economic order quantity (EOQ) model to better manage its inventories. Preliminary EOQ calculations revealed an optimal order quantity of 400 units and total annual inventory costs of $600.
    Required:
    A. In comparison with its current policy, how much will Shields save by adopting the EOQ model?
    B. Briefly explain the philosophical difference between the EOQ model and the just-in-time model. Which of the two models will likely result in lower holding costs for the firm? Why? 



  1. You are a sports agent who is representing Jack Lofton, a star football player, in contract negotiations with the New York Landmarks. The Landmarks have offered Lofton a four-year contract, with annual raises and performance bonuses that will result in a growing cash-flow stream for Lofton each year. Which table factor(s) should you use to most efficiently determine the "value" of the contract?
    A. Future value of $1.
    B. Future value of a $1 annuity.
    C. Present value of $1.
    D. Present value of a $1 annuity.
    E. Both "C" and "D."

  1. How much money must be invested today in order to have $25,000 at the end of four years if the rate of return is 12% compounded annually?
    A. $15,900.
    B. $17,100.
    C. $19,900.
    D. $22,300.
    E. Some other amount.

  1. You estimate that it will take five years to complete your college education. Your parents want to invest enough money today at an interest rate of 8% compounded annually to allow you to withdraw $10,000 at the end of each year for the next five years, with nothing left at the end. The amount of money to invest today is:
    A. $14,690.
    B. $34,050.
    C. $39,930.
    D. $50,000.
    E. none of these.


  1. You received a $5,000 loan at the end of each of your four years of college. Aunt Rose agreed to pay off your loans at the end of your fourth year of school. How much will she have to pay? Assume a 4% interest rate compounded annually on student loans.
    A. $20,000.
    B. $21,235.
    C. $39,930.
    D. $50,000.
    E. none of these.

  1. You received a $5,000 loan at the end of each of your four years of college. Your grandparents agreed to pay off your loans at the end of your fourth year of school. Assume a 4% annual compound interest rate on student loans.How much will they have to deposit when you start school so that they will have enough money to pay off your loans after four years? Their interest rate is 6% compounded annually.
    A. $20,000.
    B. $21,235.
    C. $16,818.
    D. $15,000.
    E. none of these.

  1. You want to buy a new car in five years. You want to have saved $25,000 by then. You can invest $4,000 at the end of each of the next five years at an interest rate of 6% compounded annually. Will you have enough money at the end of the fifth year?
    A. No. You are short $2,452.
    B. Yes. You have $1,532 more than you need.
    C. No. You are short $1,532.
    D. Yes. You have $2,452 more than you need.
    E. none of these


  1. Green Company owes White Company money for the purchase of equipment. White has given Green the following payment options:
    I. Immediate payment in full of $38,000.
    II. Annual payments of $15,000 made at the end of each of the next three years.
    III. A single payment of $48,000 made at the end of three years.
    Green uses a 10% annual compound interest rate and will choose the option with the lowest present value. Which option should Green choose, and what is the present value of that option?
    A. Option I, $34,542.
    B. Option I, $38,000.
    C. Option II, $37,305.
    D. Option III, $34,164.
    E. Option III, $36,048.

  1. Nelson Company owes money to Nash Company for the purchase of equipment. Nash Company has given Nelson the following payment options:
    I. Immediate payment in full of $38,000.
    II. Annual payments of $15,000 made at the end of each of the next three years.
    III. A single payment of $48,000 made at the end of three years.
    Assume that both Nelson and Nash use a 10% interest rate compounded annually. What option would Nash prefer, and what is the present value of that option?
    A. Option I, $34,542.
    B. Option I, $38,000.
    C. Option II, $37,305.
    D. Option III, $34,164.
    E. Option III, $36,048.



Essay Questions

  1. Future value and present value are two key business tools.
    Required:
    Ignoring income taxes, answer the following independent questions:
    A. Your best friend won the state lottery and has offered to give you $15,000 at the end of eight years (after he has made his first million). You figure that if you had the money now, you could invest it at a rate of 10% compound annually. What is the value today of your friend's future gift?
    B. Suppose that you invest $11,000 today in an account that bears interest at the rate of 6% compounded annually. What will your investment grow to at the end of seven years?
    C. Suppose that your best friend won the state lottery and promised to give you $9,000 per year for five years. The first payment will be made at the end of 20x1. Using a 12% annual compound discount rate, what is the value of these payments at the beginning of 20x1?
    D. Suppose that you invest $2,000 at the end of each year for nine years in an investment that provides a return of 8% compounded annually. What will be the value of your investment at the end of nine years? 





  1. Your Uncle Otto has struck it rich by investing in racehorses and desires to share some of his newfound wealth with you. Assume that you must choose from among the following three options:
    Receive a lump sum of $400,000 in 20 years.
    Receive $20,000 at the end of each year for the next 10 years.
    Receive $90,000 now.
    Required:
    A. Why is it inappropriate to compare $400,000 (no. 1) vs. $200,000 (no. 2) vs. $90,000 (no. 3) and conclude that no. 1 is the best option? Explain.
    B. What should you do to determine which option is the best? What does this process do?
    C. If Uncle Otto agreed to revise option no. 1 so that you could receive $200,000 in 10 years and the remaining $200,000 in another 10 years, would you likely prefer the revision or the option as originally stated? Why?
    D. What is an annuity? Do any of the options involve an annuity? 




  1. The time value of money and present value are important business concepts.
    Required:
    Briefly explain these concepts to someone with a limited business background. 




  1. The time value of money and present value are important business concepts.
    Required:
    Differentiate between the concepts discounting and compounding. 


Chapter 01
The Changing Role of Managerial Accounting in a Dynamic Business Environment
 True / False Questions 
  1. Controlling involves the coordination of daily business functions within an organization.
    True    False

  1. Measuring the performance of managers and subunits is not an objective of managerial accounting.
    True    False

  1. Middle-level managers would likely be considered internal users of accounting information rather than external users.
    True    False

  1. A controller is normally involved with preparing financial statements.
    True    False

  1. The upper limit on the production of goods and services if everything works perfectly is known as practical capacity.
    True    False


 Multiple Choice Questions
  1. Which of the following statements about managerial accountants is false?
    A. Managerial accountants more and more are considered "business partners."
    B. Managerial accountants often are part of cross-functional teams.
    C. An increasing number of organizations are segregating managerial accountants in separate managerial-accounting departments.
    D. In a number of companies, managerial accountants make significant business decisions and resolve operating problems.
    E. The role of managerial accountants has changed considerably over the past decade.

  1. The day-to-day work of management teams will typically comprise all of the following activities except:
    A. decision making.
    B. planning.
    C. cost minimizing.
    D. directing operational activities.
    E. controlling.

  1. Which of the following functions is best described as choosing among available alternatives?
    A. Decision making.
    B. Planning.
    C. Directing operational activities.
    D. Controlling.
    E. Budgeting.

  1. Which of the following managerial functions involves a detailed financial and operational description of anticipated operations?
    A. Decision making.
    B. Planning.
    C. Directing operational activities.
    D. Controlling.
    E. Measuring.


  1. Which of the following involves the coordination of daily business functions within an organization?
    A. Decision making.
    B. Planning.
    C. Directing operational activities.
    D. Controlling.
    E. Motivating.

  1. Taurus Company has set various goals, and management is now taking appropriate action to ensure that the firm achieves these goals. One such action is to reduce outlays for overhead, which have exceeded budgeted amounts. Which of the following functions best describes this process?
    A. Decision making.
    B. Planning.
    C. Coordinating.
    D. Controlling.
    E. Organizing.

  1. Which of the following is not an objective of managerial accounting?
    A. Providing information for decision making and planning.
    B. Assisting in directing and controlling operations.
    C. Maximizing profits and minimizing costs.
    D. Measuring the performance of managers and subunits.
    E. Motivating managers toward the organization's goals.

  1. The role of managerial accounting information in assisting management is a(n):
    A. financial-directing role.
    B. attention-directing role.
    C. planning and controlling role.
    D. organizational role.
    E. problem-solving role.


  1. Employee empowerment involves encouraging and authorizing workers to take initiatives to:
    A. improve operations.
    B. reduce costs.
    C. improve product quality.
    D. improve customer service.
    E. All of these.

  1. The process of encouraging and authorizing workers to take appropriate initiatives to improve the overall firm is commonly known as:
    A. planning and control.
    B. employee empowerment.
    C. personnel aggressiveness.
    D. decision making.
    E. problem recognition and solution.

  1. Which of the following business models considers financial, customer, internal operating, and other measures in the evaluation of performance?
    A. Deterministic simulation.
    B. Balanced scorecard.
    C. Payoff matrix.
    D. Decision tree.
    E. Chart of operating performance (COP).

  1. Which of the following perspectives is normally absent in a balanced scorecard?
    A. Financial.
    B. Customer.
    C. Internal operations.
    D. Learning and innovation/growth.
    E. None of these.


  1. Managerial accounting:
    A. focuses only on historical data.
    B. is governed by GAAP.
    C. focuses primarily on the needs of personnel within the organization.
    D. provides information for parties external to the organization.
    E. focuses on financial statements and other financial reports.

  1. Managerial accounting:
    A. is unregulated.
    B. produces information that is useful only for manufacturing organizations.
    C. is based exclusively on historical data.
    D. is regulated by the Securities and Exchange Commission (SEC).
    E. generally focuses on reporting information about the enterprise in its entirety rather than by subunits.

  1. All of the following entities would have a need for managerial accounting information except:
    A. the state of Michigan.
    B. Google.
    C. Abercrombie & Fitch.
    D. H&R Block.
    E. None of these responses is correct, as all of these entities would use managerial accounting information.


  1. Which of the following choices correctly depicts whether McDonald's, the University of Wisconsin, and Apple Inc. would have a need for managerial accounting?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Which of the following would likely be considered an internal user of accounting information rather than an external user?
    A. Stockholders.
    B. Consumer groups.
    C. Lenders.
    D. Middle-level managers.
    E. Government agencies.

  1. Financial accounting focuses primarily on reporting:
    A. to parties outside of an organization.
    B. to parties within an organization.
    C. to an organization's board of directors.
    D. to financial institutions.
    E. for financial institutions.


  1. Which of the following characteristic(s) relate(s) more to managerial accounting than to financial accounting?
    A. A focus on reporting to personnel within an organization.
    B. A focus on reporting to external parties.
    C. An area of accounting that is heavily regulated.
    D. A focus on providing information that is relevant for planning, decision making, directing, and control.
    E. Choices "A" and "D" above.

  1. Which of the following statements represents a similarity between financial and managerial accounting?
    A. Both are useful in providing information for external users.
    B. Both are governed by GAAP.
    C. Both draw upon data from an organization's accounting system.
    D. Both rely heavily on published financial statements.
    E. Both are solely concerned with historical transactions.

  1. Which of the following employees at Delta Airlines would not be considered as holding a line position?
    A. Pilot.
    B. Chief financial officer (CFO).
    C. Flight attendant.
    D. Ticket agent.
    E. Baggage handler.

  1. Which of the following employees would be considered as holding a line position?
    A. Exxon Corporation's vice-president for government relations.
    B. The controller of General Motors.
    C. A secretary employed by Verizon Communications.
    D. The manager of food and beverage services at Disney's Magic Kingdom.
    E. None of these.


  1. Which of the following employees at Starbucks would likely be considered as holding a staff position?
    A. The company's chief operating officer (COO).
    B. The manager of a store located in Kansas City, Missouri.
    C. The company's lead, in-house attorney.
    D. The company's chief financial officer (CFO).
    E. Choices "C" and "D" above.

  1. The chief managerial and financial accountant of an organization is the:
    A. chief executive officer (CEO).
    B. treasurer.
    C. vice-president of accounting.
    D. internal auditor.
    E. chief financial officer (CFO).

  1. Which of the following typically does not relate to the role of a controller?
    A. A controller supervises the accounting department.
    B. A controller safeguards an organization's assets.
    C. A controller oversees the preparation of reports required by governmental authorities.
    D. A controller normally assumes a narrow role within the organization, often preventing the individual's rise to top management ranks.
    E. Choices "B" and "D" above.

  1. A controller is normally involved with:
    A. preparing financial statements.
    B. managing investments.
    C. raising capital.
    D. safeguarding assets.
    E. managing the firm's credit policy.


  1. Which of the following is not a function of the treasurer?
    A. Safeguarding assets.
    B. Managing investments.
    C. Preparing financial statements.
    D. Being responsible for an entity's credit policy.
    E. Raising capital.

  1. Managerial accountants:
    A. often work on cross-functional teams.
    B. are located throughout an organization.
    C. are found primarily at lower levels of the organizational hierarchy.
    D. are found primarily at higher levels of the organizational hierarchy.
    E. choices "A" and "B" above.

  1. The two dimensions of managerial accounting are:
    A. a decision-facilitating dimension and a decision-influencing dimension.
    B. a decision-facilitating dimension and a financial-influencing dimension.
    C. a decision-influencing dimension and a cost-minimizing dimension.
    D. a cost-minimizing dimension and a profit-maximizing dimension.
    E. a decision-influencing dimension and a profit-maximizing dimension.

  1. Much of managerial accounting information is based on:
    A. a cost-benefit theme.
    B. profit maximization.
    C. cost minimization.
    D. the generation of external information.
    E. effectiveness but not efficiency.

  1. Which of the following is not normally considered to be an element of e-business?
    A. E-budgeting.
    B. Supply-chain management.
    C. E-commerce.
    D. Balanced scorecards.
    E. Choices "B" and "D" above.


  1. Managerial accounting has changed in recent years because of:
    A. the growth of e-business.
    B. increased global competition.
    C. the emergence of new industries.
    D. an increased focus on the customer.
    E. All of these factors.

  1. Managerial accounting has changed in recent years because of:
    A. a growing service economy in the United States.
    B. the growing popularity of cross-functional teams.
    C. an increase in global competition.
    D. time-based competition.
    E. All of these factors.

  1. Which of the following statement(s) about just-in-time (JIT) inventory management is (are) true?
    I. The emphasis of JIT is on "pull" manufacturing.
    II. Raw materials are purchased just in time to be used in production.
    III. JIT is an inventory technique that focuses on reduction of both inventory and related inventory costs.
    A. I only.
    B. II only.
    C. III only.
    D. II and III.
    E. I, II, and III.

  1. Idaho Corporation recently implemented a just-in-time (JIT) production system along with a series of continuous improvement programs. If the firm is now considering adopting a total quality management (TQM) program, it would likely find that TQM:
    A. is consistent with both JIT and continuous improvement.
    B. is consistent with JIT but inconsistent with continuous improvement.
    C. is consistent with continuous improvement but inconsistent with JIT.
    D. is inconsistent with both JIT and continuous improvement.
    E. is an antiquated management technique.


  1. Kaizen costing is consistent with:
    A. cost reduction.
    B. continuous improvement.
    C. poor quality.
    D. financial accounting and income statements.
    E. both choices "A" and "B" above.

  1. Cost management systems tend to focus on an organization's:
    A. machines.
    B. employees.
    C. activities.
    D. customers.
    E. rules and regulations.

  1. The upper limit on the production of goods and services if everything works perfectly is known as:
    A. practical capacity.
    B. theoretical capacity.
    C. utilized capacity.
    D. management capacity.
    E. capacity maximization.

  1. The capacity concept that allows for normal occurrences such as machine downtime and employee fatigue is known as:
    A. practical capacity.
    B. theoretical capacity.
    C. utilized capacity.
    D. management capacity.
    E. capacity maximization.


  1. The cost of resources supplied but unused is known as:
    A. practical capacity costs.
    B. the cost of theoretical capacity.
    C. the cost of unused capacity.
    D. the cost of resources supplied.
    E. capacity cost.

  1. Given the following information, what is the cost of unused capacity? Cost of material supplied is $3,200; Cost of material used is $3,000; Cost of material used per cake is $3; Cost of material supplied per cake is $3.20.
    A. $0.20.
    B. $200.
    C. $2,000.
    D. $1,000.
    E. There is no unused capacity.

  1. Given the following information, what is the cost of unused capacity? Cost of material supplied is $8,600; Cost of material used is $8,000; Cost of material used per shelf is $8; Cost of material supplied per shelf is $8.60.
    A. $600.
    B. $6,000.
    C. $0.60.
    D. $1,000.
    E. There is no unused capacity.

  1. The value chain of a manufacturer would tend to include activities related to:
    A. manufacturing.
    B. research and development.
    C. product design.
    D. marketing.
    E. All of these.


  1. Which of the following choices correctly depicts activities that would be included in a manufacturer's value chain?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Which of the preceding activities would likely not be considered part of The Gap clothing company's value chain?
    A. Designing a new product line.
    B. Locating and then negotiating terms with a clothing manufacturer.
    C. Marketing an existing product line.
    D. Distributing goods from regional warehouses to local stores.
    E. All of these activities would be an element in the company's value chain.

  1. The activities performed by a manufacturing organization could be categorized as pre-production (such as research and development and product design), production-related, and post-production (such as marketing and customer service). Which activities should the firm focus on if management understands the value chain concept and desires to meet organizational goals?
    A. Pre-production activities.
    B. Production-related activities.
    C. Post-production activities.
    D. Choices "A", "B", and "C" above.
    E. Choices "A" and "B" above.


  1. In order for a company to achieve a sustainable competitive advantage, it must perform value chain activities:
    A. at the same quality level as competitors, at the same cost.
    B. at the same quality level as competitors, but at a lower cost.
    C. at a higher quality level than competitors, at a higher cost.
    D. at a higher quality level than competitors, but at no greater cost.
    E. Either choice "B" or "D" above.

  1. The process of managing the various activities in the value chain, along with the associated costs, is commonly known as:
    A. activity-based costing.
    B. strategic cost management.
    C. total quality management.
    D. computer-integrated costing.
    E. sound management practices (SMP).

  1. A company has a bottleneck operation that slows production. Which of the following tools or approaches could the firm use to determine the most cost-effective ways to eliminate this problem?
    A. Linear programming.
    B. Theory of constraints.
    C. Decision-tree diagrams.
    D. Payoff matrices.
    E. Strategic path analysis (SPA).

  1. Which of the following can be linked to a wave of corporate scandals that took place not too long ago?
    A. Greedy corporate executives.
    B. Managers who made over-reaching business deals.
    C. Lack of oversight by companies' audit boards and boards of directors.
    D. Shoddy work by external auditors.
    E. All of these.


  1. Which of the following acts strives to improve corporate governance and the quality of corporate accounting/reporting?
    A. Robinson-Patman.
    B. Taft-Hartley.
    C. Sarbanes-Oxley.
    D. Bush-Cheney.
    E. Franks-Ashcroft.

  1. Which of the following statements about the ethical climate of business is false?
    A. Greedy corporate executives are, in part, to blame for the rash of corporate scandals that occurred not too long ago.
    B. Unethical business behavior can have a negative impact on our economy.
    C. The Sarbanes-Oxley Act strives to improve the overall quality of corporate reporting.
    D. The Robinson-Patman Act strives to improve the overall quality of corporate reporting.
    E. Corporate scandals have served as the accounting profession's wake-up call to pay increased attention to ethical issues in the conduct of business.

  1. Which of the following is not an ethical standard of managerial accounting?
    A. Competence.
    B. Confidentiality.
    C. Efficiency.
    D. Integrity.
    E. Credibility.

  1. Which of the following is not an element of competency?
    A. To develop appropriate knowledge about a particular subject.
    B. To perform duties in accordance with relevant laws.
    C. To perform duties in accordance with relevant technical standards.
    D. To refrain from engaging in an activity that would discredit the accounting profession.
    E. To prepare clear reports after an analysis of relevant and reliable information.


  1. Assume that a managerial accountant regularly communicates with business associates to avoid conflicts of interest and advises relevant parties of potential conflicts. In so doing, the accountant will have applied the ethical standard of:
    A. objectivity.
    B. confidentiality.
    C. integrity.
    D. credibility.
    E. unified behavior.



Essay Questions
  1. Present several examples of managerial accounting information that could help a manager make each of the following decisions:
    A. A manufacturing company is currently making a part that is a production headache. The firm is deciding whether to abandon production and buy the part from an outside supplier.
    B. An operator of fast-food restaurants is deciding whether to open a new store in Dallas. 




  1. Borders Overnight operates an overnight package delivery service that competes with Federal Express and United Parcel Service (UPS). Top management is considering the use of a balanced scorecard to evaluate operations.
    A. What is a balanced scorecard and other than customer-satisfaction measures, what are its typical key components?
    B. List four customer-satisfaction measures that Borders might use to evaluate performance. 





  1. Consider the descriptors that follow.1. Is heavily involved with the recordkeeping and reporting of assets, liabilities, and stockholders' equity.
    2. Focuses on planning, decision making, directing, and control.
    3. Is heavily regulated.
    4. A field that is becoming more "cross-functional" in nature.
    5. Much of the field is based on costs and benefits.
    6. Is involved almost exclusively with past transactions and events.
    7. Much of the information provided is directed toward stockholders, financial analysts, creditors, and other external parties.
    8. Tends to focus more on subunits within an entity rather than the organization as a whole.
    9. May become involved with measures of customer satisfaction, and the amount of actual cost incurred vs. budgeted targets.
    Required:
    Determine whether the descriptors are most closely associated with financial accounting or managerial accounting.





  1. DreamWorks Pictures produces both motion pictures for theaters as well as a variety of television series. Consider the seven activities that follow.
    1. Auditions for actors and actresses
    2. Development of promotional materials for use by local newspapers
    3. Focus groups to evaluate ideas for potential television comedy series
    4. Production of DVDs for release to Best Buy and Blockbuster Video
    5. On-location shooting of scenes
    6. Fine-tuning and rewrites of scripts
    7. Set design and construction for a new medical drama
    Required:
    A. Evaluate the seven activities as upstream (pre-production), production, or downstream (post-production) in nature.
    B. Generally speaking, which activities (upstream, production, or downstream), if any, can management ignore if the company is to be successful in achieving its key strategic goals? 





  1. Tae Franklin is the sales manager of Darius Enterprises, a very profitable distributor of office furniture to local businesses. A recent economic downturn has created an extremely tight cash position, and the company has been hurt by the bankruptcy of two key customers.
    In late October, anticipating an economic recovery, Franklin began an extensive remodeling of the company's sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000.
    Darius has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of directors. Franklin, unfortunately, missed the deadline to have the board consider this project at its regular September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two parts—construction and decorating ($190,000) and equipment purchases ($60,000)—neither of which needed board approval because of the dollar amounts involved.
    The project was recently completed and sales have begun to recover. Customers have raved about the new sales area, noting that it is far superior to those of Darius's competitors.
    Required:
    A. Would Franklin's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain.
    B. Briefly discuss whether Franklin behaved in an ethical manner.
    C. Which, if any, of the following standards of conduct would have applicability to Franklin's conduct: competence, confidentiality, integrity, or credibility? Briefly explain. 





  1. Many professions have adopted a series of ethical standards to provide guidance for their memberships. The Institute of Management Accountants (IMA), for example, has published standards that focus on competence, confidentiality, integrity, and credibility. In light of these standards, consider the three cases that follow.
    Case A—Leston Corporation has experienced serious financial difficulties in recent years. John Young, the company's chief financial officer, has just learned that a major competitor was likely to file for bankruptcy; however, he failed to disclose this information at a board meeting held later that day when a plant closure decision was being discussed. The board evaluated several proposals during the session that focused on improving Leston's financial position.
    Case B—QBX Company manufactures fertilizer from various raw materials, including a raw material know as Felstar. Paul Kelly, the firm's purchasing manager, purposely acquired a lower grade of Felstar than normal because of a very attractive price. The lower-grade product resulted in increased usage during the manufacturing process but had no effect on the fertilizer's overall quality. An end-of-period report showed that QBX profited from Kelly's actions, with the overall savings in purchase price more than offsetting the cost of added consumption.
    Case C—Central Distributing has a participative budgeting process, allowing employees to have a say in projected sales targets for the upcoming period. These targets are reflected in a series of performance reports that compare actual sales achieved against targeted amounts. Hillary Baxter submitted very low sales targets because, as she confided in a colleague, "I always want to look good in terms of meeting targets, even if anticipated sales and closures don't materialize."
    Required:
    Evaluate the three cases and determine the ethical issues, if any, that are involved. Cite the IMA's standards if appropriate. 




  1. Briefly distinguish between managerial accounting and financial accounting. Be sure to comment on the general focus, users, and regulation related to the two fields. 


Chapter 02
Basic Cost Management Concepts and Accounting for Mass Customization Operations



True / False Questions 
  1. Inventoriable costs are expensed when incurred.
    True    False

  1. Finished goods inventory is ordinarily held for sale by a manufacturing company.
    True    False

  1. Indirect labor is not a component of manufacturing overhead.
    True    False

  1. The following equation -- Beginning finished goods + cost of goods manufactured - ending finished goods -- is used to calculate cost of goods sold during the period.
    True    False

  1. A suitable cost driver for the amount of direct materials used is the number of direct labor hours worked.
    True    False

 Multiple Choice Questions
  1. Which of the following statements is true?
    A. The word "cost" has the same meaning in all situations in which it is used.
    B. Cost data, once classified and recorded for a specific application, are appropriate for use in any application.
    C. Different cost concepts and classifications are used for different purposes.
    D. All organizations incur the same types of costs.
    E. Costs incurred in one year are always meaningful in the following year.

  1. Product costs are:
    A. expensed when incurred.
    B. inventoried.
    C. treated in the same manner as period costs.
    D. treated in the same manner as advertising costs.
    E. subtracted from cost of goods sold.

  1. Which of the following is a product cost?
    A. Glass in an automobile.
    B. Advertising.
    C. The salary of the vice president-finance.
    D. Rent on a factory.
    E. Both "A" and "D."

  1. Which of the following would not be classified as a product cost?
    A. Direct materials.
    B. Direct labor.
    C. Indirect materials.
    D. Insurance on a manufacturing plant.
    E. Sales commissions.


  1. The accounting records of Georgia Company revealed the following costs: direct materials used, $250,000; direct labor, $425,000; manufacturing overhead, $375,000; and selling and administrative expenses, $220,000. Georgia's product costs total:
    A. $1,050,000.
    B. $830,000.
    C. $895,000.
    D. $1,270,000.
    E. some other amount.

  1. Costs that are expensed when incurred are called:
    A. product costs.
    B. direct costs.
    C. inventoriable costs.
    D. period costs.
    E. indirect costs.

  1. Which of the following is a period cost?
    A. Direct material.
    B. Advertising expense.
    C. Indirect Labor.
    D. Miscellaneous supplies used in production activities.
    E. Both "B" and "C."

  1. Which of the following is not a period cost?
    A. Legal costs.
    B. Public relations costs.
    C. Sales commissions.
    D. Wages of assembly-line workers.
    E. The salary of a company's chief financial officer (CFO).


  1. The accounting records of Reynolds Corporation revealed the following selected costs: Sales commissions, $65,000; plant supervision, $190,000; and administrative expenses, $185,000. Reynolds's period costs total:
    A. $250,000.
    B. $440,000.
    C. $375,000.
    D. $255,000.
    E. $185,000.

  1. Yang Corporation recently computed total product costs of $567,000 and total period costs of $420,000, excluding $35,000 of sales commissions that were overlooked by the company's administrative assistant. On the basis of this information, Yang's income statement should reveal operating expenses of:
    A. $35,000.
    B. $420,000.
    C. $455,000.
    D. $567,000.
    E. $602,000.

  1. Which of the following entities would most likely have raw materials, work in process, and finished goods?
    A. Exxon Corporation.
    B. Macy's Department Store.
    C. Wendy's.
    D. Southwest Airlines.
    E. Columbia University.

  1. Selling and administrative expenses would likely appear on the balance sheet of:
    A. The Gap.
    B. Texas Instruments.
    C. Turner Broadcasting System.
    D. All of these firms.
    E. None of these firms.


  1. Which of the following inventories would a discount retailer such as Wal-Mart report as an asset?
    A. Raw materials.
    B. Work in process.
    C. Finished goods.
    D. Merchandise inventory.
    E. All of these.

  1. Which of the following inventories would a company ordinarily hold for sale?
    A. Raw materials.
    B. Work in process.
    C. Finished goods.
    D. Raw materials and finished goods.
    E. Work in process and finished goods.

  1. Godfrey Corporation engages in mass customization and direct sales, the latter by accepting customer orders over the Internet. As a result, Godfrey:
    A. would probably begin the manufacturing process upon receipt of a customer's order.
    B. would typically have fairly low inventory levels for the amount of sales revenue generated.
    C. would typically have fairly high inventory levels for the amount of sales revenue generated.
    D. would likely find choices "A" and "B" to be applicable.
    E. would likely find choices "A" and "C" to be applicable.

  1. Companies that engage in mass customization:
    A. tend to have a relatively low production volume.
    B. tend to have a high production volume that involves highly standardized end-products.
    C. tend to have a high production volume, many standardized components, and customer-specified combinations of components.
    D. tend to have a high production volume, many unique components, and customer-specified combinations of components.
    E. could be typified by the refining operations of Shell Oil.


  1. Mideast Motors manufactures automobiles. Which of the following would not be classified as direct materials by the company?
    A. Wheel lubricant.
    B. Tires.
    C. Interior leather.
    D. CD player.
    E. Sheet metal used in the automobile's body.

  1. Which of the following employees of a commercial printer/publisher would be classified as direct labor?
    A. Book binder.
    B. Plant security guard.
    C. Sales representative.
    D. Plant supervisor.
    E. Payroll supervisor.

  1. Lake Appliance produces washers and dryers in an assembly-line process. Labor costs incurred during a recent period were: corporate executives, $500,000; assembly-line workers, $180,000; security guards, $45,000; and plant supervisor, $110,000. The total of Lake's direct labor cost was:
    A. $110,000.
    B. $180,000.
    C. $155,000.
    D. $235,000.
    E. $735,000.

  1. Which of the following employees would not be classified as indirect labor?
    A. Plant Custodian.
    B. Salesperson.
    C. Assembler of wooden furniture.
    D. Plant security guard.
    E. Choices "B" and "C."


  1. Depreciation of factory equipment would be classified as:
    A. operating cost.
    B. "other" cost.
    C. manufacturing overhead.
    D. period cost.
    E. administrative cost.

  1. Which of the following costs is not a component of manufacturing overhead?
    A. Indirect materials.
    B. Factory utilities.
    C. Factory equipment.
    D. Indirect labor.
    E. Property taxes on the manufacturing plant.

  1. The accounting records of Diego Company revealed the following costs, among others:Costs that would be considered in the calculation of manufacturing overhead total:
    A. $149,000.
    B. $171,000.
    C. $186,000.
    D. $442,000.
    E. some other amount.

  1. Which of the following statements is (are) correct?
    A. Overtime premiums should be treated as a component of manufacturing overhead.
    B. Overtime premiums should be treated as a component of direct labor.
    C. Idle time should be treated as a component of direct labor.
    D. Idle time should be accounted for as a special type of loss.
    E. Both "B" and "C" are correct.


  1. Conversion costs are:
    A. direct material, direct labor, and manufacturing overhead.
    B. direct material and direct labor.
    C. direct labor and manufacturing overhead.
    D. prime costs.
    E. period costs.

  1. Prime costs are comprised of:
    A. direct materials and manufacturing overhead.
    B. direct labor and manufacturing overhead.
    C. direct materials, direct labor, and manufacturing overhead.
    D. direct materials and direct labor.
    E. direct materials and indirect materials.

  1. Which of the following statements is true?
    A. Product costs affect only the balance sheet.
    B. Product costs affect only the income statement.
    C. Period costs affect only the balance sheet.
    D. Neither product costs nor period costs affect the Statement of Retained Earnings. This can also be a true statement if the period costs were prepaid (i.e., prepaid advertising, depreciation).
    E. Product costs eventually affect both the balance sheet and the income statement.

  1. In a manufacturing company, the cost of goods completed during the period would include which of the following elements?
    A. Raw materials used.
    B. Beginning finished goods inventory.
    C. Marketing costs.
    D. Depreciation of delivery trucks.
    E. All of the above.


  1. Which of the following equations is used to calculate cost of goods sold during the period?
    A. Beginning finished goods + cost of goods manufactured + ending finished goods.
    B. Beginning finished goods - ending finished goods.
    C. Beginning finished goods + cost of goods manufactured.
    D. Beginning finished goods + cost of goods manufactured - ending finished goods.
    E. Beginning finished goods + ending finished goods - cost of goods manufactured.

  1. Work-in-process inventory is composed of:
    A. direct material and direct labor.
    B. direct labor and manufacturing overhead.
    C. direct material and manufacturing overhead.
    D. direct material, direct labor, and manufacturing overhead.
    E. direct material only.

  1. Holden Industries began July with a finished-goods inventory of $48,000. The finished-goods inventory at the end of July was $56,000 and the cost of goods sold during the month was $125,000. The cost of goods manufactured during July was:
    A. $104,000.
    B. $125,000.
    C. $117,000.
    D. $133,000.
    E. some other amount.

  1. Carolina Plating Company reported a cost of goods manufactured of $520,000, with the firm's year-end balance sheet revealing work in process and finished goods of $70,000 and $134,000, respectively. If supplemental information disclosed raw materials used in production of $80,000, direct labor of $140,000, and manufacturing overhead of $240,000, the company's beginning work in process must have been:
    A. $130,000.
    B. $10,000.
    C. $66,000.
    D. $390,000.
    E. some other amount.


  1. The accounting records of Bronco Company revealed the following information:Bronco's cost of goods manufactured is:
    A. $519,000.
    B. $522,000.
    C. $568,000.
    D. $571,000.
    E. some other amount.

  1. The accounting records of Dolphin Company revealed the following information:Dolphin's cost of goods sold is:
    A. $508,000.
    B. $529,000.
    C. $531,000.
    D. $553,000.
    E. some other amount.


  1. The accounting records of Brownwood Company revealed the following information:Brownwood's cost of goods sold is:
    A. $721,000.
    B. $730,000.
    C. $778,000.
    D. $787,000.
    E. some other amount.

  1. For the year just ended, Cole Corporation's manufacturing costs (raw materials used, direct labor, and manufacturing overhead) totaled $1,500,000. Beginning and ending work-in-process inventories were $60,000 and $90,000, respectively. Cole's balance sheet also revealed respective beginning and ending finished-goods inventories of $250,000 and $180,000. On the basis of this information, how much would the company report as cost of goods manufactured (CGM) and cost of goods sold (CGS)?
    A. CGM, $1,430,000; CGS, $1,460,000.
    B. CGM, $1,470,000; CGS, $1,540,000.
    C. CGM, $1,530,000; CGS, $1,460,000.
    D. CGM, $1,570,000; CGS, $1,540,000.
    E. Some other amounts.

   


  1. If purchases of raw materials were $135,000 during the year, what was the amount of raw materials used during the year?
    A. $129,200.
    B. $140,800.
    C. $135,000.
    D. $146,600.
    E. some other amount.

  1. If raw materials used during the year were $135,000 what was the amount of raw materials purchased during the year?
    A. $129,200.
    B. $140,800.
    C. $135,000.
    D. $146,600.
    E. some other amount.

   

  1. If direct materials used during the year were $135,000, what was cost of goods manufactured?
    A. $140,500.
    B. $539,000.
    C. $409,500.
    D. $544,500.
    E. some other amount.


  1. If the cost of goods manufactured for the year was $565,000, what was the amount of direct materials used during the year?
    A. $155,500.
    B. $140,500.
    C. $150,000.
    D. $145,500.
    E. some other amount.

   

  1. If the cost of goods manufactured for the year was $385,000, what was the cost of goods sold for the year?
    A. $395,400.
    B. $385,000.
    C. $390,200.
    D. $400,600.
    E. some other amount.

  1. If the cost of goods sold for the year was $427,500, what was the cost of goods manufactured for the year?
    A. $402,100.
    B. $422,300.
    C. $417,100.
    D. $427,500.
    E. some other amount.


  1. Glass Industries reported the following data for the year just ended: sales revenue, $1,750,000; cost of goods sold, $980,000; cost of goods manufactured, $560,000; and selling and administrative expenses, $170,000. Glass' gross margin would be:
    A. $940,000.
    B. $1,190,000.
    C. $1,020,000.
    D. $380,000.
    E. $770,000.

  1. Pumpkin Enterprises began operations on January 1, 20x1, with all of its activities conducted from a single facility. The company's accountant concluded that the year's building depreciation should be allocated as follows: selling activities, 20%; administrative activities, 35%; and manufacturing activities, 45%. If Pumpkin sold 60% of 20x1 production during that year, what percentage of the depreciation would appear (either directly or indirectly) on the 20x1 income statement?
    A. 27%.
    B. 45%.
    C. 55%.
    D. 82%.
    E. 100%.

  1. An employee accidentally overstated the year's advertising expense by $50,000. Which of the following correctly depicts the effect of this error?
    A. Cost of goods manufactured will be overstated by $50,000.
    B. Cost of goods sold will be overstated by $50,000.
    C. Both cost of goods manufactured and cost of goods sold will be overstated by $50,000.
    D. Cost of goods sold will be overstated by $50,000, and cost of goods manufactured will be understated by $50,000.
    E. None of these.


  1. Which of the following would likely be a suitable cost driver for the amount of direct materials used?
    A. The number of units sold.
    B. The number of direct labor hours worked.
    C. The number of machine hours worked.
    D. The number of units produced.
    E. The number of employees working in the factory.

  1. The choices below depict five costs of Benton Corporation and a possible driver for each cost. Which of these choices likely contains an inappropriate cost driver?
    A. Gasoline consumed; number of miles driven.
    B. Manufacturing overhead incurred in a heavily automated facility; direct labor hours.
    C. Sales commissions; gross sales revenue.
    D. Building maintenance cost; building square footage.
    E. Human resources department cost; number of employees.

  1. Variable costs are costs that:
    A. vary inversely with changes in activity.
    B. vary directly with changes in activity.
    C. remain constant as activity changes.
    D. decrease on a per-unit basis as activity increases.
    E. increase on a per-unit basis as activity increases.

  1. As activity decreases, unit variable cost:
    A. increases proportionately with activity.
    B. decreases proportionately with activity.
    C. remains constant.
    D. increases by a fixed amount.
    E. decreases by a fixed amount.


  1. As activity increases, unit variable cost:
    A. increases proportionately with activity.
    B. decreases proportionately with activity.
    C. remains constant.
    D. increases by a fixed amount.
    E. decreases by a fixed amount.

  1. Which of the following is not an example of a variable cost?
    A. Straight-line depreciation on a machine that has a five-year service life.
    B. Wages of manufacturing workers whose pay is based on hours worked.
    C. Tires used in the production of tractors.
    D. Aluminum used to make patio furniture.
    E. Commissions paid to sales personnel.

  1. Fixed costs are costs that:
    A. vary directly with changes in activity.
    B. vary inversely with changes in activity.
    C. remain constant on a per-unit basis.
    D. remain constant as activity changes.
    E. increase on a per-unit basis as activity increases.

  1. The fixed cost per unit:
    A. will increase as activity increases.
    B. will increase as activity decreases.
    C. will decrease as activity increases.
    D. will remain constant.
    E. will exhibit the behavior described in choices "B" and "C."

  1. Which of the following is an example of a fixed cost?
    A. Paper used in the manufacture of textbooks.
    B. Property taxes paid by a firm to the City of Los Angeles.
    C. The wages of part-time workers who are paid $8 per hour.
    D. Gasoline consumed by salespersons' cars.
    E. Surgical supplies used in a hospital's operating room.


  1. The true statement about cost behavior is that:
    A. variable costs are constant on a per-unit basis and change in total as activity changes.
    B. fixed costs are constant on a per-unit basis and change in total as activity changes.
    C. fixed costs are constant on a per-unit basis and constant in total as activity changes.
    D. variable costs change on a per-unit basis and change in total as activity changes.
    E. variable costs are constant on a per-unit basis and are constant in total as activity changes.

  1. The true statement about cost behavior is that:
    A. variable costs change on a per-unit basis and change in total as activity changes.
    B. fixed costs are constant on a per-unit basis and change in total as activity changes.
    C. fixed costs are constant on a per-unit basis and constant in total as activity changes.
    D. fixed costs change on a per-unit basis and are constant in total as activity changes.
    E. variable costs are constant on a per-unit basis and are constant in total as activity changes.

  1. The variable costs per unit are $6 when a company produces 12,000 units of product. What are the variable costs per unit when 14,000 units are produced?
    A. $4.50.
    B. $5.00.
    C. $5.50.
    D. $6.00.
    E. Some other amount.

  1. The fixed costs per unit are $10 when a company produces 10,000 units of product. What are the fixed costs per unit when 8,000 units are produced?
    A. $12.50.
    B. $10.00.
    C. $8.00.
    D. $6.50.
    E. $5.50.


  1. Total costs are $180,000 when 10,000 units are produced; of this amount, variable costs are $64,000. What are the total costs when 13,000 units are produced?
    A. $199,200.
    B. $214,800.
    C. $234,000.
    D. Some other amount.
    E. Total costs cannot be calculated based on the information presented.

  1. When 5,000 units are produced variable costs are $35 per unit and total costs are $200,000. What are the total costs when 8,000 units are produced?
    A. $200,000.
    B. $305,000.
    C. $240,000.
    D. Some other amount.
    E. Total costs cannot be calculated based on the information presented.

  1. Baxter Company, which pays a 10% commission to its salespeople, reported sales revenues of $210,000 for the period just ended. If fixed and variable sales expenses totaled $56,000, what would these expenses total at sales of $168,000?
    A. $16,800.
    B. $35,000.
    C. $44,800.
    D. $51,800.
    E. Some other amount.

  1. Which of the following would not be characterized as a cost object?
    A. An automobile manufactured by General Motors.
    B. The New York Fire Department.
    C. A Burger King restaurant located in Cleveland, Ohio.
    D. A Delta Airlines flight from Atlanta to Miami.
    E. All of these are examples of cost objects.


  1. Costs that can be easily traced to a specific department are called:
    A. direct costs.
    B. indirect costs.
    C. product costs.
    D. manufacturing costs.
    E. processing costs.

  1. Which of the following would not be considered a direct cost with respect to the service department of a new car dealership?
    A. Wages of repair technicians.
    B. Property taxes paid by the dealership.
    C. Repair parts consumed.
    D. Salary of the department manager.
    E. Depreciation on new equipment used to analyze engine problems.

  1. Indirect costs:
    A. can be traced to a cost object.
    B. cannot be traced to a particular cost object.
    C. are not important.
    D. are always variable costs.
    E. may be indirect with respect to Disney World but direct with respect to one of its major components, Epcot Center.

  1. The salary that is sacrificed by a college student who pursues a degree full time is a(n):
    A. sunk cost.
    B. out-of-pocket cost.
    C. opportunity cost.
    D. differential cost.
    E. marginal cost.


  1. The tuition that will be paid next semester by a college student who pursues a degree is a(n):
    A. sunk cost.
    B. out-of-pocket cost.
    C. indirect cost.
    D. average cost.
    E. marginal cost.

  1. Which of the following costs should be ignored when choosing among alternatives?
    A. Opportunity costs.
    B. Sunk costs.
    C. Out-of-pocket costs.
    D. Differential costs.
    E. None of these.

  1. If the total cost of alternative A is $50,000 and the total cost of alternative B is $34,000, then $16,000 is termed the:
    A. opportunity cost.
    B. average cost.
    C. sunk cost.
    D. out-of-pocket cost.
    E. differential cost.

 Wee Care is a nursery school for pre-kindergarten children. The school has determined that the following biweekly revenues and costs occur at different levels of enrollment:



  1. The marginal cost when the twenty-first student enrolls in the school is:
    A. $55.
    B. $155.
    C. $300.
    D. $3,045.
    E. $3,255.

  1. The average cost per student when 16 students enroll in the school is:
    A. $100.
    B. $125.
    C. $175.
    D. $300.
    E. $400.

  1. The costs that follow all have applicability for a manufacturing enterprise. Which of the choices listed correctly denotes the costs' applicability for a service provider?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E



Essay Questions

  1. Consider the three firms that follow: (1) Southwest Airlines, (2) BMW, and (3) Target. These firms, examples of service providers, manufacturers, and merchandisers, tend to have different characteristics with respect to costs and financial-statement disclosures.
    Required:
    Determine which of the preceding firms (1, 2, and/or 3) would likely:
    A. Disclose operating expenses on the income statement.
    B. Have product costs.
    C. Have period costs.
    D. Disclose cost of cost good sold on the income statement.
    E. Have no meaningful investment in inventory.
    F. Maintain raw-material, work-in-process, and finished-goods inventories.
    G. Have variable and fixed costs. 





  1. Consider the following cost items:
    1. Sales commissions earned by a company's sales force.
    2. Raw materials purchased during the period.
    3. Current year's depreciation on a firm's manufacturing facilities.
    4. Year-end completed production of a carpet manufacturer.
    5. The cost of products sold to customers of an apparel store.
    6. Wages earned by machine operators in a manufacturing plant.
    7. Income taxes incurred by an airline.
    8. Marketing costs of an electronics manufacturer.
    9. Indirect labor costs incurred by a manufacturer of office equipment.
    Required:
    A. Evaluate the costs just cited and determine whether the associated dollar amounts would appear on the firm's balance sheet, income statement, or schedule of cost of goods manufactured.
    B. What major asset will normally be insignificant for service enterprises and relatively substantial for retailers, wholesalers, and manufacturers? Briefly discuss.
    C. Briefly explain the similarity and difference between the merchandise inventory of a retailer and the finished-goods inventory of a manufacturer. 





  1. Calamari Manufacturing produces small electric engines. Identify the following costs as direct materials (DM), direct labor (DL), manufacturing overhead (MOH), or a period cost (PC). Also indicate whether the cost is variable (V) or fixed (F) with respect to behavior.
    A. Commissions paid to salespeople
    B. Straight-line depreciation on the factory building
    C. Salary of the plant supervisor
    D. Wages of the assembly-line workers
    E. Machine lubricant used in production activities
    F. Engine casings used in production activities
    G. Advertising placed in trade journals
    H. Lease payments for the president's automobile
    I. Property taxes paid on the factory facilities 

  1. Consider the following items:
    A. Tomatoes used in the manufacture of Hunts ketchup
    B. Administrative salaries of executives employed by Jet Blue Airlines
    C. Wages of assembly-line workers at a Ford plant
    D. Marketing expenditures of the Atlanta Braves baseball club
    E. Commissions paid to Coca-Cola's salespeople
    F. Straight-line depreciation on manufacturing equipment owned by Dell Computer
    G. Shipping charges incurred by Office Depot on out-going orders
    H. Speakers used in Sony home-theater systems
    I. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant
    Required:
    Complete the table that follows and classify each of the costs listed as (1) a product or period cost and (2) a variable or fixed cost by placing an "X" in the appropriate column.





  1. The following selected costs were extracted from the accounting records of Louisiana Machining (LAM):
    1. Direct materials used in production
    2. Wages of machine operators
    3. Factory utilities
    4. Sales commissions
    5. Salary of LAM's president
    6. Factory depreciation
    7. Wages of plant security guards
    8. Uncollectible accounts expense
    9. Machine lubricant used in production
    A. 1, 2, 3, 6, 7, 9
    B. 3, 6, 7, 9
    C. 4, 5, 8
    D. 2, 3, 6, 7, 9
    E. 8
    F. 1, 2, 3, 6, 7, 9
    Required:
    By the use of numbers, identify the costs that would be used to calculate: 





  1. Parrish's Manufacturing had the following data for the period just ended:Required:
    A. Calculate Parrish's cost of goods manufactured.
    B. Calculate Parrish's cost of goods sold.





  1. Hamilton Company had the following inventory balances at the beginning and end of the year:During the year, the company purchased $100,000 of raw material and incurred $340,000 of direct labor costs. Other data: manufacturing overhead incurred, $450,000; sales, $1,560,000; selling and administrative expenses, $90,000; income tax rate, 30%.
    Required:
    A. Calculate cost of goods manufactured.
    B. Calculate cost of goods sold.
    C. Determine Hamilton's net income.


  1. The following selected information was extracted from the 20x3 accounting records of Midina Products*Seventy percent of the company's building was devoted to production activities; the remaining 30% was used for selling and administrative functions.
    Midina's beginning and ending work-in-process inventories amounted to $306,000 and $245,000, respectively. The company's beginning and ending finished-goods inventories were $450,000 and $440,000, respectively.
    Required:
    A. Calculate Midina's manufacturing overhead for the year.
    B. Calculate Midina's cost of goods manufactured.
    C. Compute Midina's cost of goods sold.





  1. The selected amounts that follow were taken from Kandace Corporation's accounting records:Required:
    Compute the following:
    A. Manufacturing overhead.
    B. Work-in-process inventory, 12/31.
    C. Finished-goods inventory, 1/1.
    D. Cost of goods sold.
    E. Gross margin.
    F. Net income.





  1. The Perez Company recorded the following transactions for February 20x1:Sales were $560,000, with sales prices determined by adding a 40% markup to the firm's manufacturing cost. The total cost of direct materials used, direct labor, and manufacturing overhead during the month was $285,000.
    Note: The materials account includes both direct materials and indirect materials.
    Required:
    Calculate the missing values.





  1. Heathrow Corporation sold 12,500 units of its single product during the year, reporting a cost of good sold that totaled $250,000. A review of the company's accounting records disclosed the following information:Heathrow is subject to a 30% income tax rate.
    Required:
    A. Determine the selling price per unit.
    B. Management established a goal at the beginning of the year to reduce the company's investment in finished-goods inventory and work-in-process inventory.
    1. Analyze cost of goods sold and determine if management's goal was achieved with respect to finished-goods inventory. Show computations.
    2. Analyze the firm's manufacturing costs and determine if management's goal was achieved with respect to work-in-process inventory. Show computations.
    C. Is the company profitable? Show calculations.





  1. Aurora Muffler, Inc. operates an automobile service facility. The table below shows the cost incurred during a month when 500 mufflers were replaced.Required:
    Fill in the missing amounts, labeled A through O, in the table above.



  1. Giraldo Systems began business on January 1 of the current year, producing a single product that is popular with home builders. Demand was very strong, allowing the company to sell its entire manufacturing output of 80,000 units. The following unit costs were incurred:Giraldo anticipates an increase in productive output to 100,000 units and sales of 95,000 units in the next accounting period. The company uses appropriate drivers to determine cost behavior and estimates.
    Required:
    A. Assuming that present cost behavior patterns continue, compute the total expected costs in the upcoming accounting period.
    B. Ben Levy is about to prepare a graph that shows the unit cost behavior for variable selling and administrative cost. If the graph's horizontal axis is volume and the vertical axis is dollars, briefly describe what Levy's graph should look like.
    C. Determine whether the following costs are variable or fixed in terms of behavior:
    1. Yearly lease payments for a state-of-the-art cutting machine.
    2. A fee paid to a consultant who provided advice about quality issues. The fee was based on the number of consulting hours provided.
    3. Cost of an awards dinner for "star" salespeople.





  1. Xi Manufacturing, which began operations on January 1 of the current year, produces an industrial scraper that sells for $325 per unit. Information related to the current year's activities follows.Xi carries its finished-goods inventory at the average unit cost of production. There was no work in process at year-end.
    Required:
    A. Compute the company's average unit cost of production.
    B. Determine the cost of the December 31 finished-goods inventory.
    C. Compute the company's cost of goods sold.
    D. If next year's production increases to 23,000 units and general cost behavior patterns do not change, what is the likely effect on:
    1. The direct-labor cost of $35 per unit? Why?
    2. The fixed manufacturing overhead cost of $400,000? Why?





  1. The following terms are used to describe various economic characteristics of costs:Required:
    Choose one of the preceding terms to characterize each of the amounts described below. Each term may be used only once.
    A. The cost of including one extra child in a day-care center.
    B. The cost of merchandise inventory purchased five years ago. The goods are now obsolete.
    C. The cost of feeding 300 children in a public school cafeteria is $450 per day, or $1.50 per child per day. What economic term describes this $1.50 cost?
    D. The management of a high-rise office building uses 3,000 square feet of space in the building for its own administrative functions. This space could be rented for $30,000. What economic term describes this $30,000 of lost rental revenue?
    E. The cost of building an automated assembly line in a factory is $700,000; a manually operated assembly line would cost $250,000. What economic term is used to describe the $450,000 variation between these two amounts?
    F. Refer to the preceding question and assume that the firm is currently building the assembly line for $700,000. What economic term is used to describe the $700,000 construction cost?


  1. Madi and Sohn Corporation has a single facility that it uses for manufacturing, sales, and administrative activities. Should the company's building depreciation charge be expensed in its entirety or is a different accounting procedure appropriate? Explain. 


  1. Manufacturers have established a cost classification called product costs. Define the term "product cost" and note where these costs appear in the financial statements. Be specific. 

  1. The income statements and balance sheets of service, retailing, and manufacturing businesses tend to differ.
    Required:
    A. Which of these businesses will disclose a cost-of-goods-sold figure on the income statement? Why?
    B. Briefly describe the difference between a retailing firm and manufacturer's disclosure of inventories on the balance sheet. 




  1. Briefly define and discuss the terms in each of the pairs that follow.
    A. Direct and indirect costs
    B. Direct materials and indirect materials
    C. Manufacturing overhead and direct labor 



  1. In discussing the operation of her automobile, a doctor once observed that gasoline is a fixed cost because the cost per gallon is relatively stable. Insurance, on the other hand, is a variable cost because the cost per mile varies inversely with the number of miles driven. Comment on the doctor's observation. 




  1. Describe the economic characteristics of sunk costs and opportunity costs, and explain the impact that these costs may have on decisions. 

  1. Cross-functional teams and time-based competition are two themes of contemporary management accounting. Briefly explain these two concepts. 


  1. Unused or excess capacity is a key component of contemporary management accounting. Define the term "excess capacity" and explain how it would relate to a coffee shop. 

  1. The value chain is a key component of contemporary management accounting. Define the term "value chain" and explain how it would relate to an airline. 

Chapter 03

Product Costing and Cost Accumulation in a Batch Production Environment

 

 
 True / False Questions 

  1. Manufacturing overhead is a pool of indirect production costs that must somehow be attached to each unit manufactured.
    True    False


  1. Electricity costs that were incurred by a company's production processes should be debited to Utilities Expense.
    True    False

  1. The final step in recognizing the completion of production requires a company to debit Finished-Goods Inventory and credit Work-in-Process Inventory.
    True    False

  1. Under- or overapplied manufacturing overhead at year-end is most commonly charged or credited to Work-in-Process Inventory.
    True    False

  1. The term "normal costing" refers to the use of job-costing systems.
    True    False



Multiple Choice Questions

  1. Product costing in a manufacturing firm is the process of:
    A. accumulating the company's period costs.
    B. allocating costs among the firm's departments.
    C. placing a value on the company's fixed assets.
    D. assigning costs to the firm's inventory.
    E. assigning costs to the company's managers.

  1. Which of the following statements is true?
    A. Service firms have little need for determining the cost of their services.
    B. The concept of product costing is relevant only for manufacturing firms.
    C. The cost of year-end inventory appears on the balance sheet as an expense.
    D. Service companies use cost information for planning and control purposes.
    E. Mining and petroleum companies have no inventoriable costs.

  1. Which of the following manufacturers would most likely use job-order costing?
    A. Chemical manufacturers.
    B. Microchip processors.
    C. Custom-furniture manufacturers.
    D. Gasoline refiners.
    E. Fertilizer manufacturers.

  1. A custom-home builder would likely utilize:
    A. job-order costing.
    B. process costing.
    C. mass customization.
    D. process budgeting.
    E. joint costing.

  1. Which of the following types of companies would most likely use process costing?
    A. Aircraft manufacturers.
    B. Textile manufacturers.
    C. Textbook publishers.
    D. Custom-machining firms.
    E. Shipbuilders.


  1. A manufacturing firm produces goods in accordance with customer specifications, commencing production upon receipt of a purchase order. To accumulate the cost of each order, the company would use a:
    A. job-cost record.
    B. cost allocation matrix.
    C. production log.
    D. overhead sheet.
    E. manufacturing cost record.

  1. A typical job-cost record would provide information about all of the following items related to an order except:
    A. the cost of direct materials used.
    B. administrative costs.
    C. direct labor costs incurred.
    D. applied manufacturing overhead.
    E. direct labor hours worked.

  1. Which of the following statements about material requisitions is false?
    A. Material requisitions are often computerized.
    B. Material requisitions are a common example of source documents.
    C. Material requisitions contain information that is useful to the cost accounting department.
    D. Material requisitions authorize the transfer of materials from the production floor to the raw materials warehouse.
    E. Material requisitions are routinely linked to a bill of materials that lists all of the materials needed to complete a job.

  1. Pruitt Company has developed an integrated system that coordinates the flow of all goods, services, and information into and out of the organization, working with raw material vendors as well as customers to improve service and reduce costs. The firm is said to be using:
    A. participative management.
    B. top-down management.
    C. strategic cost management.
    D. supply chain management.
    E. management by objectives (MBO).


  1. The assignment of direct labor cost to individual jobs is based on:
    A. an estimate of the total time spent on the job.
    B. actual total payroll cost divided equally among all jobs in process.
    C. estimated total payroll cost divided equally among all jobs in process.
    D. the actual time spent on each job multiplied by the wage rate.
    E. the estimated time spent on each job multiplied by the wage rate.

  1. When using normal costing, the total production cost of a job is composed of:
    A. direct material and direct labor.
    B. direct material, direct labor, manufacturing overhead, and outlays for selling costs.
    C. direct material, direct labor, manufacturing overhead, and outlays for both selling and administrative costs.
    D. direct material, direct labor, and applied manufacturing overhead.
    E. direct material, direct labor, and actual manufacturing overhead.

  1. Manufacturing overhead:
    A. includes direct materials, indirect materials, indirect labor, and factory depreciation.
    B. is easily traced to jobs.
    C. includes all selling costs.
    D. should not be assigned to individual jobs because it bears no obvious relationship to them.
    E. is a pool of indirect production costs that must somehow be attached to each unit manufactured.

  1. As production takes place, all manufacturing costs are added to the:
    A. Work-in-Process Inventory account.
    B. Manufacturing-Overhead Inventory account.
    C. Cost-of-Goods-Sold account.
    D. Finished-Goods Inventory account.
    E. Production Labor account.


  1. Which of the following statements regarding work in process is not correct?
    A. Work in process is partially completed inventory.
    B. Work in process consists of direct labor, direct material, and manufacturing overhead.
    C. Work-in-Process Inventory is debited to record direct material used and direct labor incurred.
    D. Work-in-Process Inventory appears on the year-end balance sheet.
    E. Work-in-Process Inventory is credited when goods are sold.

  1. Which of the following statements about manufacturing cost flows is false?
    A. Direct materials, direct labor, and manufacturing overhead are entered in the Work-in-Process Inventory account.
    B. The Finished-Goods Inventory account will contain entries that reflect the cost of goods sold during the period.
    C. The cost of units sold during the period will typically appear on the income statement.
    D. When a company sells goods that cost $54,000 for $60,000, the firm will enter $6,000 in an account entitled Profit on Sale.
    E. Units are normally transferred from Work-in-Process Inventory to Finished-Goods Inventory.

  1. Which of the following statements about materials is false?
    A. Acquisitions of materials are normally charged to the Purchases account.
    B. The use of direct materials gives rise to a debit to Work-in-Process Inventory.
    C. The use of indirect materials gives rise to a debit to Manufacturing Overhead.
    D. The use of indirect materials gives rise to a credit to Manufacturing Supplies Inventory.
    E. Direct materials are accounted for in a different manner than indirect materials.

  1. Summers Corporation recently used $75,000 of direct materials and $9,000 of indirect materials in production activities. The journal entries reflecting these transactions would include:
    A. a debit to Manufacturing Overhead for $9,000.
    B. a debit to Manufacturing Overhead for $84,000.
    C. a debit to Raw-Material Inventory for $75,000.
    D. a debit to Work-in-Process Inventory for $84,000.
    E. a credit to Manufacturing Overhead for $9,000.


  1. A review of a company's Work-in-Process Inventory account found a debit for materials of $67,000. If all procedures were performed in the correct manner, this means that the firm:
    A. also recorded a credit to Raw-Material Inventory.
    B. also recorded a credit to Manufacturing Supplies Inventory.
    C. was accounting for the usage of direct materials.
    D. was accounting for the usage of indirect materials.
    E. Both A and C are correct

  1. Othello Manufacturing incurred $106,000 of direct labor and $11,000 of indirect labor. The proper journal entry to record these events would include a debit to Work in Process for:
    A. $0 because Work in Process should be credited.
    B. $0 because Work in Process is not affected.
    C. $11,000.
    D. $106,000.
    E. $117,000.

  1. The following information relates to October:
    Production supervisor's salary: $3,500
    Factory maintenance wages: 250 hours at $10 per hour
    The journal entry to record the preceding information is:
    A.
    B.
    C.
    D.
    E. 


  1. Electricity costs that were incurred by a company's production processes should be debited to:
    A. Utilities Expense.
    B. Accounts Payable.
    C. Cash.
    D. Manufacturing Overhead.
    E. Work-in-Process Inventory.

  1. The journal entry needed to record $5,000 of advertising for Westwood Manufacturing would include:
    A. a debit to Advertising Expense.
    B. a credit to Advertising Expense.
    C. a debit to Manufacturing Overhead.
    D. a credit to Manufacturing Overhead.
    E. a debit to Projects-in-Process.

  1. Reynardo Company incurred $90,000 of depreciation for the year. Eighty percent relates to the firm's production facilities, and 20% relates to sales and administrative offices. If all items are handled in the proper manner, a review of the company's accounting records should reveal a:
    A. debit to Depreciation Expense for $90,000.
    B. debit to Manufacturing Overhead for $90,000.
    C. debit to Manufacturing Overhead for $72,000.
    D. debit to Work-in-Process Inventory for $18,000.
    E. credit to Cash for $90,000.

  1. The process of assigning overhead costs to the jobs that are worked on is commonly called:
    A. service department cost allocation.
    B. overhead cost distribution.
    C. overhead application.
    D. transfer costing.
    E. overhead cost apportionment.


  1. Which of the following is the correct method to calculate a predetermined overhead rate?
    A. Budgeted total manufacturing cost     ¸ budgeted amount of cost driver.
    B. Budgeted overhead cost     ¸ budgeted amount of cost driver.
    C. Budgeted amount of cost driver     ¸ budgeted overhead cost.
    D. Actual overhead cost     ¸ budgeted amount of cost driver.
    E. Actual overhead cost     ¸ actual amount of cost driver.

  1. Metro Corporation uses a predetermined overhead rate of $20 per machine hour. In deriving this figure, the company's accountant used:
    A. a denominator of budgeted machine hours for the current accounting period.
    B. a denominator of actual machine hours for the current accounting period.
    C. a denominator of actual machine hours for the previous accounting period.
    D. a numerator of budgeted machine hours for the current accounting period.
    E. a numerator of actual machine hours for the current accounting period.

  1. Strong Company applies overhead based on machine hours. At the beginning of 20x1, the company estimated that manufacturing overhead would be $500,000, and machine hours would total 20,000. By 20x1 year-end, actual overhead totaled $525,000, and actual machine hours were 25,000. On the basis of this information, the 20x1 predetermined overhead rate was:
    A. $0.04 per machine hour.
    B. $0.05 per machine hour.
    C. $20 per machine hour.
    D. $21 per machine hour.
    E. $25 per machine hour.

  1. Dixie Company, which applies overhead at the rate of 190% of direct material cost, began work on job no. 101 during June. The job was completed in July and sold during August, having accumulated direct material and labor charges of $27,000 and $15,000, respectively. On the basis of this information, the total overhead applied to job no. 101 amounted to:
    A. $0.
    B. $28,500.
    C. $51,300.
    D. $70,500.
    E. $79,800.


  1. Huxtable charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of machine hours. The following data pertain to the current year:
    Budgeted manufacturing overhead: $480,000
    Actual manufacturing overhead: $440,000
    Budgeted machine hours: 20,000
    Actual machine hours: 16,000
    Overhead applied to production totaled:
    A. $352,000.
    B. $384,000.
    C. $550,000.
    D. $600,000.
    E. some other amount.

  1. Simone uses a predetermined overhead application rate of $8 per direct labor hour. A review of the company's accounting records for the year just ended discovered the following:
    Underapplied manufacturing overhead: $7,200
    Actual manufacturing overhead: $392,000
    Budgeted labor hours: 50,000
    Simone's actual labor hours worked totaled:
    A. 48,100.
    B. 49,100.
    C. 49,900.
    D. 50,900.
    E. cannot be determined based on the information presented.

  1. Trenton worked on four jobs during its first year of operation: nos. 401, 402, 403, and 404. A review of job no. 403's cost record revealed direct material charges of $40,000 and total manufacturing costs of $50,000. If Trenton applies overhead at 150% of direct labor cost, the overhead applied to job no. 403 must have been:
    A. $0.
    B. $6,000.
    C. $4,000.
    D. $3,333.
    E. $5,000.


  1. The left side of the Manufacturing Overhead account is used to accumulate:
    A. actual manufacturing overhead costs incurred throughout the accounting period.
    B. overhead applied to Work-in-Process Inventory.
    C. underapplied overhead.
    D. predetermined overhead.
    E. overapplied overhead.

  1. Throughout the accounting period, the credit side of the Manufacturing Overhead account is used to accumulate:
    A. actual manufacturing overhead costs.
    B. overhead applied to Work-in-Process Inventory.
    C. overapplied overhead.
    D. underapplied overhead.
    E. predetermined overhead.

  1. An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead at a company that uses normal costing. The accountant was:
    A. applying a predetermined overhead amount to production.
    B. recognizing receipt of the factory utilities bill.
    C. recording a year-end adjustment for an insignificant amount of underapplied overhead.
    D. recognizing actual overhead incurred during the period.
    E. recognizing the completion of production.

  1. The final step in recognizing the completion of production requires a company to:
    A. debit Finished-Goods Inventory and credit Work-in-Process Inventory.
    B. debit Work-in-Process Inventory and credit Finished-Goods Inventory.
    C. add direct labor to Work-in-Process Inventory.
    D. add direct materials, direct labor, and manufacturing overhead to Work-in-Process Inventory.
    E. add direct materials to Finished-Goods Inventory.


  1. Job no. C12 was completed in November at a cost of $28,500, subdivided as follows: direct material, $13,500; direct labor, $6,000; and manufacturing overhead, $9,000. The journal entry to record the completion of the job is:
    A.
    B.
    C.
    D.
    E. 

  1. If a company sells goods that cost $80,000 for $92,000, the firm will:
    A. reduce Finished-Goods Inventory by $80,000.
    B. reduce Finished-Goods Inventory by $92,000.
    C. report sales revenue on the balance sheet of $92,000.
    D. reduce Cost of Goods Sold by $80,000.
    E. follow more than one of the above procedures.

  1. Serina Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries to record this transaction would include:
    A. a credit to Work-in-Process Inventory for $35,000.
    B. a debit to Sales Revenue for $45,000.
    C. a credit to Profit on Sale for $10,000.
    D. a debit to Finished-Goods Inventory for $35,000.
    E. a credit to Sales Revenue for $45,000.


  1. A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and billed the customer $30,000. Which of the following options correctly expresses the accounts that are debited and credited to record this transaction?
    A. Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of Goods Sold.
    B. Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, Finished-Goods Inventory.
    C. Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, Finished-Goods Inventory.
    D. Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of Goods Sold.
    E. Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.

  1. Blarney Company applies manufacturing overhead by using a predetermined rate of 50% of direct labor cost. The data that follow pertain to job no. 764:If Blarney adds a 40% markup on total cost to generate a profit, which of the following choices depicts a portion of the accounting needed to record the sale of job no. 764?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Armada Company applies manufacturing overhead by using a predetermined rate of 150% of direct labor cost. The data that follow pertain to job no. 831:If Armada adds a 30% markup on total cost to generate a profit, which of the following choices depicts a portion of the accounting needed to record the credit sale of job no. 831?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Media, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional labor hours. Overhead was estimated to be $150,000, direct professional labor hours were estimated to be 15,000, and direct professional labor cost was projected to be $225,000. During the year, Media incurred actual overhead costs of $146,000, actual direct professional labor hours of 14,500, and actual direct labor cost of $222,000. By year-end, the firm's overhead was:
    A. $1,000 underapplied.
    B. $1,000 overapplied.
    C. $4,000 underapplied.
    D. $4,000 overapplied.
    E. $5,000 underapplied.


  1. Mahler, Inc., applies manufacturing overhead at the rate of $40 per machine hour. Budgeted machine hours for the current period were anticipated to be 120,000; however, a lengthy strike resulted in actual machine hours being worked of only 90,000. Budgeted and actual manufacturing overhead figures for the year were $4,800,000 and $4,180,000, respectively. On the basis of this information, the company's year-end overhead was:
    A. overapplied by $580,000.
    B. underapplied by $580,000.
    C. overapplied by $1,200,000.
    D. underapplied by $1,200,000.
    E. underapplied by $900,000.

  1. Tiffany charges manufacturing overhead to products by using a predetermined application rate, computed on the basis of labor hours. The following data pertain to the current year:Which of the following choices is the correct status of manufacturing overhead at year-end?
    A. Overapplied by $10,000.
    B. Underapplied by $10,000.
    C. Overapplied by $35,000.
    D. Underapplied by $35,000.
    E. Overapplied by $45,000.

  1. Sting Corporation debited Cost of Goods Sold and credited Manufacturing Overhead at year-end. On the basis of this information, one can conclude that:
    A. budgeted overhead exceeded actual overhead.
    B. budgeted overhead exceeded applied overhead.
    C. budgeted overhead was less than applied overhead.
    D. actual overhead exceeded applied overhead.
    E. actual overhead was less than applied overhead.


  1. Howard Manufacturing's overhead at year-end was underapplied by $5,800, a small amount given the firm's size. The year-end journal entry to record this amount would include:
    A. a debit to Cost of Goods Sold.
    B. a debit to Manufacturing Overhead.
    C. a debit to Work-in-Process Inventory.
    D. a credit to Cost of Goods Sold.
    E. a credit to Work-in-Process Inventory.

  1. Fogg Company, which uses labor hours to apply overhead to manufacturing, may have increased amounts of underapplied overhead at month-end if:
    A. suppliers of direct materials have an across-the-board price increase.
    B. an accountant failed to record the period's charges for plant maintenance and security.
    C. employees are hit hard with a widespread outbreak of the flu.
    D. direct laborers are granted a wage increase.
    E. outlays for advertising expenditures are increased.

  1. The estimates used to calculate the predetermined overhead rate will virtually always:
    A. prove to be correct.
    B. result in a year-end balance of zero in the Manufacturing Overhead account.
    C. result in overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
    D. result in underapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
    E. result in either underapplied or overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.

  1. Under- or overapplied manufacturing overhead at year-end is most commonly:
    A. charged or credited to Work-in-Process Inventory.
    B. charged or credited to Cost of Goods Sold.
    C. charged or credited to a special loss account.
    D. prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
    E. ignored because there is no effect on the Cash account.


  1. When underapplied or overapplied manufacturing overhead is prorated, amounts can be assigned to which of the following accounts?
    A. Raw-Material Inventory, Manufacturing Overhead, and Direct Labor.
    B. Cost of Goods Sold, Work-in-Process Inventory, and Finished-Goods Inventory.
    C. Work-in-Process Inventory, Raw-Material Inventory, and Cost of Goods Sold.
    D. Raw-Material Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
    E. Raw-Material Inventory, Work-in-Process Inventory, and Finished-Goods Inventory.

  1. Fletcher, Inc. disposes of under- or overapplied overhead at year-end as an adjustment to cost of goods sold. Prior to disposal, the firm reported cost of goods sold of $590,000 in a year when manufacturing overhead was underapplied by $15,000. If sales revenue totaled $1,400,000, determine (1) Fletcher's adjusted cost of goods sold and (2) gross margin.A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. The term "normal costing" refers to the use of:
    A. job-costing systems.
    B. computerized accounting systems.
    C. targeted overhead rates.
    D. predetermined overhead rates.
    E. actual overhead rates.


  1. The primary difference between normalized and actual costing methods lies in the determination of a job's:
    A. direct material costs.
    B. direct labor costs.
    C. manufacturing overhead costs.
    D. selling costs.
    E. administrative costs.

  1. Which of the following statements about the use of direct labor as a cost driver is false?
    A. Direct labor is the most commonly used cost driver when calculating a predetermined overhead rate.
    B. Direct labor is gaining importance in many manufacturing applications with respect to being a significant cost driver.
    C. Direct labor is an inappropriate cost driver to use if a company is highly automated.
    D. If direct labor is a good cost driver, increases in direct labor are matched with increases in manufacturing overhead.
    E. Companies can use either direct labor cost or direct labor hours as a cost driver.

  1. If the amount of effort and attention to products varies substantially throughout a company's various manufacturing operations, the company might consider the use of:
    A. a plant-wide overhead rate.
    B. departmental overhead rates.
    C. actual overhead rates instead of predetermined overhead rates.
    D. direct labor hours to determine the overhead rate.
    E. machine hours to determine the overhead rate.

  1. In the two-stage cost allocation process, costs are assigned:
    A. from jobs, to service departments, to production departments.
    B. from service departments, to jobs, to production departments.
    C. from service departments, to production departments, to jobs.
    D. from production departments, to jobs, to service departments.
    E. from the balance sheet (when goods are produced), to the income statement (when goods are sold).


  1. Which of the following entities would not likely be a user of job-costing systems?
    A. Custom-furniture manufacturers.
    B. Repair shops.
    C. Hospitals.
    D. Accounting firms.
    E. None of these, because all are likely users.

  1. Which of the following would not likely be used by service providers to accumulate job costs?
    A. Projects.
    B. Contracts.
    C. Clients.
    D. Processes.
    E. All of these, because service providers cannot use job-costing systems.

  1. At the Nassau Advertising Agency, partner and staff compensation cost is a key driver of agency overhead. In light of this fact, which of the following is the correct expression to determine the amount of overhead applied to a particular client job?
    A. (Budgeted overhead     ¸ budgeted compensation) ´ budgeted compensation cost on the job.
    B. (Budgeted overhead     ¸ budgeted compensation) ´ actual compensation cost on the job.
    C. (Budgeted compensation     ¸ budgeted overhead) ´ budgeted compensation cost on the job.
    D. (Budgeted compensation     ¸ budgeted overhead) ´ actual compensation cost on the job.
    E. None of these, because service providers do not apply overhead to jobs.



Essay Questions

  1. Taffy Corporation sells a number of products to groups that provide educational workshops and seminars. One of the products involves a combination leather case and note pad. The company purchases the case and pad combination from a supplier and encloses a $3 pen that contains the educational groups' name and logo.
    Taffy began to carry this product at the start of 20x3, acquiring 12,500 cases from Executive Supply for $87,500 along with an identical number of pens from Accent Goods. During 20x3, 9,500 of the cases and pens were issued to Taffy's assembly operation where the pen is added. Eighty percent of these cases were completed as of December 31, and a review of the December 31 finished-goods inventory found 2,600 completed cases in the warehouse. Conversations with salespeople revealed that 70 finished sets were used in various company marketing activities throughout the year.
    Required:
    A. Determine the cost of the cases and pens that would appear in Taffy's raw materials, work in process, and finished-goods inventory as of December 31.
    B. Determine the cost of the cases and pens that would appear in the company's cost of goods sold for 20x3. 




  1. The selected data that follow relate to the Bargeron Furniture Company.During the year, products costing $310,000 were completed, and products costing $316,000 were sold on account for $455,000.
    Required:
    Prepare journal entries to record the preceding transactions and events.





  1. Quatro Products started and finished job no. C19 during June. The job required $15,000 of direct material and 75 hours of direct labor at $12 per hour. The predetermined overhead rate is $16 per direct labor hour.
    During June, direct materials requisitions for all jobs totaled $149,000; the total direct labor hours and cost were 6,200 hours at $12 per hour; and the total cost of jobs completed was $337,500. All of these figures include data that pertain to job no. C19.
    Required:
    A. Prepare journal entries that summarize June's total activity.
    B. Determine the cost of job no. C19. 





  1. Dancer Corporation, which uses a job-costing system, had two jobs in process at the start of 20x1: job no. 59 ($95,000) and job no. 60 ($39,500). The following information is available:
    · The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine activity for the year were anticipated to be $720,000 and 20,000 hours, respectively.
    · The company worked on three jobs during the first quarter. Direct materials used, direct labor incurred, and machine hours consumed were:    · Manufacturing overhead during the first quarter included charges for depreciation ($20,000), indirect labor ($50,000), indirect materials used ($4,000), and other factory costs ($108,700).
    · Dancer completed job no. 59 and job no. 60. Job no. 59 was sold for cash, producing a gross profit of $24,600 for the firm.
    Required:
    A. Determine the company's predetermined overhead application rate.
    B. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries where appropriate by combining individual job data.)
    1. The issuance of direct material to production, and the direct labor incurred.
    2. The manufacturing overhead incurred during the quarter.
    3. The application of manufacturing overhead to production.
    4. The completion of job no. 59 and no. 60.
    5. The sale of job no. 59.


  1. Buckman Corporation, which began operations on January 1 of the current year, reported the following information:Buckman uses a normal cost system and applies manufacturing overhead to jobs on the basis of direct labor cost. A 60% markup is added to the cost of completed production when finished goods are sold. On December 31, job no. 18 was the only job that remained in production. That job had direct-material and direct-labor charges of $16,500 and $36,000, respectively.
    Required:
    A. Determine the company's predetermined overhead rate.
    B. Determine the amount of under- or overapplied overhead. Be sure to label your answer.
    C. Compute the amount of direct materials used in production.
    D. Calculate the balance the company would report as ending work-in-process inventory.
    E. Prepare the journal entry(ies) needed to record Buckman's sales, which are all made on account.


  1. Margery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople on the payroll. Job no. 789 was the only job in process on January 1, having costs of $22,500 as of that date. Direct materials used and direct labor incurred during January were:Job no. 791 was the only job in production as of January 31.
    Required:
    A. Should Margery use direct labor or machine hours as a cost driver. Why?
    B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct labor and manufacturing overhead are anticipated to be $200,000 and $300,000, respectively, what is the firm's predetermined overhead rate?
    C. Compute the cost of work-in-process inventory as of January 31.
    D. Compute the cost of jobs completed during January.
    E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much would the firm report as sales revenue?


  1. Rock Star, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing overhead on the basis of direct-labor cost. The following information relates to 20x3:
    · Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000, respectively.
    · Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labor:    · Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3 remained in production.
    · Actual manufacturing overhead by year-end totaled $233,000. Rock Star adjusts all under- and overapplied overhead to cost of goods sold.
    Required:
    A. Compute the company's predetermined overhead application rate.
    B. Compute Rock Star's ending work-in-process inventory.
    C. Determine Rock Star's sales revenue.
    D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
    E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end.
    F. Does the presence of under- or overapplied overhead at year-end indicate that Rock Star's accountants made a serious error? Briefly explain.





  1. Athena Corporation uses a job-cost system and applies manufacturing overhead to products on the basis of machine hours. The company's accountant estimated that overhead and machine hours would total $800,000 and 50,000, respectively, for 20x1. Actual costs incurred follow.The manufacturing overhead figure presented above excludes $27,000 of sales commissions incurred by the firm. An examination of job-cost records revealed that 18 jobs were sold during the year at a total cost of $2,960,000. These goods were sold to customers for $3,720,000. Actual machine hours worked totaled 51,500, and Athens adjusts under- or overapplied overhead at year-end to Cost of Goods Sold.
    Required:
    A. Determine the company's predetermined overhead application rate.
    B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether overhead was under- or overapplied.
    C. Compute the company's adjusted cost of goods sold.
    D. What alternative accounting treatment could the company have used at year-end to adjust for under- or overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?


  1. Dodger Products uses a job-costing system for its units, which pass from the Machining Department, to the Assembly Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the Assembly Department performs a number of manual-assembly activities. The company uses machine hours to apply manufacturing overhead to products in the Machining Department, and direct labor cost to apply manufacturing overhead to products in the Assembly Department.
    The following information relates to the Machining Department for the year just ended:    The Machining Department data that follow pertain to job no. 775, the only job in production at year-end.Required:
    A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the Machining Department.
    B. Compute the cost of the Machining Department's year-end work-in-process inventory.
    C. Determine the amount that overhead was under- or overapplied during the year in the Machining Department. Indicate whether it is overapplied or underapplied.
    D. If Dodger disposes of the Machining Department's under- or overapplied overhead as an adjustment to Cost of Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain.
    E. How much overhead would have been charged to the Machining Department's Work-in-Process account during the year?
    F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly Department.





  1. Kei Products uses a predetermined overhead application rate of $18 per labor hour. A review of the company's accounting records revealed budgeted manufacturing overhead for the period of $621,000, applied manufacturing overhead of $590,400, and overapplied overhead of $11,900.
    Required:
    A. Determine Kei's actual labor hours, budgeted labor hours, and actual manufacturing overhead.
    B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the firm allocates over- or underapplied overhead to Cost of Goods Sold. 


  1. A review of the records of Pilgrim, Inc., a new company, disclosed the following year-end information:
    · Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales commissions.
    · Work-in-Process Inventory account: Contained charges for overhead of $875,000.
    · Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was computed prior to any year-end adjustment for under- or overapplied overhead.
    Pilgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine hour. Budgeted overhead for the period was anticipated to be $900,000.
    Required:
    A. Determine the actual manufacturing overhead for the year.
    B. Determine the amount of manufacturing overhead applied to production.
    C. Is overhead under- or overapplied? By how much?
    D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income statement.
    E. How many machine hours did Pilgrim actually work during the year?
    F. Compute budgeted machine hours for the year. 

  1. Finney & Associates is an interior decorating firm in Tucson. The following costs were incurred in a project to redecorate the mayor's offices:|The firm's budget for the year included the following estimates:Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional labor cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000.
    Required:
    A. Determine the total cost to redecorate the mayor's offices.
    B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.


  1. Boxworth and Associates designs relatively small sports stadiums and arenas at various sites throughout the country. The firm's accountant prepared the following budget for the upcoming year:Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for the administrative support staff and other operating costs. Traceable costs are charged directly to client projects; nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a predetermined overhead application rate.
    Boxworth had one project in process at year-end: an arena that was being designed for Charlotte County. Costs directly chargeable to this project were:Required:
    A. Determine Boxworth's overhead for the year and the firm's predetermined overhead application rate. The rate is based on costs directly chargeable to firm projects.
    B. Compute the cost of the Charlotte County arena project as of year-end.
    C. Present three examples of "other operating costs" that might be directly traceable to the Charlotte County project.


  1. ADF provides consulting services and uses a job-order system to accumulate the cost of client projects. Traceable costs are charged directly to individual clients; in contrast, other costs incurred by ADF, but not identifiable with specific clients, are charged to jobs by using a predetermined overhead application rate. Clients are billed for directly chargeable costs, overhead, and a markup.
    ADF anticipates the following costs for the upcoming year:    ADF's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total cost to achieve that figure.
    On May 14, ADF completed work on a project for Lawrence Manufacturing. The following costs were incurred: professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other operating costs, $2,600.
    Required:
    A. Determine ADF's total traceable costs for the upcoming year and the firm's total anticipated overhead.
    B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs.
    C. What percentage of total cost will ADF add to each job to achieve its profit target?
    D. Determine the total cost of the Lawrence Manufacturing project. How much would Lawrence be billed for services performed?





  1. Describe the types of manufacturing environments that would best be suited for (1) job-order costing and (2) process costing. Include two examples of manufacturers that would likely use job-cost systems. 


  1. Manufacturing overhead is applied to production.
    A. Describe several situations that may give rise to underapplied overhead.
    B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold. Explain why an underapplication of overhead increases Cost of Goods Sold. 


  1. Discuss the reason for (1) allocating overhead to the cost of production jobs, and (2) applying overhead using a predetermined rate instead of an actual overhead rate. 


  1. Harris, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity, production processes, and units manufactured. Job no. 78 was manufactured by Joe Barton who earns $14 per hour, whereas job no. 79 was completed by Susan Franklin who earns $20 per hour. If Joe and Susan are equally efficient, would the company be better off using direct labor cost or direct labor hours as the cost driver in its predetermined overhead rate? Briefly explain. 


83. Briefly describe the stages used in the two-stage allocation process for assigning overhead costs


Chapter 04

Process Costing and Hybrid Product-Costing Systems

 




True / False Questions
  1. The flow of costs through the manufacturing accounts is essentially the same in both process costing and job-order costing.
    True    False

  1. Companies that use a process-cost accounting system would establish a separate Work-in-Process Inventory account for each manufacturing department.
    True    False

  1. CFF, Inc. overstated the percentage of work completed with respect to conversion cost on the ending work-in-process inventory. This overstatement caused conversion-cost equivalent units to be overstated.
    True    False

  1. Equivalent-unit calculations are necessary to allocate manufacturing costs between units sold and ending work in process.
    True    False

  1. Operation costing tends to parallel job-order costing with respect to the treatment of conversion cost.
    True    False



Multiple Choice Questions

  1. Process costing is used to account for:
    A. large numbers of identical products that are produced in a continuous manufacturing environment.
    B. small numbers of products that are produced in batches.
    C. raw materials that are converted directly to finished goods.
    D. finished goods that are refined and processed further.
    E. large numbers of products that are produced in a non-repetitive process.

  1. Which of the following manufacturers would most likely not use a process-cost accounting system?
    A. A producer of computer monitors.
    B. A paint manufacturer.
    C. A producer of frozen orange juice.
    D. A builder of customized yachts.
    E. A lumber mill.

  1. Process costing would likely be used in all of the following industries except:
    A. petroleum refining.
    B. chemicals.
    C. truck tire manufacturing.
    D. wood pulp production.
    E. automobile repair.


  1. Which of the following companies would likely use a process-costing system?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Which of the following statements about similarities between process costing and job-order costing are true?
    I. Both systems assign production costs to units of output.
    II. Both systems require extensive knowledge of financial accounting.
    III. The flow of costs through the manufacturing accounts is essentially the same.
    A. I only.
    B. I and III.
    C. II and III.
    D. III only.
    E. I, II, and III.

  1. Companies that use a process-cost accounting system would:
    A. establish a separate Work-in-Process Inventory account for each manufacturing department.
    B. establish a separate Finished-Goods Inventory account for each manufacturing department.
    C. pass completed production directly to Cost of Goods Sold.
    D. charge goods produced with actual overhead amounts rather than applied overhead amounts.
    E. eliminate the need for the Finished-Goods Inventory account.


  1. Which of the following statements is false?
    A. In job-order costing, costs are accumulated by job order.
    B. In process costing, costs are accumulated by department.
    C. In process costing, the cost per unit in a department is found by spreading the period's manufacturing costs over the production activity.
    D. In process costing, the total cost of each unit is found by dividing the total factory costs by the number of units completed.
    E. In job-order costing, the unit cost is found by dividing the job's total cost by the job's total units.

  1. In a process-costing system, manufacturing costs are accumulated by:
    A. batch.
    B. batch and time period.
    C. department.
    D. department and time period.
    E. department or process, and time period.

  1. Which of the following choices correctly shows how costs are accumulated in a process-costing system?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Masterson, Inc., which uses a process-cost accounting system, passes completed production from Department A to Department B for further manufacturing. The journal entry to record completed production in Department A requires:
    A. a debit to Work-in-Process Inventory and a credit to Finished-Goods Inventory.
    B. a debit to Finished-Goods Inventory and a credit to Work-in-Process Inventory.
    C. a debit to Finished-Goods Inventory and a credit to Work-in-Process Inventory: Department A.
    D. a debit to Work-in-Process Inventory: Department A and a credit to Work-in-Process Inventory: Department B.
    E. a debit to Work-in-Process Inventory: Department B and a credit to Work-in-Process Inventory: Department A.

  1. Griswold, Inc., which uses a process-costing system, transfers completed production from Department no. 1 to Department no. 2 for further work. Which of the following best describes the account that would be debited to record this transfer?
    A. Cost of Goods Transferred.
    B. Finished-Goods Inventory: Department no. 1.
    C. Finished-Goods Inventory: Department no. 2.
    D. Work-in-Process Inventory: Department no. 1.
    E. Work-in-Process Inventory: Department no. 2.

  1. Barnett, Inc., which uses a process-costing system, transfers completed production from Department no. 1 to Department no. 2 for further work. Which of the following best describes the account that would be credited to record this transfer?
    A. Cost of Goods Transferred.
    B. Finished-Goods Inventory: Department no. 1.
    C. Finished-Goods Inventory: Department no. 2.
    D. Work-in-Process Inventory: Department no. 1.
    E. Work-in-Process Inventory: Department no. 2.


  1. Hamilton, which uses a process-costing system, had a balance in its Work-in-Process account of $68,000 on January 1. The account was charged with direct materials, direct labor, and manufacturing overhead of $450,000 throughout the year. If a review of the accounting records determined that $86,000 of goods were still in production at year-end, Hamilton should make a journal entry on December 31 that includes:
    A. a debit to Cost of Goods Sold for $432,000.
    B. a credit to Finished-Goods Inventory for $432,000.
    C. a credit to Work-in-Process Inventory for $432,000.
    D. a debit to Finished-Goods Inventory for $86,000.
    E. a credit to Work-in-Process Inventory for $86,000.

  1. Hammett has a single production department, and uses a process-costing system. The balance in its Work-in-Process account on January 1 was $68,000. The account was charged with direct materials, direct labor, and manufacturing overhead of $450,000 throughout the year. If a review of the accounting records determined that $86,000 of goods were still in production at year-end, Hammett should make a journal entry on December 31 that includes:
    A. a debit to Cost of Goods Sold for $432,000.
    B. a debit to Finished-Goods Inventory for $432,000.
    C. a debit to Work-in-Process Inventory for $432,000.
    D. a debit to Finished-Goods Inventory for $86,000.
    E. a credit to Work-in-Process Inventory for $86,000.

  1. Unit costs in a process-costing system are derived by using:
    A. in-process units.
    B. completed units.
    C. physical units.
    D. equivalent units.
    E. a measure of activity other than those listed above.


  1. Barrett Corporation had 6,500 units of work in process on April 1. During April, 19,100 units were completed and as of April 30, 5,100 units remained in production. How many units were started during April?
    A. 11,600.
    B. 17,700.
    C. 20,500.
    D. 30,700.
    E. None of these.

  1. Lester Corporation had 8,200 units of work in process on November 1. During November, 26,800 units were started and as of November 30, 7,900 units remained in production. How many units were completed during November?
    A. 16,100.
    B. 26,500.
    C. 27,100.
    D. 42,800.
    E. None of these.

  1. Xin Co., had 3,000 units of work in process on April 1 that were 60% complete. During April, 10,000 units were completed and as of April 30, 4,000 units that were 40% complete remained in production. How many units were started during April?
    A. 8,600.
    B. 9,800.
    C. 11,000.
    D. 12,200.
    E. None of these.

  1. Yes! Co., had 3,000 units of work in process on April 1 that were 60% complete. During April, 11,000 units were started and as of April 30, 4,000 units that were 40% complete remained in production. How many units were completed during April?
    A. 10,000.
    B. 9,800.
    C. 11,000.
    D. 12,200.
    E. None of these.


  1. Ohio, Inc., which uses a process-cost accounting system, began operations on January 1 of the current year. The company incurs conversion cost evenly throughout manufacturing. If Ohio started work on 3,000 units during the period and these units were 70% of the way through manufacturing, it would be correct to say that the company has:
    A. 3,000 physical units in production.
    B. 2,100 completed units.
    C. 900 in-process units.
    D. 900 equivalent units of production.
    E. 3,000 equivalent units of production.

  1. Which of the following data are needed to calculate total equivalent units under the weighted-average method?
    A. Work-to-date on ending work in process, units started during the period.
    B. Units completed during the period, work-to-date on ending work in process.
    C. Work to complete beginning work in process, work-to-date on ending work in process.
    D. Work to complete beginning work in process, units completed, and work done on ending work in process.
    E. Units completed, work to complete beginning work in process.

  1. Kentucky Corporation uses a process-cost accounting system. The company adds direct materials at the start of its production process; conversion cost, on the other hand, is incurred evenly throughout manufacturing. The firm has no beginning work-in-process inventory; its ending work in process is 40% complete. Which of the following sets of percentages would be used to calculate the correct number of equivalent units in the ending work-in-process inventory?
    A. Materials, 40%; conversion cost, 40%.
    B. Materials, 40%; conversion cost, 100%.
    C. Materials, 100%; conversion cost, 40%.
    D. Materials, 100%; conversion cost, 60%.
    E. Materials, 100%; conversion cost, 100%.


  1. Kendra Corporation uses a process-cost accounting system. The company adds direct materials and direct labor at the start of its production process; overhead cost is incurred evenly throughout manufacturing. The firm has no beginning work-in-process inventory; its ending work in process is 40% complete. Which of the following sets of percentages would be used to calculate the correct number of equivalent units in the ending work-in-process inventory?
    A. Materials, 100%; labor, 100%; overhead cost, 40%.
    B. Materials, 100%; labor, 100%; overhead cost, 100%.
    C. Materials, 100%; labor 40%; overhead cost, 40%.
    D. Materials, 40%; labor, 40%; overhead cost, 60%.
    E. Materials, 40%; labor, 40%; overhead cost, 100%.

  1. Agora Company uses a process-cost system for its single product. Material A is added at the beginning of the process; in contrast, material B is added when the units are 75% complete. The firm's ending work-in-process inventory consists of 6,000 units that are 80% complete. Which of the following correctly expresses the equivalent units of production with respect to materials A and B in the ending work-in-process inventory?
    A. A, 4,800; B, 0.
    B. A, 4,800; B, 4,800.
    C. A, 6,000; B, 0.
    D. A, 6,000; B, 4,800.
    E. A, 6,000; B, 6,000.

  1. Aglow Company uses a process-cost system for its single product. Material A is added at the beginning of the process; in contrast, material B is added when the units are 50% complete. The firm's ending work-in-process inventory consists of 4,000 units that are 75% complete. Which of the following correctly expresses the equivalent units of production with respect to materials A and B in the ending work-in-process inventory?
    A. A, 3,000; B, 0.
    B. A, 3,000; B, 3,000.
    C. A, 4,000; B, 0.
    D. A, 4,000; B, 4,000.
    E. A, 4,000; B, 3,000.


  1. Willingham uses a process-costing system for its single product, which is manufactured from Material X and Material Y. X and Y are introduced to the product as follows:
    Material X: Added at the beginning of manufacturing
    Material Y: Added at the 75% stage of completion
    The company started and completed 40,000 units during the period, and had an ending work-in-process inventory amounting to 8,000 units, 20% complete. Which of the following choices correctly expresses the total equivalent units of production for Material X and Material Y?    A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

 Haskins Textile Co. manufactures a variety of fabrics. All materials are introduced at the beginning of production; conversion cost is incurred evenly through manufacturing. The Weaving Department had 2,000 units of work in process on April 1 that were 30% complete as to conversion costs. During April, 9,000 units were completed and on April 30, 4,000 units remained in production, 40% complete with respect to conversion costs.

  1. The equivalent units of direct materials for April total:
    A. 9,000.
    B. 13,000.
    C. 13,600.
    D. 14,400.
    E. 15,000.


  1. The equivalent units of conversion for April total:
    A. 9,000.
    B. 10,600.
    C. 11,200.
    D. 12,000.
    E. 12,600.

  1. Fiero Corporation adds all materials at the beginning of production and incurs conversion cost evenly throughout manufacturing. The company completed 70,000 units during the year and had 12,000 units in process at year end, 20% complete with respect to conversion cost. Equivalent units for the year total:
    A. materials, 70,000; conversion, 70,000.
    B. materials, 70,000; conversion, 2,400.
    C. materials, 72,400; conversion, 72,400.
    D. materials, 82,000; conversion, 72,400.
    E. materials, 82,000; conversion, 82,000.

  1. Gregory, which uses a process-costing system, adds all material at the beginning of production and incurs conversion cost evenly throughout manufacturing. The information that follows relates to the period just ended:
    Units started and completed: 75,000
    Units in ending work-in-process inventory: 15,000, 60% complete
    Which of the following choices correctly expresses the total equivalent units of production with respect to material and conversion cost?    A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Gajewski began operations on January 1 of the current year. The company uses a process-costing system, and conversion cost is incurred evenly throughout manufacturing. By January 31, the firm had completed 56,000 units. Which of the following statements could be true about the ending work-in-process inventory if equivalent units for conversion cost totaled 59,000 units?
    A. There is no ending work-in-process inventory.
    B. The ending work-in-process inventory totaled 3,000 physical units.
    C. The ending work-in-process inventory of 10,000 physical units was 30% complete.
    D. The ending work-in-process inventory of 20,000 physical units was 85% complete.
    E. More than one of the above could be true.

  1. Majesco, which uses a process-costing system, adds material at the beginning of production and incurs conversion cost evenly throughout manufacturing. The following selected information was taken from the company's accounting records:
    Total equivalent units of materials: 5,000
    Total equivalent units of conversion: 4,400
    Units started and completed during the period: 3,500
    On the basis of this information, the ending work-in-process inventory's stage of completion is:
    A. 40%.
    B. 60%.
    C. 70%.
    D. 80%.
    E. some other percentage not listed above.

  1. Muhares, which uses a process-costing system, adds material at the beginning of production and incurs conversion cost evenly throughout manufacturing. The following selected information was taken from the company's accounting records:
    Total equivalent units of materials: 8,000
    Total equivalent units of conversion: 7,400
    Units started and completed during the period: 6,500
    On the basis of this information, the ending work-in-process inventory's stage of completion is:
    A. 80%.
    B. 70%.
    C. 60%.
    D. 40%.
    E. some other percentage not listed above.


  1. Corruption, Inc. overstated the percentage of work completed with respect to conversion cost on the ending work-in-process inventory. What is the effect of this overstatement on conversion-cost equivalent units and physical units manufactured, respectively?
    A. Overstated, overstated.
    B. Overstated, understated.
    C. Overstated, none.
    D. None, overstated.
    E. None, none.

  1. Michaella, Inc. uses a process-costing system. A newly-hired accountant identified the following procedures that must be performed by the close of business on Friday:
    1—Calculation of equivalent units
    2—Analysis of physical flows of units
    3—Assignment of costs to completed units and units still in process
    4—Calculation of unit costs
    Which of the following choices correctly expresses the proper order of the preceding tasks?
    A. 1, 2, 3, 4.
    B. 1, 2, 4, 3.
    C. 1, 4, 3, 2.
    D. 2, 1, 4, 3.
    E. 2, 1, 3, 4.

  1. When calculating unit costs under the weighted-average process-costing method, the unit cost is based on:
    A. only the current period's manufacturing costs.
    B. only costs in the period's beginning work-in-process inventory.
    C. a summation of the costs in the beginning work-in-process inventory plus costs incurred in the current period.
    D. only costs incurred in previous accounting periods.
    E. a summation of the costs in the beginning work-in-process inventory plus costs to be incurred in the upcoming period.


  1. When computing the conversion cost per equivalent unit under the weighted-average method of process costing, all of the following information would be needed except:
    A. the number of units completed during the current accounting period.
    B. the conversion work performed during the current period on the ending work-in-process inventory.
    C. the conversion work performed during the current period on the beginning work-in-process inventory.
    D. the conversion cost in the beginning work-in-process inventory.
    E. the conversion cost incurred during the current accounting period.

  1. Tesla Corporation, which adds materials at the beginning of production, uses a weighted-average process-costing system. Consider the data that follow.The company's cost per equivalent unit for materials is:
    A. $1.24.
    B. $1.66.
    C. $1.67.
    D. $2.05.
    E. some other amount.

  1. Peach Company uses a weighted-average process-costing system. Company records disclosed that the firm completed 40,000 units during the month and had 10,000 units in process at month-end, 20% complete. Conversion costs associated with the beginning work-in-process inventory amounted to $231,000, and amounts that relate to the current month totaled $966,000. If conversion is incurred uniformly throughout manufacturing, Peach's equivalent-unit cost is:
    A. $23.00.
    B. $23.94.
    C. $24.15.
    D. $28.50.
    E. some other amount.


 Universal Manufacturing uses a weighted-average process-costing system. All materials are introduced at the start of manufacturing, and conversion costs are incurred evenly throughout the process. The company's beginning and ending work-in-process inventories totaled 10,000 units and 15,000 units, respectively, with the latter units being 2/3 complete at the end of the period. Universal started 30,000 units into production and completed 25,000 units. Manufacturing costs follow.
Beginning work in process: Materials, $60,000; conversion cost, $150,000
Current costs: Materials, $180,000; conversion cost, $480,000

  1. Universal's equivalent-unit cost for materials is:
    A. $4.50.
    B. $6.00.
    C. $8.00.
    D. $9.60.
    E. some other amount.

  1. Universal's equivalent-unit cost for conversion cost is:
    A. $13.71.
    B. $18.00.
    C. $21.00.
    D. $25.20.
    E. some other amount.


  1. Gilberto adds materials at the beginning of production and incurs conversion cost uniformly throughout manufacturing. Consider the data that follow.Conversion cost in the beginning work-in-process inventory totaled $120,000, and August conversion cost totaled $270,000. Assuming use of the weighted-average method, which of the following choices correctly depicts the number of equivalent units for materials and the conversion cost per equivalent unit?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Which of the following are needed to calculate the total cost of the ending work-in-process inventory under the weighted-average process-costing method?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Which of the following are needed under weighted-average process costing to calculate the cost of goods completed during the period?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Equivalent-unit calculations are necessary to allocate manufacturing costs between:
    A. units completed and ending work in process.
    B. beginning work in process and units completed.
    C. units sold and ending work in process.
    D. cost of goods manufactured and beginning work in process.
    E. cost of goods manufactured and cost of goods sold.

 Southern Lake Chemical manufactures a product called Zubek. Direct materials are added at the beginning of the process, and conversion activity occurs uniformly throughout production. The beginning work-in-process inventory is 60% complete with respect to conversion; the ending work-in-process inventory is 20% complete. The following data pertain to May:


  1. Using the weighted-average method of process costing, the equivalent units of direct materials total:
    A. 68,000.
    B. 69,400.
    C. 74,000.
    D. 75,000.
    E. some other amount.


  1. Using the weighted-average method of process costing, the equivalent units of conversion activity total:
    A. 60,400.
    B. 68,000.
    C. 69,400.
    D. 74,000.
    E. some other amount.

  1. Using the weighted-average method of process costing, the cost per unit of direct materials is:
    A. $1.17.
    B. $1.18.
    C. $1.20.
    D. $1.28.
    E. some other amount.

  1. Using the weighted-average method of process costing, the cost per unit of conversion activity is:
    A. $2.50.
    B. $2.53.
    C. $2.70.
    D. $2.76.
    E. some other amount.

  1. Using the weighted-average method of process costing, the cost of goods completed and transferred during May is:
    A. $249,560.
    B. $250,240.
    C. $258,400.
    D. $263,840.
    E. some other amount.


  1. Using the weighted-average method of process costing, the total costs remaining in work in process on May 31 are:
    A. $0.
    B. $12,040.
    C. $17,480.
    D. $25,640.
    E. some other amount.

  1. Forest Company, which uses a weighted-average process-costing system, had 7,000 units in production at the end of the current period that were 60% complete. Material A is introduced at the beginning of the process; material B is introduced at the end of the process; and conversion cost is introduced evenly throughout manufacturing. Equivalent-unit production costs follow.
    Material A: $12.50
    Material B: $2.00
    Conversion cost: $6.60
    The cost of the company's ending work-in-process inventory is:
    A. $88,620.
    B. $115,220.
    C. $123,620.
    D. $147,700.
    E. some other amount.

 Chen Corporation, a new company, adds material at the beginning of its production process; conversion cost, in contrast, is incurred evenly throughout manufacturing. During May, the firm completed 15,000 units and had ending work in process of 2,000 units, 60% complete. Equivalent-unit costs were: materials, $15; conversion, $22.

  1. The cost of Chen's completed production is:
    A. $225,000.
    B. $330,000.
    C. $333,000.
    D. $555,000.
    E. some other amount.


  1. The cost of the company's ending work-in-process inventory is:
    A. $26,640.
    B. $44,400.
    C. $56,400.
    D. $74,000.
    E. some other amount.

 Cosby uses a weighted-average process-costing system. All materials are added at the beginning of the process; conversion costs are incurred evenly throughout production. The company finished 40,000 units during the period and had 15,000 units in progress at year-end, the latter at the 40% stage of completion. Total material costs amounted to $220,000; conversion costs were $414,000.

  1. The cost of goods completed is:
    A. $312,000.
    B. $414,000.
    C. $520,000.
    D. $634,000.
    E. some other amount.

  1. The cost of the ending work in process is:
    A. $54,000.
    B. $78,000.
    C. $114,000.
    D. $195,000.
    E. some other amount.

  1. Which of the following is a key document in a typical process-costing system?
    A. Departmental production report.
    B. Master schedule.
    C. Production budget.
    D. Sequential product report.
    E. Materials requirement report.


  1. Which of the following is true concerning cost drivers for the predetermined overhead rate in a process-costing system?
    A. Predetermined overhead rates are not used in a process-costing system.
    B. If direct material cost is the cost driver, direct labor and direct materials may be combined into the single element of prime cost.
    C. If direct labor hours is the cost driver, direct labor and manufacturing overhead may be combined into the single element of conversion cost.
    D. If direct labor cost is the cost driver, direct labor and manufacturing overhead may be combined into the single element of conversion cost.
    E. Cost drivers are irrelevant in process-costing systems.

  1. Operation costing might be used to determine the cost of all of the following products except:
    A. sweaters.
    B. automobiles.
    C. living-room sofas.
    D. dishwashing detergent.
    E. high-definition (HD) and surround-sound cables.

  1. Which of the following statements about operation costing is (are) true?
    I. Conversion costs are accumulated by department.
    II. Direct material costs are accumulated by batch.
    III. Operation costing is a hybrid product-costing system.
    A. I only.
    B. I and II.
    C. I and III.
    D. II and III.
    E. I, II, and III.

  1. Operation costing:
    A. tends to parallel job-order costing with respect to the treatment of conversion cost.
    B. tends to parallel process costing with respect to the treatment of conversion cost.
    C. tends to parallel process costing with respect to the treatment of direct materials.
    D. would likely be used by a manufacturing plant that produces one model of a single product.
    E. is commonly known as a joint-costing system.


  1. Which of the following best describes the procedures used in operation costing to assign direct-material and conversion costs to production?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. When determining the cost of a manufactured good under an operation-costing system, a company would:
    A. trace direct-material cost and actual conversion cost to each product produced.
    B. trace direct-material cost to each product produced and use a predetermined application rate for conversion cost.
    C. trace actual conversion cost to each product produced and use a predetermined application rate for direct material.
    D. use a predetermined application rate for both direct-material cost and conversion cost.
    E. often switch to a job-costing system to simplify recordkeeping procedures.

  1. All of the following statements about an operation-costing system are true except:
    A. direct material and conversion costs are traced to each batch of product produced.
    B. direct-material cost is traced to each batch produced.
    C. conversion costs are applied to products on a departmental basis using a predetermined application rate.
    D. batches of product pass sequentially through the same processes.
    E. conversion activities are similar across product lines but direct materials differ significantly.



Essay Questions

  1. Colonial Products employs a process-costing system for its manufacturing operations. All materials are added at the beginning of the process, and conversion costs are incurred uniformly throughout production. The information that follows relates to September.Required:
    A. Calculate equivalent units of direct material for September.
    B. Calculate equivalent units of conversion activity for September.





  1. EnviroSmart Chemical Company refines a variety of petrochemical products. The following data pertain to the firm's Baton Rouge plant:Required:
    Compute the equivalent units of direct materials and conversion for August.





  1. Starling Chemical uses a weighted-average process-costing system. The following data relate to May:Required:
    A. Calculate the number of pounds completed during May.
    B. Calculate equivalent units of materials and conversion for May.
    C. Does Starling introduce all of its direct materials at the very beginning of production? Explain your answer.





  1. Portofina Manufacturing uses a weighted-average process-costing system. The following figures pertain to July:All materials are introduced at the start of the process, and conversion cost is incurred evenly throughout production. The company used direct materials that cost $640,000; conversion amounted to $8 per equivalent unit.
    Required:
    A. Calculate the direct materials cost per equivalent unit.
    B. Calculate the cost of units completed and transferred.
    C. What percentage of conversion work will be performed on the 40,000-unit ending work-in-process inventory during August?
    D. In all likelihood, were all of the 120,000 completed units begun in July? Explain.





  1. Fedora, Inc., uses a weighted-average process-costing system and has one production department. All materials are introduced at the start of manufacturing; in contrast, conversion cost is incurred uniformly throughout production. The company had respective work-in-process inventories on May 1 and May 31 of 62,000 units and 70,000 units, the latter of which was 40% complete. The production supervisor noted that Federal completed 100,000 units during the month.
    Costs in the May 1 work-in-process inventory were subdivided as follows: materials, $40,000; conversion, $90,000. During May, Fedora charged production with $300,000 of material and $710,000 of conversion, resulting in a material cost per equivalent unit of $2.
    Required:
    A. Determine the number of units that Fedora started during May.
    B. Compute the number of equivalent units with respect to conversion cost.
    C. Determine the conversion cost per equivalent unit.
    D. Compute the cost of the May 31 work-in-process inventory.
    E. What account would have been credited to record Fedora's completed production? 




  1. Manhattan, Inc., uses a weighted-average process-costing system. All materials are introduced at the beginning of production; conversion cost is incurred evenly throughout manufacturing. The following information pertains to April:The company's accountant has already computed the cost per equivalent unit, as follows: materials, $5; conversion, $14.
    Required:
    Calculate the cost of goods completed during April and the cost of the ending work-in-process inventory.





  1. Marcellus Corporation, which uses the weighted-average method of process costing, reported the following as of February 1:Conversations with the production supervisor revealed that materials are introduced at the start of the process and conversion cost is incurred evenly throughout manufacturing. The company started 29,000 units during the month. Goods in process at the beginning and end of February totaled 3,000 units and 5,000 units, respectively, the latter batch being 60% complete.
    Just prior to leaving on vacation, a trusted staff assistant was asked to compute the cost of February's ending work-in-process inventory. Her calculations showed a huge rise in unit cost when compared with the February 1 figures, soaring to $250 [($470,000 + $280,000)¸ 3,000 units (5,000 units ´ 60%)].
    Required:
    A. Did the staff assistant make any errors in her calculations? Explain.
    B. Analyze the company's production volume and determine the proper equivalent-unit figures for February.
    C. Calculate the proper unit costs for February.
    D. Calculate the cost of the February 28 work-in-process inventory. 





  1. Edge Company had a beginning work-in-process inventory of 30,000 units on June 1. These units contained $120,000 of direct materials and $272,000 of conversion cost. The following data relate to activity during June:Edge uses a weighted-average process-costing system. All materials are added at the start of manufacturing; in contrast, conversion cost is incurred evenly throughout production.
    Required:
    A. Compute the total equivalent units for direct material and conversion cost.
    B. Compute the cost per equivalent unit of direct material and conversion cost.
    C. Determine the cost of completed production.
    D. Determine the cost of the June 30 work in process.





  1. On May 1, Dawdle Company had a work-in-process inventory of 10,000 units. The units were 100% complete for material and 30% complete for conversion, with respective costs of $30,000 and $1,850.
    During the month, 150,000 units were completed and transferred to finished goods. The May 31 ending work-in-process inventory consisted of 10,000 units that were 100% complete with respect to materials and 80% complete with respect to conversion.
    Costs added during the month were $330,000 for materials and $503,750 for conversion.
    Required:
    Using the weighted-average method, calculate:
    A. total equivalent units for material and conversion.
    B. the cost per equivalent unit for material and conversion.
    C. the cost transferred to finished goods.
    D. the cost of ending work in process. 





  1. Baxley Products manufactures office furniture by using an assembly-line process. All direct materials are introduced at the start of the process, and conversion cost is incurred evenly throughout manufacturing. An examination of the company's Work-in-Process account for August revealed the following selected information:
    Debit side—
    August 1 balance: 600 units, 40% complete; cost, $44,600*
    Production started: 1,800 units
    Direct materials used during August: $90,000
    August conversion cost: $51,400
    Credit side—
    Production completed: 1,400 units
    *Supplementary records disclosed direct material cost of $30,000 and conversion cost of $14,600.
    Conversations with manufacturing personnel revealed that the ending work in process was 80% complete.
    Required:
    A. Determine the number of units in the August 31 work-in-process inventory.
    B. Calculate the cost of goods completed during August, and prepare the appropriate journal entry to record completed production.
    C. Determine the cost of the August 31 work-in-process inventory. 





  1. Laskey uses a weighted-average process-costing system. Material A is added at the start of production; packaging material is introduced at the end. Conversion costs are incurred evenly throughout manufacturing.
    The following selected data were extracted from the company's production report:    Required:
    A. Compute the equivalent-unit cost for conversion cost.
    B. How far into the manufacturing process is the ending work-in-process inventory?
    C. Would the total equivalent units for Material A and the packaging material be the same? Why?
    D. Compute the cost of goods completed during the period.
    E. Compute the cost of the ending work-in-process inventory.
    F. What account would be debited to record the cost of goods completed during the period?





  1. Levitt Corporation, which uses an operation-costing system, has three processing departments. All units pass through Department no. 1; upon completion, 70% of the goods are sent to Department no. 2 and 30% are sent to Department no. 3. Additional data follow.
    · Forty thousand units were manufactured during the year.
    · Conversion cost in each department was: No. 1, $380,000; no. 2, $196,000; and no. 3, $150,000.
    · Batch no. 67, which consisted of 500 units, was sent to Department no. 3 for its additional processing. Direct materials of $23,500 and $11,900 were introduced to this batch in Department nos. 1 and 3, respectively.
    Levitt assigns conversion cost to goods manufactured on the basis of units produced.
    Required:
    A. Determine the conversion cost per unit in Department no. 1, Department no. 2, and Department no. 3.
    B. Compute the total cost of batch no. 67.
    C. Operation costing is sometimes referred to as a hybrid costing system. Briefly explain. 





  1. Orville Knitters manufactures sweaters and uses an operation-costing system. All sweaters are processed through Department no. 1, with subsequent processing taking place in Department no. 2 or Department no. 3 depending on the type of fabric used. Twenty thousand sweaters were produced during the year; there was no beginning or ending work in process. Sixty percent of the goods were sent to Department no. 2 for manufacturing.
    Conversion cost incurred in the three departments totaled $504,000, subdivided as follows: Department no. 1, $360,000; Department no. 2, $60,000; and Department no. 3, $84,000.
    Data pertaining to two representative orders, nos. 545 and 567, were:    Required:
    A. Explain the nature of operation costing.
    B. Determine the cost of order nos. 545 and 567.



 Chapter 05
Activity-Based Costing and Management
            
True / False Questions
  1. In an activity-based costing system, direct materials used would typically be classified as a unit-level cost.
    True    False

  1. Activity-based costing systems have a tendency to distort product costs.
    True    False

  1. Consumption ratios are useful in determining the existence of product-line diversity.
    True    False

  1. An example of a customer-value-added activity is final painting and polishing of the product.
    True    False

  1. Generally speaking, companies prefer doing business with customers who order small quantities rather than large quantities.
    True    False



Multiple Choice Questions

  1. Consider the following statements regarding traditional costing systems:
    I. Overhead costs are applied to products on the basis of volume-related measures.
    II. All manufacturing costs are easily traceable to the goods produced.
    III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have widely varying production requirements.
    Which of the above statements is (are) true?
    A. I only.
    B. II only.
    C. III only.
    D. I and III.
    E. II and III.

  1. Many traditional costing systems:
    A. trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates.
    B. write off manufacturing overhead as an expense of the current period.
    C. combine widely varying elements of overhead into a single cost pool.
    D. use a host of different cost drivers (e.g., number of production setups, inspection hours, orders processed) to improve the accuracy of product costing.
    E. produce results far superior to those achieved with activity-based costing.

  1. The following tasks are associated with an activity-based costing system:
    1— Assignment of cost to products
    2— Calculation of pool rates
    3— Identification of cost drivers
    4— Identification of cost pools
    Which of the following choices correctly expresses the proper order of the preceding tasks?
    A. 1, 2, 3, 4.
    B. 2, 4, 1, 3.
    C. 3, 4, 2, 1.
    D. 4, 2, 1, 3.
    E. 4, 3, 2, 1.


  1. Which of the following is the proper sequence of events in an activity-based costing system?
    A. Identification of cost drivers, identification of cost pools, calculation of pool rates, assignment of cost to products.
    B. Identification of cost pools, identification of cost drivers, calculation of pool rates, assignment of cost to products.
    C. Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of pool rates.
    D. Calculation of pool rates, identification of cost drivers, identification of cost pools, assignment of cost to products.
    E. Some other sequence of the four activities listed above.

  1. Which of the following tasks is not normally associated with an activity-based costing system?
    A. Calculation of pool rates.
    B. Identification of cost pools.
    C. Preparation of allocation matrices.
    D. Identification of cost drivers.
    E. Assignment of cost to products.

  1. Which of the following is not a broad, cost classification category typically used in activity-based costing?
    A. Unit-level.
    B. Batch-level.
    C. Product-sustaining level.
    D. Facility-level.
    E. Management-level.

  1. In an activity-based costing system, direct materials used would typically be classified as a:
    A. unit-level cost.
    B. batch-level cost.
    C. product-sustaining cost.
    D. facility-level cost.
    E. matrix-level cost.


  1. Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system?
    A. Shipping.
    B. Receiving and inspection.
    C. Production setup.
    D. Property taxes.
    E. Quality assurance.

  1. In an activity-based costing system, materials receiving would typically be classified as a:
    A. unit-level activity.
    B. batch-level activity.
    C. product-sustaining activity.
    D. facility-level activity.
    E. period-level activity.

  1. Feinstein, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The research and testing costs associated with the new ovens is said to arise from a:
    A. unit-level activity.
    B. batch-level activity.
    C. product-sustaining activity.
    D. facility-level activity.
    E. competitive-level activity.

  1. Consider the following statements regarding product-sustaining activities:
    I. They must be performed for each batch of product that is made.
    II. They must be performed for each unit of product that is made.
    III. They are needed to support an entire product line.
    Which of the above statements is (are) true?
    A. I only.
    B. II only.
    C. III only.
    D. I and II.
    E. II and III.


  1. Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?
    A. Plant maintenance.
    B. Property taxes.
    C. Machine processing cost.
    D. Plant depreciation.
    E. Plant management salaries.

  1. The salaries of a manufacturing plant's management are said to arise from:
    A. unit-level activities.
    B. batch-level activities.
    C. product-sustaining activities.
    D. facility-level activities.
    E. direct-cost activities.

  1. Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from a facility-level activity?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Which of the following choices correctly depicts the proper classification of direct materials used and management salaries?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is commonly known as a cost:
    A. object.
    B. application method.
    C. hierarchy.
    D. estimation method.
    E. classification scheme that is useful in traditional, volume-based systems.

  1. Alamo's customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company's wholesale operation (the remainder were for the retail division), costs allocated to the retail division should amount to:
    A. $0.
    B. $29.
    C. $85,260.
    D. $117,740.
    E. $203,000.


  1. Aladin's customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the company's wholesale operation (the remainder were for the retail division), costs allocated to the wholesale operation should amount to:
    A. $0.
    B. $29.
    C. $85,260.
    D. $117,740.
    E. $203,000.

  1. Alaina's customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company's wholesale operation; the remainder were for the retail division. Costs allocated to the wholesale operation are:
    A. $0.
    B. $31,200.
    C. $118,560.
    D. $193,440.
    E. $203,000.

  1. Astro's customer service department follows up on customer complaints by telephone inquiry. During a recent period, the department initiated 10,000 calls and incurred costs of $312,000. Of these calls, 3,800 were for the company's wholesale operation; the remainder were for the retail division. Costs allocated to the retail division are:
    A. $0.
    B. $31,200.
    C. $118,560.
    D. $193,440.
    E. $203,000.


 Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks; other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.

  1. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
    A. $7.15.
    B. $8.75.
    C. $12.50.
    D. $13.75.
    E. some other amount.

  1. The cost of wages and salaries and other overhead that would be charged to each delivery is closest to:
    A. $19.63.
    B. $20.31.
    C. $26.75.
    D. $40.63.
    E. some other amount.


 HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its budgeted cost, and related cost driver is identified below.
The following information pertains to the three product lines for next year:


  1. What is HiTech's pool rate for the material-handling activity?
    A. $1.00 per part.
    B. $2.25 per part.
    C. $6.62 per labor hour.
    D. $13.23 per part.
    E. A rate other than those listed above.

  1. What is HiTech's pool rate for the automated machinery activity?
    A. $24.00 per machine hour.
    B. $24.50 per labor hour.
    C. $49.42 per unit.
    D. $50.00 per machine hour.
    E. A rate other than those listed above.


  1. What is HiTech's pool rate for the finishing activity?
    A. $5.00 per labor hour.
    B. $5.00 per machine hour.
    C. $5.00 per unit.
    D. $7.50 per unit.
    E. A rate other than those listed above.

  1. What is HiTech's pool rate for the packaging activity?
    A. $4.86 per machine hour.
    B. $5.00 per labor hour.
    C. $10.00 per unit.
    D. $100.00 per order shipped.
    E. A rate other than those listed above.

  1. Under an activity-based costing system, what is the per-unit overhead cost of Economy?
    A. $141.
    B. $164.
    C. $225.
    D. $228.
    E. An amount other than those listed above.

  1. Under an activity-based costing system, what is the per-unit overhead cost of Standard?
    A. $164.
    B. $228.
    C. $272.
    D. $282.
    E. An amount other than those listed above.

  1. Under an activity-based costing system, what is the per-unit overhead cost of Deluxe?
    A. $272.
    B. $282.
    C. $320.
    D. $440.
    E. An amount other than those listed above.


  1. Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Deluxe product line is closest to:
    A. $456,471.
    B. $646,471.
    C. $961,176.
    D. $1,141,176.
    E. An amount other than those listed above.

  1. Assume that HiTech is using a volume-based costing system, and the preceding overhead costs are applied to all products on the basis of direct labor hours. The overhead cost that would be assigned to the Standard product line is closest to:
    A. $456,471.
    B. $646,471.
    C. $961,176.
    D. $1,141,176.
    E. An amount other than those listed above.

 St. James, Inc., currently uses traditional costing procedures, applying $800,000 of overhead to products Beta and Zeta on the basis of direct labor hours. The company is considering a shift to activity-based costing and the creation of individual cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as cost drivers. Data on the cost pools and respective driver volumes follow.



  1. The overhead cost allocated to Beta by using traditional costing procedures would be:
    A. $240,000.
    B. $356,000.
    C. $444,000.
    D. $560,000.
    E. some other amount.

  1. The overhead cost allocated to Zeta by using traditional costing procedures would be:
    A. $240,000.
    B. $356,000.
    C. $444,000.
    D. $560,000.
    E. some other amount.

  1. The overhead cost allocated to Beta by using activity-based costing procedures would be:
    A. $240,000.
    B. $356,000.
    C. $444,000.
    D. $560,000.
    E. some other amount.

  1. The overhead cost allocated to Zeta by using activity-based costing procedures would be:
    A. $240,000.
    B. $356,000.
    C. $444,000.
    D. $560,000.
    E. some other amount.


  1. Martin and Beasley, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $270,000) has been allocated to services on this basis of billable hours to clients. A recent analysis found that 55% of the firm's billable hours to clients resulted from tax planning services, while 45% resulted from consulting services.
    The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:    A recent analysis of staff support found a strong correlation with the number of clients served. In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting clients served totaled 35% of the total client base, consumed 30% of the firm's computer hours, and accounted for 20% of the total client transactions.
    If Martin and Beasley switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
    A. decrease by $32,500.
    B. increase by $32,500.
    C. decrease by $59,500.
    D. change by an amount other than those listed above.
    E. change, but the amount cannot be determined based on the information presented.


 Kelly and Logan, an accounting firm, provides consulting and tax planning services. For many years, the firm's total administrative cost (currently $250,000) has been allocated to services on the basis of billable hours to clients. A recent analysis found that 65% of the firm's billable hours to clients resulted from tax planning services, while 35% resulted from consulting services.
The firm, contemplating a change to activity-based costing, has identified three components of administrative cost, as follows:
A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20; tax planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's computer hours and had 20% of the total client transactions.

  1. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax planning services is:
    A. 20%.
    B. 60%.
    C. 65%.
    D. 75%.
    E. 80%.

  1. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of administrative cost chargeable to consulting services would:
    A. decrease by $23,500.
    B. increase by $23,500.
    C. decrease by $32,500.
    D. change by an amount other than those listed above.
    E. change, but the amount cannot be determined based on the information presented.


  1. Activity-based costing systems:
    A. use a single, volume-based cost driver.
    B. assign overhead to products based on the products' relative usage of direct labor.
    C. often reveal products that were under- or over-costed by traditional costing systems.
    D. typically use fewer cost drivers than more traditional costing systems.
    E. have a tendency to distort product costs.

  1. Dreyson Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure, and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
    A. All other things being equal, the company should consider a drop in its sales price.
    B. The company may have been extremely competitive in the marketplace from a price perspective.
    C. Product no. 519 could be labeled as being overcosted by the firm's traditional costing procedures.
    D. If product no. 519 is undercosted by traditional accounting procedures, then all of the company's other products must be undercosted as well.
    E. Generally speaking, the activity-based cost figure is "less accurate" than the traditionally-derived cost figure.

  1. Drake Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of product no. 520 revealed a traditionally-derived total cost of $1,623 and a selling price of $1,850 based on that figure. A newly computed activity-based total cost is $1,215. Which of the following statements is true?
    A. All other things being equal, Drake should consider increasing its sales price.
    B. Drake should increase the product's selling price to maintain the same markup percentage.
    C. Product no. 520 could be labeled as being overcosted by Drake's traditional costing procedures.
    D. If product no. 520 is undercosted by traditional accounting procedures, then all of Drake's other products must be undercosted as well.
    E. Generally speaking, the activity-based cost figure is "less accurate" than the traditionally-derived cost figure.


  1. Vanguilder combines all manufacturing overhead into a single cost pool and allocates this overhead to products by using machine hours. Activity-based costing would likely show that with Vanguard's current procedures
    A. all of the company's products are undercosted.
    B. the company's high-volume products are undercosted.
    C. all of the company's products are overcosted.
    D. the company's high-volume products are overcosted.
    E. the company's low-volume products are overcosted.

  1. Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product, requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as a result of Jackson's current accounting procedures?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Johnson manufactures products X and Y, applying overhead on the basis of labor hours. X is a high-volume product and relatively simplistic in nature. Y is both a low-volume product and requires a variety of complex manufacturing procedures. What would an activity-based costing system likely disclose about products X and Y as a result of Johnson's current accounting procedures?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product, requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as a result of Koski's current accounting procedures?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Consider the following statements:
    I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in different ways.
    II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with traditional application bases such as direct labor hours or machine hours.
    III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.
    Which of the above statements is (are) true?
    A. I only.
    B. II only.
    C. I and II.
    D. I and III.
    E. II and III.

  1. Consumption ratios are useful in determining:
    A. the existence of product-line diversity.
    B. overhead that is incurred at the unit level.
    C. if overhead-producing activities are being utilized effectively.
    D. if overhead costs are being applied to products.
    E. if overhead-producing activities are being utilized efficiently.

  1. Widely varying consumption ratios:
    A. are reflective of product-line diversity.
    B. indicate an out-of-control production environment.
    C. dictate a need for traditional costing systems.
    D. work against the implementation of activity-based costing.
    E. create an unsolvable product-costing problem.

  1. In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred when a company has:
    A. a large proportion of nonunit-level activities.
    B. product-line diversity.
    C. minimal product-line diversity and a small proportion of nonunit-level activities.
    D. existing variances from budgeted amounts.
    E. Choices A and B.


  1. Consider the following factors:
    I. The degree of correlation between consumption of an activity and consumption of a particular cost driver.
    II. The likelihood that a particular cost driver will induce a desired behavioral effect.
    III. The likelihood that a particular cost driver will cause an increase in the cost of measurement.
    Which of these factors should be considered in the selection of a cost driver?
    A. I only.
    B. I and II.
    C. I and III.
    D. II and III.
    E. I, II, and III.

  1. Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Grist Enterprises is converting to an activity-based costing system and needs to depict the various activities in its manufacturing process along with the activities' relationships. Which of the following is a possible tool that the company can use to accomplish this task?
    A. Storyboards.
    B. Activity relationship charts (ARCs).
    C. Decision trees.
    D. Simulation games.
    E. Process organizers.

  1. Successful adoptions of activity-based costing typically occur when companies rely heavily on:
    A. finance personnel.
    B. accounting personnel.
    C. manufacturing personnel.
    D. office personnel.
    E. multidisciplinary project teams.

  1. Which of the following statements is (are) true about non-value-added activities?
    I. Non-value-added activities are often unnecessary and dispensable.
    II. Non-value-added activities may be necessary but are being performed in an inefficient and improvable manner.
    III. Non-value-added activities can be eliminated without deterioration of product quality, performance, or perceived value.
    A. I only
    B. II only.
    C. III only.
    D. I and II.
    E. I, II, and III.


  1. During a recent accounting period, Marty's shipping department processed 26 orders. Each order typically takes four hours to complete; however, the average time increased to five hours because of various departmental inefficiencies. If shipping labor is paid $14 per hour, the company's non-value-added cost would be:
    A. $0.
    B. $56.
    C. $364.
    D. $1,456.
    E. $1,820.

  1. Storch Corporation takes eight hours to complete the setup process for a certain electrical component, with the setup cost averaging $150 per hour. If the company's competitor can accomplish the same process in six hours, Stanley's non-value-added cost would be:
    A. $0.
    B. $150.
    C. $300.
    D. $900.
    E. $1,200.

  1. Factory Oak produces various wooden bookcases, tables, storage units, and chairs. Which of the following would be included in a listing of the company's non-value-added activities?
    A. Assembly of tables.
    B. Staining of storage units.
    C. Transfer of chairs from the assembly line to the staining facility.
    D. Storage of completed bookcases in inventory.
    E. Both "C" and "D."

  1. Airstream builds recreational motor homes. All of the following activities add value to the finished product except:
    A. installation of carpet.
    B. assembly of the frame to the chassis.
    C. storage of the vehicle in the sales area.
    D. addition of exterior lights.
    E. final painting and polishing.


  1. An example of a customer-value-added activity is:
    A. final painting and polishing of the product.
    B. installation of a computerized human resource management module.
    C. shortening the customers' billing cycle.
    D. addition of an employee hotline for workplace complaints.
    E. maintenance of an adequate safety stock.

  1. Which of the following is not an example of a business-value-added activity?
    A. Adopting bar-code technology in the receiving department.
    B. Installation of a computerized human resource management module.
    C. Shortening the customers' billing cycle.
    D. Addition of an employee hotline for workplace complaints.
    E. Final painting and polishing of the product.

  1. The adoption of a 24-7 customer service help line is an example of a:
    A. business-value-added activity.
    B. customer-value-added activity.
    C. nonvalue-added activity.
    D. batch-related activity.
    E. product-sustaining activity.

  1. The adoption of a 24-7 employee hotline for workplace complaints is an example of a:
    A. business-value-added activity.
    B. customer-value-added activity.
    C. nonvalue-added activity.
    D. batch-related activity.
    E. product-sustaining activity.

  1. Customer profitability analysis is tied closely to:
    A. just-in-time systems.
    B. activity-based costing.
    C. job costing.
    D. process costing.
    E. operation costing.


  1. When determining customer profitability, activity-based costing can be used to analyze:
    A. orders processed.
    B. sales visits.
    C. special packaging and handling.
    D. billing and collections.
    E. All of these.

  1. Generally speaking, companies prefer doing business with customers who:
    A. order small quantities rather than large quantities.
    B. often change their orders.
    C. require special packaging or handling.
    D. request normal delivery times.
    E. need specialized engineering design changes.

  1. Which of the following can have a negative impact on a sale's profitability?
    A. Number of required sales contacts (phone calls, visits, etc.).
    B. Special shipping instructions.
    C. Accounts receivable collection time.
    D. Purchase-order changes.
    E. All of these.

  1. Hilton Corporation's customers differ greatly with respect to number of required sales contacts (e.g., phone calls and sales visits), account payment patterns, and design/engineering change orders. Which of the following choices likely denotes an ideal customer from Hilton's perspective?
    A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. Of the following organizations, activity-based costing (ABC) cannot be used by:
    A. manufacturers.
    B. financial-services firms.
    C. book publishers.
    D. hotels.
    E. None of these are correct, as all these organizations can use ABC.

  1. A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following tasks would not be part of this process?
    A. Identification of cost pools.
    B. Calculation of pool rates.
    C. Assignment of cost to services provided.
    D. Identification of cost drivers.
    E. None of these, as all these tasks would be part of the process.

  1. A company that adopts a just-in-time production system would attempt to reduce and/or eliminate:
    A. raw-material inventory.
    B. raw-material inventory and work-in-process inventory.
    C. raw-material inventory, work-in-process inventory, and finished-goods inventory.
    D. work-in-process inventory.
    E. finished-goods inventory.


  1. Which of the following inventories would a company try to reduce and/or eliminate under a just-in-time system?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Marion Corporation, which produces unique office furniture, recently installed a just-in-time production system. The various steps in the company's manufacturing process are coordinated by using a philosophy known as:
    A. supply pull.
    B. demand pull.
    C. supply push.
    D. demand push.
    E. None of these.

  1. Which of the following statements regarding the pull method is (are) true?
    I. Goods are produced in each manufacturing stage only as they are needed at the next stage.
    II. The pull method greatly reduces work-in-process inventory.
    III. The pull method reduces waiting time and the associated non-value-added cost.
    A. II only.
    B. I and II.
    C. I and III.
    D. II and III.
    E. I, II, and III.


  1. A Kanban:
    A. is used in conjunction with activity-based costing.
    B. facilitates quick and inexpensive setups of machines.
    C. helps train workers to do a variety of assignments.
    D. initiates production in a particular work center.
    E. measures the correlation between a cost driver and a cost pool.

  1. Which of the following is not a key feature of a JIT system?
    A. Purchases of materials in relatively large amounts (i.e., lot sizes).
    B. A smooth, uniform production rate.
    C. Total quality control.
    D. Multiskilled workers and flexible production facilities.
    E. A pull approach to coordinating steps in the production process.

  1. Which of the following statements regarding quality is (are) true for a company that has implemented a JIT system?
    I. JIT requires quality production facilities, methods, and employees.
    II. JIT requires the acquisition of quality raw materials.
    III. JIT requires that long-term contracts be negotiated with quality suppliers.
    A. II only.
    B. I and II.
    C. I and III.
    D. II and III.
    E. I, II, and III.

  1. A firm that uses a JIT purchasing philosophy probably:
    A. has many suppliers.
    B. has extensive inspection of purchased items at the receiving point.
    C. has relatively few suppliers.
    D. has deliveries of purchased items made in small lot sizes immediately before the goods are needed in production.
    E. Choices C and D.


  1. Which of the following statements about a just-in-time (JIT) purchasing system is false?
    A. Since there is minimal backup, companies must acquire quality raw materials.
    B. Raw materials are stockpiled to avoid production disruptions.
    C. In comparison with experiences under traditional systems, manufacturers normally deal with a reduced number of suppliers.
    D. Supplier reliability tends to be more important under a JIT system than under a traditional purchasing system.
    E. The average purchase size is smaller with a JIT system than under a traditional purchasing system.

  1. Hudson, Inc., is considering a change from a traditional purchasing system to a just-in-time purchasing system. What has probably happened to Hudson's cost per purchase order and inventory unit storage cost to prompt the company to consider such a change?
    A. Purchase-order cost is increasing and unit storage cost is increasing.
    B. Purchase-order cost is increasing and unit storage cost is decreasing.
    C. Purchase-order cost is decreasing and unit storage cost is increasing.
    D. Purchase-order cost is decreasing and unit storage cost is decreasing.
    E. Both of these costs are relatively stable in amount.

  1. When a company adopts a just-in-time inventory system, it would expect:
    A. higher inventories and less frequent purchases.
    B. higher inventories and more frequent purchases.
    C. lower inventories and less frequent purchases.
    D. lower inventories and more frequent purchases.
    E. lower inventories and more units purchased on a given order.

  1. When a company adopts a just-in-time inventory system, it would expect:
    A. higher inventories and fewer units purchased on a given order.
    B. higher inventories and more units purchased on a given order.
    C. lower inventories and fewer units purchased on a given order.
    D. lower inventories and more units purchased on a given order.
    E. lower inventories and less frequent purchases.


  1. Rodeo Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E

  1. Harvest Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically ordered 700 units of raw material at a time and purchased units that scored a 7 on a 10-point quality scale, with 10 being very close to perfection. All other things being equal, which of the following choices denotes a likely scenario under the just-in-time system?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E


  1. When a company switches from a traditional system to a just-in-time production and inventory system, what often happens to the quality of raw material purchased and the number of vendors that supply the firm?A. Choice A
    B. Choice B
    C. Choice C
    D. Choice D
    E. Choice E



Essay Questions
  1. St. Helena Cellars produces wine in northern California. Consider the following selected costs that arose during the current year:
    1. Safety costs at winery
    2. Truckload shipping costs
    3. Building maintenance costs
    4. Bottle and cork cost
    5. Development cost of new, after-dinner wine
    6. Tasting and testing costs
    Required:
    A. Briefly distinguish between unit-level and product-sustaining activities.
    B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity. 





  1. Consider the following costs that relate to a bank and a manufacturer of software:
    Bank
    1. Review cost of commercial loan applications
    2. Operating cost of human resources department
    3. Immediate processing cost of a specific customer's cash deposit
    4. Bank membership cost of joining local Chamber of Commerce
    Software manufacturer
    5. Label and packaging charges from a commercial printer for a new software release
    6. Air conditioning/heating costs of the firm's production plant
    7. Transport cost of moving the CD-output from production run no. 1 to the company's warehouse
    8. Design, development, and coding cost of new spreadsheet software
    Required:
    A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level activity.
    B. Would number of loan applications or number of customers be a more appropriate cost-driver base for the review of loan applications? Briefly explain. 





  1. Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose during the current year:
    1. Direct materials used: $3,640,000
    2. Plant rent, utilities, and taxes: $1,229,000
    3. New technology design engineering: $2,040,000
    4. Materials receiving: $318,000
    5. Manufacturing-run/set-up charges: $115,000
    6. Equipment depreciation: $92,000
    7. General management salaries: $1,564,000
    Required:
    A. Briefly distinguish between batch-level and facility-level activities.
    B. Determine the cost of the firm's unit-level, batch-level, product-sustaining, and facility-level activities. 





  1. The controller for Wofford Machining has established the following overhead cost pools and cost drivers:Order no. 715 has the following production requirements:
    Machine setups: 7
    Raw material: 11,200 units
    Inspections: 16
    Machine hours: 850
    Required:
    A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
    B. Suppose that Wofford were to use a single, predetermined overhead rate based on machine hours. Compute the rate per hour and the total overhead assigned to order no. 715.
    C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.





  1. Weston Enterprises uses a traditional-costing system to estimate quality-control costs for its PDA product line. Costs are estimated at 32% of direct-labor cost, and direct labor totaled $860,000 for the quarter just ended. Management is contemplating a change to activity-based costing, and has established three cost pools: incoming material inspection, in-process inspection, and final product certification. Number of parts, number of units, and number of orders have been selected as the respective cost drivers.
    The following data show the pool rates that have been calculated by the company along with the quantity of driver units for the PDAs:    Required:
    A. Calculate the quarterly quality-control cost that is allocated to the PDA product line under Weston's traditional-costing system.
    B. Calculate the quarterly quality-control cost that is allocated to the PDAs if activity-based costing is used.
    C. Does the traditional approach under- or overcost the product line? By how much?





  1. Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company's products (H15, H16, and H17) follow.Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
    Required:
    A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
    B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to product H17.
    C. Consider the company's current overhead application procedure.
    1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
    2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss.
    3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.





  1. Kenyon Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are:
    F56: 2,000 units, $234
    F57: 3,500 units, $271
    Kenyon's overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kenyon's selling prices are based heavily on cost.
    Required:
    A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures. Briefly explain how this improved accuracy is attained.
    B. Compute:
    1. the pool rate for purchase-order processing.
    2. the purchase-order processing cost to be charged to one unit of F56.
    C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.
    1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.
    2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain. 





  1. Lennox Industries manufactures two products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volumes:Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting procedures, and the following data are available:
    Lennox determines selling prices by adding 40% to a product's total cost.
    Required:
    A. Compute the per-unit cost and selling price of product B by using Lennox's current costing procedures.
    B. Compute the per-unit overhead cost of product B if the company switches to activity-based costing.
    C. Compute B's total per-unit cost and selling price under activity-based costing.
    D. Lennox has recently encountered significant international competition for product B, with considerable business being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with product B from a price perspective? Briefly explain.
    E. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based costing? Why? Hint: No calculations are necessary.





  1. Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company's products follows.
    Regular—
    Estimated production volume: 3,000 units
    Direct materials cost: $28 per unit
    Direct labor per unit: 3 hours at $15 per hour
    Deluxe—
    Estimated production volume: 4,000 units
    Direct materials cost: $42 per unit
    Direct labor per unit: 4 hours at $15 per hour
    Scott's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.    Required:
    A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.
    B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected manufacturing volume is attained.
    C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this procedure? Overcosted?





  1. Pink Corporation manufactures two types of transponders—no. 156 and no. 157—and applies manufacturing overhead to all units at the rate of $76.50 per machine hour. Production information follows.The controller, who is studying the use of activity-based costing, has determined that the firm's overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours worked, and outgoing shipments, the activities' three respective cost drivers, follow.
    The firm's total overhead of $3,060,000 is subdivided as follows: manufacturing setups, $260,000; machine processing, $2,400,000; and product shipping, $400,000.
    Required:
    A. Compute the pool rates that would be used for manufacturing setups, machine processing, and product shipping in an activity-based costing system.
    B. Assuming use of activity-based costing, compute the unit overhead costs of product nos. 156 and 157 if the expected manufacturing volume is attained.
    C. Assuming use of activity-based costing, compute the total cost per unit of product no. 156.
    D. If the company's selling price is based heavily on cost, would a switch to activity-based costing from the current traditional system result in a price increase or decrease for product no. 156? Show computations.





  1. Heartfelt Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing to determine the wisdom of its previous ways. The following information is available:Two loan applications, among many others, were originated and closed during the year. No. 7439 consumed 3.5 hours in loan underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time, subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.
    Required:
    A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan applications.
    B. Determine the cost of processing the two loans if Heartfelt uses the traditional labor-hour-based system. Conversations with management found that, on average, each application took nine labor hours of processing time, excluding underwriting and closure.
    C. Is Heartfelt making a mistake by continuing to use a traditional system that is based on an average labor cost per hour? Why?





  1. Consider the nine activities that follow.
    1. Microsoft: Developing computer coding for a new spreadsheet package.
    2. General Mills: Painting the office of a maintenance supervisor at a plant that produces cereal.
    3. Mayo Clinic: Examining a new patient.
    4. American Airlines: The 90 minutes that a Boeing 757 sits idle on the ground between flights.
    5. Office Depot: Moving cases of paper from one location to another in the same warehouse.
    6. Rolex: Attaching a watch band to the watch's face.
    7. United States Postal Service: Reprocessing mail that had been sorted incorrectly on a malfunctioning sorting machine.
    8. Fidelity Investments: Correcting errors made by company personnel in customer accounts.
    9. Marriott: Upgrading the quality of bedding used at hotels in very competitive marketplaces.
    Required:
    Categorize each of the activities as either value-added or non-value-added for the
    companies noted. 





  1. Switzer, Inc., which sells books to college bookstores and individuals, uses activity-based costing and activity-based management. The following information is available for the company's three cost pools:Bookstore sales totaled $8,400,000, and sales to individuals amounted to $2,400,000. Costs for the three activities were: Incoming receipts, $450,000; warehousing, $520,000; and outgoing shipments, $630,000. A review of the company's activities found various inefficiencies with respect to the warehousing of textbooks (acquired for eventual sale to bookstores) and outgoing shipments to individuals. These inefficiencies resulted in an extra 500 moves and 400 shipments, respectively.
    Required:
    A. What is a non-value-added activity?
    B. How much did non-value-added activities cost Switzer this past year?
    C. Which of the two markets—sales to bookstores or sales to individuals—resulted in lower overall costs for incoming receipts, warehousing, and outgoing shipments? Evaluate these costs in both absolute dollars and as a percentage of sales. In addition, present a possible explanation for your results. Note: Exclude costs that arose from inefficient operations.





  1. Filipe's Fresh Meats and Produce is a wholesale distributor that operates in central California. An analysis of two of the company's customers, Atriums Retirement Home and Sigma Sigma Sigma Fraternity, revealed the data that follow for a recent 12-month period.Filipe's uses activity-based costing to determine the cost of servicing its customers. The company had total delivery costs during the year of $576,000 and 8,000 deliveries, along with cost of $765,000 for the administrative processing of 90,000 invoices.
    Required:
    A. Compute the pool rates for deliveries and invoice processing.
    B. Compute the operating income that Ippilito's earned from these two customers.
    C. Compute the total of customer-related costs (deliveries and invoice processing) for each customer as a percentage of gross margin, and analyze the results for management. Explain any significant differences that you find.





  1. Clark Corporation manufactures cooling system components. The company has gathered the following information about two of its customers: Engle Equipment and Midwest Refrigeration.Cost-driver data used by the firm and traceable to Engle and Midwest are:
    Required:
    A. Perform a customer profitability analysis for Clark. Compute the gross margin and operating income on transactions related to Engle Equipment and Midwest Refrigeration.
    B. Compute gross margin as a percentage of sales revenue. Then compute (1) general selling and administrative costs as a percentage of gross margin and (2) total customer-related costs (i.e., costs that arise from sales visits, order taking, and special handling and shipping) as a percentage of gross margin.
    C. On the basis of your calculations, which of the two customers is "more costly" to deal with? Briefly explain.





  1. Homestead Corporation sells a line of power tools to home improvement chains, generating a cost of goods sold equal to 70% of net sales. The selected data that follow relate to the period just ended for the company's three largest customers: Weekend Project, Tool Mart, and Fix-It City.Homestead's management recently attended a seminar and learned that customers with excessive requests and demands can have a significant, negative impact on corporate profitability.
    Required:
    A. For each of the three chains, compute:
    1. Total customer-related costs as a percentage of gross margin.
    2. The average order size (ignoring sales returns).
    3. The ratio of regular orders to rush orders.
    4. The number of sales returns as a percentage of the number of total orders.
    B. Prepare a brief summary of your findings. Should Homestead work with any of the chains in an effort to improve results? Explain.





  1. Bravo Manufacturing is a relatively new customer of Haxton Enterprises. In the short period that the two companies have done business with each other, Haxton has found Bravo to be, in management's words, "an expensive proposition." Numerous sales visits are typically required to "close a deal," with selling prices and discounts offered being among the most attractive in the industry. Complicating matters, Bravo is slow to settle its account, orders in small quantities, and often has numerous specialized shipping and handling needs.
    A recent customer profitability analysis has painted a very negative picture of Bravo Manufacturing, and Haxton's managers are questioning whether an on-going relationship with the firm is warranted.
    Required:
    A. Briefly explain why the customer profitability analysis painted a negative picture of Bravo Manufacturing.
    B. What actions are available to Haxton Enterprises to improve Bravo profitability? 





  1. The wholesale division of Navigator Enterprises is considering the installation of a just-in-time purchasing system. The company's accountant has provided the following figures if the system is adopted:
    · Sales lost because of out-of-stock situations will total 5,500 units, with each unit producing an average profit for the firm of $23.
    · The overall inventory will drop by $700,000. Navigator can invest these funds elsewhere and produce a return of 13%.
    · A leased warehouse (monthly rent of $3,000) will no longer be needed.
    · Two warehouse employees (total annual salary cost of $43,000) will be transferred elsewhere in the firm.
    · Annual property taxes and insurance are expected to fall by $18,900.
    · In order to keep valued customers, Navigator will occasionally have to use air freight when an out-of-stock situation arises, resulting in added cost for the company of $2,300.
    Required:
    A. Determine whether it is financially advantageous over a 12-month period for Navigator to adopt the just-in-time system.
    B. How would Navigator describe the "ideal supplier" if the company adopts the just-in-time system. 





  1. Management of Laredo Enterprises recently decided to adopt a just-in-time inventory policy to curb steadily rising costs and free-up cash for purposes of investment. The company anticipates that inventory will decrease by $4,450,000, with the released funds to be invested at a 10% return for the firm. Additional data follow.
    1. Reduced inventories should produce savings in insurance and property taxes of $46,000.
    2. Reduced raw-material inventory levels and accompanying stockouts will cost Laredo $85,000.
    3. Laredo will lease 80% of an existing warehouse to another firm for $2.50 per square foot. The warehouse has 40,000 square feet.
    4. Four employees who currently earn $35,000 each will be directly affected by the just-in-time adoption decision. Three employees will be transferred to other positions with Laredo; one will be terminated.
    5. A shift in suppliers is expected to result in the purchase and use of more expensive raw materials. However, these materials should give rise to fewer warranty and repair problems after Laredo's finished product is sold, resulting in a net savings for the company of $38,000.
    6. Because of the need to handle an increased number of small shipments from suppliers, Laredo will remodel production and receiving-dock facilities at a cost of $750,000. The construction costs will be depreciated over a 10-year life.
    Required:
    A. Compute the annual financial impact of Laredo's decision to adopt a just-in-time inventory system.
    B. How would the number and size of incoming supplier shipments under a traditional purchasing system compare to the number and size of shipments under a just-in-time system? Explain any differences. 





  1. Putnam Enterprises currently purchases a total of 50,000 sensors annually from Utah Electronics at $80 per unit. The firm places 25 purchase orders during the year at an average cost of $10 per order. Putnam's management is contemplating a switch to a just-in-time purchasing system that would require an increase in orders to 200.
    Required:
    A. Compute the average order size under both the current system and the proposed just-in-time system. Also, calculate the change in annual purchase-order processing cost.
    B. Explain why the number of orders will increase under a just-in-time system.
    C. What benefits might Putnam experience to help offset the increase in purchase-order processing cost?
    D. What might Utah do to the $80 price, given the company's need to process an additional 175 orders? 





  1. Falcon Enterprises, which manufactures lawn mowers, recently installed a just-in-time purchasing system and an activity-based management program.
    Required:
    A. Determine whether the following items would be apt to increase or decrease as a result of the just-in-time system:
    1. Inventory storage costs.
    2. Number of suppliers used.
    3. Number of raw material shipments handled.
    4. Dollars available for alternative investment opportunities.
    5. Quality of raw materials purchased.
    B. Identify the following items as value-added activities, non-value-added activities, or both.
    1. Attaching the engine to the mower's body.
    2. Installing a new air-conditioning system in the executive offices.
    3. Replacing a defective wheel with a new wheel.
    4. Designing and printing an owner's instruction manual for a new model.
    5. Moving completed mowers to the finished-goods warehouse.
    6. Attaching the handle to the mower's body. The process took longer than normal because of a worker slowdown caused by disgruntled employees. 




  1. Templeton Industries currently assigns overhead to products by using a predetermined rate based on direct labor hours. The company is considering the adoption of an activity-based costing (ABC) system, and management desires a brief overview of this system before it makes a final decision.
    Compare ABC with the company's current system, focusing on the number of cost pools and cost drivers, costing accuracy, and cost distortion. 





  1. At a recent professional meeting, two controllers discussed product-costing problems in their respective companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system.
    Controller D reported that part of the problem in his firm results from major differences among product lines with respect to unit volume, utilization of activities, quality assurance requirements established by customers, and product size. Controller M noted that in her company, which manufactures consumer goods, all items undergo the same basic production processes in the same sequence. Lately, however, there has been a significant increase in the number of item colors.
    Both controllers are worried about the potential distortion of product costs under their traditional product-costing systems.
    Required:
    Which controller should be more concerned about the potential distortion? Explain.



  1. Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers. 


  1. Non-value-added costs occur in nonmanufacturing organizations as well as in manufacturing firms.
    Required:
    A. Explain what is meant by a non-value-added cost.
    B. Identify two potential non-value-added costs for each of the following service providers: airlines, banks, and hotels. 



  1. A just-in-time production system uses a "pull method" to coordinate steps in the manufacturing process. Explain what is meant by the term "pull method." 






  1. A considerable portion of the text's process-costing presentation illustrated the proper way to allocate manufacturing costs to the units completed during the period and the ending work-in-process inventory. For companies that have a single manufacturing department, the journal entry to recognize completed production involves a debit to Finished-Goods Inventory and a credit to Work-in-Process Inventory. What journal entry, if any, is needed for these same companies to properly account for ending work in process? 


Professor Jones is concerned that her students do not understand the concept of equivalent units. She has therefore prepared the following questions, to appear on an upcoming examination:
Equivalent units are used in a process-costing accounting system.
A. Explain the need for equivalent units and why separate equivalent-unit totals are calculated for direct materials and conversion cost.
B. If an examination of goods in production at the end of the period revealed 12,000 units that are, on average, 75% complete, would it be correct to say that 9,000 units were finished during the period? Why?
Required:
Prepare a complete answer key that can be used in grading the examination questions. 



  1. Operation costing is a hybrid type of accounting system that combines features of job-order and process-cost accounting.
    Required:
    A. Briefly discuss the similarities and differences of an operation-costing system and a job-order cost system.
  1. Operation costing is a popular type of accounting system, one that combines selected features of job-order and process-cost accounting.
    Required:
    A. Briefly discuss the basic features that are associated with an operation-costing system.
    B. Explain why a sweater manufacturer may have a need for an operation-costing system. 





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