Folk Exam Questions - Chapter 1

1. The following data (in thousands of dollars) have been taken from the accounting records of Davis Corporation for the just completed year: Administrative expenses Direct labor Finished goods inventory, beginning Finished goods inventory, ending Manufacturing overhead Purchases of raw materials Raw materials inventory, beginning Raw materials inventory, ending Sales Selling expenses Work in process inventory, beginning Work in process inventory, ending $ 600 800 480 640 920 480 160 280 3,960 560 280 200

What was the cost of the raw materials used in production during the year (in thousands of dollars)? Solution: Raw materials inventory, beginning Purchases of raw materials Less raw materials inventory, ending Raw materials used in production $160 480 (280) $360

2. The following data (in thousands of dollars) have been taken from the accounting records of Davis Corporation for the just completed year: Administrative expenses Direct labor Finished goods inventory, beginning Finished goods inventory, ending Manufacturing overhead Purchases of raw materials Raw materials inventory, beginning Raw materials inventory, ending Sales Selling expenses Work in process inventory, beginning Work in process inventory, ending $ 600 800 480 640 920 480 160 280 3,960 560 280 200

What was the cost of goods manufactured (finished) for the year (in thousands of dollars)? Solution: Work in process inventory, beginning Raw materials used in production (calculated above) Direct labor Manufacturing overhead Total manufacturing costs Less: work in process inventory, ending Cost of goods manufactured $ 280 360 800 920 2,360 (200) $2,160

3. The following data (in thousands of dollars) have been taken from the accounting records of Davis Corporation for the just completed year: Administrative expenses Direct labor Finished goods inventory, beginning Finished goods inventory, ending Manufacturing overhead Purchases of raw materials Raw materials inventory, beginning Raw materials inventory, ending Sales Selling expenses Work in process inventory, beginning Work in process inventory, ending $ 600 800 480 640 920 480 160 280 3,960 560 280 200

What was the cost of goods sold for the year (in thousands of dollars)? Solution: Finished goods inventory, beginning Cost of goods manufactured (calculated above) Less finished goods inventory, ending Cost of goods sold $ 480 2,160 (640) $2,000

4.

The following data (in thousands of dollars) have been taken from the accounting records of Davis Corporation for the just completed year. (Note that this is the same data as that provided for the question above.)

Administrative expenses Direct labor Finished goods inventory, beginning Finished goods inventory, ending Manufacturing overhead Purchases of raw materials Raw materials inventory, beginning Raw materials inventory, ending Sales Selling expenses Work in process inventory, beginning Work in process inventory, ending

$ 600 800 280 640 920 480 160 280 3,960 560 280 200

What was the net income for the year (in thousands of dollars)? Solution: Sales Cost of goods sold (calculated above) Gross profit Operating expenses: Administrative expenses Selling expenses Net income $3,960 2,000 1,960 Administrative expenses 560 $600 (1,160) $ 800

1. Simmons Company has the following estimated costs for next year: Direct materials Direct labor Sales commissions Salary of production supervisor Indirect materials Advertising expense Rent on factory equipment $ 60,000 220,000 300,000 140,000 20,000 44,000 64,000

Simmons estimates that 40,000 direct labor and 64,000 machine hours will be worked during the year. If overhead is applied on the basis of machine hours, what will be the overhead rate per hour? Solution: Salary of production supervisor Indirect materials Rent on factory equipment Estimated manufacturing overhead costs $140,000 20,000 64,000 224,000

Estimated machine hours Predetermined overhead rate

64,000 $3.50 per MH

2. Houghton Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $200,000 and direct labor hours would be 20,000. The actual figures for the year were $220,000 for manufacturing overhead and 21,000 direct labor hours. What will the cost records for the year show? Solution: First, calculate the predetermined overhead rate (based on direct labor hours here): Estimated overhead costs Estimated direct labor hours = Predetermined rate $200,000 20,000 direct labor hours = $10.00/direct labor hour Then, determine the amount of manufacturing overhead assigned during the period: Predetermined overhead rate x Actual direct labor hours = Overhead assigned $10.00/direct labor hour x 21,000 direct labor hours = $210,000 Finally, compare the actual manufacturing overhead costs to the amount assigned, and decide whether it is over- or underapplied: Actual $220,000 Assigned 210,000 Balance (underapplied) $ 10,000 3. Kasper Companys predetermined overhead rate is based on direct labor hours. At the beginning of the current year, the company estimated that its manufacturing overhead would total $440,000 during the year. During the year, the company incurred $400,000 in actual manufacturing overhead costs. The Manufacturing Overhead account showed that overhead was overapplied by $16,000 during the year. If the predetermined overhead rate was $20.00 per direct labor hour, how many hours were worked during the year? Solution: First, determine the amount of overhead applied to production by reference to the information about the Manufacturing Overhead account: Actual overhead Amount applied to production = Amount over- (under)applied $400,000 Amount applied to production = $16,000 Amount assigned to production = $384,000 Then, solve for the direct labor hours here (the activity base for the overhead rate): Predetermined overhead rate x Direct labor hours = Manufacturing overhead applied $20.00/direct labor hour x Actual direct labor hours = $384,000 (from above) Actual direct labor hours = 19,200

4. Under Horton Company's job-order costing system, manufacturing overhead is applied to Work in Process inventory using a predetermined overhead rate. During July, Hortons transactions included the following: Direct labor cost incurred Direct materials issued to production Indirect materials issued to production Manufacturing overhead cost applied Manufacturing overhead cost incurred $428,000 360,000 32,000 452,000 500,000

Horton Company had no beginning or ending inventories in July. What was the cost of goods manufactured for July? Solution: Work in process, beginning of period Direct materials issued to production Direct labor cost incurred Manufacturing overhead cost applied Total manufacturing costs Less: work in process, end of period Cost of goods manufactured 0 360,000 428,000 452,000 1,240,000 (0) $1,240,000 $

1. All of the following are examples of product-level activities except: C) Human resource management. B) Advertising a product. C) Testing a prototype of a new product. D) Parts administration. 2. All of the following are examples of batch-level activities except: A) Purchase order processing. B) Setting up equipment. C) The clerical activity associated with processing purchase orders to produce an order for a standard product. D) Worker recreational facilities. 3. Angelina Company uses activity-based costing to determine the costs of its two products: A and B. The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: Activity Cost Pool Activity 1 Estimated Cost $19,800 Expected Activity Product B 300

Product A 800

Total 1,100

Activity 2 Activity 3

$16,000 $14,000

2,200 400

1,800 300

4,000 700

The activity rate under the activity-based costing system for Activity 3 is closest to: A) $4.00. B) $8.59. C) $18.00. D) $20.00. Solution: Activity rate for Activity 3: $14,000 700 = $20.00 4. Flaherty Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities for the current year are presented below for the three activity cost pools: Estimated Overhead Cost $36,000 $20,000 $40,000

Activity 1 Activity 2 Activity 3

Expected Activity 1,800 2,000 2,500

Actual activity for the current year was as follows: Actual Activity 1,815 2,005 2,490

Activity 1 Activity 2 Activity 3

The amount of overhead applied for Activity 3 during the year was closest to: A) $36,300. D) $39,840. C) $40,000. D) $96,190. Solution: Activity rate for Activity 3: $40,000 2,500 = $16.00 Amount of overhead applied for Activity 3:

2,490 x $16.00 = $39,840 5. Charles Company has two products: A and B. The company uses activity-based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools: Activity Cost Pool Activity 1 Activity 2 Activity 3 Estimated Overhead Cost $ 40,000 $ 29,200 $180,000

Expected Activity Product A Product B 200 800 1,000 500 600 5,400

Total 1,000 1,500 6,000

The annual production and sales level of Product A is 9,094 units. The annual production and sales level of Product B is 15,826. The activity rate under the activity-based costing system for Activity 3 is closest to: A) $29.32. B) $30.00. C) $33.33. D) $41.53. Solution: Activity rate for Activity 3: $180,000 6,000 = $30.00 6. Charles Company has two products: A and B. The company uses activity-based costing and has prepared the following analysis showing the estimated total cost and expected activity for each of its three activity cost pools: Activity Cost Pool Activity 1 Activity 2 Activity 3 Estimated Overhead Cost $ 40,000 $ 29,200 $180,000

Expected Activity Product A Product B 200 800 1,000 500 600 5,400

Total 1,000 1,500 6,000

The annual production and sales level of Product A is 9,094 units. The annual production and sales level of Product B is 15,826. (Note that this is the same information as provided for the previous question.) The overhead cost per unit of Product A under activity-based costing is closest to: A) $1.83. B) $1.98. C) $5.00. D) $10.00.

Solution: Overhead cost for Product A: Activity 1: ($40,000 1,000) x 200 Activity 2: ($29,200 1,500) x 1,000 Activity 3: ($180,000 6,000) x 600 Total overhead cost per unit for Product A Divided by number of units produced Overhead cost per unit of Product A

$ 8,000.00 19,466.67 18,000.00 45,466.67 9,094 $ 5.00

7. DuPage Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities for the current year are presented below for the three activity cost pools: Estimated Overhead Cost $ 58,656 $ 60,048 $130,324

Activity 1 Activity 2 Activity 3

Expected Activity 2,400 4,800 4,400

Actual costs and activities for the current year were as follows: Actual Overhead Cost $ 58,476 $ 59,798 $130,234

Activity 1 Activity 2 Activity 3

Actual Activity 2,370 4,830 4,450

The total debits to the Manufacturing Overhead account during the year were closest to: A) $248,508. B) $248,988. C) $251,110. D) $250,334 Solution: Actual Overhead Cost $ 58,476

Activity 1

Activity 2 Activity 3 Total

59,798 130,234 $248,508

8 DuPage Company uses activity-based costing to compute product costs for external reports. The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool. Estimated costs and activities for the current year are presented below for the three activity cost pools. (Note that this is the same data as that provided for the question above.) Estimated Overhead Cost $ 58,656 $ 60,048 $130,324

Activity 1 Activity 2 Activity 3

Expected Activity 2,400 4,800 4,400

Actual costs and activities for the current year were as follows: Actual Overhead Cost $ 58,476 $ 59,798 $130,234

Activity 1 Activity 2 Activity 3

Actual Activity 2,370 4,830 4,450

The total credits to the Manufacturing Overhead account during the year were closest to: A) $248,508. B) $248,988. C) $250,151. D) $251,334. Solution: Total credits to Manufacturing Overhead account (that is, amount of overhead applied to production): Activity 1: ($58,656 2,400) x 2,370 $ 57,922.80 Activity 2: ($60,048 4,800) x 4,830 60,423.30 Activity 3: ($130,324 4,400) x 4,450 131,804.96 Total overhead cost per unit for Product A $250,151.06

9.Which of the following statements is (are) true?

A) An activity-based costing system is generally easier to implement and maintain than a traditional costing system. B) One of the goals of activity-based management is the elimination of waste by allocating costs to products that waste resources. C) Activity-based costing uses a number of activity cost pools, each of which is allocated to products on the basis of direct labor-hours. D) Activity rates in activity-based costing are computed by dividing costs from the first-stage allocations by the activity measure for each activity cost pool. 10. When there are batch-level or product-level costs, in comparison to a traditional cost system, an activity-based costing system ordinarily will: A) Shift costs from low-volume to high-volume products. B) Shift costs from high-volume to low-volume products. C) Shift costs from standardized to specialized products. D) Shift costs from specialized to standardized products. 1. An analysis of past janitorial costs indicates that janitorial cost is an average of $0.80 per machine-hour at an activity level of 40,000 machine-hours and $1.00 per machine-hour at an activity level of 32,000 machine-hours. Assuming that this activity is within the relevant range, what is the total expected janitorial cost if the activity level is 37,000 machine-hours? Solution: Using the data provided above, janitorial costs are fixed (rather than variable or mixed) in nature; that is, they total $32,000 at both 40,000 and 32,000 machine hours. Machine Hours 40,000 32,000 Cost per Machine Hour $0.80 $1.00 Total Cost $32,000 $32,000

Accordingly, janitorial costs would be expected to be $32,000 at 37,000 machine hours (or at any other level of machine hours within the relevant range). 2. Shipping expense is $10,000 for 1,000 pounds shipped and $13,750 for 1,500 pounds shipped. Assuming that this activity is within the relevant range, if the company ships 1,250 pounds, what is its expected shipping expense? Solution: Using the high-low method, the companys variable cost per unit for shipping costs can be calculated as follows:

Variable cost per unit = Change in costs Change in units Variable cost per unit = ($13,750 $10,000) (1,500 1,000) Variable cost per unit = $3,750 500 = $7.50 per pound shipped. Then, the companys fixed shipping cost can be calculated as follows: Total cost = Total variable cost + Total fixed cost or Total fixed cost = Total cost Total variable cost Total fixed cost = $10,000 (1,000 pounds x $7.50 per pound) Total fixed cost = $10,000 $7,500 = $2,500 Finally, if the company ships 1,250 pounds, its total shipping cost can be estimated as follows: Total cost = Total variable cost + Total fixed cost Total cost = (1,250 pounds x $7.50 per pound) + $2,500 Total cost = $9,375 + $2,500 = $11,875 3. The following information has been provided by the Batavia Office
Supply Store for the first quarter of the year:

Sales Variable selling expense Fixed selling expenses Cost of goods sold Fixed administrative expenses Variable administrative expenses

$1,400,000 140,000 100,000 640,000 220,000 60,000

What is the contribution margin of Batavia Office Supply Store for the first quarter? Solution: Sales Variable expenses: Variable selling expense Cost of goods sold Variable administrative expenses Total variable expenses Contribution margin $1,400,000 $140,000 640,000 60,000 840,000 $760,000

4. Lewis Company has provided the following data for the second quarter of the most recent year:

Sales Fixed manufacturing overhead Direct labor

$1,200,000 22,000 290,000

Fixed selling expense Variable manufacturing overhead Variable administrative expense Direct materials Fixed administrative expense Variable selling expense

185,000 164,000 192,000 206,000 178,000 199,000

Assume that direct labor is a variable cost and that there were no beginning or ending inventories. What was the total contribution margin of Lewis Company for the second quarter? Solution: Sales Variable expenses: Direct labor Variable manufacturing overhead Variable administrative expenses Direct materials Variable selling expense Total variable expenses Contribution margin $1,200,000 $ 290,000 164,000 192,000 206,000 199,000 1,051,000 $ 149,000

1. An analysis of past janitorial costs indicates that janitorial cost is an average of $0.80 per machine-hour at an activity level of 40,000 machine-hours and $1.00 per machine-hour at an activity level of 32,000 machine-hours. Assuming that this activity is within the relevant range, what is the total expected janitorial cost if the activity level is 37,000 machine-hours? Solution: Using the data provided above, janitorial costs are fixed (rather than variable or mixed) in nature; that is, they total $32,000 at both 40,000 and 32,000 machine hours. Machine Hours 40,000 32,000 Cost per Machine Hour $0.80 $1.00 Total Cost $32,000 $32,000

Accordingly, janitorial costs would be expected to be $32,000 at 37,000 machine hours (or at any other level of machine hours within the relevant range). 2. Shipping expense is $10,000 for 1,000 pounds shipped and $13,750 for 1,500 pounds shipped. Assuming that this activity is within the relevant range, if the company ships

1,250 pounds, what is its expected shipping expense? Solution: Using the high-low method, the companys variable cost per unit for shipping costs can be calculated as follows: Variable cost per unit = Change in costs Change in units Variable cost per unit = ($13,750 $10,000) (1,500 1,000) Variable cost per unit = $3,750 500 = $7.50 per pound shipped. Then, the companys fixed shipping cost can be calculated as follows: Total cost = Total variable cost + Total fixed cost or Total fixed cost = Total cost Total variable cost Total fixed cost = $10,000 (1,000 pounds x $7.50 per pound) Total fixed cost = $10,000 $7,500 = $2,500 Finally, if the company ships 1,250 pounds, its total shipping cost can be estimated as follows: Total cost = Total variable cost + Total fixed cost Total cost = (1,250 pounds x $7.50 per pound) + $2,500 Total cost = $9,375 + $2,500 = $11,875 3. The following information has been provided by the Batavia Office
Supply Store for the first quarter of the year:

Sales Variable selling expense Fixed selling expenses Cost of goods sold Fixed administrative expenses Variable administrative expenses

$1,400,000 140,000 100,000 640,000 220,000 60,000

What is the contribution margin of Batavia Office Supply Store for the first quarter? Solution: Sales Variable expenses: Variable selling expense Cost of goods sold Variable administrative expenses Total variable expenses Contribution margin $1,400,000 $140,000 640,000 60,000 840,000 $760,000

4. Lewis Company has provided the following data for the second quarter of the most recent year:

Sales Fixed manufacturing overhead Direct labor Fixed selling expense Variable manufacturing overhead Variable administrative expense Direct materials Fixed administrative expense Variable selling expense

$1,200,000 22,000 290,000 185,000 164,000 192,000 206,000 178,000 199,000

Assume that direct labor is a variable cost and that there were no beginning or ending inventories. What was the total contribution margin of Lewis Company for the second quarter? Solution: Sales Variable expenses: Direct labor Variable manufacturing overhead Variable administrative expenses Direct materials Variable selling expense Total variable expenses Contribution margin $1,200,000 $ 290,000 164,000 192,000 206,000 199,000 1,051,000 $ 149,000