Chapter 2: Basic Cost Management Concepts and Accounting for Mass

Customization Operations
MULTIPLE COICE !UE"TIO#"
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 organiations incur the same types of costs.
!. Costs incurred in one year are always meaningful in the following year.
Answer" C #$" 1 Type" %C
&. 'roduct costs are"
A. e(pensed when incurred.
B. in)entoried.
C. treated in the same manner as period costs.
D. treated in the same manner as ad)ertising costs.
!. su*tracted from cost of goods sold.
Answer" B #$" & Type" %C
+. Which of the following is a product cost?
A. ,lass in an automo*ile.
B. Ad)ertising.
C. The salary of the )ice president-finance.
D. %ent on a factory.
!. Both "A" and "D."
Answer" ! #$" & Type" .
/. Which of the following would not *e classified as a product cost?
A. Direct materials.
B. Direct la*or.
C. 0ndirect materials.
D. 0nsurance on the manufacturing plant.
!. 1ales commissions.
Answer" ! #$" & Type" %C, .
Chapter 2 17
2. The accounting records of Tacoma Company re)ealed the following costs" direct materials used,
3145,5556 direct la*or, 3+25,5556 manufacturing o)erhead, 3/55,5556 and selling and
administrati)e e(penses, 3&&5,555. Tacoma7s product costs total"
A. 32&5,555.
B. 3425,555.
C. 38&5,555.
D. 31,1/5,555.
!. some other amount.
Answer" C #$" & Type" A
9. Costs that are e(pensed when incurred are called"
A. product costs.
B. direct costs.
C. in)entoria*le costs.
D. period costs.
!. indirect costs.
Answer" D #$" & Type" %C
4. Which of the following is a period cost?
A. Direct material.
B. Ad)ertising e(pense.
C. Depreciation on cars dri)en *y a firm7s president and treasurer.
D. :iscellaneous supplies used in production acti)ities.
!. Both "B" and "C."
Answer" ! #$" & Type" .
;. Which of the following is not a period cost?
A. #egal costs.
B. 'u*lic relations costs.
C. 1ales commissions.
D. Wages of assem*ly-line wor<ers.
!. The salary of a company7s chief financial officer =C>$?.
Answer" D #$" & Type" %C, .
8. The accounting records of @ill Corporation re)ealed the following selected costs" 1ales
commissions, 3/5,5556 plant super)ision, 38/,5556 and administrati)e e(penses, 31;2,555. @ill7s
period costs total"
A. 3/5,555.
B. 38/,555.
C. 31;2,555.
D. 3&&2,555.
!. 3+18,555.
Answer" D #$" & Type" A
18 Hilton, Managerial Accounting, Seventh Edition
15. Which of the following entities would most li<ely ha)e raw materials, wor< in process, and
finished goods?
A. !((on Corporation.
B. :acy7s Department 1tore.
C. Wendy7s.
D. 1outhwest Airlines.
!. Colum*ia Ani)ersity.
Answer" A #$" + Type" .
11. 1elling and administrati)e e(penses would li<ely appear on the *alance sheet of"
A. The ,ap.
B. Te(as 0nstruments.
C. Turner Broadcasting 1ystem.
D. all of the a*o)e firms.
!. none of the a*o)e firms.
Answer" ! #$" + Type" .
1&. Which of the following in)entories would a discount retailer such as Wal-:art report as an asset?
A. %aw materials.
B. Wor< in process.
C. >inished goods.
D. :erchandise in)entory.
!. All of the a*o)e.
Answer" D #$" + Type" %C
1+. Which of the following in)entories would a company ordinarily hold for sale?
A. %aw materials.
B. Wor< in process.
C. >inished goods.
D. %aw materials and finished goods.
!. Wor< in process and finished goods.
Answer" C #$" + Type" %C
1/. Beno Corporation engages in mass customiation and direct sales, the latter *y accepting
customer orders o)er the 0nternet. As a result, Beno"
A. would pro*a*ly *egin the manufacturing process upon receipt of a customer7s order.
B. would typically ha)e fairly low in)entory le)els for the amount of sales re)enue generated.
C. would typically ha)e fairly high in)entory le)els for the amount of sales re)enue generated.
D. would li<ely find choices "A" and "B" to *e applica*le.
!. would li<ely find choices "A" and "C" to *e applica*le.
Answer" D #$" / Type" %C
Chapter 2 19
12. Companies that engage in mass customiation"
A. tend to ha)e a relati)ely low production )olume.
B. tend to ha)e a high production )olume that in)ol)es highly standardied end-products.
C. tend to ha)e a high production )olume, many standardied components, and customer-
specified com*inations of components.
D. tend to ha)e a high production )olume, many uniCue components, and customer-specified
com*inations of components.
!. could *e typified *y the refining operations of 1hell $il.
Answer" C #$" / Type" %C
19. :idwest :otors manufactures automo*iles. Which of the following would not *e classified as
direct materials *y the company?
A. 1heet metal used in the automo*ile7s *ody.
B. Tires.
C. 0nterior leather.
D. CD player.
!. Wheel lu*ricant.
Answer" ! #$" 2 Type" .
14. Which of the following employees of a commercial printerDpu*lisher would *e classified as direct
la*or?
A. Boo< *inder.
B. 'lant security guard.
C. 1ales representati)e.
D. 'lant super)isor.
!. 'ayroll super)isor.
Answer" A #$" 2 Type" .
1;. .orwood Appliance produces washers and dryers in an assem*ly-line process. #a*or costs
incurred during a recent period were" corporate e(ecuti)es, 3155,5556 assem*ly-line wor<ers,
3;5,5556 security guards, 31;,5556 and plant super)isor, 3+5,555. The total of .orwood7s direct
la*or cost was"
A. 3;5,555.
B. 38;,555.
C. 3115,555.
D. 31&;,555.
!. 3&&;,555.
Answer" A #$" 2 Type" A
20 Hilton, Managerial Accounting, Seventh Edition
18. Which of the following employees would not *e classified as indirect la*or?
A. Custodian.
B. 1alesperson.
C. Assem*ler of wooden furniture.
D. 'lant security guard.
!. Choices "B" and "C."
Answer" ! #$" 2 Type" %C, .
&5. Depreciation of factory eCuipment would *e classified as"
A. operating cost.
B. "other" cost.
C. manufacturing o)erhead.
D. depreciation e(pense.
!. administrati)e cost.
Answer" C #$" 2 Type" %C
&1. Which of the following costs is not a component of manufacturing o)erhead?
A. 0ndirect materials.
B. >actory utilities.
C. >actory eCuipment.
D. 0ndirect la*or.
!. 'roperty ta(es on the manufacturing plant.
Answer" C #$" 2 Type" %C
&&. The accounting records of Westcott Company re)ealed the following costs"
>actory utilities 3 +2,555
Wages of assem*ly-line personnel 145,555
Customer entertainment /2,555
0ndirect materials used 18,555
Depreciation on salespersons7 cars 21,555
'roduction eCuipment rental costs 115,555
Costs that would *e considered in the calculation of manufacturing o)erhead total"
A. 319/,555.
B. 3&12,555.
C. 3+;2,555.
D. 3/+5,555.
!. some other amount.
Answer" A #$" 2 Type" A
Chapter 2 21
&+. Which of the following statements is =are? correct?
A. $)ertime premiums should *e treated as a component of manufacturing o)erhead.
B. $)ertime premiums should *e treated as a component of direct la*or.
C. 0dle time should *e treated as a component of direct la*or.
D. 0dle time should *e accounted for as a special type of loss.
!. Both "B" and "C" are correct.
Answer" A #$" 2 Type" %C
&/. Con)ersion costs are"
A. direct material, direct la*or, and manufacturing o)erhead.
B. direct material and direct la*or.
C. direct la*or and manufacturing o)erhead.
D. prime costs.
!. period costs.
Answer" C #$" 2 Type" %C
&2. 'rime costs are comprised of"
A. direct materials and manufacturing o)erhead.
B. direct la*or and manufacturing o)erhead.
C. direct materials, direct la*or, and manufacturing o)erhead.
D. direct materials and direct la*or.
!. direct materials and indirect materials.
Answer" D #$" 2 Type" %C
&9. Which of the following statements is true?
A. 'roduct costs affect only the *alance sheet.
B. 'roduct costs affect only the income statement.
C. 'eriod costs affect only the *alance sheet.
D. 'eriod costs affect *oth the *alance sheet and the income statement.
!. 'roduct costs e)entually affect *oth the *alance sheet and the income statement.
Answer" ! #$" 9 Type" .
&4. 0n a manufacturing company, the cost of goods completed during the period would include which
of the following elements?
A. %aw materials used.
B. Beginning finished goods in)entory.
C. :ar<eting costs.
D. Depreciation of deli)ery truc<s.
!. :ore than one of the a*o)e.
Answer" A #$" 9 Type" %C
22 Hilton, Managerial Accounting, Seventh Edition
&;. Which of the following eCuations is used to calculate cost of goods sold during the period?
A. Beginning finished goods E cost of goods manufactured E ending finished goods.
B. Beginning finished goods - ending finished goods.
C. Beginning finished goods E cost of goods manufactured.
D. Beginning finished goods E cost of goods manufactured - ending finished goods.
!. Beginning finished goods E ending finished goods - cost of goods manufactured.
Answer" D #$" 9 Type" %C
&8. Wor<-in-process in)entory is composed of"
A. direct material and direct la*or.
B. direct la*or and manufacturing o)erhead.
C. direct material and manufacturing o)erhead.
D. direct material only.
!. direct material, direct la*or, and manufacturing o)erhead.
Answer" ! #$" 9 Type" %C
+5. >ort Walton 0ndustries *egan Fuly with a finished-goods in)entory of 3/;,555. The finished-
goods in)entory at the end of Fuly was 3/1,555 and the cost of goods sold during the month was
31&2,555. The cost of goods manufactured during Fuly was"
A. 344,555.
B. 3;/,555.
C. 311;,555.
D. 31+&,555.
!. some other amount.
Answer" C #$" 9 Type" A
+1. Gansas 'lating Company reported a cost of goods manufactured of 3&95,555, with the firm7s
year-end *alance sheet re)ealing wor< in process and finished goods of 3+2,555 and 394,555,
respecti)ely. 0f supplemental information disclosed raw materials used in production of 3/5,555,
direct la*or of 345,555, and manufacturing o)erhead of 31&5,555, the company7s *eginning wor<
in process must ha)e *een"
A. 32,555.
B. 3+4,555.
C. 392,555.
D. 384,555.
!. some other amount.
Answer" C #$" 9 Type" A
Chapter 2 23
+&. The accounting records of Bronco Company re)ealed the following information"
%aw materials used 3 95,555
Direct la*or 1&2,555
:anufacturing o)erhead +95,555
Wor<-in-process in)entory, 1D1 25,555
>inished-goods in)entory, 1D1 1;8,555
Wor<-in-process in)entory, 1&D+1 49,555
>inished-goods in)entory, 1&D+1 1/5,555
Bronco7s cost of goods manufactured is"
A. 3218,555.
B. 32&&,555.
C. 329;,555.
D. 3241,555.
!. some other amount.
Answer" A #$" 9 Type" A
++. The accounting records of Dolphin Company re)ealed the following information"
Total manufacturing costs 32+5,555
Wor<-in-process in)entory, Fan. 1 29,555
Wor<-in-process in)entory, Dec. +1 4;,555
>inished-goods in)entory, Fan. 1 1/9,555
>inished-goods in)entory, Dec. +1 1&+,555
Dolphin7s cost of goods sold is"
A. 325;,555.
B. 32&8,555.
C. 32+1,555.
D. 322+,555.
!. some other amount.
Answer" C #$" 9 Type" A
+/. >or the year Hust ended, Cole Corporation7s manufacturing costs =raw materials used, direct la*or,
and manufacturing o)erhead? totaled 31,255,555. Beginning and ending wor<-in-process
in)entories were 395,555 and 385,555, respecti)ely. Cole7s *alance sheet also re)ealed
respecti)e *eginning and ending finished-goods in)entories of 3&25,555 and 31;5,555. $n the
*asis of this information, how much would the company report as cost of goods manufactured
=C,:? and cost of goods sold =C,1??
A. C,:, 31,/+5,5556 C,1, 31,/95,555.
B. C,:, 31,/45,5556 C,1, 31,2/5,555.
C. C,:, 31,2+5,5556 C,1, 31,/95,555.
D. C,:, 31,245,5556 C,1, 31,2/5,555.
!. 1ome other amounts.
Answer" B #$" 9 Type" A
24 Hilton, Managerial Accounting, Seventh Edition
+2. #eggio 0ndustries reported the following data for the year Hust ended" sales re)enue, 3825,5556
cost of goods sold, 3/&5,5556 cost of goods manufactured, 3++5,5556 and selling and
administrati)e e(penses, 3145,555. #eggio7s gross margin would *e"
A. 3+5,555.
B. 3&55,555.
C. 3+95,555.
D. 32+5,555.
!. 39&5,555.
Answer" D #$" 9 Type" A
+9. 'ump<in !nterprises *egan operations on Fanuary 1, &5(1, with all of its acti)ities conducted
from a single facility. The company7s accountant concluded that the year7s *uilding depreciation
should *e allocated as follows" selling acti)ities, &5I6 administrati)e acti)ities, +2I6 and
manufacturing acti)ities, /2I. 0f 'ump<in sold 95I of &5(1 production during that year, what
percentage of the depreciation would appear =either directly or indirectly? on the &5(1 income
statement?
A. &4I.
B. /2I.
C. 22I.
D. ;&I.
!. 155I.
Answer" D #$" 9 Type" A
+4. An employee accidentally o)erstated the year7s ad)ertising e(pense *y 325,555. Which of the
following correctly depicts the effect of this error?
A. Cost of goods manufactured will *e o)erstated *y 325,555.
B. Cost of goods sold will *e o)erstated *y 325,555.
C. Both cost of goods manufactured and cost of goods sold will *e o)erstated *y 325,555.
D. Cost of goods sold will *e o)erstated *y 325,555, and cost of goods manufactured will *e
understated *y 325,555.
!. .one of the a*o)e.
Answer" ! #$" 9 Type" A
+;. Which of the following would li<ely *e a cost dri)er for the amount of direct materials used?
A. The num*er of units sold.
B. The num*er of direct la*or hours wor<ed.
C. The num*er of machine hours wor<ed.
D. The num*er of employees wor<ing in the factory.
!. The num*er of units produced.
Answer" ! #$" 4 Type" .
Chapter 2 2
+8. The choices *elow depict fi)e costs of Benton Corporation and a possi*le dri)er for each cost.
Which of these choices li<ely contains an inappropriate cost dri)er?
A. ,asoline consumed6 num*er of miles dri)en.
B. :anufacturing o)erhead incurred in a hea)ily automated facility6 direct la*or hours.
C. 1ales commissions6 gross sales re)enue.
D. Building maintenance cost6 *uilding sCuare footage.
!. 'ersonnel department cost6 num*er of employees.
Answer" B #$" 4 Type" .
/5. Jaria*le costs are those costs that"
A. )ary in)ersely with changes in acti)ity.
B. )ary directly with changes in acti)ity.
C. remain constant as acti)ity changes.
D. decrease on a per-unit *asis as acti)ity increases.
!. increase on a per-unit *asis as acti)ity increases.
Answer" B #$" ; Type" %C
/1. As acti)ity decreases, unit )aria*le cost"
A. increases proportionately with acti)ity.
B. decreases proportionately with acti)ity.
C. remains constant.
D. increases *y a fi(ed amount.
!. decreases *y a fi(ed amount.
Answer" C #$" ; Type" %C
/&. Which of the following is not an e(ample of a )aria*le cost?
A. 1traight-line depreciation on a machine that has a fi)e-year ser)ice life.
B. Wages of manufacturing wor<ers whose pay is *ased on hours wor<ed.
C. Tires used in the production of tractors.
D. Aluminum used to ma<e patio furniture.
!. Commissions paid to sales personnel.
Answer" A #$" ; Type" .
/+. >i(ed costs are those costs that"
A. )ary directly with changes in acti)ity.
B. )ary in)ersely with changes in acti)ity.
C. remain constant on a per-unit *asis.
D. increase on a per-unit *asis as acti)ity increases.
!. remain constant as acti)ity changes.
Answer" ! #$" ; Type" %C
2! Hilton, Managerial Accounting, Seventh Edition
//. The fi(ed cost per unit"
A. will increase as acti)ity increases.
B. will increase as acti)ity decreases.
C. will decrease as acti)ity increases.
D. will remain constant.
!. will e(hi*it the *eha)ior descri*ed in choices "B" and "C."
Answer" ! #$" ; Type" .
/2. Which of the following is an e(ample of a fi(ed cost?
A. 'aper used in the manufacture of te(t*oo<s.
B. 'roperty ta(es paid *y a firm to the City of #os Angeles.
C. The wages of part-time wor<ers who are paid 3; per hour.
D. ,asoline consumed *y salespersons7 cars.
!. 1urgical supplies used in a hospital7s operating room.
Answer" B #$" ; Type" .
/9. The )aria*le costs per unit are 3/ when a company produces 15,555 units of product. What are
the )aria*le costs per unit when ;,555 units are produced?
A. 3/.55.
B. 3/.25.
C. 32.55.
D. 32.25.
!. 1ome other amount.
Answer" A #$" ; Type" A
/4. The fi(ed costs per unit are 315 when a company produces 15,555 units of product. What are the
fi(ed costs per unit when 1&,255 units are produced?
A. 3/.
B. 39.
C. 3;.
D. 315.
!. 1ome other amount.
Answer" C #$" ; Type" A
/;. Total costs are 31&5,555 when 15,555 units are produced6 of this amount, )aria*le costs are
3/;,555. What are the total costs when 1&,555 units are produced?
A. 324,955.
B. 34&,555.
C. 31&5,555.
D. 31&8,955.
!. 31//,555.
Answer" D #$" ; Type" A
Chapter 2 27
/8. Ba(ter Company, which pays a 15I commission to its salespeople, reported sales re)enues of
3&15,555 for the period Hust ended. 0f fi(ed and )aria*le sales e(penses totaled 329,555, what
would these e(penses total at sales of 319;,555?
A. 319,;55.
B. 3+2,555.
C. 3//,;55.
D. 321,;55.
!. 1ome other amount.
Answer" D #$" ; Type" A
25. Which of the following would not *e characteried as a cost o*Hect?
A. An automo*ile manufactured *y ,eneral :otors.
B. The .ew Kor< >ire Department.
C. A Burger Ging restaurant located in Cle)eland, $hio.
D. A Delta Airlines flight from Atlanta to :iami.
!. All of the a*o)e are e(amples of cost o*Hects.
Answer" ! #$" 8 Type" .
21. Costs that can *e easily traced to a specific department are called"
A. direct costs.
B. indirect costs.
C. product costs.
D. manufacturing costs.
!. processing costs.
Answer" A #$" 8 Type" %C
2&. Which of the following would not *e considered a direct cost with respect to the ser)ice
department of a new car dealership?
A. Wages of repair techniCues.
B. 'roperty ta(es paid *y the dealership.
C. %epair parts consumed.
D. 1alary of the department manager.
!. Depreciation on new eCuipment used to analye engine pro*lems.
Answer" B #$" 8 Type" .
2+. 0ndirect costs"
A. can *e traced to a cost o*Hect.
B. cannot *e traced to a particular cost o*Hect.
C. are not important.
D. are always )aria*le costs.
!. may *e indirect with respect to Disney World *ut direct with respect to one its maHor
components, !pcot Center.
Answer" B #$" 8 Type" %C, .
28 Hilton, Managerial Accounting, Seventh Edition
2/. The salary that is sacrificed *y a college student who pursues a degree full time is a=n?"
A. sun< cost.
B. out-of-poc<et cost.
C. opportunity cost.
D. differential cost.
!. marginal cost.
Answer" C #$" 15 Type" .
22. The tuition that will *e paid ne(t semester *y a college student who pursues a degree is a=n?"
A. sun< cost.
B. out-of-poc<et cost.
C. indirect cost.
D. a)erage cost.
!. marginal cost.
Answer" B #$" 15 Type" .
29. Which of the following costs should *e ignored when choosing among alternati)es?
A. $pportunity costs.
B. 1un< costs.
C. $ut-of-poc<et costs.
D. Differential costs.
!. .one of the a*o)e.
Answer" B #$" 15 Type" %C
24. 0f the total cost of alternati)e A is 325,555 and the total cost of alternati)e B is 3+/,555, then
319,555 is termed the"
A. opportunity cost.
B. a)erage cost.
C. sun< cost.
D. out-of-poc<et cost.
!. differential cost.
Answer" ! #$" 15 Type" .
Ase the following to answer Cuestions 2;-28"
Wee Care is a nursery school for pre-<indergarten children. The school has determined that the following
*iwee<ly re)enues and costs occur at different le)els of enrollment"
.um*er of
1tudents !nrolled Total %e)enue Total Costs
15 3+,555 3&,155
12 /,255 &,455
19 /,;55 &,;55
&5 9,555 +,&55
&1 9,+55 +,&22
Chapter 2 29
2;. The marginal cost when the twenty-first student enrolls in the school is"
A. 322.
B. 3122.
C. 3+55.
D. 3+,5/2.
!. 3+,&22.
Answer" A #$" 15 Type" A
28. The a)erage cost per student when 19 students enroll in the school is"
A. 3155.
B. 31&2.
C. 3142.
D. 3+55.
!. 3/55.
Answer" C #$" 15 Type" A
95. The costs that follow all ha)e applica*ility for a manufacturing enterprise. Which of the choices
listed correctly denotes the costsL applica*ility for a ser)ice pro)ider?
'eriod Cost Ancontrolla*le Cost $pportunity Cost
Applica*le Applica*le .ot applica*le
Applica*le .ot applica*le Applica*le
Applica*le Applica*le Applica*le
.ot applica*le Applica*le Applica*le
.ot applica*le Applica*le .ot applica*le
Answer" C #$" 15 Type" %C
E$E%CI"E"
Cost Concepts& 'ifferent T(pes of Entities
91. Consider the three firms that follow" =1? Continental Airlines, =&? B:W, and =+? Target. These
firms, e(amples of ser)ice pro)iders, manufacturers, and merchandisers, tend to ha)e different
characteristics with respect to costs and financial-statement disclosures.
%eCuired"
Determine which of the preceding firms =1, &, andDor +? would li<ely"
A. Disclose operating e(penses on the income statement.
B. @a)e product costs.
C. @a)e period costs.
D. Disclose cost of cost good sold on the income statement.
!. @a)e no meaningful in)estment in in)entory.
>. :aintain raw-material, wor<-in-process, and finished-goods in)entories.
,. @a)e )aria*le and fi(ed costs.
#$" &, +, ; Type" .
30 Hilton, Managerial Accounting, Seventh Edition
Answer"
A. 1, &, + !. 1
B. &, + >. &
C. 1, &, + ,. 1, &, +
D. &, +
Content of )inancia* "tatements and %eports
9&. Consider the following cost items"
1. 1ales commissions earned *y a company7s sales force.
&. %aw materials purchased during the period.
+. Current year7s depreciation on a firm7s manufacturing facilities.
/. Kear-end completed production of a carpet manufacturer.
2. The cost of products sold to customers of an apparel store.
9. Wages earned *y machine operators in a manufacturing plant.
4. 0ncome ta(es incurred *y an airline.
;. :ar<eting costs of an electronics manufacturer.
8. 0ndirect la*or costs incurred *y a manufacturer of office eCuipment.
%eCuired"
A. !)aluate the costs Hust cited and determine whether the associated dollar amounts would *e
found on the firm7s *alance sheet, income statement, or schedule of cost of goods
manufactured.
B. What maHor asset will normally *e insignificant for ser)ice enterprises and relati)ely
su*stantial for retailers, wholesalers, and manufacturers? Briefly discuss.
C. Briefly e(plain the similarity and difference *etween the merchandise in)entory of a retailer
and the finished-goods in)entory of a manufacturer.
#$" +, 9 Type" .
Answer"
A. 1. 0ncome statement
&. 1chedule of cost of goods manufactured
+. 1chedule of cost of goods manufactured
/. Balance sheet
2. 0ncome statement
9. 1chedule of cost of goods manufactured
4. 0ncome statement
;. 0ncome statement
8. 1chedule of cost of goods manufactured
B. The asset that differs among these *usinesses is in)entory. 1er)ice *usinesses
typically carry no =or )ery little? in)entory. %etailers and wholesalers normally stoc<
considera*le in)entory. :anufacturers also carry significant in)entories, typically
su*di)ided in three categories" raw materials, wor< in process, and finished goods.
C. The similarity" Both in)entories are carried for sale *y the respecti)e *usinesses. The
difference" %etailers purchase merchandise in)entory6 in contrast, manufacturing firms
produce their goods.
Chapter 2 31
Identification of Product Costs and Period Costs+ Cost Beha,ior
9+. !astside :anufacturing produces small electric engines. 0dentify the following costs as direct
materials =D:?, direct la*or =D#?, manufacturing o)erhead =:$@?, or a period cost ='C?. Also
indicate whether the cost is )aria*le =J? or fi(ed =>? with respect to *eha)ior.
A. Commissions paid to salespeople
B. 1traight-line depreciation on the factory *uilding
C. 1alary of the plant super)isor
D. Wages of the assem*ly-line wor<ers
!. :achine lu*ricant used in production acti)ities
>. !ngine casings used in production acti)ities
,. Ad)ertising placed in trade Hournals
@. #ease payments for the president7s automo*ile
0. 'roperty ta(es paid on the factory facilities
#$" &, 2, ; Type" .
Answer"
A. 'C, J
B. :$@, >
C. :$@, >
D. D#, J
!. :$@, J
>. D:, J
,. 'C, >
@. 'C, >
0. :$@, >
32 Hilton, Managerial Accounting, Seventh Edition
Identification of Product Costs and Period Costs+ Cost Beha,ior
9/. Consider the following items"
A. Tomatoes used in the manufacture of @ein <etchup
B. Administrati)e salaries of e(ecuti)es employed *y 1outhwest Airlines
C. Wages of assem*ly-line wor<ers at a >ord plant
D. :ar<eting e(penditures of the #os Angeles Dodgers *ase*all clu*
!. Commissions paid to Coca-Cola7s salespeople
>. 1traight-line depreciation on manufacturing eCuipment owned *y Dell Computer
,. 1hipping charges incurred *y $ffice Depot on out-going orders
@. 1pea<ers used in 1ony home-theater systems
0. 0nsurance costs related to a :ary Gay Cosmetics7 manufacturing plant
%eCuired"
Complete the ta*le that follows and classify each of the costs listed as =1? a product or period cost
and =&? a )aria*le or fi(ed cost *y placing an "M" in the appropriate column.
'roduct or 'eriod Cost Jaria*le or >i(ed Cost
0tem 'roduct 'eriod Jaria*le >i(ed
A
B
C
D
!
>
,
@
0
#$" &, 2, ; Type" .
Answer"
'roduct or 'eriod Cost Jaria*le or >i(ed Cost
0tem 'roduct 'eriod Jaria*le >i(ed
A M M
B M M
C M M
D M M
! M M
> M M
, M M
@ M M
0 M M
Chapter 2 33
Identification of -arious Cost Concepts
92. The following selected costs were e(tracted from the accounting records of #os Angeles
:achining =#A:?"
1. Direct materials used in production
&. Wages of machine operators
+. >actory utilities
/. 1ales commissions
2. 1alary of #A:7s president
9. >actory depreciation
4. Wages of plant security guards
;. Ancollecti*le accounts e(pense
8. :achine lu*ricant used in production
%eCuired"
By the use of num*ers, identify the costs that would *e used to calculate"
A. cost of goods manufactured.
B. manufacturing o)erhead.
C. total period costs.
D. total con)ersion costs.
!. total direct costs of #A:7s credit and collections department.
>. #A:7s in)entory )aluation.
#$" &, 2, 9, 8 Type" .
Answer"
A. 1, &, +, 9, 4, 8
B. +, 9, 4, 8
C. /, 2, ;
D. &, +, 9, 4, 8
!. ;
>. 1, &, +, 9, 4, 8
34 Hilton, Managerial Accounting, Seventh Edition
Cost of .oods Manufactured and Cost of .oods "o*d
99. 'anama :anufacturing had the following data for the period Hust ended"
Wor< in process, Fan. 1 3 &1,555
Wor< in process, Dec. +1 /5,555
>inished goods, Fan. 1 45,555
>inished goods, Dec. +1 91,555
Direct materials used 1&9,555
Direct la*or &95,555
>actory depreciation ;5,555
1ales 8/2,555
Ad)ertising e(pense 2&,555
>actory utilities &4,555
0ndirect materials 18,555
0ndirect la*or +2,555
%eCuired"
A. Calculate 'anama7s cost of goods manufactured.
B. Calculate 'anama7s cost of goods sold.
#$" 9 Type" A
Answer"
A. Direct materials used 31&9,555
Direct la*or &95,555
:anufacturing o)erhead"
>actory depreciation ;5,555
>actory utilities &4,555
0ndirect materials 18,555
0ndirect la*or +2,555
Total manufacturing costs 32/4,555
Add" Wor< in process, Fan. 1 &1,555
329;,555
Deduct" Wor< in process, Dec. +1 /5,555
Cost of goods manufactured 32&;,555
B. >inished goods, Fan. 1 3 45,555
Add" Cost of goods manufactured 2&;,555
,oods a)aila*le for sale 328;,555
Deduct" >inished goods, Dec. +1 91,555
Cost of goods sold 32+4,555
Chapter 2 3
Income/%e*ated Computations
94. @ampton Company had the following in)entory *alances at the *eginning and end of the year"
Fanuary 1 Decem*er +1
%aw material 3 25,555 3 +2,555
Wor< in process 1+5,555 145,555
>inished goods &;5,555 &22,555
During the year, the company purchased 3155,555 of raw material and spent 3+/5,555 on direct
la*or. $ther data" manufacturing o)erhead incurred, 3/25,5556 sales, 31,295,5556 selling and
administrati)e e(penses, 385,5556 income ta( rate, +5I.
%eCuired"
A. Calculate cost of goods manufactured.
B. Calculate cost of goods sold.
C. Determine @ampton7s net income.
#$" 9 Type" A
Answer"
A. Direct materials used"
%aw materials, Fan. 1 3 25,555
Add" 'urchases 155,555
%aw materials a)aila*le for use 3125,555
Deduct" %aw material, Dec. +1 +2,555
%aw material used 3 112,555
Direct la*or +/5,555
:anufacturing o)erhead /25,555
Total manufacturing costs 3 852,555
Add" Wor< in process, Fan. 1 1+5,555
31,5+2,555
Deduct" Wor< in process, Dec. +1 145,555
Cost of goods manufactured 3 ;92,555
B. >inished goods, Fan. 1 3 &;5,555
Add" Cost of goods manufactured ;92,555
Cost of goods a)aila*le for sale 31,1/2,555
Deduct" >inished goods, Dec. +1 &22,555
Cost of goods sold 3 ;85,555
C. 1ales re)enue 31,295,555
#ess" Cost of goods sold ;85,555
,ross margin 3 945,555
#ess" 1elling and administrati)e e(penses 85,555
0ncome *efore ta(es 3 2;5,555
0ncome ta( e(pense =32;5,555 ( +5I? 14/,555
.et income 3 /59,555
3! Hilton, Managerial Accounting, Seventh Edition
E*ements of )inancia* "tatements
9;. The following selected information was e(tracted from the &5(+ accounting records of :iami
'roducts"
%aw materials used 3&;/,555
Direct la*or 14;,555
0ndirect la*or +2,555
1elling and administrati)e salaries &25,555
Building depreciationN ++5,555
$ther selling and administrati)e e(penses ;5,555
$ther factory costs 9&5,555
N1e)enty percent of the company7s *uilding was de)oted to production acti)ities6 the
remaining +5I was used for selling and administrati)e functions.
:iami7s *eginning and ending wor<-in-process in)entories amounted to 3+59,555 and 3&/2,555,
respecti)ely. The company7s *eginning and ending finished-goods in)entories were 3/25,555
and 3//5,555, respecti)ely.
%eCuired"
A. Calculate :iami7s manufacturing o)erhead for the year.
B. Calculate :iami7s cost of goods manufactured.
C. Compute the company7s cost of goods sold.
#$" 2, 9 Type" A
Answer"
A. 0ndirect la*or 3 +2,555
Building depreciation =3++5,555 ( 45I? &+1,555
$ther factory costs 9&5,555
Total 3 ;;9,555
B. %aw material used 3 &;/,555
Direct la*or 14;,555
:anufacturing o)erhead ;;9,555
Total manufacturing costs 31,+/;,555
Add" Wor< in process, *eg. +59,555
31,92/,555
Deduct" Wor< in process, end. &/2,555
Cost of goods manufactured 31,/58,555
C. >inished goods, *eg. 3 /25,555
Add" Cost of goods manufactured 1,/58,555
Cost of goods a)aila*le for sale 31,;28,555
Deduct" >inished goods, end. //5,555
Cost of goods sold 31,/18,555
Chapter 2 37
Income and )inancia*/"chedu*e Ca*cu*ations: 0or1ing Bac12ards
98. The selected amounts that follow were ta<en from Gentuc<y Corporation7s accounting records"
%aw material used 3 &4,555
Direct la*or +2,555
Total manufacturing costs 15/,555
Wor<-in-process in)entory, 1D1 18,555
Cost of goods manufactured 155,555
Cost of goods a)aila*le for sale 142,555
>inished-goods in)entory, 1&D+1 95,555
1ales re)enue +55,555
1elling and administrati)e e(penses 1&2,555
0ncome ta( e(pense 1;,555
%eCuired"
Compute the following"
A. :anufacturing o)erhead.
B. Wor<-in-process in)entory, 1&D+1.
C. >inished-goods in)entory, 1D1.
D. Cost of goods sold.
!. ,ross margin.
>. .et income.
#$" 9 Type" A
Answer"
A. Total manufacturing costs 315/,555
#ess" %aw material used 3&4,555
Direct la*or +2,555 9&,555
:anufacturing o)erhead 3 /&,555
B. Total manufacturing costs 315/,555
Add" Wor<-in-process in)entory, 1D1 18,555
31&+,555
#ess" Cost of goods manufactured 155,555
Wor<-in-process in)entory, 1&D+1 3 &+,555
C. Cost of goods a)aila*le for sale 3142,555
#ess" Cost of goods manufactured 155,555
>inished-goods in)entory, 1D1 3 42,555
D. Cost of goods a)aila*le for sale 3142,555
#ess" >inished-goods in)entory, 1&D+1 95,555
Cost of goods sold 3112,555
!. 1ales re)enue 3+55,555
#ess" Cost of goods sold 112,555
,ross margin 31;2,555
38 Hilton, Managerial Accounting, Seventh Edition
>. ,ross margin 31;2,555
#ess" 1elling and administrati)e e(penses 31&2,555
0ncome ta( e(pense 1;,555 1/+,555
.et income 3 /&,555
)*o2 of Costs+ Missing -a*ues
45. The :orton Company recorded the following transactions for >e*ruary &5(1"
:aterials Wor< in 'rocess >inished ,oods
'urchases 3155,555
Beginning in)entory 1;,555 3 ;,555 3 !
!nding in)entory A &5,555 +5,555
Direct materials used 85,555
Direct la*or B
:anufacturing o)erhead
=includes indirect materials used
of 315,555? 112,555
Transferred to finished goods C
Cost of goods sold D
1ales were 3295,555, with sales prices determined *y adding a /5I mar<up to the firm7s
manufacturing cost. The total cost of direct materials used, direct la*or, and manufacturing
o)erhead during the month was 3&;2,555.
%eCuired"
Calculate the missing )alues.
#$" 9 Type" A
Answer"
"te# A$
Beginning materials 3 1;,555
Add" 'urchases 155,555
#ess" Direct materials used =85,555?
#ess" 0ndirect materials used =15,555 ?
!nding materials 3 1;,555
"te# %$
Total production costs 3 &;2,555
#ess" Direct materials used =85,555?
#ess" :anufacturing o)erhead =112,555 ?
Direct la*or 3 ;5,555
"te# C$
Beginning wor< in process 3 ;,555
Add" Total production costs &;2,555
#ess" !nding wor< in process =&5,555 ?
Transferred to finished goods 3&4+,555
Chapter 2 39
"te# &$
1ales 3295,555
Di)ided *y rate 1/5I
Cost of goods sold 3/55,555
"te# E$
!nding finished goods 3 +5,555
Add" Cost of goods sold /55,555
#ess" Transferred to finished goods =&4+,555 ?
Beginning finished goods 3124,555
)i3ed and -aria4*e Cost Beha,ior
41. :ighty :uffler, 0nc., operates an automo*ile ser)ice facility. The ta*le *elow shows the cost
incurred during a month when 955 mufflers were replaced.
.um*er of :uffler %eplacements
255 955 455
Total costs"
>i(ed costs A 3 ;,/55 C
Jaria*le costs B 9,555 D
Total costs ! 31/,/55 >
Cost per muffler replacement"
>i(ed cost , @ 0
Jaria*le cost F G #
Total cost per muffler replacement : . $
%eCuired"
>ill in the missing amounts, la*eled A through $, in the ta*le.
#$" ; Type" A
40 Hilton, Managerial Accounting, Seventh Edition
Answer"
.um*er of :uffler %eplacements
255 955 455
Total costs"
>i(ed costs 3 ;,/55.55 3 ;,/55.55 3 ;,/55.55
Jaria*le costs 2,555.55 9,555.55 4,555.55
Total costs 31+,/55.55 31/,/55.55 312,/55.55
Cost per muffler replacement"
>i(ed cost 3 19.;5 3 1/.55 3 1&.55
Jaria*le cost 15.55 15.55 15.55
Total cost per muffler replacement 3 &9.;5 3 &/.55 3 &&.55
E'planator( note)$
A and C each eCual 3;,/55, since fi(ed costs do not )ary with acti)ity.
F, G, and # each eCual 315 =39,555 O 955?, since )aria*le cost per replacement remains
constant.
B eCuals 32,555 =255 ( 315?
D eCuals 34,555 =455 ( 315?
, eCuals 319.;5 =3;,/55 O 255?
@ eCuals 31/.55 =3;,/55 O 955?
0 eCuals 31&.55 =3;,/55 O 455?
Chapter 2 41
)i3ed and -aria4*e Cost Beha,ior
4&. ,lo*al 1ystems *egan *usiness on Fanuary 1 of the current year, producing a single product that
is popular with home *uilders. Demand was )ery strong, allowing the company to sell its entire
manufacturing output of ;5,555 units. The following unit costs were incurred"
:anufacturing costs"
Direct materials 312
Direct la*or ;
Jaria*le o)erhead 11
>i(ed o)erhead 9
1elling and administrati)e costs"
Jaria*le 2
>i(ed &

,lo*al anticipates an increase in producti)e output to 155,555 units and sales of 82,555 units in
the ne(t accounting period. The company uses appropriate dri)ers to determine cost *eha)ior and
estimates.
%eCuired"
A. Assuming that present cost *eha)ior patterns continue, compute the total e(pected costs in
the upcoming accounting period.
B. ,eorge #e)y is a*out to prepare a graph that shows the unit cost *eha)ior for )aria*le selling
and administrati)e cost. 0f the graphLs horiontal a(is is )olume and the )ertical a(is is
dollars, *riefly descri*e what ,eorgeLs graph should loo< li<e.
C. Determine whether the following costs are )aria*le or fi(ed in terms of *eha)ior"
1. Kearly lease payments for a state-of-the-art cutting machine.
&. A fee paid to a consultant who pro)ided ad)ice a*out Cuality issues. The fee was *ased
on the num*er of consulting hours pro)ided.
+. Cost of an awards dinner for "star" salespeople.
#$" 4, ; Type" A, .
Answer"
Direct materials =155,555 ( 312? 31,255,555
Direct la*or =155,555 ( 3;? ;55,555
Jaria*le o)erhead =155,555 ( 311? 1,155,555
>i(ed o)erhead =;5,555 ( 39? /;5,555
Jaria*le selling and administrati)e =82,555 ( 32? /42,555
>i(ed selling and administrati)e =;5,555 ( 3&? 195,555
Total costs 3/,212,555
The )aria*le selling and administrati)e costs are constant at 32 per unit. Thus, the graph is
a straight, horiontal line.
>i(ed
Jaria*le
Jaria*le
42 Hilton, Managerial Accounting, Seventh Edition
E*ements of )inancia* "tatements+ Cost Beha,ior
4+. GC :anufacturing, which *egan operations on Fanuary 1 of the current year, produces an
industrial scraper that sells for 3+&2 per unit. 0nformation related to the current year7s acti)ities
follows.
.um*er of scrapers produced &5,555
.um*er of scrapers sold 14,555
Jaria*le costs per unit"
Direct materials 3&2
Direct la*or +2
:anufacturing o)erhead 95
Annual fi(ed costs"
:anufacturing o)erhead 3/55,555
1elling and administrati)e 1/5,555
GC carries its finished-goods in)entory at the a)erage unit cost of production. There was no
wor< in process at year-end.
%eCuired"
A. Compute the company7s a)erage unit cost of production.
B. Determine the cost of the Decem*er +1 finished-goods in)entory.
C. Compute the company7s cost of goods sold.
D. 0f ne(t year7s production increases to &+,555 units and general cost *eha)ior patterns do not
change, what is the li<ely effect on"
1. The direct-la*or cost of 3+2 per unit? Why?
&. The fi(ed manufacturing o)erhead cost of 3/55,555? Why?
#$" 2, 9, ; Type" A
Answer"
A. >i(ed manufacturing o)erhead per unit"
3/55,555 &5,555 scrapers produced P 3&5
A)erage unit manufacturing cost"
Direct materials 3 &2
Direct la*or +2
Jaria*le manufacturing o)erhead 95
>i(ed manufacturing o)erhead &5
A)erage unit cost 31/5
B. 'roduction =units? &5,555
1ales =units? 14,555
!nding finished-goods in)entory =units? +,555
+,555 units ( 31/5 P 3/&5,555
Chapter 2 43
C. >inished goods, Fan. 1 3 ---
Add" Cost of goods manufactured =&5,555 units ( 31/5? &,;55,555
Cost of goods a)aila*le for sale 3&,;55,555
Deduct" >inished goods, Dec. +1 /&5,555
Cost of goods sold 3&,+;5,555
D. 1. .o change. Direct la*or is a )aria*le cost, and the cost per unit will remain constant.
&. .o change. Despite the increase in the num*er of units produced, this is a fi(ed cost,
which remains the same in total.
Economic Characteristics of Costs
4/. The following terms are used to descri*e )arious economic characteristics of costs"
$pportunity cost Differential cost
$ut-of-poc<et cost :arginal cost
1un< cost A)erage cost
%eCuired"
Choose one of the preceding terms to characterie each of the amounts descri*ed *elow. !ach
term may *e used only once.
A. The cost of including one e(tra child in a day-care center.
B. The cost of merchandise in)entory purchased fi)e years ago. The goods are now o*solete.
C. The cost of feeding +55 children in a pu*lic school cafeteria is 3/25 per day, or 31.25 per
child per day. What economic term descri*es this 31.25 cost?
D. The management of a high-rise office *uilding uses +,555 sCuare feet of space in the *uilding
for its own administrati)e functions. This space could *e rented for 3+5,555. What
economic term descri*es this 3+5,555 of lost rental re)enue?
!. The cost of *uilding an automated assem*ly line in a factory is 3455,5556 a manually
operated assem*ly line would cost 3&25,555. What economic term is used to descri*e the
3/25,555 )ariation *etween these two amounts?
>. %efer to the preceding Cuestion and assume that the firm is currently *uilding the assem*ly
line for 3455,555. What economic term is used to descri*e the 3455,555 construction cost?
#$" 15 Type" .
Answer"
A. :arginal cost
B. 1un< cost
C. A)erage cost
D. $pportunity cost
!. Differential cost
>. $ut-of-poc<et cost
44 Hilton, Managerial Accounting, Seventh Edition
'I"CU""IO# !UE"TIO#"
Product Costs and Period Costs
42. :adison Corporation has a single facility that it uses for manufacturing, sales, and administrati)e
acti)ities. 1hould the company7s *uilding depreciation charge *e e(pensed in its entirety or is a
different accounting procedure appropriate? !(plain.
#$" & Type" .
Answer"
The company7s depreciation charge is, in part, a period cost and, in part, a product cost. The
portion that relates to selling and administrati)e acti)ities should *e e(pensed when incurred. 0n
contrast, the portion that relates to manufacturing should *e attached to the goods produced, with
the costs now in)entoried on the *alance sheet.
Product Costs and Period Costs+ Cost )*o2s
49. :anufacturers ha)e esta*lished a cost classification called product costs. Define the term
"product cost" and note where these costs appear in the financial statements. Be specific.
#$" &, 2 Type" %C
Answer"
'roduct costs are costs that relate to the manufacturing process and consist of direct materials,
direct la*or, and manufacturing o)erhead. 1imply stated, these are costs incurred to ma<e a
product.
'roduct costs are attached to the units produced =i.e., wor< in process? and, thus, in)entoried on
the *alance sheet. These costs are later charged to finished goods when the goods are completed.
Another transfer occurs when the finished units are sold, with the costs now transferred to cost of
goods sold on the income statement.
)inancia* "tatements of "er,ice+ %etai*ing+ and Manufacturing )irms
44. The income statements and *alance sheets of ser)ice, retailing, and manufacturing *usinesses
tend to differ.
%eCuired"
A. Which of these *usinesses will disclose a cost-of-goods-sold figure on the income statement?
Why?
B. Briefly descri*e the difference *etween a retailing firm and manufacturer7s disclosure of
in)entories on the *alance sheet.
#$" + Type" %C
Answer"
A. %etailers and manufacturers will disclose a cost-of-goods-sold figure *ecause *oth of these
entities sell goods. 1er)ice *usinesses, in contrast, do not gi)en that such firms pro)ide
ser)ices.
Chapter 2 4
B. A retailer will typically disclose in)entories as one-line item entitled merchandise
in)entories. :anufacturers, on the other hand, carry three different types of in)entories" raw
materials, wor< in process, and finished goods.
'efinition of Cost Terms
4;. 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. :anufacturing o)erhead and direct la*or
#$" 2, 8 Type" %C
Answer"
A. Direct costs are logically and practically related =i.e., easily tracea*le? to a particular cost
o*Hect. An indirect cost, on the other hand, is not. Whether a cost is direct or indirect
depends on the cost o*Hect under consideration. A cost may *e easily tracea*le to a company,
for e(ample, *ut not easily traced to a department of that firm.
B. Direct materials form an integral part of the finished product and, at the same time, are easily
traced to that product. 0ndirect materials, which are part of manufacturing o)erhead,
generally do not meet these guidelines. .ote, though, that some indirect material may *e
easily traced to the product =e.g., fi)e sCuirts of wood glue in a piece of furniture? *ut it may
*e too costly to do so.
C. :anufacturing o)erhead consists of indirect materials, indirect la*or, plant depreciation,
factory utilities, and other factory-related costs. This cost component reflects all
manufacturing costs other than direct materials and direct la*or. Direct la*or, in contrast,
consists of wages of those employees who wor< directly on the goods in production =machine
operators, assem*ly-line wor<ers, and so forth?.
Beha,ior of )i3ed and -aria4*e Costs
48. 0n discussing the operation of his automo*ile, a doctor once o*ser)ed that gasoline is a fi(ed cost
*ecause the cost per gallon is relati)ely sta*le. 0nsurance, on the other hand, is a )aria*le cost
*ecause the cost per mile )aries in)ersely with the num*er of miles dri)en. Comment on the
doctor7s o*ser)ation.
#$" ; Type" .
Answer"
The doctor7s o*ser)ations are incorrect, as gasoline is a )aria*le cost and insurance is a fi(ed cost.
,asoline cost will increase with the num*er of miles dri)en, whereas insurance outlays will
remain the same. The doctor seems to ha)e confused the "total" perspecti)e, as defined *y
accountants, with the notion of per-unit cost *eha)ior.
4! Hilton, Managerial Accounting, Seventh Edition
Economic Characteristics of Costs+ %e*e,ance for 'ecisions
;5. Descri*e the economic characteristics of sun< costs and opportunity costs, and e(plain the impact
that these costs may ha)e on decisions.
#$" 15 Type" %C
Answer"
1un< costs ha)e already *een incurred. They are part of history and cannot *e altered.
Therefore, sun< costs are not rele)ant for any current or future management decision.
$pportunity costs, in contrast, are rele)ant for current and future decisions. 1uch costs are
defined as the net *enefits from a decision alternati)e that was not selectedQthat is, the *enefits
were sacrificed to pursue another option.
Chapter 2 47