COST ACCOUNTING

Select the one best answer for each:

1. Which one of the following would not be classified as manufacturing overhead?

a. Indirect labor
b. Direct materials
c. Insurance on factory building
d. Indirect materials

2. Prime costs of a company are $3,000,000, manufacturing overhead is $1,500,000

and direct labor is $750,000. What is the amount of direct materials?
a. $1,500,000.
b. $750,000.
c. $2,250,000.
d. Cannot be determined from the information provided.

3. An important feature of a job order cost system is that each job

a. must be similar to previous jobs completed.
b. has its own distinguishing characteristics.
c. must be completed before a new job is accepted.
d. consists of one unit of output.

4. When a job is completed and all costs have been accumulated on a job cost sheet,
the journal entry that should be made is
a. Finished Goods Inventory
Direct Materials
Direct Labor
Manufacturing Overhead
b. Work In Process Inventory
Direct Materials
Direct Labor
Manufacturing Overhead
c. Raw Materials Inventory
Work In Process Inventory
d. Finished Goods Inventory
Work In Process Inventory

5. 3,000 units in a process that are 70% complete, are referred to as

a. 3,000 equivalent units of production.
b. 900 equivalent units of production.
c. 2,100 equivalent units of production.
d. 900 unequivalent units of production.
6. Which of the following is correct?
Job Order Process Cost
a. Work in process account several one for each process
b. Work in process account one one
c. Work in process account one one for each process
d. Work in process account several one4.

7. A well-designed activity-based costing system starts with

a. identifying the activity-cost pools.
b. computing the activity-based overhead rate.
c. assigning manufacturing overhead costs for each activity cost pool to
products.
d. analyzing the activities performed to manufacture a product.

8. Which of the following factors would suggest a switch to activity-based costing?

a. Product lines similar in volume and manufacturing complexity.
b. Overhead costs constitute a significant portion of total costs.
c. The manufacturing process has been stable.
d. Production managers use data provided by the existing system.

9. Which of the following is not typical of traditional costing systems?

a. Use of a single predetermined overhead rate.
b. Use of direct labor hours or direct labor cost to assign overhead.
c. Assumption of correlation between direct labor and incurrence of overhead
cost.
d. Use of multiple cost drivers to allocate overhead.

10. An increase in the level of activity will have the following effects on unit costs for
variable and fixed costs:

Unit Variable Cost Unit Fixed Cost

a. Increase Decrease
b. Remains constant Remains constant
c. Decrease Remains constant
d. Remains constant Decrease

11. The relevant range of activity refers to the

a. geographical areas where the company plans to operate.
b. activity level where all costs are curvilinear.
c. levels of activity over which the company expects to operate.
d. level of activity where all costs are constant.
12. The financial budgets include the
a. cash budget and the selling and administrative expense budget.
b. cash budget and the budgeted balance sheet.
c. budgeted balance sheet and the budgeted income statement.
d. cash budget and the production budget.

13. It is important that budgets be accepted by

a. division managers.
b. department heads.
c. supervisors.
d. all of these.

14. If costs are not responsive to changes in activity level, then these costs can be best
described as
a. mixed.
b. flexible.
c. variable.
d. fixed

15. If actual direct material costs are greater than standard direct materials costs, it
means that
a. actual costs were calculated incorrectly.
b. the actual unit price of direct materials was greater than the standard unit price
of direct materials.
c. the actual unit price of raw materials or the actual quantities of raw materials
used was greater than the standard unit price or standard quantities of raw
materials expected.
d. the purchasing agent or the production foreman is inefficient.

16. The per-unit standards for direct labor are 2 direct labor hours at $12 per hour. If in
producing 1,200 units, the actual direct labor cost was $25,600 for 2,000 direct
labor hours worked, the total direct labor variance is
a. $960 unfavorable.
b. $3,200 favorable.
c. $2,000 unfavorable.
d. $3,200 unfavorable.

17. Adler Company manufactures a product with a unit variable cost of $50 and a unit
sales price of $88. Fixed manufacturing costs were $240,000 when 10,000 units
were produced and sold. The company has a one-time opportunity to sell an
additional 3,000 units at $70 each in a foreign market which would not affect its
present sales. If the company has sufficient capacity to produce the additional
units, acceptance of the special order would affect net income as follows:
a. Income would decrease by $12,000.
b. Income would increase by $12,000.
c. Income would increase by $210,000.
d. Income would increase by $60,000.
18. If a plant is operating at full capacity and receives a one-time opportunity to accept
an order at a special price below its usual price, then
a. only variable costs are relevant.
b. fixed costs are not relevant.
c. the order will likely be accepted.
d. the order will likely be rejected.

19. The cost-plus pricing approach's major advantage is

a. it considers customer demand.
b. that sales volume has no effect on per unit costs.
c. it is simple to compute.
d. none of these.

20. Downing Company produces a high resolution computer monitor. The following
information is available for this product:
Fixed cost per unit $ 50
Variable cost per unit 150
Total cost per unit 200
Desired ROI per unit 60

Downing Company's markup percentage would be:

a. 120%.
b. 60%.
c. 40%.
d. 30%.

Match the items in the two columns below by entering the appropriate code letter in
space provided.

A. Activity index G. Break-even point

B. Variable costs H. Contribution margin
C. Fixed costs I. Margin of safety
D. High-low method J. Contribution margin ratio
E. Relevant range K. Variable costing
F. Mixed costs L. Absorption costing

__H__ 1. The amount of revenue remaining after deducting variable costs.

__F__ 2. Costs that contain both a variable and a fixed cost element.

__J__ 3. The percentage of sales dollars available to cover fixed costs and produce
income.

__A__ 4. Identifies the activity which causes changes in the behavior of costs.
__I__ 5. The difference between actual or expected sales and sales at the break-even
point.

__B__ 6. Costs that vary in total directly and proportionately with changes in the activity
level.

__G__ 7. The level of activity at which total revenues equal total costs.

__E__ 8. The range over which the company expects to operate during the year.

__C__ 9. Costs that remain the same in total regardless of changes in the activity level.

__L__10. A costing approach in which all manufacturing costs are charged to the
product.

Short Essay:

1. Define the three classes of manufacturing costs.

The three classes of manufacturing costs are Direct Material, Direct Labor and
Overhead. Direct Material is any identifiable part of a product. Direct Labor refers to the
time spent by individuals who work specifically on manufacturing a product or performing
a service. Overhead is any factory or production cost that is indirect to the product or
service.

2. Distinguish between product and period costs.

Product costs are related to making or acquiring the products or providing the services
that directly generate the revenue of an entity while period costs are related to other
business function such as selling and administration.

3. List the five components of cost-volume-profit analysis.

The five basic components of Cost-Volume-Profit Analysis are: (1) the Level of Activity,
(2) Selling Price per Unit, (3) Variable Cost per Unit, (4) Total Fixed Costs, and (5) Sales
Mix. Level of Activity is volume of activity that will incur both costs and benefits. The
Selling per Unit is the price the company will sell a unit. Variable Cost per Unit is a cost
that directly associated to a single production unit. Total Fixed Costs are costs that
remain constant in total regardless on the change in production or sales level. A sales
mix is the proportions of sales coming from different products or services

4. Budgeting can be an important management tool if implemented properly. Identify

several positive results when budgets are used properly. Since budgets affect people,
identify several negative aspects if budgets are not implemented properly.
Exercise 1:

Carson Company manufactures a single product. Annual production costs incurred in the
manufacturing process are shown below for the production of 2,000 units. The Utilities
and Maintenance are mixed costs. The fixed portions of these costs are $200 and $300,
respectively.
Costs Incurred
Production in Units 2,000 3,000
Production Costs
a. Direct Materials $ 4,000 ?
b. Direct Labor 16,000 ?
c. Utilities 1,200 ?
d. Rent 3,000 ?
e. Indirect Labor 4,600 ?
f. Supervisory Salaries 1,500 ?
g. Maintenance 900 ?
h. Depreciation 2,500 ?

Instructions
Calculate the expected costs to be incurred when production is 3,000 units. Use your
knowledge of cost behavior to determine which of the costs are fixed, mixed, or
variable, and mark your answer next to your cost figure.

Example: Shop Labor $X,XXX $X,XXX Variable

Solution Template:

Costs Incurred Fix, Mix, Var

Production in Units 2,000 3,000___
Production Costs
a. Direct Materials $ 4,000 $ 6,000 Variable
b. Direct Labor 16,000 24,000 Variable
c. Utilities 1,200 1,700 Mixed
d. Rent 3,000 3,000 Fixed
e. Indirect Labor 4,600 6,900 Variable
f. Supervisory Salaries 1,500 1,500 Fixed
g. Maintenance 900 1,200 Mixed
h. Depreciation 2,500 2,500 Fixed
Exercise 2:

Kuhn Bicycle Company has been manufacturing its own seats for its bicycles. The
company is currently operating at 100% capacity, and variable manufacturing overhead
is charged to production at the rate of 60% of direct labor cost. The direct materials and
direct labor cost per unit to make the bicycle seats are $5.00 and $6.00, respectively.
Normal production is 50,000 bicycles per year.

A supplier offers to make the bicycle seats at a price of $13 each. If the bicycle company
accepts this offer, all variable manufacturing costs will be eliminated, but the $20,000 of
fixed manufactur-ing overhead currently being charged to the bicycle seats will have to
be absorbed by other products.

Instructions
(a) Prepare the incremental analysis for the decision to make or buy the bicycle seats.
(b) Should Kuhn Bicycle Company buy the seats from the outside supplier?

Justify your answer.

Kuhn Bicycle Company should buy because it will cause the net income to
increase.

Solution Template:

(a) Net Income

Make Buy Increase(Decrease)
Direct Materials (50,000 × $5) $250,000 $ -0- $250,000
Direct Labor (50,000 × $6) 300,000 -0- 300,000
Variable Manufacturing Costs
($300,000 × 60%) 180,000 -0- 180,000
Fixed Manufacturing Costs 20,000 20,000 -0-
Purchase Price (50,000 × $13) -0- 650,000 (650,000)
Total annual cost $750,000 $670,000 $ 80,000
Exercise 3:

Given below are the production data for Department No. 1 for the first month of
operation:
Costs charged to Department 1:
Materials $15,000
Labor 2,600
Overhead 17,000

During this first month of operations, 3,000 units were started into production; 2,500
units were transferred out; and the remaining 500 units are 100% complete with respect
to materials and 60% complete with respect to conversion costs.

Instructions
Compute the following:
(a) Unit materials cost.
(b) Equivalent units of conversion costs.
(c) Unit conversion cost.
(d) Total cost of 500 units in process at end of month.
(e) Total cost of 2,500 units transferred out.

a)
Unit Material Cost = $15,000 / 3,000 units = $5 per Unit

b)
EUP (Conversion) = 2,500 units + (500 units x 60%) = 2,800 Units

c)
Unit Conversion Cost = ($2,600 + $17,000) / 2,800 units = $7 per Unit

d)
Total Cost of 500 units = (500 units x $5) + (500 x 60% x $7) = $4,600

e)
Total Cost of 2,500 units = 2,500 units x ($5 + $7) = $30,000