MODEL ((B))

Islamic university Final exam Cost accounting 1

Gaza 2010/2011
College of commerce Sunday
16/01/2011
Accounting department
2 hours

Name:

. Id.:.

Question 1 (10 marks): Identify whether of the following

statements is true or false.
a # Statement
F 1 Managers always require the information in an accounting system
to be presented in the same format.
F 2 The balance sheet, income statement, and statement of cash
flows are used for financial accounting, but not for management
accounting.
T 3 Products, services, departments, and customers may be cost
objects.
F 4 Costs are accounted for in two basic stages: assignment followed
by accumulation
T 5 A cost function is a mathematical description of how a cost
changes with changes in the level of an activity relating to that
cost.
F 6 All cost functions are linear.
F 7 The longer the time horizon, the more likely that a cost will have a
fixed cost behavior
F 8 Raw materials that can be traced to a cost object are an example
of an indirect cost.
T 9 Fixed and variable costs may be allocated to a cost object.
T 1 Quality control costs may be a direct cost of the Manufacturing
0 Department, but an indirect cost of an individual job.

Question 2(10marks) : choose the best answer.

1 Which of the following descriptors refers to management

accounting information?
A It is verifiable and reliable.
B It is driven by rules.
C It is prepared for shareholders.
# D It provides reasonable and timely estimates.
1
 2 Which of the following statements refers to management
accounting information?
# A There are no regulations governing the reports.
B The reports are generally delayed and historical.
C The audience tends to be stockholders, creditors, and tax
authorities.
D It primarily measures and records business transactions.

3 In order to make decisions, managers need to know:

A actual costs
B budgeted costs
# C Both costs
D neither cost

4 A cost system determines the cost of a cost object by:

# A accumulating and then assigning costs
B accumulating costs
C assigning and then accumulating costs
D assigning costs

5 Product cost for reimbursement under government contracts

may include all costs EXCEPT:
# A marketing costs
B design costs
C production costs
D research and development costs

6 Which of the following statements related to assumptions about

estimating linear cost functions is FALSE?
A Variations in a single cost driver explain variations in total costs.
B A cost object is anything for which a separate measurement of
costs is desired.
C A linear function approximates cost behavior within the relevant
range of the cost driver.
# D A high correlation between two variables ensures that a cause-
and-effect relationship exists.

7 Job costing information is used:

A to develop strategies
B to make pricing decisions
C for external financial reporting
# D All of these answers are correct.
2
 8 Each indirect-cost pool of a manufacturing firm:
A utilizes a separate cost-allocation rate
B is a subset of total indirect costs
C relates to one cost object
# D All of these answers are correct.

9 An updated costing system should:

A be installed even if the costs outweigh the additional benefits
# B be tailored to fit the underlying operations rather than the
current cost system
C focus specifically on the costing needs of the CFO
D provide all information for management decision needs

1 Which of the following cost(s) are inventoried when using

0 absorption costing?
A direct manufacturing costs
B Variable marketing costs
C fixed manufacturing costs
# D Both A and C are correct.

:Question 3(8 marks)

MMM Hospital uses an indirect job-costing system for all patients. In .1
June, the budgeted nursing care charges for each department and
:budgeted allocation bases of nursing days are as follows
General Care Special CareCritical Care June
$1,280,400 $1,644,000$2,480,000Budgeted nursing costs
8,000 4,000 5,000Budgeted nursing days

Patient Ms. SSS spent six days in critical care and eight days in special
care during June. The remainder of the 30-day month was spent in the
.general care area
:Required
.Determine the budgeted overhead rate for each department a.
b. What are the total charges to Ms. SSS if she was in the facility the
?entire month

= $2,480,000/5,000 nursing days Overhead rate critical care a.

.= $496.00 per day
= $1,644,000/4,000 nursing days Overhead rate special care
= $411.00 per day
= $1,280,400/8,000 nursing days Overhead rate general
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= $160.05 per day

Ms. SSS b.
$2,976.00$496.00 6 days = Critical care
3,288.00$411.00 8 days = Special care
2560.80$160.05 16 days = General care
Total overhead charges
$8,824.80

A local attorney employs ten full-time professionals. The budgeted .2

compensation per employee is $80,000. The maximum billable hours
for each client are 400. Clients always receive their full amount of time.
All professional labor costs are included in a single direct-cost category
and are traced to jobs on a per-hour basis. Any other costs are included
in a single indirect-cost pool, allocated according to professional labor-
hours. Budgeted indirect costs for the year are $400,000 and the firm
.had 20 clients
:Required
?What is the direct-labor-cost rate per hour a.
?b. What is the indirect-cost rate per hour

= $80,000 10 = $800,000 Total direct cost a.

= 400 20 = 8,000 Total hours
= $800,000/8,000 = $100.00 per hour Direct-cost rate per unit

b. Indirect-cost rate per unit = $400,000/8,000 = $50.00 per hour

For each item below indicate the source documents that would most .3
.likely authorize the journal entry in a job-costing system
ITEM ANSWER
0 Example (indirect manufacturing labor) labor time card
1 direct materials purchased purchase invoice
2 direct materials used materials
requisition record
3 direct manufacturing labor labor time
card/record
4 cost of goods sold sales invoice

QUESTION 4(8 marks):

1. MMM Corporation applies overhead based upon machine-hours.
Budgeted factory overhead was $266,400 and budgeted machine-hours
were 18,500. Actual factory overhead was $287,920 and actual
machine-hours were 19,050. Before disposition of under/oeverallocated

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overhead, the cost of goods sold was $560,000 and ending inventories
were as follows:

$ 60,000 Direct materials

190,000 WIP
250,000 Finished goods
$500,000 Total

:Required
.Determine the budgeted factory overhead rate per machine-hour a.
hrs. = $14.40 per hour $266,400/18,500

.Compute the over/ oeverallocated overhead b.

hours = $274,320 - $287,920 = $13,600 19,050 $14.40
oeverallocated overhead

Prepare the journal entry to dispose of the variance using the write- c.
.off to cost of goods sold approach
13,600 Cost of Goods Sold
13,600Factory Department Overhead Control

d. Prepare the journal entry to dispose of the variance using the

proration approach

7,616 Cost of Goods Sold

2,584 WIP Inventory
3,400 Finished Goods Inventory
Factory Department Overhead Control 13,600

2. Match each of the following items with one or more of the

denominator-level capacity concepts
ITEM ANSWER
0 Example (Ideal goal of capacity utilization) Theoretical
capacity
1 Reduces theoretical capacity by considering Practical
unavoidable operating interruptions capacity

2 Producing at full efficiency all the time Theoretical

capacity
3 Measures capacity levels in terms of demand Normal capacity
&
Master-budget

5
 capacity
4 Does not allow for plant maintenance Theoretical
capacity

QUESTION 5(11 marks):

1. For each report listed below, identify whether the major

purpose of the report is for (1) routine internal reporting, (2)
nonroutine internal reporting, or for (3) external reporting to
investors and other outside parties.
REPORT ANSWER
0 Example 3
1 study detailing sale information of the top-ten 2
selling products
2 weekly report of total sales generated by each 1
store in the metropolitan area
3 annual Report sent to shareholders 3
4 monthly report comparing budgeted sales by store 1
to actual sales

Classify each cost item of Ripon Printers into one of the .2

business functions of the value chain, either (1) R&D, (2)
design, (3) production, (4) marketing, (5) distribution, or (6)
.customer service
# ITEM ANSWER
0 Example 3
1 cost of customer order forms 4
2 cost of paper used in manufacture of books 3
3 cost of paper used in packing cartons to ship books 5
4 cost of paper used in display at national trade show 4

At the Jordan Company, the cost of the personnel department .3

has always been charged to production departments based
upon number of employees. Recently, opinions gathered from
the department managers indicate that the number of new
hires might be a better predictor of personnel costs. Total
personnel department costs are $160,000
C B A Department
100 27030Number of employees
6
5 12 8 The number of new hires

# QUESTION ANSWER
1 If the number of employees is considered the cost [30 / (30 + 270
driver, what amount of personnel costs will be + 100)]
allocated to Department A? $160,000 =
$12,000
2 If the number of new hires is considered the cost [8 / (8 + 12 +
driver, what amount of personnel costs will be 5)] $160,000
allocated to Department A? = $51,200
3 Which cost estimation method is being used by the conference
Jordan Company? method

QUESTION 6 (9 marks): answer the following questions

Discuss the reasons a consulting firm might use a normal costing .A

.system rather than an actual costing system
Budget rates are normally used because actual costs may not be available until
some time after a job is completed. Decisions about billing a client for services
rendered generally must be made immediately after the job is completed. Also,
actual costs may reflect short-run changes in the environment that may distort
the billing process. Budgeted costs are affected by weekly or monthly
fluctuations and, therefore, offer a stable comparison and assignment of costs
.throughout the accounting cycle

What might be some reasons for the firm to change from a one- .B
?pool to a multiple-pool allocation concept
Having separate professional labor-hour rates assists in assigning the personnel
costs to jobs closest to their real values. This helps to maintain different costs for
jobs that have the same number of hours but a different mix of professionals doing
the job. Seldom is there only one cause-and-effect relationship between a job and
the tasks performed on the job; therefore, it may also be a good idea to develop
multiple indirect-cost assignments (i.e., one for staff support and others for such
.items as computer support or general administrative support)

are three possible ways to dispose of underallocated or .C

overallocated overhead costs at the end of a fiscal year? Briefly
comment on the theoretical correctness or incorrectness of each
.method
One way to dispose of underallocated or overallocated overhead costs at the end
of a fiscal year would be to prorate the underallocated or overallocated overhead
costs to the work-in-process control account, the finished goods control account,
and to the cost of goods sold account based on the relative amounts in each
account. This is a theoretically correct method since it is reasonable to believe
that the underallocated or overallocated overhead costs should attach
themselves to the goods as they are produced. A second way to dispose of the
underallocated or overallocated overhead costs at the end of a fiscal year would
be to adjust the allocation rate based on the actual amounts and reallocate the
7
overhead to completed jobs. This is also a theoretically correct method. A third
way is to clear all underallocated or overallocated overhead to the cost of goods
sold account. This is not theoretically valid but it is practical if the amount of
.underallocated or overallocated overhead is not material

QUESTION 7 (6 marks): answer the following questions

The following data are available for MMM Company for the year ended
.September 30, 2010
24,000 units at $50 each Sales:
30,000 units Expected and actual production:
:Manufacturing costs incurred
$525,000 Variable:
$372,000 Fixed:
:Nonmanufacturing costs incurred
$144,800 Variable:
$77,400 Fixed:
none Beginning inventories:
:Required

.Determine operating income using the variable-costing approach a.

sales $1,200,000 = $50 24,000
variable manufacturing cost $420,000 = 24,000 ($525,000/30,000)
contribution margin $635,200 = $144,800 - $420,000 - $1,200,000
operating income $185,800 = $77,400 - $372,000 - $635,200

.Determine operating income using the absorption-costing approach b.

manufacturing fixed cost $297,600 = 24,000 ($372,000/30,000)
gross margin $482,400 = $297,600 - $420,000 - $1,200,000
operating income $260,200 = $77,400 - $144,800 - $482,400

c. Explain why operating income is not the same under the two
.approaches
or 6,000 units in ending inventory $74,400 = $185,800 - $260,200
. $12.40 per unit of fixed manufacturing cost

With best wishes

Mohammad Marwan Al Ashi