Testbank

to accompany

Accounting
8th Edition

by
John Hoggett, Lew Edwards
John Medlin and Matthew Tilling

Prepared by
Barbara Burns

John Wiley & Sons Australia, Ltd 2011

Testbank to accompany Accounting 8e

Chapter 8:
Multiple Choice

1. Which of these statements is not correct?

a. An expense is the consumption or loss of resources that will result in a decrease in equity
b. A cost that provides future economic benefits is treated as an asset
c. To accountants the terms cost and expense always mean the same thing
d. Many costs eventually become expenses

ANSWER C
Section 8.1

2. Costs which are not directly required to produce a product but are expensed in the income
statement in the period in which they are incurred are called:
a. Product costs
b. Period costs
c. Variable costs
d. Fixed costs

ANSWER B
Section 8.2

3. Product costs are integral to the production of a product and are expensed in the period in
which:
a. The related units are sold
b. The related units are produced
c. The costs are paid
d. The costs are incurred

ANSWER A
Section 8.2

4. Which of these is an example of a period cost?

a. Direct materials
b. Production supervisors salary
c. Factory rent
d. Freight outwards

ANSWER D
Section 8.2

5. For which purposes do product costs need to be calculated by a manufacturer?

Inventory Profit Management decision-
valuation determination making
a. Yes Yes Yes
b. Yes No Yes
c. No Yes Yes

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d. No No Yes

ANSWER A
Section 8.1

6. Which of these is not a product cost:

a. Factory power
b. Wages of factory workers
c. Material used in production
d. Advertising of a new product

ANSWER D
Section 8.2

7. Which of these is an example of a product cost?

a. Assembly line workers wages
b. General office printing and stationery
c. Interest expense
d. Depreciation of office furniture

ANSWER A
Section 8.2

8. Which of these would normally be classified as direct materials?

Sheet metal used Lubricants used on Plastic used
in making tractors production machinery in making
calculators
a. Yes Yes Yes
b. Yes No Yes
c. No Yes No
d. No No Yes

ANSWER B
Section 8.3

9. The correct statement is:

a. Items such as glue, nails and screws become part of the finished product but are usually
classified as factory overhead
b. The cost of collecting debts from customers is classified as part of factory overhead
c. Power used for factory lighting and heating is classified as a period cost
d. Absorption costing splits up factory costs into product and period costs

ANSWER A
Section 8.3

10. Issues that must be resolved in accounting for factory overhead are all of the following
except:
a. The allocation of common costs between activities
b. The assignment of service department costs to production departments
c. How to assign factory overhead costs as product costs

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Testbank to accompany Accounting 8e

d. How to calculate prime cost

ANSWER D
Section 8.3

11. As manufacturing overhead costs cannot be traced to products a method must be developed
for assigning them to products. Common bases for assignment are all of the following
except:
a. Direct labour cost
b. Direct labour hours
c. Machine hours
d. Direct labour hours plus direct machine hours

ANSWER D
Section 8.3

12. If projected factory overhead is $150 000 p.a. and projected direct labour hours are 30 000
hours p.a., the overhead application rate is:
a. $5 per Direct labour Hour
b. $30 per Direct labour Hour
c. 20c per Direct labour Hour
d. $150 000

ANSWER A
Section 8.3

13. What is the correct order in which the flow of costs in a manufacturing organisation
occurs?
1. Charge raw materials, direct labour and factory overhead to work in process
2. Purchase stocks of raw materials
3. Transfer finished goods to cost of sales
4. Transfer finished goods to stock of finished goods
a. 1, 2, 3, 4
b. 2, 1, 4, 3
c. 2, 1, 3, 4
d. 4, 3, 2, 1

ANSWER B
Section 8.3

14. Direct material costs plus direct labour costs are known as:
a. Prime costs
b. Conversion costs
c. Fixed costs
d. Period costs

ANSWER A
Section 8.3

15. Applying overhead to products means:

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 Chapter 8: Accounting for Manufacturing

a. Assigning the overhead on a basis that closely relates it to the work performed
b. Adding up the overhead
c. Directly tracing the overhead to products
d. Passing on the overhead costs to customers in the price charged

ANSWER A
Section 8.3

16. If expected factory overhead costs are $400 000 and expected direct labour hours are 40
000, what is the overhead application rate per direct labour hour?
a. $10
b. $100
c. $1 000
d. $16

ANSWER A
Section 8.3

17. Direct labour costs plus factory overhead costs are known as:
a. Prime costs
b. Conversion costs
c. Direct costs
d. Variable costs

ANSWER B
Section 8.3

18. Variable costs:

a. Remain constant in total regardless of the level of output
b. Increase per unit as output increases
c. Decrease per unit as output decreases
d. Remain constant per unit regardless of the level of output

ANSWER D
Section 8.4

19. If total fixed costs are $25 000 what is the per unit overhead cost for R Co if 50 000 units
are produced? Assume units of production are used as the basis for applying overhead to
product.
a. $50
b. $5
c. $0.50
d. $0.05

ANSWER C
Section 8.4

20. A fixed cost is one that:

a. Is the same per unit of production regardless of volume
b. Remain constant in total within the relevant production range

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Testbank to accompany Accounting 8e

c. Increases on a per unit basis as volume increases

d. Does not rise as inflation changes

ANSWER B
Section 8.4

21. What type of business would calculate cost of sales in the income statement as stock of
finished goods at start + purchases stock of finished goods at end?
a. A service business
b. A manufacturer
c. A retailer
d. Partnership

ANSWER C
Section 8.5

22. For a manufacturer, if cost of goods manufactured is $652 000, stock of finished goods at
start is $36 000 and stock of finished goods at end is $40 000, calculate the cost of sales.
a. $656 000
b. $648 000
c. $728 000
d. Cannot be calculated with the information available

ANSWER B
Section 8.5

23. When preparing a Cost of Goods Manufactured Statement from the following information
the total cost of goods manufactured is:
Direct materials $8
Advertising expenses 3
Indirect labour 1
Indirect materials 5
Direct labour 2
Other manufacturing overhead 4
a. $23
b. $20
c. $17
d. $16

ANSWER B
$8 + $1 + $5 + $2 + $4
Section 8.5

24. These figures have been extracted from the trial balance of ABC Ltd for June 2011:
Direct Materials $5 000
Light and Power Factory 14 000
Freight Outwards 2 000
Office Salaries 11 000
Depreciation on Factory Plant 6 000
Directors' Fees 7 000

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 Chapter 8: Accounting for Manufacturing

Salesmen's Commission 8 000

Factory Wages - Direct30 000
- Indirect 10 000
There was no opening or closing work in process. Total factory overhead expenses are:
a. $35 000
b. $30 000
c. $60 000
d. $20 000

ANSWER B
$14 000 + $6 000 + $10 000
Section 8.5

25. Calculate product cost per unit.

Direct materials per unit $50
Direct labour per unit $30
Factory overhead applied at 2/3 of direct labour cost
a. $110
b. $100
c. $90
d. $80

ANSWER B
$50 + $30 + $20
Section 8.5

26. Mc Manufacturing reports the following information for a recent year. Determine the cost of
finished goods manufactured. $
Work in process 1 January 7 000
Work in process 31 December 10 000
Finished goods inventory 1 January 5 000
Finished goods inventory 31 December 6 000
Direct materials used 3 000
Direct labour 2 000
Factory overhead 2 000
Selling expenses 3 000
General and administrative expenses 4 000
a. $4000
b. $3000
c. $5000
d. $6000

ANSWER A
$7000 - $10 000 + $3 000 + $2 000 + $2 000
Section 8.5

27. Cost of goods manufactured is $35 000

Ending work in process is $7 500
Manufacturing overhead is $12 700
Direct labour is $8 900

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Beginning work in process is $11 500

What is the direct material cost for the period?
a. $17 400
b. $13 400
c. $9 400
d. $6 400

ANSWER C
$35 000 + $7 500 - $12 700 - $8 900 - $11 500
Section 8.5

28. 2010 2011

Finished goods inventory $20 000 $10 000
Work in process inventory 5 000 10 000
Raw materials inventory 10 000 15 000
Purchases of raw materials 13 000
Cost of goods manufactured 50 000
The cost of raw materials transferred to production in 2011 is:
a. $8 000
b. $10 000
c. $13 000
d. $18 000

ANSWER A
$10 000 + $13 000 - $15 000
Section 8.5

29. Before the application of overhead costs Veccio Corporation has the following costs traced
to production:
Direct Materials Direct Labour
Charged to production $30 000 $40 000

Assuming that overhead is applied at the rate of 100% of direct labour cost what is the
amount of inventory finished for the period (assume no work in process)?
a. $30 000
b. $40 000
c. $80 000
d. $110 000

ANSWER D
$30 000 + $40 000 + OH $40 000
Section 8.5

30. In relation to the cost of goods manufactured report which is not a correct statement?
a. It is prepared to calculate the cost of goods completed in the period
b. The total of direct materials, direct labour and factory overhead represent the
manufacturing costs for the period
c. The ending work in process is subtracted to obtain the cost of completed goods
manufactured for the period
d. Cost of goods manufactured is transferred to the cost of sales account

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ANSWER D
Section 8.5

31. For March 2011

Finished goods purchases $ 5 000
Cost of goods manufactured 50 000
Sales 100 000

Inventories 1 Mar 11 31 Mar 11

Raw materials $10 000 $18 000
Work in process 25 000 32 000
Finished goods 80 000 90 000
Gross profit for the month of March 2011 is:
a. $50 000
b. $60 000
c. $55 000
d. $45 000

ANSWER C
$100 000 [$5000 + $50 000 + $80 000 - $90 000]
Section 8.5

32. In the general ledger the accounts used to determine the cost of goods manufactured are
closed to the manufacturing summary account which is then closed to the:
a. Income summary account
b. Cost of sales account
c. Gross profit account
d. Profit account

ANSWER A
Section 8.6

33. The correct statement concerning sustainable manufacturing is:

a. Manufacturing in a sustainable way always involves higher manufacturing costs
b. Recycling can occur within the production process or at the end of the products useful
life
c. Businesses in Australia have little interest in sustainable manufacturing
d. Businesses that operate sustainably make less profit than businesses that ignore
sustainability

ANSWER B
Section 8.7

34. How many of the following are reasons why managers need information on manufacturing
costs?
i. Inventory valuation
ii. Profit determination
iii. Pricing
iv. Future planning

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a. 1
b. 2
c. 3
d. 4

ANSWER D
Section 8.1

35. The correct statement is:

a. Manufacturing overhead costs are treated as period costs rather than product cost
b. GST is treated as a period cost
c. For a retailer all costs and expenses are treated as period costs
d. Product costs are included in inventory until the product is sold

ANSWER D
Section 8.2

Fill-in the blanks

1. The factory office and the quality control departments are known as s_____________
departments and are considered to be part of the manufacturing process.

ANSWER service (or support)

Section 8.3

2. P_______________ costs are expensed in the income statement in the period when they
are incurred.

ANSWER Period
Section 8.2

3. The cost of a finished product consists of three basic elements: raw materials,
d______________ l______________, and factory overhead.

ANSWER direct labour

Section 8.3

4. All manufacturing costs, except direct materials and direct labour, are included in factory
_________________.

ANSWER overhead
Section 8.3

5. An overhead application rate is developed by dividing the estimated o_______________

costs by the basis used to measure estimated productive capacity.

ANSWER overhead
Section 8.3

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6. If budgeted overhead is $20,000 and estimated direct labour hours are 2000, the
overhead recovery rate is $_________ per direct labour hour.

ANSWER $10
Section 8.3

7. Fixed costs per unit vary (directly/inversely) __________ with the level of activity.

ANSWER inversely
Section 8.4

8. For a manufacturing firm, at the end of the accounting period, all manufacturing costs
are closed to the M________________ S_____________ ledger account.

ANSWER Manufacturing Summary

Section 8.6

9. In comparing the income statement of a manufacturer and a retailer cost of goods

manufactured takes the place of _________________ for a retailer.

ANSWER purchases
Section 8.5

10. Deficiencies of using a periodic inventory system for a manufacturer increase with the
number of products and production departments, consequently such a system can only
be used satisfactorily by a s_______ manufacturing entity.

ANSWER small
Section 8.6

Exam type questions

QUESTION 8.1

Mungo and Associates provide the following information:

$
Administrative salaries 20,000
Advertising expense 12,000
Direct labour 30,000
Factory depreciation 6,000
Finished goods - January 1 20,000
Finished goods - December 31 18,000
Income tax expense 2,000
Indirect labour 15,000
Materials inventory - January 1 40,000
Materials inventory - December 31 38,000
Materials purchased 16,000
Sales 108,000
Work in progress - January 1 13,000
Work in progress - December 31 14,000

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Testbank to accompany Accounting 8e

REQUIRED:

a) Calculate total manufacturing costs.

b) Calculate cost of goods manufactured.
c) Calculate cost of sales.
d) Calculate profit or loss after tax

Question 8.2

During the first month of the current accounting period, Carlo Limited experienced a
devastating loss due to a fire. Many of the accounting records were lost and the company is
now trying to re-create the lost information. Fragments of data include the following:

A portion of the budget indicates that the manufacturing overhead rate was $10 per direct
labour hour.
Job 44 was in process and had incurred $9,600 of direct materials and $14,000 of direct
labour (1,000 hours). The company has a single hourly wage rate.
4,500 direct labour hours were worked during the month.
Actual manufacturing overhead costs were $48,000. No indirect materials were used.
The materials inventory account had a beginning balance of $28,000 and an ending
balance of $18,000.
The finished goods inventory account had a beginning balance of $12,000 and an ending
balance of $26,000.
The work in progress inventory account had a beginning balance of $17,000.
The cost of sales is $171,000

REQUIRED

Calculate the following amounts:

a) Ending work in progress inventory account balance.
b) Cost of goods completed.
c) Direct materials used.
d) Direct materials purchased.

Solutions exam type questions

SOLUTION QUESTION 8.1

a)
Mungo and Associates

$
Total manufacturing costs 69,000

Direct materials # 18,000

Direct labour 30,000
Factory depreciation 6,000
Indirect labour 15,000

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Total manufacturing costs $ 69,000

# Materials (Jan 1) + materials purchased - materials (Dec 31)

= 40,000 + 16,000 + 38,000
= $18,000
b)
$
Cost of goods manufactured 68,000

Total manufacturing costs 69,000

Plus WIP inventory January 1 13,000
Total cost of WIP during the year 82,000
Less WIP inventory December 31 14,000
Cost of goods manufactured $ 68,000

c)
$
Cost of sales 70,000

Finished goods inventory January 1 20,000

Plus cost of goods manufactured 68,000
Total cost of goods available for sale 88,000
Less finished goods inventory December 31 18,000
Cost of sales $ 70,000

d)
$
Profit after tax 4,000

Sales 108,000
Less cost of sales 70,000
Gross margin 38,000
Less advertising and admin expenses 32,000
Income before taxes 6,000
Less income tax expense 2,000
Profit after tax $ 4,000

Solution Question 8.2

a)
Ending work in progress = $33,600
Job 44 = Direct materials + direct labour + applied overhead
= $9,600 + $14,000 + ($10 x 1,000 hours)

b)
Cost of goods completed = $185,000
Ending finished goods inventory + cost of sales - beginning finished goods inventory
= $26,000 + $171,000 - $12,000

c)

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Direct materials used = $93,600

Ending work in progress + cost of goods completed - beginning work in progress
- direct labour - applied overhead
= $33,600 + $185,000 - $17,000 - ($14 x 4,500 hours) - ($10 x 4,500 hours)

d)
Direct materials purchased = $83,600
Ending materials inventory + direct materials used - beginning materials inventory
= $18,000 + $93,600 - $28,000

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