Cost

JOB ORDER COSTING
MULTIPLE CHOICE
Question Nos. 4, 5, 9-13, and 18 are AICPA adapted.
Question Nos. 7, 8, and 14-17 are ICMA adapted.
A 1. Under job order cost accumulation, the factory overhead control account
controls:
A. factory overhead analysis sheets
B. all general ledger subsidiary accounts
C. job order cost sheets
D. cost reports by processes
E. materials inventories
B 2. Supplies needed for use in the factory are issued on the basis of:
A. job cost sheets
B. materials requisitions
C. time tickets
D. factory overhead analysis sheets
E. clock cards
B 3. Finished Goods is debited and Work in Process is credited for a:

A. transfer of completed goods out of the factory
B. transfer of completed production to the finished goods storeroom
C. purchase of goods on account
D. transfer of materials to the factory
E. return of unused materials from the factory
A 4. In job order costing, when materials are returned to the storekeeper that
were previously issued to the factory for cleaning supplies, the journal entry should be
made to:
46
A. Materials
Factory Overhead
B. Materials
Work in Process
C. Purchases Returns
Work in Process
D. Work in Process
Materials
E. Factory Overhead
Work in Process
47
Job Order Costing 48
A 5. Under a job order cost system, the dollar amount of the entry to transfer the
inventory from Work in Process to Finished Goods is the sum of the costs charged to all
jobs:
A. completed during the period
B. started in process during the period
C. in process during the period
D. completed and sold during the period
E. none of the above
B 6. When a manufacturing company has a highly automated plant producing

many different products, probably the most appropriate basis of applying factory overhead
costs to Work in Process is:
A. units processed
B. machine hours
C. direct labor hours
D. direct labor dollars
A 7. Cherokee Company applies factory overhead on the basis of direct labor

hours. Budget and actual data for direct labor and overhead for the year are as follows:
Budget Actual
Direct labor hours 600,000 650,000
Factory overhead costs $720,000 $760,000
The factory overhead for Cherokee for the year is:

A. overapplied by $20,000
B. overapplied by $40,000
C. underapplied by $20,000
D. underapplied by $40,000
E. neither underapplied nor overapplied
49 Chapter 5
SUPPORTING CALCULATION:
$720,000
= $1.20 _ 650,000
600,000
= $780,000 (applied) $760,000 (actual) = $20,000 (overapplied)

C 8. At the end of the year, Paola Company had the following account balances
after applied factory overhead had been closed to Factory Overhead Control:
Factory Overhead Control $ 1,000 CR

Cost of Goods Sold 980,000 DR
Work in Process 38,000 DR
Finished Goods 82,000 DR
The most common treatment of the balance in Factory Overhead Control would be to:
A. carry it as a deferred credit on the balance sheet
B. report it as miscellaneous operating revenue on the income statement
C. credit it to Cost of Goods Sold
D. prorate it between Work in Process and Finished Goods
E. prorate it among Work in Process, Finished Goods, and Cost of
Goods Sold
B 9. Overapplied factory overhead would result if:

A. the plant were operated at less than normal capacity
B. factory overhead costs incurred were less than costs charged to
production
C. factory overhead costs incurred were unreasonably large in relation to
units produced
D. factory overhead costs incurred were greater than costs charged to
production
E. a firm incurred a significant amount of overhead
A 10. The Waitkins Company estimated Department A's overhead at $255,000 for
the period based on an estimated volume of 100,000 direct labor hours. At the end of
the period, the factory overhead control account for Department A had a balance of
$265,500; actual direct labor hours were 105,000. What was the over- or under-applied
overhead for the period?
51 Chapter 5
A. $2,250
B. $(2,250)
C. $15,000
D. $(15,000)
E. $(5,000)
$255,000
= $2.55 _ 105,000 = $267,750 (applied) $265,500 (actual)
100,000
= $2,250 (overapplied)
D 11. Howell Corporation has a job order cost system. The following debits
(credits) appeared in Work in Process for the month of July:
July 1, balance $ 12,000

July 31, direct materials 40,000
July 31, direct labor 30,000
July 31, factory overhead 27,000
July 31, to finished goods (100,000)
Howell applies overhead to production at a predetermined rate of 90% based on the direct
labor cost. Job 1040, the only job still in process at the end of July, has been charged
with factory overhead of $2,250. What was the amount of direct materials charged to Job
1040?
A. $6,750
B. $2,250
C. $2,500
D. $4,250
E. $9,000
Job 1040 = $12,000 + $40,000 + $30,000 + $27,000 - $100,000 = $9,000
$2,250
Direct materials = $9,000 $2,250 = $4,250
.9
E 12. Valentino Corporation makes aluminum fasteners. Among Valentino's 19--

manufacturing costs were:
Wages and salaries:

Machine operators $80,000
Factory supervisors 30,000
Machine mechanics 20,000
Direct labor amounted to:

A. $50,000
B. $100,000
53 Chapter 5
C. $110,000
D. $130,000
B 13. Rudolpho Corporation makes aluminum fasteners. Among Rudolpho's 19--

manufacturing costs were:
Materials and supplies:

Aluminum $400,000
Machine parts 18,000
Lubricants for machines 5,000
Direct materials amounted to:

A. $23,000
B. $400,000
C. $405,000
D. $418,000
E. $423,000
C 14. Selected cost data (in thousands) concerning the past fiscal year's
operations of the Moscow Manufacturing Company are presented below.
Inventories
Beginning Ending
Materials $75 $ 85
Work in process 80 30
Finished goods 90 110
Materials used, $326

Total manufacturing costs charged to production during the year (including
direct materials, direct labor, and factory overhead applied at the rate of 60% of direct
labor cost), $686
Cost of goods available for sale, $826
Selling and general expenses, $25
55 Chapter 5
The cost of direct materials purchased during the year amounted to:
A. $360
B. $316
C. $336
D. $411
SUPPORTING CALCULATION: $326 + $85 - $75 = $336

C 15. Selected cost data (in thousands) concerning the past fiscal year's
Inventories
Beginning Ending
Materials $75 $ 85

Total manufacturing costs charged to production during the year (including direct materials,
direct labor, and factory overhead applied at the rate of 60% of direct labor cost), $686
Direct labor costs charged to production during the year amounted to:
A. $216
B. $135
C. $225
D. $360
SUPPORTING CALCULATION: $686 = $326 + x + .6x

x = $225
A 16. Selected cost data (in thousands) concerning the past fiscal year's
Inventories
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62 Chapter 5
Beginning Ending
Materials $75 $ 85

The cost of goods manufactured during the year was:

A. $736
B. $716
C. $636
D. $766
PROCESS COSTING
MULTIPLE CHOICE
Question Nos. 1, 7-12, 18-23, and 28-32 are AICPA adapted.
62
B 1. An equivalent unit of material or conversion cost is equal to:

A. the prime cost
B. the amount of material or conversion cost necessary to complete one
unit of production
C. a unit of work in process inventory
D. the amount of material or conversion cost necessary to start a unit of
production into work in process
E. 50% of the material or conversion cost of a unit of finished goods
inventory, assuming a linear production pattern
B 2. The product flow format where certain portions of the work are done
simultaneously and then brought together for completion is called:
A. applied
B. parallel
C. standard
D. selective
E. sequential
C 3. An item that does not appear on a cost of production report is:

A. work in processCbeginning inventory
B. cumulative costs through the end of departmental production
C. finished goodsCending inventory
D. materials used in the department
E. unit costs added by the department
C 4. Goode Manufacturing has three producing departments in its factory. The

ending inventory in the Milling Department consisted of 3,000 units. These units were
60% complete with respect to labor and factory overhead. Materials are applied at the end
of the milling process. Unit costs for the complete process in the Milling Department are:
materials, $1; labor, $2; and factory overhead, $3. The appropriate unit cost for each unit
63
64 Chapter 5
in the ending inventory is:

A. $2
B. $5
C. $3
D. $6
E. $4
SUPPORTING CALCULATION: 60% ($2 + $3) = $3
64
Process Costing 65
D 5. When added materials in subsequent departments result in an increase of

the units produced, the unit transferred-in costs will:
A. be reclassified as new materials
B. be increased to provide for the additional units
C. be accounted for under the fifo costing method
D. be decreased as they are spread over more units
E. remain unchanged
E 6. Gyro Products transferred 10,000 units to one department. An additional

3,000 units of materials were added in the department. At the end of the month, 7,000
units were transferred to the next department. There was no beginning inventory. The
costs for units transferred in would be effectively allocated over:
A. 17,000 units
B. 3,000 units
C. 10,000 units
D. 7,000 units
E. 13,000 units
SUPPORTING CALCULATION: 7,000 units transferred out + 6,000 units

in ending inventory = 13,000 units
E 7. A characteristic of a process costing system is that:

A. costs are accumulated by order
B. it is used by a company manufacturing custom machinery
C. standard costs are not applicable
D. it requires a lot more detailed accounting than does a job order
system
E. work in process inventory is restated in terms of completed units
D 8. Transferred-in costs as used in a process cost accounting system are:

66 Chapter 6
A. supervisory salaries that are transferred from an overhead cost center

to a production cost center
B. ending work in process inventory of a previous process that will be
used in a succeeding process
C. labor that is transferred from another department within the same
plant instead of hiring temporary workers from the outside
D. costs of the product of a previous internal process that is
subsequently used in a succeeding internal process
E 9. In a process costing system, how is the unit cost affected in a production

cost report when materials are added in a department subsequent to the first department
and the added materials result in additional units?
A. The first department's unit cost is increased, but it does not
necessitate an adjustment of the transferred-in unit cost.
B. The first department's unit cost is decreased, but it does not
necessitate an adjustment of the transferred-in unit cost.
C. The first department's unit cost is not affected.
D. The first department's unit cost is increased, which necessitates an
adjustment of the transferred-in unit cost.
E. The first department's unit cost is decreased, which necessitates an
adjustment of the transferred-in unit cost.
Process Costing 67
E 10. Assuming that there was no beginning work in process inventory and the
ending work in process inventory is 50% complete as to conversion costs, the number of
equivalent units as to conversion costs would be:
A. less than the units completed
B. more than the units completed
C. the same as the units placed in process
D. the same as the units completed
E. less than the units placed in process
A 11. An error was made in the computation of the percentage of completion of

the current year's ending work in process inventory. The error resulted in assigning a
lower percentage of completion to each component of the inventory than actually was the
case. What is the effect of this error upon:
(1) the computation of equivalent units in total
(2) the computation of costs per equivalent unit
(3) costs assigned to cost of goods completed for the period
(1) (2) (3)

A. understate overstate overstate
B. understate understate overstate
C. overstate understate understate
D. overstate overstate understate
C 12. Read, Inc. instituted a new process in October. During October, 10,000
units were started in Department A. Of the units started, 7,000 were transferred to
Department B, and 3,000 remained in work in process at October 31. The work in
process at October 31 was 100% complete as to material costs and 50% complete as to
conversion costs. Materials costs of $27,000 and conversion costs of $39,950 were
charged to Department A in October. What were the total costs transferred to Department
B?
68 Chapter 6
A. $46,900
B. $53,600
C. $51,800
D. $57,120
Materials unit cost = $27,000 (7,000 + 3,000) = $2.70

Conversion unit cost = $39,950 [7,000 + 50%(3,000)] = $4.70
Costs transferred = 7,000($2.70 + $4.70) = $51,800
D 13. In accounting for beginning inventory costs, the method that allows the
addition of beginning inventory costs with costs incurred during the period is referred to
as:
A. first-in, first-out
B. addition
C. last-in, first-out
D. average
E. first-in, last-out
Process Costing 69
E 14. Chicago Processing Co. uses the average costing method and reported a
beginning inventory of 5,000 units that were 20% complete with respect to materials in
one department. During the month, 11,000 units were started; 8,000 units were finished;
ending inventory amounted to 8,000 units that were 60% complete with respect to
materials. Total materials cost during the period for work in process should be spread
over:
A. 7,200 units
B. 16,000 units
C. 11,200 units
D. 13,200 units
E. 12,800 units
SUPPORTING CALCULATION: 8,000 + .60(8,000) = 12,800 units
E 15. In determining the cost of goods transferred in from a previous department

under the average cost method:
A. a simple average of unit costs is used
B. beginning inventory costs are separated from costs transferred in
during the period
C. a first-in, first-out approach is used
D. equivalent production in ending inventory is separated from other
transferred-in costs
E. a weighted average of unit costs is used
E 16. The average and fifo process costing methods differ in that the average
method:
A. can be used under any cost flow assumption
B. is much more difficult to apply than the fifo method
C. requires that ending work in process inventory be stated in terms of equivalent
units of production
70 Chapter 6
D. considers the ending work in process inventory only partially complete

E. does not consider the degree of completion of beginning work in
process inventory when computing equivalent units of production
A 17. The first step in applying the average cost method is to:
A. add the beginning work in process costs to the current period's
production costs
B. divide the current period's production costs by the equivalent units
C. subtract the beginning work in process costs from the current period's
production costs
D. A and B
E. B and C
C 18. Beginning work in process was 60% complete as to conversion costs, and
ending work in process was 45% complete as to conversion costs. The dollar amount of
the conversion cost included in ending work in process (using the average cost method)
is determined by multiplying the average unit conversion costs by what percentage of the
total units in ending work in process?
A. 60%
B. 55%
C. 45%
D. 52%
E. 100%
Process Costing 71
C 19. Dover Corporation's production cycle starts in the Mixing Department. The
following information is available for April:
Units
Work in process, April 1 (50% complete) 40,000
Started in April 240,000
Work in process, April 30 (60% complete) 25,000
Materials are added at the beginning of the process in the Mixing Department. Using the
average cost method, what are the equivalent units of production for the month of April?
Materials Conversion
A. 255,000 255,000
B. 270,000 280,000
C. 280,000 270,000
D. 305,000 275,000
E. 240,000 250,000
Materials = 40,000 + 240,000 = 280,000

Conversion = (280,000 - 25,000) + .6(25,000) = 270,000
B 20. Information concerning Department A of Neeley Company for June is as

follows:
Materials
Units Costs
Beginning work in process 17,000 $12,800
Started in June 82,000 69,700
72 Chapter 6
Units completed 85,000

Ending work in process 14,000
All materials are added at the beginning of the process. Using the average cost method,
the cost per equivalent unit for materials is:
A. $0.825
B. $0.833
C. $0.85
D. $0.97
E. $1.01
SUPPORTING CALCULATION: ($12,800 + $69,700) (85,000 +

14,000) = $.833
134 Chapter 6
B 21. Kennedy Company adds materials in the beginning of the process in the
Forming Department, which is the first of two stages of its production cycle. Information
concerning the materials used in the Forming Department in October is as follows:
Materials
Units Costs
Work in process, October 1 6,000 $ 3,000
Units started 50,000 25,560
Units completed and transferred out 44,000
Using the average cost method, what was the materials cost of work in process at October
31?
A. $3,000
B. $6,120
C. $3,060
D. $5,520
E. $6,000
($3,000 + $25,560) (44,000 + 12,000) = $.51

$.51 x 12,000 = $6,120
E 22. Roger Company manufactures Product X in a two-stage production cycle in

Departments A and B. Materials are added at the beginning of the process in Department
B. Roger uses the average costing method. Conversion costs for Department B were 50%
complete as to the 6,000 units in beginning work in process and 75% complete as to the
8,000 units in ending work in process. A total of 12,000 units were completed and
transferred out of Department B during February. An analysis of the costs relating to work
134
Process Costing 135
in process and production activity in Department B for February follows:
Transferred- Materials Conversion

in Costs Costs Costs
Work in process, February 1:
Costs attached $12,000 $2,500 $1,000
February activity:
Costs added 29,000 5,500 5,000
The total cost per equivalent unit transferred out for February of Product X, rounded to the
nearest penny, was:
A. $2.82
B. $2.85
C. $2.05
D. $2.75
E. $2.78
Transferred-in costs = $41,000 20,000 = $2.05

Materials cost = $8,000 20,000 = .40
Conversion cost = $6,000 18,000 = .33
$2.78
JUST-IN-TIME AND BACKFLUSHING
MULTIPLE CHOICE
135
136 Chapter 6
D 1. One of the requirements for a JIT system to be successful is:

A. cyclical production
B. adequate inventory stock
C. coupling it with job order costing
D. high quality and balanced work loads
E. all of the above
A 2. All of the following are terms used to describe the JIT effort to reduce
inventories of work in process and raw materials, except:
A. backflush production
B. stockless production
C. lean production
D. ZIP production
E. none of the above are appropriate terms
C 3. The JIT production ideal is a batch size of:

A. one hundred
B. ten
C. one
D. zero
C 4. The objective of reducing inventory to zero is possible if all of the following

conditions are present, except:
A. low or insignificant setup costs
B. minimum lead times
C. long setup times
D. balanced and level work loads
E. no interruptions due to stockouts
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Process Costing 137
D 5. The continuing reduction of inventories is achieved by all of the following

steps except:
A. inventories are reduced until a problem is discovered
B. once the problem is defined the inventory level is increased to keep
the system operating smoothly
C. the problem is analyzed and practical ways are identified to reduce it
D. once the problem is removed, the inventory level is increased until
another problem is discovered
E. all of the above steps are required
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138 Chapter 10
B 6. In a JIT system, velocity is inversely related to:

A. backflushing
B. throughput time
C. acceleration
D. zero inventory production
D 7. If 500 units are produced per day and 2,000 units are in process at any
time, the throughput time is:
A. 1/2 day
B. 1/4 day
C. two days
D. four days
2,000
= 4 days
500
D 8. In a JIT system, if the rate of output is doubled while the number of units in
process is cut in half, then the speed of the system has been:
A. reduced by 25%
B. doubled
C. reduced by 50%
D. quadrupled
A 9. Of the following, the only activity that adds value to a product is:
A. processing time
B. moving time
Just-in-Time and Backflushing 139
C. waiting time
D. inspection time
E. all of the above
B 10. If the annual carrying cost percentage is 30% and average work in process
is $300,000 and management plans to use JIT to double the velocity of work in process
without changing total annual output, the savings in annual carrying costs will be:
A. $90,000
B. $45,000
C. $150,000
D. $180,000
30% x 1/2 x $300,000 = $45,000

140 Chapter 10
A 11. If Step 1 in a production process processes each unit and sends it to await
Step 2, and 500 units are waiting between Steps 1 and 2, how many defective units
might Step 1 produce before the problem is detected in Step 2?
A. 500
B. an unlimited number
C. 250
D. 1,000
C 12. Assume that a company plans a reduction in work in process levels of 50%
and has an annual inventory carrying cost of 20% and a past average cost of work in
process of $75,000. The 50% reduction in work in process would be expected to
produce annual savings of:
A. $37,500
B. $15,000
C. $7,500
D. $3,750
50% x 20% x $75,000 = $7,500
E 13. Alpha Company has 10 work stations where work in process is held, 100
average units in work in process per station, an average cost of a unit in work in process
of $75, and an annual inventory carrying cost of 20%. If Alpha plans a 50% reduction in
work in process levels, the expected annual savings in carrying costs would be:
A. $37,500
B. $15,000
C. $30,000
D. $3,750
50% x 20% x (10 x 100 x $75) = $7,500
B 14. Beta Company has an average dollar loss per defective unit of $25, a
planned reduction in number of defective units produced per out-of-control condition of 5,
and the number of out-of-control conditions not discovered immediately is 250. The
expected savings in cost of defects would be:
A. $1,250
B. $31,250
C. $6,250
D. $125
$25 x 5 x 250 = $31,250

142 Chapter 10
B 15. Beta Company has an average dollar loss per defective unit of $25, a
planned reduction in work in process levels of 50%, and an average number of units in
work in process per station of 100. Assume that the total number of instances in which
some work station goes out of control limits and produces defects is expected to be 500
annually and that in half those instances the out-of-control condition is not discovered
immediately and enters 10% of the units produced. The expected annual savings in cost
of defective units would be:
A. $1,250
B. $31,250
C. $6,250
D. $125
$25 x (50% x 100 x 10%) x (1/2 x 500) = $31,250
D 16. The costs to be offset against the savings from lower work in process levels
in a JIT system include all of the following, except:
A. handling a larger number of small batches of work in process
B. the higher probability of shutdowns due to the smaller safety stock
C. the possibility that setup costs cannot be reduced enough to offset
the larger number of setups
D. the possibility of customer dissatisfaction due to slower response time
to orders
E. all of the above
A 17. Advantages that result from reducing raw materials inventory include all of
the following except:
A. a decreased possibility of not being able to produce a unit when
required
B. a need for less storage space
C. a reduced risk of obsolescence
D. a reduced risk of damaged materials
E. all of the above are advantages
C 18. Under a JIT approach to purchasing, the ideal number of vendors for each
material is:
A. two
B. less than six
C. one
D. as many as can supply quality goods
E 19. All of the following are obstacles to JIT purchasing, except:

A. the layout of the production process
B. the frequency of schedule changes
C. the attitudes of purchasing agents and suppliers
D. the distance from suppliers
E. all of the above are obstacles
144 Chapter 10
B 20. JIT purchasing eliminates all of the following documents, except:

A. purchase requisitions
B. blanket purchase orders
C. receiving reports
D. materials requisitions
E. all of the above are eliminated
B 21. All of the following statements apply to a JIT work cell except that:
A. a cell is responsible for the entire production of a product or part
B. every worker in the cell specializes in a single task
C. a cell's workers may be evaluated and rewarded as a team
D. all workers in a cell are responsible for product quality
E. all of the above statements apply
A 22. All of the following are JIT performance measures, except:

A. capacity utilization
B. cycle time efficiency
C. inventory turnover
D. unscheduled maintenance downtime
E. number of defects
E 23. The cost accounting system that is noted for its lack of detailed tracking of
work in process during the accounting period is:
A. process costing
B. job order costing
C. standard costing
D. actual costing
E. backflush costing
A 24. The cost accounting system that would be most apt to use a single
inventory account entitled Raw and In Process (RIP) would be:
A. backflush costing
B. process costing
C. job order costing
D. historical costing
E. standard costing
D 25. To backflush materials cost from Raw and In Process (RIP) to Finished
Goods, the calculation would be:
A. materials in ending RIP inventory plus materials received during the
period minus materials in the beginning RIP inventory
B. materials in ending finished goods inventory plus materials cost
transferred from RIP minus materials in beginning finished goods inventory
C. materials in beginning finished goods inventory plus materials cost
transferred from RIP minus materials in ending finished goods inventory
D. materials in beginning RIP inventory plus materials received during
the period minus materials in ending RIP inventory
146 Chapter 10
B 26. Cheeta Company has materials cost in the June 1 Raw and In Process of
$10,000, materials received during June of $205,000 and materials cost in the June 30
Raw and In Process of $12,500. The amount to be backflushed from Raw and In
Process to Finished Goods at the end of June would be:
A. $215,000
B. $202,500
C. $207,500
D. $217,500
D 27. In backflush costing, if the conversion cost in the Raw and In Process was
$500 on July 1 and $1,000 on July 31, the account to be credited at the end of July for
the $500 increase would be:
A. Raw and In Process
B. Finished Goods
C. Raw Materials
D. Cost of Goods Sold
A 28. In backflush costing, if the conversion cost in Raw and In Process was
$1,000 on March 1 and $400 on March 31, the account to be credited for the $600
decrease would be:
A. Raw and In Process
B. Finished Goods
C. Raw Materials
D. Cost of Goods Sold
PROBLEMS
PROBLEM
1.
Cost Savings From Smaller Inventory. Automated Assembly Company maintains a WIP
inventory at each of 15 work stations, and the average size of the inventory is 200 units
per station. The physical flow of units into and out of each WIP location is first-in, first-
out. The total number of instances in which some work station goes out of its control
limits is expected to be 100 during the coming year. In 80% of these instances, the out-
of-control condition is expected to be discovered immediately by the operator at that
station; in the other 20% of these instances, a defect will enter 10% of the units
produced. These defective units enter WIP between stations, where they will be
discovered by the next station's operator. Every out-of-control condition is corrected as
soon as it is discovered. The average cost of a unit in WIP is $40, and the average loss
from an out-of-control condition is $20 per defective unit produced. The annual cost of
carrying WIP is 33% of the cost of the inventory.
Management plans to reduce the number of units held at every work station by 50%. The
rate of final output will be unchanged, and no other changes will be made in the system.
Required:
(1) Calculate the expected carrying cost savings from the change planned by the
management.
(2) Calculate the expected savings in cost of defects if the changes are implemented.
SOLUTION
(1) Carrying cost savings = 33% x reduction in average cost of WIP

148 Chapter 10
= 33% x 50% x past average cost of WIP

= .33 x .5 x (15 x 200 x $40)
= $19,800
(2) Savings in cost of defects = $20 x reduction in the number of defective units
= $20 x (50% x 200 x 10%) x (.20 x 100)
= $20 x 10 x 20
= $4,000
PROBLEM
2.
Inventory Size, Velocity, and Lead Time. Probtype Incorporated requires an average lead
time of 45 days on customer orders that require parts not kept in stock. When such a
customer order is received, the parts order is placed with a vendor immediately by
telephone, and the parts are received in an average of 21 days. The parts are inspected
and put into production an average of three days after receipt. The average time spent in
production is 16 days. After production is completed, the order goes through final
inspection in two days and arrives at the customer's site after an additional three days, on
average.
Management plans to leave the rate of final output unchanged, induce vendors to reduce
their total lead time by one-third, and reduce the average size of WIP to one-fourth of its
present level.
Required: Assuming management's plans are implemented successfully, calculate the

average lead time on customer orders that require parts not kept in stock.
SOLUTION
The average lead time will be 26 days, calculated as follows:
Reduction of vendor lead time = 1/3 x 21 days = 7 days
Reduction of time in WIP = 3/4 of present time in WIP

= 3/4 x 16 days
= 12 days
New lead time = present lead time - reductions

= 45 days - (7 days + 12 days)
= 26 days
PROBLEM
3.
Comparison of Process Costing and Backflushing; Unit Cost Calculations. BF Company
had 35 units in process, 50% converted, at the beginning of a recent, typical month; the
conversion cost component of this beginning inventory was $525. There were 40 units in
process, 50% converted, at the end of the month. During the month, 5,000 units were
completed and transferred to finished goods, and conversion costs of $250,000 were
incurred.
Required:
150 Chapter 10
(1) Carrying calculations to three decimal places, find the conversion cost per unit for
the month:
(a) by the average cost method as used in process costing.
(b) by dividing the total conversion cost incurred during the month by the number of
units completed during the month (do not calculate equivalent units).
(c) by dividing the total conversion cost incurred during the month by the number of
units started during the month.
(2) Using the three unit costs from Requirement (1), calculate three amounts for the
total conversion cost of the ending inventory of work in process to the nearest dollar.
(3) In light of the results of Requirement (2), which of the three methods of calculating
unit conversion cost would you recommend for the purpose of inventory costing, 1(a),
1(b), or 1(c)? Why?
SOLUTION
(1) (a) Equivalent production = 5,000 + (.50 x 40) = 5,020 units
$250,525
= $49.905 per unit
5,020
$250,000
(b) = $50 per unit
5,000
(c) Units started = 5,000 + 40 - 35 = 5,005
$250,000
= $49.950 per unit
5,005
(2) 40 x .50 x 49.905 = 998
40 x .50 x 50.000 = 1,000
40 x .50 x 49.950 = 999
(3) Considering that the results of Requirement (2) were within two dollars of each
other, then method 1(b) would be recommended because of its ease and simplicity.
PROBLEM
4.
Backflush Costing With a Finished Goods Account. The LanFat Manufacturing Company
uses a Raw and In Process (RIP) inventory account and expenses all conversion costs to
the cost of goods sold account. At the end of each month, all inventories are counted,
their conversion cost components are estimated, and inventory account balances are
adjusted accordingly. Raw material cost is backflushed from RIP to Finished Goods. The
following information is for the month of August:
Beginning balance for RIP account, including $4,800 of conversion cost $

152 Chapter 10
43,500
Raw materials received on credit 680,000
Ending RIP inventory per physical count, including $5,300 conversion
cost estimate 47,200
Required: Prepare all journal entries involving the RIP account.

SOLUTION
Journal entries involving the RIP account are:
Raw and In Process 680,000

Accounts Payable 680,000
This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed, because they remain a part of RIP.
Finished Goods 676,800

This entry backflushes material cost from RIP to Finished Goods. This is a postdeduction.
The calculation is:
Material in August 1 RIP balance $ 38,700

Material received during August 680,000
$ 718,700
Material in August 31 RIP, per physical count 41,900
Amount to be backflushed $ 676,800
Raw and In Process 500

Cost of Goods Sold 500
Conversion cost in RIP is adjusted from the $4,800 of August 1 to the $5,300 estimate at
August 31. The offsetting entry is made to Cost of Goods Sold, where all conversion
costs were charged during August.
PROBLEM
154 Chapter 10
5.
Backflush Costing With No Finished Goods Account. The ATM Manufacturing Company
produces only for customer order, and most work is shipped within twenty-four hours of
the receipt of an order. ATM uses a Raw and In Process (RIP) inventory account and
expenses all conversion costs to the cost of goods sold account. At the end of each
month, inventory is counted, its conversion cost component is estimated, and the RIP
account balance is adjusted accordingly. Raw material cost is backflushed from RIP to
Cost of Goods Sold. The following information is for the month of June:
Beginning balance of RIP account, including $900 of conversion cost $ 8,500

Ending RIP inventory per physical count, including $1,100 conversion
cost estimate 7,900
Required: Prepare all journal entries involving the RIP account.

SOLUTION
Journal entries involving the RIP account are:

This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed because they remain a part of RIP.
Cost of Goods Sold 187,800

This entry backflushes material cost from RIP to Cost of Goods Sold. This is a
postdeduction. The calculation is:
Material in June 1 RIP balance $ 7,600

Material received during June 187,000
$ 194,600
Material in June 30 RIP, per physical count 6,800

Conversion cost in RIP is adjusted from the $900 of June 1 to the $1,100 estimate at
June 30. The offsetting entry is made to Cost of Goods Sold, where all conversion costs
were charged during June.
PROBLEM
156 Chapter 10
6.
Backflush Costing; Entries in RIP and Finished Goods. The Clifton Manufacturing
Company has a cycle time of 1.5 days, uses a Raw and In Process (RIP) account, and
charges all conversion costs to Cost of Goods Sold. At the end of each month, all
inventories are counted, their conversion cost components are estimated, and inventory
account balances are adjusted. Raw material cost is backflushed from RIP to Finished
Goods. The following information is for May:
Beginning balance of RIP account, including $600 of conversion cost $ 5,500

Beginning balance of finished goods account, including $2,000 of
conversion cost 6,000
Ending RIP inventory per physical count, including $850 conversion
cost estimate 6,200
Ending finished goods inventory per physical count, including $1,550
conversion cost estimate 4,900
Required: Prepare all the journal entries that involve the RIP account and/or the finished
goods account.
SOLUTION


To backflush material cost from RIP to Finished Goods. This is a postdeduction. The
calculation is:
Material in May 1 RIP balance $ 4,900

Material received during May 173,000
$ 177,900
Material in May 31 RIP, per physical count 5,350

To backflush material cost from Finished Goods to Cost of Goods Sold. This is a
postdeduction. The calculation is:
Material in May 1 finished goods $ 4,000

Material backflushed from RIP 172,550
$ 176,550
Material in May 31 finished goods, per physical count 3,350

158 Chapter 10
Finished Goods 450
Conversion cost in RIP is adjusted from $600 of May 1 to the $850 estimate at May 31.
Conversion cost in Finished Goods is adjusted from the $2,000 at May 1 to the $1,550
estimate at May 31.
A 23. Simpson Co. adds materials at the beginning of the process in Department
M. The following information pertains to Department M's work in process during April:
Units
Work in process on April 1
(60% complete as to conversion cost) 3,000
Started in April 25,000
Completed in April 20,000
Work in process on April 30
(75% complete as to conversion cost) 8,000
Under the average costing method, the equivalent units for conversion cost are:
A. 26,000
B. 25,000
C. 24,000
D. 21,800
SUPPORTING CALCULATION: 20,000 + .75(8,000) = 26,000
D 24. During March, Quig Company's Department Y equivalent unit product costs,
computed under the average cost method, were as follows:
Materials $1
Conversion 3
Transferred-in 5
Materials are introduced at the end of the process in Department Y. There were 4,000
units (40% complete as to conversion costs) in work in process at March 31. The total
costs assigned to the March 31 work in process inventory should be:
160 Chapter 10
A. $36,000
B. $28,800
C. $27,200
D. $24,800
SUPPORTING CALCULATION: $5(4,000) + $3(4,000 x .4) = $24,800
The following questions are based on the material in the Appendix to the chapter.
B 25. If a company reports two different unit costs for goods transferred to the
next department, it is reasonable to assume that:
A. the department accounts for lost units at the end of the process
B. a fifo costing method is used
C. lost unit costs are computed separately
D. an average costing method is used
E. errors must have occurred in recording costs
C 26. In order to compute equivalent units of production using the fifo method of
process costing, work for the period must be broken down to units:
A. started and completed during the period
B. completed during the period and units in ending inventory
C. completed from beginning inventory, started and completed during the
month, and units in ending inventory
D. started during the period and units transferred out during the period
E. processed during the period and units completed during the period
A 27. The first-in, first-out method of process costing will produce the same cost
of goods manufactured amount as the average cost method when:
A. there is no beginning inventory
B. there is no ending inventory
C. beginning and ending inventories are each 50% complete
D. beginning inventories are 100% complete as to materials
E. goods produced are homogeneous
B 28. The fifo method of process costing differs from the average cost method of
process costing in that fifo:
A. allocates costs based on whole units, but the average cost method
uses equivalent units
B. considers the stage of completion of beginning work in process in
computing equivalent units of production, but the average cost method does not
C. does not consider the stage of completion of beginning work in
process in computing equivalent units of production, but the average cost method does
D. is applicable only to those companies using the fifo inventory pricing
method, but the average cost method may be used with any inventory pricing method
A 29. Connor Company computed the flow of physical units completed for
Department M for the month of March as follows:
162 Chapter 10
Units completed:
From work in process on March 1 15,000
From March production 45,000
Total 60,000
Materials are added at the beginning of the process. The 12,000 units of work in process
at March 31 were 80% complete as to conversion costs. The work in process at March 1
was 60% complete as to conversion costs. Using the fifo method, the equivalent units for
March conversion costs were:
A. 60,600
B. 55,200
C. 57,000
D. 54,600
E. 63,600
SUPPORTING CALCULATION: (15,000 x .4) + 45,000 + (12,000 x .8) =

60,600
164 Chapter 10
A 17. Selected cost data (in thousands) concerning the past fiscal year's
Inventories
Beginning Ending
Materials $75 $ 85

The cost of goods sold during the year was:

A. $716
B. $691
C. $801
D. $736
A 18. J. D. Doonesbury Company manufactures tools to customer specifications.

The following data pertain to Job 1501 for April:
Direct materials used $ 4,200

Direct labor hours worked 300
Direct labor rate per hour $ 8.00
Machine hours used 200

Applied factory overhead rate per machine hour $ 15.00
What is the total manufacturing cost recorded on Job 1501 for April?
A. $9,600
B. $10,300
C. $11,100
D. $5,400
E. $8,800
SUPPORTING CALCULATION: $4,200 + (300 x $8) + (200 x $15) =

$9,600
C 19. In service businesses using job order costing, the most commonly used
base for applying overhead to jobs is:
A. machine hours
B. direct materials consumed
C. direct labor cost
D. meals, travel, and entertainment
166 Chapter 10
A 20. In service businesses using job order costing, the hourly rate used to charge
costs to a job usually includes:
A. both labor and overhead cost
B. labor cost only
C. overhead cost only
D. labor, overhead, and miscellaneous costs
A 21. Work in Process is debited and Materials is credited for:

A. the issuance of direct materials into production
B. the issuance of indirect materials into production
C. the return of materials to the storeroom
D. the application of materials overhead
B 22. Factory Overhead Control is debited and Payroll is credited for:

A. the recording of payroll
B. the distribution of indirect labor costs
C. the distribution of direct labor costs
D. the distribution of withholding taxes
A 23. Applied Factory Overhead is debited and Factory Overhead is credited to:
A. close the estimated overhead account to actual overhead
B. record the actual factory overhead for the period
C. charge estimated overhead to all jobs worked on during the period
D. to record overapplied overhead for the period
C 24. The best overhead allocation base to use in a labor-intensive manufacturing

environment probably would be:
A. materials cost
B. machine hours
C. direct labor hours
D. units of production
D 25. Finished Goods is debited and Cost of Goods Sold is credited for:
A. transfer of completed goods to the customer
B. sale of a customer order
C. return of materials to the supplier
D. return of goods by the customer
168 Chapter 10
PROBLEMS
PROBLEM
1.
Job Order Cost Schedule. Winkel Woodcrafters produces special-order wood products.
The company uses job order costing for pricing and cost accumulation purposes. The
following costs were incurred on two recent jobs:
Cost Item Job Pine-20 Job Birch-10

Direct materials:
Issued $6,500 $8,000
Returned 500 0
Indirect materials used 500 400
Direct labor $9,000 $15,000
Direct labor rate $9 per hour $10 per hour
Overhead application rate $10 per direct labor hour $15 per direct labor hour
The company adds a 50% markup on cost in determining the amount to charge for each
job.
Required: Prepare a schedule showing the cost and the amount to be charged for each
job.
SOLUTION
Job Pine-20 Job Birch-10

Direct materials $ 6,000 $ 8,000
Direct labor 9,000 15,000
Factory overhead applied 10,000 22,500

Total $ 25,000 $ 45,500
Allowance for profit and other costs 12,500 22,750
Amount to be charged $ 37,500 $ 68,250
PROBLEM
2. Job Order Cost Sheet; Over- or Underapplied Overhead. During June, the following
transactions took place at the Cassandran Corp.
June 3 Purchased materials, $30,000.

5 Requisitioned materials from inventory, $20,000 (75% of these were direct;
25% were indirect). Direct materials of $3,000 and indirect materials of $1,000 were for
Job 00-1. The remainder were for Job 00-2.
7 For Job 00-2, returned $150 of direct materials and $200 of indirect
materials.
8 Recorded liabilities for payroll: direct labor, $15,000 and indirect labor,
$5,000. Of the direct labor cost, 60% was for Job 00-1; the remainder was for Job
00-2.
10 Incurred other factory overhead costs, $20,000 (all applicable to Jobs 00-1
and 00-2).
14 Applied overhead at the rate of 200% of direct labor cost to Jobs 00-1 and
00-2, which were completed and transferred to finished goods account today.
170 Chapter 10
Required: Assuming that Jobs 00-1 and 00-2 were the only jobs during the period and
that all overhead (as recorded above) is the total applicable overhead for these projects:
(1) Prepare a job order cost sheet for each job.

(2) Determine the difference between applied and actual overhead for the month.
SOLUTION
(1)
Job 00-1 Job 00-2
Materials $ 3,000 $ 11,850
Labor 9,000 6,000
Overhead applied 18,000 12,000
Total cost $ 30,000 $ 29,850
(2) Analysis of Factory Overhead

Incurred:
Indirect materials $ 4,800
Indirect labor 5,000
Other overhead incurred 20,000 $ 29,800
Applied:
Job 00-1 $ 18,000
Job 00-2 12,000 30,000
Amount overapplied $ (200 )
PROBLEM
3.
Job Order Cycle Entries. The following completed cost sheets were prepared for three
jobs that were in production during April in the Special Order Division of Byron Company:
Job 097 Job 781 Job 946

Direct materials $ 6,000 $2,700 $4,100
Direct labor 9,200 7,300 8,200
Applied factory overhead 6,900 5,475 6,120
Allowance for commercial expenses and profit 11,050 7,738 9,210
On April 1, Job 097 was 75% complete as to materials, labor, and overhead. It was
finished during the month. The other jobs were started and finished during the month.
Jobs 097 and 946 were sold on account at the end of the month.
Required: Prepare general journal entries to be recorded in April to accumulate these job
costs for Work in Process as well as for Finished Goods and for the sale of the two jobs.
172 Chapter 10
SOLUTION
Debit Credit
Work in Process 8,300 *
Materials 8,300
Work in Process 17,800 **

Accrued Payroll 17,800
Work in Process 13,320 ***

Factory Overhead Control 13,320

Work in Process 55,995

Accounts Receivable 60,780

Sales 60,780
* (.25 x $6,000) + $2,700 + $4,100

** (.25 x $9,200) + $7,300 + $8,200
*** (.25 x $6,900) + $5,475 + $6,120
PROBLEM
4.
Voyager Inc. produces customized vans in a job order shop. On November 1, the
following balances appear in the inventory records:
Finished goods $179,000

Work in process 308,000
Materials 83,000
The amount in Finished Goods represents $101,000 recorded for Van 175 and $78,000
recorded for Van 177. The work in process account represents the three vans in process,
as follows:
Van 179 Van 180 Van 181

Factory overhead $75,000 $50,000 $25,000
Direct labor 60,000 40,000 20,000
Direct materials 26,000 7,000 5,000
174 Chapter 10
The following transactions occurred during November:

(a) Purchased materials on account, $80,000.
(b) Requisitioned $60,000 of materials from inventory: $15,000 applied to Van 180,
$25,000 to Van 181, and $16,000 to Van 182, a new order; the balance was for indirect
materials.
(c) Recorded the liability for the payroll and the labor cost distribution in a single entry:
total payroll, $208,750. Of the payroll cost, 10% applied to Van 179, 20% to Van 180,
35% to Van 181, 30% to Van 182, and the remainder to indirect labor.
(d) Paid the payroll.
(e) Applied factory overhead at the rate of 150% of direct labor cost.
(f) Completed Vans 179 and 180.
(g) Sold Vans 175, 177, and 180 at 50% over manufacturing costs.
Required: Prepare general journal entries to record these transactions.
SOLUTION
Debit Credit
(a) Materials 80,000
(b) Factory Overhead Control 4,000

Materials 60,000
(c) Factory Overhead Control 10,437

Accrued Payroll 208,750
(d) Accrued Payroll 208,750

Cash 208,750
(e) Work in Process 297,470

Applied Factory Overhead 297,470
(f) Finished Goods 429,563

(g) Accounts Receivable 593,063

Sales 593,063

176 Chapter 10
PROBLEM
5.
Manufacturing Costs. The work in process account of Meyers Company showed:
Work in Process
Materials $22,000 | Finished goods $68,000

Direct labor 37,000 |
Factory overhead 55,500 |
Materials charged to the one job still in process amounted to $5,000. Factory overhead
is applied as a predetermined percentage of direct labor cost.
Required: Compute the following:
(1) The amount of direct labor cost in finished goods.

(2) The amount of factory overhead in finished goods.
SOLUTION
(1) The amount of direct labor in finished goods:

Finished goods $68,000
Materials included in finished goods 17,000
Direct labor and factory overhead in finished goods $51,000
Factory overhead charged to work in process $55,500

= = 1.5
Direct labor charged to work in process $37,000
Let x = direct labor in finished goods

2.5x = $51,000 direct labor and factory overhead in finished goods

x = $20,400 direct labor in finished goods
(2) The amount of factory overhead in finished goods:
x = $20,400
1.5x = 1.5($20,400)
1.5x = $30,600 factory overhead in finished goods
PROBLEM
6.
Manufacturing Costs. Teddy Company is to submit a bid on the production of 5,500
vases. It is estimated that the cost of materials will be $8,500, and the cost of direct
labor will be $12,000. Factory overhead is applied at 50% of direct labor cost in the
Molding Department and at $7.50 per direct labor hour in the Finishing Department. Of
the above direct labor, it is estimated that 500 direct labor hours at a cost of $4,000 will
be required in Finishing. The company wishes a markup of 100% of its total production
cost.
178 Chapter 10
Required: Determine the following:
(1) Estimated cost to produce.

(2) Estimated prime cost.
(3) Estimated conversion cost.
(4) Bid price.
SOLUTION
(1) Materials $ 8,500

Direct labor 12,000
Factory overhead:
Molding (50% x $8,000) 4,000
Finishing (500 DLH x $7.50) 3,750
Estimated cost to produce $ 28,250
(2) Materials $ 8,500

Direct labor 12,000
Estimated prime cost $ 20,500
(3) Direct labor $ 12,000

Factory overhead 7,750
Estimated conversion cost $ 19,750
(4) Estimated cost to produce $ 28,250

Markup ($28,250 x 100%) 28,250
Bid price $ 56,500
PROBLEM
7.
Flow of Costs Through T Accounts. The Palmer Company had the following inventories at
the beginning and end of July:
July 1 July 31
Materials $20,000 $ 45,000
Work in process ? 185,000
Finished goods 65,000 115,000
During July, the cost of materials purchased was $160,000 and factory overhead of
$125,000 was applied at a rate of 75% of direct labor cost. July cost of goods sold was
$240,000.
Required: Prepare completed T accounts showing the flow of the cost of goods
manufactured and sold.
SOLUTION
Materials Work in Process

Inv. 20,000 | WIP 135,000 Inv. 48,333 **
| FG 290,000
Purch. 160,000 | Materials 135,000 |
180,000 | Factory |
45,000 | overhd. 125,000 |
| Labor 166,667 |
| 475,000 |
| 185,000 |
Finished Goods Cost of Goods Sold

Inv. 65,000 | CGS 240,000 FG 240,000 |
WIP 290,000* | |
355,000 | |
115,000 | |
CGA-Canada (adapted). Reprinted with permission.
*Beginning inventory + WIP = Ending inventory + CGS

$65,000 + WIP = $115,000 + $240,000
WIP = $290,000
**Beginning WIP + Mfg. costs = Ending WIP + FG

Beginning WIP + $426,667 = $185,000 + $290,000
Beginning WIP = $48,333
197
198 Chapter 10
ACTIVITY ACCOUNTING: ACTIVITY-BASED COSTING AND ACTIVITY-BASED

MANAGEMENT
MULTIPLE CHOICE
A 1. A base used to allocate the cost of a resource to the different activities

using that resource is a(n):
A. resource driver
B. activity driver
C. final cost object
D. driver
B 2. A base used to allocate the cost of products, customers, or other final cost
objects is a(n):
A. resource driver
B. activity driver
C. final cost object
D. driver
B 3. Examples of activities at the batch level of costs include:

A. cutting, painting, and packaging
B. scheduling, setting up, and moving
C. designing, changing, and advertising
D. heating, lighting, and security
198
C 4. Examples of activities at the product level of costs include:

D 5. Examples of activities at the plant level of costs include:

199
200 Chapter 14
A 6. Examples of activities at the unit level of costs include:

A 7. Examples of unit-level costs are:

A. portions of electricity and indirect materials
B. salaries of schedulers and setup personnel
C. salaries of designers and programmers
D. depreciation and insurance on buildings
C 8. Examples of product-level costs are:

D 9. Examples of plant-level costs are:

B 10. Examples of batch-level costs are:

Activity Accounting: Activity-Based Costing and Activity-Based Management 201

A 11. Examples of unit-level activity drivers include:

A. units of output and direct labor hours
B. number of batches and material moves
C. number of products and design changes
D. square footage occupied
E. all of the above
B 12. Examples of batch-level activity drivers include:

E. all of the above
202 Chapter 14
C 13. Examples of product-level activity drivers include:

E. all of the above
D 14. Examples of plant-level activity drivers include:

E. all of the above
A 15. Unit-level costs are costs that:

A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site
D 16. Plant-level costs are costs that:

A. inevitably increase whenever a unit is produced
B. are caused by the number of batches produced and sold
C. are incurred to support the number of different products produced
D. are incurred to sustain capacity at a production site
E 17. Unit-level drivers are:

A. inversely proportional to the volume of output
B. measures of activities that vary with the number of batches produced
and sold
C. measures of activity that vary with the number of different products
produced and sold
D. for assigning plant-level costs
A 18. Traditional costing systems are characterized by their use of which of the
following measures as bases for allocating overhead to output:
A. unit-level drivers
B. batch-level drivers
C. product-level drivers
D. plant-level drivers
E 19. ABC systems are characterized by their use of which of the following
measures as bases for allocating overhead to output:
A. unit-level drivers
B. batch-level drivers
C. product-level drivers
D. plant-level drivers
E. all of the above
204 Chapter 14
A 20. All of the following are distinctions that usually exist between traditional and
ABC costing systems, except that:
A. the number of overhead cost pools tends to be lower in ABC systems
B. the number of allocation bases tend to be higher in ABC systems
C. costs within an ABC cost pool tend to be more homogeneous than
the costs within a traditional system's cost pool
D. all ABC systems are two-stage costing systems, while traditional
systems may be one- or two-stage
E. all of the above are distinctions
D 21. All of the following are distinctions that usually exist between traditional and
ABC costing systems, except that:
A. the number of overhead cost pools tends to be higher in ABC
systems
B. the number of allocation bases tend to be higher in ABC systems
C. costs within an ABC cost pool tend to be more homogeneous than
the costs within a traditional system's cost pool
D. all ABC systems are one-stage costing systems, while traditional
systems may be one- or two-stage
E. all of the above are distinctions
B 22. Compared to an ABC system, a traditional costing system reports:

A. a lower unit cost for high-volume products and a higher unit cost for
low-volume products
B. a higher unit cost for high-volume products and a lower unit cost for
low-volume products
C. the same unit costs for high- and low-volume products as does an
ABC system
D. either higher or lower unit cost for high-volume products than an ABC
system depending upon the level of fixed costs
C 23. Activity-based management (ABM) is:

A. a costing system in which multiple overhead cost pools are allocated
using bases that include one or more nonvolume related factors
B. a base used to allocate the cost of a resource to the different
activities using it
C. the use of information obtained from ABC to make improvements in
the firm
D. a base used to allocate the cost of an activity to products and
customers
A 24. All of the following are ways that activities can be managed to achieve
improvements in a process, except:
A. activity induction
B. activity elimination
C. activity selection
D. activity sharing
E. all of the above are ways in which activities may be managed
C 25. All of the following are examples of non-value-added activities except:

A. ordering
B. receiving
C. assembling
D. inspections
E. setting up
206 Chapter 14
PROBLEMS
PROBLEM
1.
Levels of Activity Drivers
Required: Each of the following is a potential activity driver. Identify the most likely level
of each activity driver by writing U for a unit-level driver, B for a batch-level driver, and P
for a product-level driver.
1. Number of setups
2. Number of work orders
3. Machine hours
4. Pounds of product
5. Number of part numbers
6. Design hours
7. Number of design changes
8. Marketing promotions
9. Direct materials dollars
10. Loads of materials moved
SOLUTION
1. B 2. B 3. U 4. U 5. P
6. P 7. P 8. P 9. U 10. B
PROBLEM
2.
Distortion of Batch-Level Costs. Maupin Company's existing cost system accumulates all
overhead in a single cost pool and allocates it based on direct labor hours. Last year,
overhead costs totaled $1,500,000, and Product A used 3,000 of the 30,000 total direct
labor hours. An ABC study revealed that of the total overhead cost for last year,
$100,000 represented batch-level costs; these batch-level costs are driven by work
orders; and a total of 500 work orders were issued, of which 25 were for Product A.
Required: With respect to batch-level costs only, calculate the existing cost system's
direction and amount of cost distortion for Product A.
SOLUTION
The existing system allocated 3,000/30,000 = 10% of all overhead to Product A last
year; but A accounted for only 25/500 = 5% of batch-level activity. So, with respect to
batch-level costs only, the existing system overstated A's cost last year by a total of:
(10% - 5%) x $100,000 = $5,000 overstatement

208 Chapter 14
PROBLEM
3.
Value-Added and Non-Value-Added Activities. Sequential Company's sole product, a
unique end table made from lumber, is produced and sold in the following sequence of
steps:
(a) wood received and inspected at receiving dock

(b) wood moved to stores inventory
(c) wood moved to Cutting Department
(d) wood cut to size
(e) moved to Planing Department
(f) placed in queue to await planing
(g) wood smoothed and shaped
(h) moved to Inspection Department
(i) inspected
(j) moved to in-process storage area
(k) moved to Assembly Department
(l) various parts of the table are assembled
(m) placed on hand truck to await material handler
(n) moved to Staining Department
(o) tables stained
(p) moved to Inspection Department
(q) inspected
(r) moved to Shipping Department
(s) tables shipped
Required: Which of the steps add value to the product?
SOLUTION
Activities (d), (g), (l), and (o) are the only ones which add value.
210 Chapter 14
PROBLEM
4.
Allocation Rates and Driver Rates. The Barre Division of Scranton Company manufactures
many high-volume products and many low-volume products. Selected information follows
for Barre's most recent year of operations:
Indirect costs:
Machine related:
Machine operation $ 75,000
Machine setup 50,000
Total machine overhead $ 125,000
Materials related:
Materials handling $ 45,000
Other materials-related 60,000
Total materials overhead $ 105,000
Other overhead $ 190,000
Total overhead $ 420,000
Machine hours 10,000

Pounds of materials 50,000
Setup hours 1,000
Purchase orders 1,200
Direct labor hours 25,000
Barre's existing cost system allocates all machine-related overhead based on machine
hours and all the remaining overhead based on direct labor hours. However, a recent
study determined that machine setup costs and material handling costs are primarily
related to setup hours, and other materials-related costs are primarily related to the
number of purchase orders issued. Barre does not keep significant materials inventories
on hand.
Required:
(1) Calculate the two overhead rates in Barre's existing cost system for the most recent
year.
(2) Calculate the overhead (driver) rates that an ABC system would use for the most
recent year, making only the changes suggested by the results of the recent study.
212 Chapter 14
SOLUTION
(1)
$125,000 of machine- related overhead
= $12.50 per machine hour
10,000 machine hours
$295,000 of remaining overhead costs

= $11.80 per direct labor hour
25,000 DLH
(2)
$75,000 of machine operation overhead
= $7.50 per machine hour
10,000 machine hours
$50,000 of machine- setup overhead + $45,000 of materials handling overhead

= $95 per setup hour
1,000 setup hours
$60,000 of other materials- related cost

= $50 per purchase order
1,200 purchase orders
$190,000 of _ other overhead _

= $7.60 per direct labor hour
25,000 DLH
PROBLEM
5.
Comparison of ABC and Traditional Costing; Two Products. Blaine Company produces
two products, Nifty and So-So, and uses a costing system in which all overhead is
accumulated in a single cost pool and allocated based on machine hours. Blaine's
management has decided to implement ABC because a cost study has revealed significant
amounts of overhead cost related to setup activity and design activity. The number of
setups and the number of design hours will be the activity drivers for the two new cost
pools, and machine hours will continue as the base for allocating the remaining overhead.
Selected information follows for Blaine Company's most recent year of operations:
Nifty So-So Total

Units produced 500 15,500 16,000
Direct material cost:

Per unit $ 200 $ 20
Total $ 100,000 $ 310,000 $ 410,000
Machine hours 3,000 47,000 50,000

Direct labor cost $ 50,000 $ 350,000 $ 400,000
Setups 120 80 200
Design hours 6,000 4,000 10,000
Overhead:
Setup-related $ 250,000
Design-related 350,000
Other 900,000
Total overhead $ 1,500,000
214 Chapter 14
Required:
(1) Calculate the total and per-unit costs reported for the two products by the existing
costing system.
(2) Calculate the total and per-unit costs reported for the two products by the ABC
system.
12 Chapter 14
SOLUTION
(1) Blaine Company

Product Costs from Existing Cost System
Overhead Rate:
$1,500,000 of overhead divided by 50,000 machine hours = $30 per machine hour
Nifty So-So Total

Direct material $ 100,000 $ 310,000 $ 410,000
Direct labor 50,000 350,000 400,000
Overhead:
$30 x 3,000 90,000
$30 x 47,000 1,410,000 1,500,000
Total cost $ 240,000 $ 2,070,000 $ 2,310,000
Units produced 500 15,500
Cost per unit $ 480.00 $ 133.55
(2) Blaine Company

Product Costs from Activity-Based Costing System
Overhead Rate:
$250,000 setup-related costs divided by 200 setups = 1,250 per setup
$350,000 design-related costs divided by 10,000 design hours = $35 per design hour
$900,000 of other overhead divided by 50,000 machine hours = $18 per machine hour
Nifty So-So Total

Direct material $ 100,000 $ 310,000 $ 410,000
Direct labor 50,000 350,000 400,000
12
Overhead:
$1,250 x 120 setups 150,000
$1,250 x 80 setups 100,000 250,000
$35 x 6,000 design hours 210,000
$35 x 4,000 design hours 140,000 350,000
$18 x 3,000 machine hours 54,000
$18 x 47,000 machine hours 846,000
900,000
Total cost $ 564,000 $ 1,746,000 $ 2,310,000
Units produced 500 15,500
Cost per unit $ 1,128.00 $ 112.65
STANDARD COSTING: INCORPORATING

STANDARDS INTO THE ACCOUNTING RECORDS
MULTIPLE CHOICE
Question Nos. 8-15, 17, and 19-21 are AICPA adapted.

Question Nos. 16, 22, and 23 are ICMA adapted.
Question No. 18 is CIA adapted.
D 1. When the amount for materials inventory in the general ledger represents
the standard cost of materials and the materials ledger cards are kept in quantities only,
the materials price variance is:
A. recorded at the time of disposition of the inventory
B. ignored
C. recorded when materials are requisitioned for production
13
14 Chapter 14
D. recorded when materials are received

E. allocated to cost of sales only
B 2. A company recorded the following journal entry when materials were issued
to the factory:

Materials Quantity Variance 200
Materials 8,800
Assuming that there was both a price variance and a quantity variance associated with
these materials, this entry indicates that the method used for materials price variances is
to:
A. allocate variances to ending inventories and cost of sales
B. record variances at the time materials are received
C. record variances at the time of disposition of work in process
D. allocate variances to cost of sales only
E. record variances at the time materials are used
D 3. Variances resulting from materials price changes that are to be passed on to

customers are:
A. charged to cost of goods sold
B. carried as a special credit to inventory accounts
C. recorded as ordinary inflation revenue
D. allocated to inventories and cost of goods sold
E. charged to a special loss account
14
Standard Costing: Incorporating Standards into the Accounting Records 15
E 4. When standard cost variances are significant, Cost Accounting Standards

require that the variances be:
A. charged to cost of goods sold
B. deferred
C. allocated to inventories only if they are allocated solely for financial
reporting purposes
D. recorded as extra income in the current period
E. allocated to inventories as well as cost of goods sold
D 5. If new standard costs reflect conditions that affected the actual cost of
goods in the ending inventory, then ending inventories are costed at:
A. the contra amount carried in cost of sales
B. the old standard
C. the amount carried in the variance accounts
D. the new standard
E. actual cost
A 6. A credit balance in the labor efficiency variance indicates that:

A. standard hours exceed actual hours
B. actual hours exceed standard hours
C. standard rate and standard hours exceed actual rate and actual hours
D. actual rate and actual hours exceed standard rate and standard hours
D 7. A debit balance in a direct labor efficiency variance account indicates that:

A. actual total direct labor costs incurred were less than standard direct
labor costs allowed for the units produced
B. the number of units produced was less than the number of units
budgeted for the period
C. the average wage rate paid to direct labor employees was less than
the standard rate
16 Chapter 19
D. the standard hours allowed for the units produced were less than
actual direct labor hours used
E. all of the above
E 8. Josey Manufacturing Corporation uses a standard cost system that records

direct materials at actual cost, records materials price variances at the time that direct
materials are issued to work in process, and prorates all variances at year end. Variances
associated with direct materials are prorated based on the direct materials balances in the
appropriate accounts, and variances associated with direct labor and factory overhead are
prorated based on the direct labor balances in the appropriate accounts.
The following information is available for Josey for the year ended December 31:
Finished goods inventory at December 31:

Direct materials $ 87,000
Direct labor 130,500
Applied factory overhead 104,400
Direct materials inventory at December 31 65,000
Cost of goods sold for the year ended December 31:
Direct materials 348,000
Direct materials price variance (unfavorable) 12,500
Direct materials usage variance (favorable) 15,000
Direct labor rate variance (unfavorable) 20,000
Direct labor efficiency variance (favorable) 5,000
Factory overhead incurred 690,000
There were no beginning inventories and no ending work in process inventory. Factory
overhead is applied at 80% of standard direct labor cost.
The amount of direct materials price variance to be prorated to finished goods inventory at
December 31 is a:
A. $1,740 debit
B. $2,000 debit
18 Chapter 19
C. $2,610 credit
D. $3,000 credit
$87,000
_ $12,500 = $2,500
$87,000 + $348,000
A 9. Josey Manufacturing Corporation uses a standard cost system that records


The total amount of direct materials in finished goods inventory at December 31, after all
materials variances have been prorated, is:
A. $86,500
B. $87,500
20 Chapter 19
C. $88,000
D. $86,000
$87,000 $87,000
$87,000 + _ $12,500 _ $15,000
$87,000 + $348,000 $87,000 + $348,000
= $86,500
C 10. Josey Manufacturing Corporation uses a standard cost system that records

The total amount of direct labor in finished goods inventory at December 31, after all
variances have been prorated, is:
A. $126,750
B. $134,250
22 Chapter 19
C. $132,750
D. $133,750
$130,500 $130,500
$130,500 + _ $20,000 _ $5,000
$130,500 + $739,500 $130,500 + $739,500
= $132,750
B 11. Josey Manufacturing Corporation uses a standard cost system that records

The total cost of goods sold for the year ended December 31, after all variances have
been prorated, is:
A. $1,693,850
B. $1,684,750
24 Chapter 19
C. $1,675,450
D. $1,683,270
$348,000 + $739,500 + $591,600 + ($15,000 x .85) - ($2,500 x .80) -

.85 ($6,000) = $1,684,750
B 12. Kaiser Manufacturing Company uses a standard cost system in accounting

for the costs of production of its only product, Product A. The standards for the
production of one unit of Product A are as follows:
Direct materials: 10 feet of Item 1 at $.78 per foot and 3 feet of Item 2 at $1 per foot
Direct labor: 4 hours at $3.60 per hour
Factory overhead: applied at 150% of standard direct labor costs
There was no inventory on hand at the end of the year. Materials price variances are
isolated at purchase. Following is a summary of costs and related data for the production
of Product A during the year:
100,000 feet of Item 1 were purchased at $.75 per foot.

8,000 units of Product A were produced that required 78,000 feet of Item 1, 26,000 feet
of Item 2, and 31,000 hours of direct labor at $3.50 per hour.
6,000 units of Product A were sold.
The total debits to the direct materials account for the purchase of Item 1 should be:
A. $75,000
B. $78,000
C. $58,500
D. $60,000
100,000 x $.78 = $78,000

26 Chapter 19
D 13. Kaiser Manufacturing Company uses a standard cost system in accounting


The total debits to the work in process account for direct labor should be:
A. $111,600
B. $108,500
C. $112,000
D. $115,200
8,000 x 4 x $3.60 = $115,200

A 14. Kaiser Manufacturing Company uses a standard cost system in accounting


Before allocation of standard variances, the balance in the materials quantity variance
account of Item 2 was:
A. $2,000 debit
B. $1,000 credit
C. $2,600 debit
D. $600 debit
E. $1,000 debit
26,000 - (8,000 x 3 x $1) = $2,000

28 Chapter 19
C 15. Kaiser Manufacturing Company uses a standard cost system in accounting

There was no work in process inventory on hand at the end of the year. Materials price
variances are isolated at purchase. Following is a summary of costs and related data for
the production of Product A during the year:

If all standard variances are prorated to inventories and cost of goods sold, the amount of
materials quantity variance for Item 2 to be prorated to direct materials inventory would
be:
A. $500 debit
B. $500 credit
C. 0
D. $333 credit
E. $333 debit
The variance would be allocated only to finished goods and cost of goods
sold.
E 16. The most appropriate time from a control standpoint to record any variance
of actual materials prices from standard is:
A. at the time of materials usage
B. as needed to evaluate the performance of the purchasing manager
C. at the time the materials are issued by the storeroom
D. at year end, when all variances will be known
E. at the time of purchase
C 17. Standard costing will produce the same income before extraordinary items
as does actual costing when standard cost variances are assigned to:
A. work in process and finished goods inventories
B. an income or expense account
C. cost of goods sold and inventories
D. cost of goods sold
E. income summary
30 Chapter 19
D 18. When items are transferred from stores to production, an accountant debits
Work in Process and credits Materials. During production, a materials quantity variance
may occur. Materials Quantity Variance is debited for an unfavorable variance and
credited for a favorable variance. The intent of variance entries is to provide:
A. accountability for materials lost during production
B. a means of safeguarding assets in the custody of the system
C. compliance with GAAP
D. information for use in controlling the cost of production
E. all of the above
B 19. At the end of an accounting period, a quantity variance that is significant in

amount should be:
A. reported as a deferred charge or credit
B. allocated among work in process inventory, finished goods inventory,
and cost of goods sold
C. charged or credited to cost of goods manufactured
D. allocated among cost of goods manufactured, finished goods
inventory, and cost of goods sold
C 20. What is the normal year-end treatment of immaterial variances recognized in

a cost accounting system utilizing standards?
A. reclassified to deferred charges until all related production is sold
B. allocated among cost of goods manufactured and ending work in
process inventory
C. closed to Cost of Goods Sold in the period in which they arose
D. capitalized as a cost of ending finished goods inventory
A 21. An unacceptable treatment of factory overhead variances at an interim

reporting date is to:
A. apportion the total only between work in process and finished goods
inventories on hand at the end of the interim reporting period
B. apportion the total only between that part of the current period's
production remaining in inventories at the end of the period and that part sold during the
period
C. carry forward the total to be offset by opposite balances in later
periods
D. charge or credit the total to Cost of Goods Sold during the period
E. all are acceptable
32 Chapter 19
A 22. Sam Company adopted a standard cost system several years ago. The
standard costs for the prime costs of its single product are as follows:
Material (8 kilograms x $5.00/kg.) $40.00

Labor (6 hours x $8.20/hr.) $49.20
The operating data in the following column were taken from the records for November:
In-process beginning inventoryCnone

In-process ending inventoryC800 units, 75% complete as to labor; material is issued at
the beginning of processing
Units completedC5,600 units
Budgeted outputC6,000 units
Purchases of materialsC50,000 kilograms
Total actual labor costsC$300,760
Actual hours of laborC36,500 hours
Material usage varianceC$1,500 unfavorable
Total material varianceC$750 unfavorable
The total amount of material and labor cost transferred to the finished goods account for
November is:
A. $499,520
B. $535,200
C. $550,010
D. $561,040
(5,600 x $40) + (5,600 x $49.20) = $499,520

C 23. Sam Company adopted a standard cost system several years ago. The
standard costs for the prime costs of its single product are as follows:
Material (8 kilograms x $5.00/kg.) $40.00

Labor (6 hours x $8.20/hr.) $49.20
The operating data in the following column were taken from the records for November:
In-process beginning inventoryCnone

In-process ending inventoryC800 units, 75% complete as to labor; material is issued at
the beginning of processing
Units completedC5,600 units
Budgeted outputC6,000 units
Purchases of materialsC50,000 kilograms
Total actual labor costsC$300,760
Actual hours of laborC36,500 hours
Material usage varianceC$1,500 unfavorable
Total material varianceC$750 unfavorable
The total amount of material and labor cost in the ending balance of work in process
inventory at the end of November is:
A. 0
$9,840
$61,520
$71,360
(800 x $40) + (800 x .75 x $49.20) = $61,520

34 Chapter 19
C 24. When the amount for materials inventory in the general ledger represents
the actual cost of materials and the materials ledger cards show quantities and dollar
values, the materials price variance is:
A. recorded at the time of disposition of the inventory
B. ignored
C. recorded when materials are requisitioned for production
D. recorded when materials are received
E. allocated to cost of sales only
E 25. The treatment of variances depends upon all of the following, except the:
A. type of variance
B. size of the variance
C. cause of the variance
D. timing of the variance
E. it depends upon all of the above
The following questions are based on the material in the Appendix to the chapter.
C 26. A company recorded the following journal entry:

Factory Overhead Variable Efficiency Variance 950
Factory Overhead Fixed Efficiency Variance 425
This entry indicates that the:

A. four-variance method is in use and the variance is favorable
B. three-variance method is in use and the variance is favorable
C. four-variance method is in use and the variance is unfavorable
D. two-variance method is in use and the variance is favorable
E. three-variance method is in use and the variance is unfavorable
A 27. In the alternative three-variance method, the amount of over- or

underapplied factory overhead is analyzed as:
A. spending, idle capacity, and efficiency variances
B. volume, variable efficiency, and fixed efficiency variances
C. controllable, spending, and idle capacity variances
D. volume, variable efficiency, and spending variances
D 28. In the four-variance method, the amount of over- or underapplied factory

overhead is analyzed as:
A. spending, idle capacity, efficiency, and volume variances
B. controllable idle capacity, spending, and efficiency variances
C. variable efficiency, fixed efficiency, controllable, and volume variances
D. variable efficiency, fixed efficiency, spending, and idle capacity
variances
36 Chapter 19

PROBLEMS
PROBLEM
1.
Journal Entries for Variances. Parrothead Corp. determines that the following variances
arose in production during March:
Variance Amount
Materials purchase price $2,400 favorable
Materials quantity 1,000 favorable
Labor efficiency 500 favorable
Labor rate 750 unfavorable
Factory overhead volume 1,700 favorable
Factory overhead controllable 2,950 unfavorable
Materials purchases totaled $90,000 at standard costs, while $77,000 in materials were
taken from inventory for use in production. Labor payroll totaled $144,000, and actual
overhead incurred was $256,000.
Required: Prepare the journal entries to record the above variances, including the
recording of the actual and applied factory overhead using a single factory overhead
control account.
SOLUTION
Materials 90,000
Materials Purchase Price Variance 2,400
38 Chapter 19

Materials 77,000
Materials Quantity Variance 1,000

Labor Rate Variance 750
Payroll 144,000
Labor Efficiency Variance 500

Various Credits 256,000

Factory Overhead Controllable Variance 2,950
Factory Overhead Volume Variance 1,700
or

Factory Overhead Controllable Variance 2,950

PROBLEM
2.
Journal Entries, Three-Variance Method. Canelli Products Co. presents the following data
related to June production:
Item 100% Budget 80% Budget Actual

Materials $ 30,000 $ 24,000 $ 23,600
Labor 60,000 48,000 52,500
Factory overhead 280,000 250,000 252,500
$ 370,000 $ 322,000 $ 328,600
Item 100% Budget 80% Budget Actual

Direct labor hours 5,000 4,000 4,200
Labor rate -- -- $12.50
Materials purchases -- -- --
Production in units 2,500 2,000 2,000
Required: Prepare the journal entries to record the above data, including the recording of
the actual and applied factory overhead using a single factory overhead control account
and using the three-variance method. The company records the materials price variance
at the time that materials are purchased. The factory overhead is based on the budget at
100%. (Hint: To obtain the overhead variances, first solve for the variable overhead
rate.)
40 Chapter 19
SOLUTION

Materials Quantity Variance 400
Materials 23,600

Labor Efficiency Variance [$12 x (4,200 DLH - 4,000 DLH)] 2,400
Labor Rate Variance [($12.50 - $12) x 4,200 DLH] 2,100
Payroll ($12.50 x 4,200 DLH) 52,500

Overhead at 100% Overhead at 80% $280,000 $250,000

=
Hours at 100% Hours at 80% 5,000 4,000
= $30 per hour variable overhead


Factory Overhead Variable Efficiency Variance 6,0002
Factory Overhead Spending Variance 3,5001
Actual factory overhead $ 252,500

Budget allowance based on actual hours:
Fixed expense $ 130,0001
Variable expense (4,200 hours x $30) 126,000 256,000
Factory overhead spending variance $ (3,500) fav.
1
$250,000 - $30 (4,000) = $130,000 fixed overhead
2
Budget allowance based on actual hours $ 256,000
Budget allowance based on standard hours allowed:
Variable overhead (4,000 x $30) $ 120,000
Fixed overhead ($250,000 - $120,000) 130,000 250,000
Variable efficiency variance $ 6,000 unfav.
3
Budget allowance based on standard hours allowed $
250,000
Standard factory overhead charged to production
($56 x 4,000) 224,000
Volume variance $ 26,000 unfav.
PROBLEM
3.
Materials, Labor, and Overhead Variance Analyses. TYPCO Corp. manufactures
42 Chapter 19
changeable typeheads for use on portable typewriters. Each typehead is in a set

consisting of the lead alloy typehead itself, a cover for the key on the typewriter keyboard,
and a plastic box to hold the two items. At the beginning and end of June, there were no
materials inventories. The following standards were developed for each unit:
Item Standard per Unit

Materials:
Lead alloy (3 oz. @ $.22) $ .66
Cover materials (6 oz. @ $.04) .24
Container boxes (1 @ $.10) .10
Direct labor (1/4 hr. @ $12 per hr.) 3.00
Overhead ($10 per direct labor hour) 2.50
Total cost $ 6.50
Annual production is estimated at 50,000 units, with fixed overhead of $25,000. During
the past year, the following costs were incurred to produce 40,000 units:
Materials:
Lead alloy: 122,000 oz. @ $.20
Cover materials: 235,000 oz. @ $.04
Container boxes: 40,500 @ $.09
Direct labor: 9,500 hrs. @ $12.50
Overhead: $90,000
Required: Compute the variances for each materials and labor item, recording the
materials price variance at the time of usage. Show the overhead variances using the
two-variance method. (Indicate whether each variance is favorable or unfavorable.)
SOLUTION
Materials Variances
Lead alloy:
Actual (122,000 oz. @ $.20) $ 24,400
Actual usage at standard cost (122,000 oz. @ $.22) 26,840
Price variance $ (2,440) fav.
Actual usage at standard cost $ 26,840

Standard usage at standard cost (3 oz. per unit x 40,000 units x $.22)
26,400
Quantity variance $ 440 unfav.
Cover materials:
Actual (235,000 oz. @ $.04) $ 9,400
Actual usage at standard cost (same) 9,400
Price variance $ 0

Standard usage at standard cost (6 oz. per unit x 40,000 units x $.04)
9,600
Quantity variance $ (200) fav.
Container boxes:
Actual (40,500 @ $.09) $ 3,645
44 Chapter 19
Actual usage at standard cost (40,500 @ $.10) 4,050

Price variance $ (405) fav.

Standard usage at standard cost (40,000 x $.10) 4,000
Quantity variance $ 50 unfav.
Labor Variances
Actual (9,500 hrs. @ $12.50) $ 118,750

Actual hours at standard rate (9,500 hrs. @ $12.00) 114,000
Labor rate variance $ 4,750 unfav.
Actual hours at standard rate $ 114,000

Standard hours at standard rate (1/4 hr. per unit x 40,000
units x $12.00) 120,000
Labor efficiency variance $ (6,000) fav.
Overhead Variances
Actual overhead $ 90,000

Fixed overhead $25,000
Variable overhead [($2.50 per unit x 50,000 units)
- $25,000] x 80% 80,000 105,000
Controllable variance $ (15,000) fav.
Budget allowance $ 105,000

Standard cost charged in (40,000 units x
1/4 hr. per unit x $10) 100,000
Volume variance $ 5,000 unfav.
PROBLEM
4.
Allocation of Variances to Inventory and Cost of Goods Sold. The management of Paco
Products was presented with the following distribution of materials, labor, and overhead
costs in inventories and cost of goods sold:
Materials Direct Labor Overhead

Costs Costs Costs
MaterialsCending inventory $ 100,000 -- --
Work in processCending inventory 150,000 $ 250,000 $
150,000
Finished goodsCending inventory 50,000 250,000
150,000
Cost of goods sold 800,000 2,000,000 1,200,000
$ 1,100,000 $ 2,500,000 $ 1,500,000
46 Chapter 19
During the year, the following variances were noted:
Materials price usage $(10,000) favorable

Materials quantity 22,280 unfavorable
Labor rate (27,000) favorable
Labor efficiency 23,000 unfavorable
Net overhead 31,500 unfavorable
Required:
(1) Allocate the variances to inventories and cost of goods sold.

(2) Determine the cost of goods sold after the allocation of variances.
SOLUTION
(1)
Materials price usage variance to:
$150,000
Work in process ---------------- x $ (10,000) =
(1,500) fav.
$1,000,000
$50,000
Finished goods ---------------- x $ (10,000) =
(500) fav.
$1,000,000
$800,000
Cost of goods sold ---------------- x $ (10,000) =
(8,000) fav.
$1,000,000
Total $ (10,000) fav.
Materials quantity variance to:
$150,000
Work in process ---------------- x $ 22,280 = $
3,342 unfav.
$1,000,000
$50,000
Finished goods ---------------- x $ 22,280 =
1,114 unfav.
48 Chapter 19
$1,000,000
$800,000
Cost of goods sold ---------------- x $ 22,280 =
17,824 unfav.
$1,000,000
Total $ 22,280 unfav.
Labor variances to:
$250,000
Work in process ---------------- x $ (4,000) = $
(400) fav.
$2,500,000
Finished goods (same as to work in process) =

(400) fav.
$2,000,000
Cost of goods sold ---------------- x $ (4,000) =
(3,200) fav.
$2,500,000
Total $ (4,000)1 fav.
1
Labor rate variance - Labor efficiency variance = Net labor
variance
($27,000) fav. - $23,000 unfav. = ($4,000) fav.
Overhead variances to:
$150,000
Work in process ---------------- x $ 31,500 = $
3,150 unfav.
$1,500,000
$150,000
Finished goods ---------------- x $ 31,500 =
3,150 unfav.
$1,500,000
$1,200,000
Cost of goods sold ---------------- x $ 31,500 =
25,200 unfav.
$1,500,000
Total $ 31,500 unfav.
(2)
Standard cost of goods sold:
Materials $ 800,000
Labor 2,000,000
Overhead 1,200,000
$ 4,000,000
Add unfavorable variances:
Materials quantity 17,824
Overhead 25,200
Less favorable variances:
Materials price usage (8,000)
Labor (3,200)
Cost of goods sold after allocation $ 4,031,824
50 Chapter 19
The following problems are based on material in the Appendix to the chapter.
PROBLEM
5.
Journal Entries for Factory Overhead; Alternate Three-Variance Method. The practical
capacity of Mindy Manufacturing Company is 10,000 units of product Mork. At the normal
capacity level (80% of practical), the following factory amounts have been budgeted:
Fixed $27,000
Variable $29,000
Standards were set as follows:

Processing time, 2 hours per unit of Mork
Factory overhead, $3.50 per hour of processing
Actual data for November were:

Production, 7,600 units of Mork
Processing time, 15,400
Factory overhead, $55,500
Required: Assuming that actual and applied overhead are recorded in separate accounts,
give the general journal entries to record actual overhead, to charge overhead to
production, to close the two overhead accounts, and to record the overhead variances
using the alternative three-variance method.
SOLUTION
Factory Overhead Control 55,500.00

Various Credits 55,500.00
Work in Process ($3.50 F.O. rate x 7,600 units x 2 SH per unit) 53,200.00
Applied Factory Overhead 53,200.00
Applied Factory Overhead 53,200.00

Efficiency Variance [$3.50 F.O. rate x (15,400 AH - 15,200 SH)] 700.00
Idle Capacity Variance [$1.6875 fix. rate x
(16,000 BH - 15,400 AH)] 1,012.50
Spending Variance 587.50
Factory Overhead Control 55,500.00
PROBLEM
6.
Journal Entries for Factory Overhead; Four-Variance Method. Melvin Corporation charges
factory overhead to production on the basis of the standard processing time allowed for
actual production. The following data relate to the results of operations for December:
Normal capacity in processing hours 5,000

Standard processing hours allowed for actual production 4,600
52 Chapter 19
Actual processing hours required during December 5,200
The factory overhead rate per hour of processing based on normal capacity follows:
Variable overhead $ 45,000 5,000 hours = $ 9

Fixed overhead 155,000 5,000 hours = 31
Total factory overhead $ 200,000 5,000 hours = $ 40
Actual factory overhead incurred during December totaled $199,000.
Required: Give the appropriate general journal entries to record the actual overhead cost,
to record the charge to production for overhead (assuming that actual and applied
overhead are recorded in separate accounts), and the closing of the two overhead
accounts along with the appropriate overhead variances using the four-variance method.
SOLUTION

Work in Process ($40 F.O. rate x 4,600 SH) 184,000


Variable Efficiency Variance [$9 var. x (5,200 AH - 4,600 SH)] 5,400
Fixed Efficiency Variance [$31 fix. x (5,200 AH - 4,600 SH)] 18,600
Spending Variance 2,800
Idle Capacity Variance [$31 fix. x (5,000 BH - 5,200 AH)] 6,200
STANDARD COSTING: SETTING

STANDARDS AND ANALYZING VARIANCES
MULTIPLE CHOICE
Question Nos. 11-16, 18, 19, 21, 22, 26-28, 31, 35, and 36 are AICPA adapted.
Question Nos. 23-25 and 30 are ICMA adapted.
Question Nos. 17, 20, 29, 32-34, and 37 are CIA adapted.
D 1. The type of standard that is intended to represent challenging yet attainable

results is:
251
252 Chapter 19
A. theoretical standard
B. flexible budget standard
C. controllable cost standard
D. normal standard
E. expected actual standard
A 2. Standard costs are used for all of the following except:

A. income determination
B. controlling costs
C. measuring efficiencies
D. forming a basis for price setting
E. establishing budgets
C 3. Of the following variances, the one that is most useful in assessing the
performance of the Purchasing Department is the:
A. idle capacity variance
B. overhead price variance
C. materials purchase price variance
D. labor rate variance
E. materials price usage variance
B 4. The labor efficiency variance is computed as:

A. the difference between standard and actual rates, multiplied by
standard hours
B. the difference between standard and actual hours, multiplied by
standard rate
C. the difference between standard and actual rates, multiplied by actual
hours
D. the difference between standard and actual hours, multiplied by the
difference between standard and actual rates
E. a percentage of the labor time variance
252
B 5. The method used to assure fairness in the rates paid for each operation
performed by an employee is:
A. job costing
B. job rating
C. union contracting
D. the agreed-upon wages at the time of employment
E. labor rate variance analysis
D 6. Materials and labor cost standards are generally based on:

A. expected actual conditions, anticipated prices, and desired efficiency
levels
B. theoretical conditions, present price levels, and desired efficiency
levels
C. capacity conditions, anticipated prices, and desired efficiency levels
D. normal conditions, present price levels, and desired efficiency levels
E. theoretical conditions, anticipated prices, and theoretically attainable
efficiency levels
D 7. The most effective standards are set following a careful study of products
and operating conditions by the:
A. Accounting Department, central management, and the Industrial
Engineering Department
B. central management and the employees whose performance is being
evaluated
C. Accounting Department and engineering staff
D. Industrial Engineering Department and the employees whose
performance is being evaluated
E. central management and the Industrial Engineering Department
E 8. In analyzing factory overhead variances, the volume variance is the

difference between the:
A. actual amount spent for overhead items during the period and the
amount applied during the period
B. variable efficiency variance and fixed efficiency variance
C. amount shown in the flexible budget and the amount shown in the
master budget
D. master budget application rate and the flexible budget application
rate, multiplied by actual hours worked
E. budget allowance based on standard hours allowed for actual
production for the period and the amount of applied factory overhead during the period
D 9. The variance resulting from obtaining an output different from the one
expected on the basis of input is the:
A. mix variance
B. output variance
C. usage variance
D. yield variance
E. efficiency variance
A 10. In its reports to management, a company disclosed the presence of a fixed

efficiency variance. The procedure used to analyze variances was the:
A. four-variance method
B. mix and yield variances method
C. two-variance method
D. alternative three-variance method
E. three-variance method
D 11. A purpose of standard costing is to:
A. allocate cost with more accuracy
B. eliminate the need for subjective decisions by management
C. determine the "break-even" production level
D. control costs
E. all of the above
A 12. Which one of the following is true concerning standard costs?

A. If properly used, standards can help motivate employees.
B. Unfavorable variances, material in amount, should be investigated,
but large favorable variances need not be investigated.
C. Standard costs are difficult to use with a process costing system.
D. Standard costs are estimates of costs attainable only under the most
ideal conditions, but rarely practicable.
E. All of the above
A 13. When computing variances from standard costs, the difference between
actual and standard price multiplied by actual quantity yields a:
A. price variance
B. volume variance
C. mix variance
D. yield variance
E. combined price-quantity variance
E 14. A company controls its production costs by comparing its actual monthly
production costs with the expected levels. Any significant deviations from expected levels
are investigated and evaluated as a basis for corrective actions. The quantitative
technique that is most probably being used is:
A. time-series or trend regression analysis
B. correlation analysis
C. differential calculus
D. risk analysis
E. standard cost variance analysis
C 15. What type of direct material variances for price and usage will arise if the
actual number of pounds of materials used was less than standard pounds allowed but
actual cost exceeds standard cost?
Usage Price
A. unfavorable favorable
B. favorable favorable
C. favorable unfavorable
D. unfavorable unfavorable
E. none none
B 16. If a company follows a practice of isolating variances at the earliest time,

the appropriate time to isolate and recognize a direct materials price variance would be
when:
A. the purchase order is originated
B. materials are purchased
C. materials are issued
D. the materials requisition is prepared
E. materials are used in production
A 17. Which of the following would least likely cause an unfavorable materials
quantity (usage) variance?
A. labor that possesses skills equal to those required by the standards
B. scheduling of substantial overtime
C. a mix of direct materials that does not conform to plan
D. materials that do not meet specifications
E. machinery that has not been maintained properly
D 18. Information about Sargent Company's direct material costs is as follows:
Standard unit price $3.60

Actual quantity purchased 1,600
Standard quantity allowed for actual production 1,450
Materials purchase price varianceCunfavorable $240
What was the actual purchase price per unit, rounded to the nearest penny?
A. $3.06
B. $3.11
C. $3.45
D. $3.75
E. $3.60
$240 = 1,600 (x - $3.60)

1,600 x = $240 + $5,760
x = $3.75
C 19. Using the following symbols, which formula represents the calculation of the
labor rate variance?
AH = Actual hours
SH = Standard hours allowed for actual production
AR = Actual rate
SR = Standard rate
A. SR(AH - SH)
B. AR(AH - SH)
C. AH(AR - SR)
D. SH(AR - SR)
E. SH(SR - AR)
D 20. When a change in the manufacturing process reduces the number of direct
labor hours and standards are unchanged, the resulting variance will be:
A. an unfavorable labor usage variance
B. an unfavorable labor rate variance
C. a favorable labor rate variance
D. a favorable labor usage variance
E. both (C) and (D) above
B 21. The most probable reason a company would experience a favorable labor
rate variance and an unfavorable labor efficiency variance is that:
A. the mix of workers assigned to the particular job was heavily
weighted toward the use of higher paid, experienced individuals
B. the mix of workers assigned to the particular job was heavily
weighted toward the use of new, relatively low-paid, unskilled workers
C. because of the production schedule, workers from other production
areas were assigned to assist in this particular process
D. defective materials caused more labor to be used in order to produce
a standard unit
E. the actual price paid for materials that went into production was less
than the standard price that was expected to be paid
C 22. Information on Orman Company's direct labor costs is as follows:
Standard direct labor rate $3.75

Actual direct labor rate $3.50
Standard direct labor hours 10,000
Direct labor usage (efficiency) varianceCunfavorable $
4,200
What were the actual hours worked, rounded to the nearest hour?
A. 11,914
B. 10,714
C. 11,120
D. 11,200
$4,200 = $3.75 (x - 10,000)

$3.75 x = $4,200 + $37,500
x = 11,120
D 23. Each unit of Product 8in1 requires two direct labor hours. Employee benefit
costs are treated as direct labor costs. Data on direct labor are as follows:
Number of direct employees 25

Weekly productive hours per employee 30
Estimated weekly wages per employee $240
Employee benefits (related to weekly wages) 25%
The standard direct labor cost per unit of Product 8in1 is:
A. $8.00
B. $10.00
C. $12.00
D. $20.00
$240 + .25(240)
= $20 / unit
30 2
B 24. J. R. Richard Company employs a standard absorption system for product
costing. The standard cost of its product is as follows:
Direct materials $14.50

Direct labor (2 direct labor hours x $8) 16.00
Manufacturing overhead (2 direct labor hours x $11) 22.00
Total standard cost $52.50
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct
labor hours. Richard planned to produce 25,000 units each month during the year. The
budgeted annual manufacturing overhead is:
Variable $3,600,000
Fixed 3,000,000
$6,600,000
During November, Richard produced 26,000 units. Richard used 53,500 direct labor
hours in November at a cost of $433,350. Actual manufacturing overhead for the month
was $250,000 fixed and $325,000 variable.
The manufacturing overhead controllable variance for November is:

A. $9,000 unfavorable
B. $13,000 unfavorable
C. $9,000 favorable
D. $4,000 favorable

Budget allowance:
Variable factory overhead (52,000 x $6) $312,000
Budgeted fixed overhead 250,000 562,000
Controllable variance $ 13,000 unfavorable
B 25. J. R. Richard Company employs a standard absorption system for product
costing. The standard cost of its product is as follows:
Direct materials $14.50

Direct labor (2 direct labor hours x $8) 16.00
Manufacturing overhead (2 direct labor hours x $11) 22.00
Total standard cost $52.50
The manufacturing overhead rate is based upon a normal activity level of 600,000 direct
labor hours. Richard planned to produce 25,000 units each month during the year. The
budgeted annual manufacturing overhead is:
Variable $3,600,000
Fixed 3,000,000
$6,600,000
During November, Richard produced 26,000 units. Richard used 53,500 direct labor
hours in November at a cost of $433,350. Actual manufacturing overhead for the month
was $250,000 fixed and $325,000 variable.
The manufacturing overhead volume variance for November is:

A. $12,000 unfavorable
C. $3,000 unfavorable
D. $9,000 unfavorable
E. $1,000 favorable
Budget allowance based on standard hours allowed

[(52,000 x $6) + $250,000] $ 562,000
Factory overhead applied at standard 572,000
Volume variance $ (10,000) favorable
C 26. The following information relates to Department 1 of Ruiz Company for the
fourth quarter. The total overhead variance is divided into three variances: spending,
variable efficiency, and volume.
Actual total overhead (fixed plus variable) $178,500

Budget formula $110,000 + $.50 per hour
Total overhead application rate $1.50 per hour
Actual hours worked 121,000
What was the spending variance in this department during the quarter?
A. $8,000 favorable
B. $4,500 favorable

Budget allowance:
Variable for actual hours
(121,000 x $.50) $ 60,500
Fixed 110,000 170,500
Spending variance $ 8,000 unfavorable
A 27. The following information relates to Department 1 of Ruiz Company for the
fourth quarter. The total overhead variance is divided into three variances: spending,
variable efficiency, and volume.
Actual total overhead (fixed plus variable) $178,500

Budget formula $110,000 + $.50 per hour
Total overhead application rate $1.50 per hour
Actual hours worked 121,000
Standard hours allowed for production 130,000
What was the variable efficiency variance in this department during the quarter?
A. $4,500 favorable
B. $8,000 favorable
Budget allowance for actual hours

[(121,000 x $.50) + $110,000] $ 170,500
Budget allowance for standard hours:
Variable (130,000 x $.50) $ 65,000
Fixed 110,000 175,000
Variable efficiency variance $ (4,500) favorable
E 28. Under the two-variance method for analyzing factory overhead, the
controllable (budget) variance is the difference between the:
A. actual fixed factory overhead and the budgeted fixed overhead
B. budget allowance based on standard hours allowed and the factory
overhead applied to production
C. budget allowance based on standard hours allowed and the budget
allowance based on actual hours worked
D. actual factory overhead and the factory overhead applied to
production
E. actual factory overhead and the budget allowance based on standard
hours allowed
A 29. Materials usage variances are normally chargeable to the:

A. Production Department
B. Purchasing Department
C. Finished Goods Department
D. Materials Storage Department
E. Factory Storeroom Department
C 30. Todco planned to produce 3,000 units of its single product, Teragram,
during November. The standard specifications for one unit of Teragram include six
pounds of material at $.30 per pound. Actual production in November was 3,100 units of
Teragram. The accountant computed a favorable materials purchase price variance of
$380 and an unfavorable materials quantity variance of $120. Based on these variances,
one could conclude that:
A. more materials were purchased than were used
B. more materials were used than were purchased
C. the actual cost of materials was less than the standard cost
D. the actual usage of materials was less than the standard allowed
E. actual cost and usage of materials were both less than standard
D 31. Information on Duke Co.'s direct material costs for May is as follows:
Actual quantity of direct materials purchased and used 30,000

lbs.
Actual cost of direct materials $84,000
Unfavorable direct materials usage variance 3,000
Standard quantity of direct materials allowed for May production
29,000 lbs.
For the month of May, Duke's direct materials price variance was:
A. $2,800 favorable
D. $6,000 favorable
$3,000 = x (30,000 - 29,000)
1,000 x = $3,000
x = $3
y = $2.80 - $3.00(30,000)
y = ($6,000) favorable
A 32. A company uses a standard cost system to account for its only product.
The materials standard per unit was 4 lbs. at $5.10 per lb. Operating data for April were
as follows:
Material used 7,800 lbs.

Cost of material used $40,950
Number of finished units produced 2,000
The material usage variance for April was:

A. $1,020 favorable
B. $1,050 favorable
x = $5.10 [7,800 - (2,000 x 4)]

x = ($1,020) favorable
D 33. During the last three months, a manufacturer incurred an unfavorable labor
efficiency variance. The least likely cause of this variance is:
A. substantial materials were purchased at a discount at a previously
unused supplier's liquidation
B. for one week, only half of the workforce, those with the highest
seniority, were called in to work
C. a second production line with all new personnel was started
D. the cost-of-living adjustment for the three-month period was $.10
more per hour than expected
D 34. The direct labor standards for producing a unit of a product are two hours at
$10 per hour. Budgeted production was 1,000 units. Actual production was 900 units,
and direct labor cost was $19,000 for 2,000 direct labor hours. The direct labor
efficiency variance was:
A. $1,000 favorable
C. $2,000 favorable
x = $10 [2,000 - (900 x 2)]

x = $2,000 unfavorable
C 35. Under the two-variance method for analyzing factory overhead, the factory
overhead applied to production is used in the computation of the:
Controllable Volume
(Budget) Variance Variance
A. yes no
B. yes yes
C. no yes
D. no no
D 36. Under the three-variance method for analyzing factory overhead, which of
the following is used in computation of the spending variance?
Actual Factory Budget Allowance

Overhead Based on Actual Hours
A. no yes
B. no no
C. yes no
D. yes yes
D 37. Compute the variable efficiency variance, using the following data:
Standard labor hours per good unit produced 2

Good units produced 1,000
Actual labor hours used 2,100
Standard variable overhead per standard labor hour $3
Actual variable overhead $ 6,500
A. $200 favorable
B. $200 unfavorable
C. $300 favorable
D. $300 unfavorable
Variable budget allowance for actual hours (2,100 x $3) $

6,300
Variable budget allowance for standard hours
($3 x 1,000 x 2) 6,000
$ 300 unfavorable
The following questions are based on materials in the Appendix to the chapter.
A 38. In the alternate three-variance method, the efficiency variance is:

A. Standard factory overhead rate x (Actual units of allocation base -
Standard units of allocation base allowed)
B. Actual factory overhead incurred - Budget allowance based on actual
hours
C. Budget allowance based on actual hours - (Actual hours x Factory
overhead rate)
D. Budgeted fixed factory overhead - (Actual hours x Fixed overhead
rate)
D 39. The four-variance method reconciles to the two-variance method by

combining which of the following to get the controllable variance?
A. fixed efficiency variance and idle capacity variance
B. spending variance and fixed efficiency variance
C. spending variance and idle capacity variance
D. spending variance and variable efficiency variance
B 40. The four-variance method reconciles to the two-variance method by

combining which of the following to get the volume variance?
A. spending variance and variable efficiency variance
B. fixed efficiency variance and idle capacity variance
C. variable efficiency variance and fixed efficiency variance
D. spending variance and idle capacity variance
PROBLEMS
PROBLEM
1.
Labor Variance Analysis. Last National Bank uses a standard cost accounting system for
analyzing its labor costs in its Proof and Transit Division. The primary task of this division
is the encoding of checks with magnetic ink for reading by the computer. The standard
calls for an employee to process 900 checks per hour and to be paid $10 per hour.
During the eight-hour night shift last Wednesday, the production levels attained by the four
employees on that shift, together with their hourly wages, were:
Employee Checks Encoded Hourly Wages

Wilson 7,020 $11.00
Xavier 6,480 9.25
Yelding 7,875 10.50
Ziachin 7,425 9.75
Required: Compute the labor rate variance and the labor efficiency variance for each
employee and for the entire night shift.
SOLUTION
Wilson Xavier Yelding Ziachin Total

Actual rate $ 11.00 $ 9.25 $ 10.50 $ 9.75 $ 40.50
Standard rate 10.00 10.00 10.00 10.00 40.00
Rate difference $ 1.00 $ (.75) $ .50 $ (.25) $
.50
Multiplied by hours worked x 8 x 8 x 8 x 8
x 8
Labor rate variance $ 8.00 $ (6.00) $ 4.00 $ (2.00) $
4.00
unfav. fav. unfav. fav. unfav.
Actual hours worked 8.0 8.0 8.00 8.00

32
Standard hours allowed 7.8 7.2 8.75 8.25
32
Difference in hours .2 .8 (.75) (.25)
0
Multiplied by standard rate x $10 x $10 x $10 x $10
x $10
Labor efficiency variance $ 2.00 $ 8.00 $ (7.50) $ (2.50)
0
unfav. unfav. fav. fav.
PROBLEM
2.
Materials Variance Analyses. Healthy Dinners Inc. packages a frozen fish dinner that
consists of 6 ounces of halibut, 4 ounces of asparagus, 5 ounces of rice, and 3 ounces
of yogurt. On October 1, the following price standards were set for each batch of 1,000
dinners:
Materials
Item Price Standard
Halibut $.60 per ounce
Asparagus .25
Rice .10
Yogurt .20
The actual cost for 1,000 dinners was: halibut, $.70 per ounce; asparagus $.20 per
ounce; rice, $.12 per ounce; and yogurt, $.22 per ounce.
Quantity variances arise from the cooking process. The materials used for the 1,000
dinners in Batch 1099 were:
Halibut 5,500 ounces

Asparagus 3,800
Rice 4,900
Yogurt 3,150
Required: Determine the materials price usage variance and the materials quantity (or
usage) variance for Batch 1099. (Indicate whether each variance is favorable or
unfavorable.)
SOLUTION
(Actual unit price - Standard unit price) x Actual usage = Materials price usage variance
Halibut: ($.70 per oz. - $.60 per oz.) x 5,500 oz. $ 550 unfav.
Asparagus: ($.20 per oz. - $.25 per oz.) x 3,800 oz. (190) fav.
Rice: ($.12 per oz. - $.10 per oz.) x 4,900 oz. 98 unfav.
Yogurt: ($.22 per oz. - $.20 per oz.) x 3,150 oz. 63 unfav.
Materials price usage variance $ 521 unfav.
(Actual quantity - Standard quantity allowed) x Standard price = Materials quantity

variance
Halibut: (5,500 oz. - 6,000 oz.) x $.60 $(300) fav.

Asparagus: (3,800 oz. - 4,000 oz.) x $.25 (50) fav.
Rice: (4,900 oz. - 5,000 oz.) x $.10 (10) fav.
Yogurt: (3,150 oz. - 3,000 oz.) x $.20 30 unfav.
Materials quantity variance $(330) fav.
PROBLEM
3.
Materials Mix and Yield Variance Analysis. Kreutzer Candle Co. manufactures candles in
various shapes, sizes, colors, and scents. Depending on the orders received, not all
candles require the same amount of color, dye, or scent materials. Yields also vary,
depending upon the usage of beeswax or synthetic wax. Standard ingredients for 1,000
lbs. of candles are:
Standard Cost
Standard Mix per Pound
Input:
Beeswax 200 lbs. $1.00
Synthetic wax 840 .20
Colors 7 2.00
Scents 3 6.00
Totals 1,050 lbs.
Standard output 1,000 lbs.
Price variances are charged off at the time of purchase. During January, the company
was busy manufacturing red candles for Valentine's Day. Actual production then was:
Input:
Beeswax 4,100
Synthetic wax 13,800
Colors 2,200
Scents 60
Totals 20,160 lbs.
Actual output 18,500 lbs.

Required: Compute the materials mix variance and the materials yield variance. (Indicate
whether each variance is favorable or unfavorable and round to three decimal places.)
SOLUTION
Actual quantities at individual standard materials cost $ 11,6201

Actual input quantity at weighted average of standard
materials cost (20,160 x $.381 2) $ 7,681
Materials mix variance $ 3,939 unfav.
Actual input quantity at weighted average of standard

materials cost (20,160 x $.381 2) $ 7,681
Actual output quantity at standard materials cost per
pound of output (18,500 lbs. x $.40 3) 7,400
Materials yield variance $ 281 unfav.
1
Beeswax 4,100 lbs. @ $1 per lb. $ 4,100
Synthetic wax 13,800 lbs. @ $.20 per lb. 2,760
Colors 2,200 lbs. @ $2 per lb. 4,400
Scents 60 lbs. @ $6 per lb. 360
20,160 lbs. $ 11,620
2
Weighted average standard materials costs:
Beeswax 200 lbs. @ $1 $ 200
Synthetic wax 840 lbs. @ $.20 168
Colors 7 lbs. @ $2 14
Scents 3 lbs. @ $6 18
1,050 lbs. $ 400
$400
Standard materials cost = = $.381 per lb .
1,050 lbs .
3
Standard materials costs $400
= = $.40 per lb . cost per unit of output
Standard output 1,000 lbs .
PROBLEM
4.
Overhead Variance Analysis, Using the Two-Variance Method. Tuxla Products Co.
charges factory overhead into production at the rate of $10 per direct labor hour, based on
a standard production of 15,000 direct labor hours for 15,000 units; 60% of factory
overhead costs are variable. Production data for May and June are:
May June
Production 12,000 hrs. 14,200 hrs.
Units produced 12,000 15,000
Actual factory overhead $140,100 $149,300
Required: Prepare a factory overhead variance analysis for May and June, using the
two-variance method. (Indicate whether each variance is favorable or unfavorable.)
SOLUTION
May June
Actual factory overhead $ 140,100 $ 149,300
Budget allowance based on standard:
Budgeted fixed expense (40% x $10 x
15,000 units) (60,000) (60,000)
Variable expenses:
12,000 hrs. allowed x $10 x .60 (72,000)
15,000 hrs. allowed x $10 x .60 (90,000)
Controllable variance $ 8,100 unfav. $ (700) fav.
Budgeted allowance based on standard
hours allowed $ 132,000 $ 150,000
Standard hours allowed x Standard factory
overhead rate:
12,000 hrs. x $10 (120,000)
15,000 hrs. x $10 (150,000)
Volume variance $ 12,000 unfav. 0
PROBLEM
5.
Overhead Variance Analysis, Using the Three-Variance Method. Standard direct labor
hours budgeted for May production were 5,000, with factory overhead at that level
budgeted at $25,000, of which $15,000 is variable. Actual labor hours for the month
were 4,800; however, the number of standard labor hours allowed for actual May
production is 5,200. Actual factory overhead incurred during the month was $25,600.
Required: Compute the overall factory overhead variance and analyze it using the three-
variance method (i.e., the spending variance, the variable efficiency variance, and the
volume variance). Indicate whether the variances are favorable or unfavorable.
SOLUTION

Standard overhead chargeable to production (5,200
standard hours allowed x $5 overhead rate) 26,000
Overall factory overhead variance $ (400) favorable

Budget allowance based on actual hours:
Variable overhead (4,800 actual hours x $3) $14,400
Fixed overhead 10,000 24,400
Spending variance $ 1,200 unfavorable
Budget allowance based on actual hours (from above) $ 24,400

Budget allowance based on standard hours:
Variable overhead (5,200 standard hours x $3) $15,600
Fixed overhead 10,000 25,600
Variable efficiency variance $ (1,200) favorable
Budget allowance based on standard hours (from above) $

25,600
Standard factory overhead chargeable to production
(from above) 26,000
Volume variance $ (400) favorable
Spending variance $ 1,200

Variable efficiency variance (1,200)
Volume variance (400)
Overall factory overhead variance $ (400) favorable
The following problem is based on the material in the Appendix to the chapter.
PROBLEM
6.
Overhead Variance Analysis, Using the Four-Variance Method. In May, the management
of Kentucky Co. received the following data for its Bluegrass Products Division:
Standard1 Actual
Units produced 5,000 5,100
Direct labor hours 10,000 10,300
Fixed factory overhead $12,000 $13,000
Variable factory overhead $30,000 $34,500
1
Denotes normal capacity used for predetermined overhead rate computation.
Required: Prepare a factory overhead variance analysis for May, using the four-variance
method. (Indicate whether each variance is favorable or unfavorable.)
SOLUTION

Budget allowance based on actual hours worked:
Fixed factory overhead $12,000
Variable factory overhead:
$30,000
10,300 actual hrs. x ---------------- 30,900 42,900
10,000 DLH
Spending variance $ 4,600 unfav.
Budget allowance based on actual hours worked $ 42,900

Actual hours x standard overhead rate:
$30,000 + $12,000
10,300 hrs. x -------------------------- 43,260
10,000 DLH
Idle capacity variance $ (360) fav.
Budget allowance based on actual hours worked $ 42,900

Fixed expense $12,000
Variable expense (10,200 standard hours
allowed x $3 variable overhead rate) 30,600 42,600
Variable efficiency variance $ 300 unfav.
Actual hours (10,300) x fixed overhead rate ($1.20) $ 12,360

Standard hours allowed (10,200) x fixed overhead
rate ($1.20) 12,240
Fixed efficiency variance $ 120 unfav.

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JOB ORDER COSTING

B 3. Finished Goods is debited and Work in Process is credited for a:

B 6. When a manufacturing company has a highly automated plant producing

A 7. Cherokee Company applies factory overhead on the basis of direct labor

The factory overhead for Cherokee for the year is:

= $780,000 (applied) $760,000 (actual) = $20,000 (overapplied)

Factory Overhead Control $ 1,000 CR

B 9. Overapplied factory overhead would result if:

July 1, balance $ 12,000

Job 1040 = $12,000 + $40,000 + $30,000 + $27,000 - $100,000 = $9,000

E 12. Valentino Corporation makes aluminum fasteners. Among Valentino's 19--

Wages and salaries:

Direct labor amounted to:

B 13. Rudolpho Corporation makes aluminum fasteners. Among Rudolpho's 19--

Materials and supplies:

Direct materials amounted to:

Materials used, $326

SUPPORTING CALCULATION: $326 + $85 - $75 = $336

Materials used, $326

SUPPORTING CALCULATION: $686 = $326 + x + .6x

Materials used, $326

The cost of goods manufactured during the year was:

SUPPORTING CALCULATION: $80 + $686 - $30 = $736

Question Nos. 1, 7-12, 18-23, and 28-32 are AICPA adapted.

B 1. An equivalent unit of material or conversion cost is equal to:

C 3. An item that does not appear on a cost of production report is:

C 4. Goode Manufacturing has three producing departments in its factory. The

in the ending inventory is:

SUPPORTING CALCULATION: 60% ($2 + $3) = $3

D 5. When added materials in subsequent departments result in an increase of

E 6. Gyro Products transferred 10,000 units to one department. An additional

SUPPORTING CALCULATION: 7,000 units transferred out + 6,000 units

E 7. A characteristic of a process costing system is that:

D 8. Transferred-in costs as used in a process cost accounting system are:

A. supervisory salaries that are transferred from an overhead cost center

E 9. In a process costing system, how is the unit cost affected in a production

A 11. An error was made in the computation of the percentage of completion of

(1) (2) (3)

Materials unit cost = $27,000 (7,000 + 3,000) = $2.70

SUPPORTING CALCULATION: 8,000 + .60(8,000) = 12,800 units

E 15. In determining the cost of goods transferred in from a previous department

D. considers the ending work in process inventory only partially complete

Materials = 40,000 + 240,000 = 280,000

B 20. Information concerning Department A of Neeley Company for June is as

Units completed 85,000

SUPPORTING CALCULATION: ($12,800 + $69,700) (85,000 +

($3,000 + $25,560) (44,000 + 12,000) = $.51

E 22. Roger Company manufactures Product X in a two-stage production cycle in

in process and production activity in Department B for February follows:

Transferred- Materials Conversion

Transferred-in costs = $41,000 20,000 = $2.05

JUST-IN-TIME AND BACKFLUSHING

D 1. One of the requirements for a JIT system to be successful is:

C 3. The JIT production ideal is a batch size of:

C 4. The objective of reducing inventory to zero is possible if all of the following

D 5. The continuing reduction of inventories is achieved by all of the following

B 6. In a JIT system, velocity is inversely related to:

30% x 1/2 x $300,000 = $45,000

50% x 20% x $75,000 = $7,500

50% x 20% x (10 x 100 x $75) = $7,500

$25 x 5 x 250 = $31,250

$25 x (50% x 100 x 10%) x (1/2 x 500) = $31,250

E 19. All of the following are obstacles to JIT purchasing, except:

B 20. JIT purchasing eliminates all of the following documents, except: