CHAPTER 1: COST CONCEPTS, COST CLASSIFICATION AND COST BEHAVIOR Part 1: Multiple - choices questions

1. Indirect material costs are easily traced to products because of their physical association with the finished product. A. True B. False 2. Which one of the following is not a manufacturing cost? a. Advertising cost B. Wages of assembly workers C. Wheels that are being installed on new automobiles being manufactured D. Factory maintenance 3. Which of the following is not an element of manufacturing overhead? A. Sales manager's salary. B. Plant manager's salary. C. Factory repairman's wages. D. Product inspector's salary. 4. Product costs are costs that are a necessary and integral part of producing the finished product. A. True B. False 5. Barry's BarBQue incurred the following costs: $1,400 for ribs, 45 hours of labor to cook the ribs at $10 per hour, $50 for seasoning and sauce, $300 for signs to advertise the ribs, $150 to clean the grill after cooking the ribs, and $100 of administrative costs. How much are total product costs? A. $2,350 B. $2,050 C. $1,850 D. $2,150 6. Indirect labor is a A. nonmanufacturing cost. B. raw material cost. C. product cost. D. period cost. 7. Each of the following is a period cost except A. administrative expenses. B. indirect labor. C. nonmanufacturing costs. D. selling expenses. 8. Pharmco incurred the following costs while manufacturing its product: Materials used in production, $120,000; factory depreciation, $60,000; property taxes on the administrative offices, $12,000; labor costs of assembly-line workers, $95,000; factory supplies used, $8,000; advertising expense, $13,000; property taxes on the factory, $20,000; delivery expense, $23,000; salaries of the sales staff, $53,000; and sales commissions, $17,000. The total product costs for Pharmco are A. $421,000. B. $303,000. C. $315,000. D. $391,000. 9. Which of the following would you find on the income statement of a manufacturing company, but not on the income statement of a merchandising company? A. Cost of goods manufactured B. Cost of goods purchased C. Work in process D. Raw materials
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10. Cost of goods available for sale is reported on the income statement of A. a merchandising company but not a manufacturing company. B. a manufacturing company but not a merchandising company. C. a merchandising company and a manufacturing company. D. neither a manufacturing company nor a merchandising company. 11. For a manufacturing firm, cost of goods available for sale is computed by adding the beginning finished goods inventory to A. cost of goods purchased. B. cost of goods manufactured. C. net purchases. D. total manufacturing costs. 12. The costs assigned to beginning work in process inventory are based on the manufacturing costs incurred in the prior period. A. True B. False 13. Checker Clackers, Inc. manufactures clackers. Checker's transactions and accounts included the following during June:

How much is cost of goods manufactured for June? A. $77,000 B. $76,800 C. $78,900 D. $76,500 14. The formula to determine the cost of goods manufactured is A. beginning raw materials inventory + total manufacturing costs ending work in process inventory. B. beginning work in process inventory + total manufacturing costs ending finished goods inventory. C. beginning finished goods inventory + total manufacturing costs ending finished goods inventory. D. beginning work in process inventory + total manufacturing costs ending work in process inventory. 15. The sum of the direct materials costs, direct labor costs, and manufacturing overhead incurred is the A. cost of goods manufactured. B. total manufacturing overhead. C. total manufacturing costs. D. total cost of work in process. 16. Companies compute cost of goods manufactured by subtracting ending work in process inventory from A. cost of goods available for sale. B. total manufacturing overhead. C. total manufacturing costs. D. total cost of work in process.

17. Model Magic Manufacturing reported the following year-end balances: Beginning work in process inventory, $35,000; beginning raw materials inventory, $18,000; ending work in process inventory, $38,000; ending raw materials inventory, $15,000; raw materials purchased, $510,000; direct labor, $180,000; and manufacturing overhead, $75,000. What is the amount of total work in process for Model Magic for the current year? A. $513,000. B. $768,000. C. $803,000. D. $765,000. 18. Which one of the following is true concerning manufacturing and merchandising companies' inventories? A. Both types of companies subtract total inventories from sales revenue on the income statement. B. Goods available for sale consist of Merchandise Inventory for merchandisers and Work in Process for manufacturers. C. The balance sheet for both types of companies reports one category for inventories. D. Manufacturing companies report inventories in the order of liquidity. 19. Which one of the following is true concerning manufacturing and merchandising companies' inventories on the balance sheet? A. Raw materials is to a manufacturer what merchandise inventory is to a merchandiser. B. A merchandiser reports its inventories as a current asset, and a manufacturer reports inventories as an expense. C. Finished goods is to a manufacturer what merchandise inventory is to a merchandiser. D. Manufacturer's include raw materials, work in process, finished goods, and cost of goods sold on the balance sheet, while merchandisers include only merchandise inventory and cost of goods sold on their balance sheet. 20. As activity changes, a cost that is variable will a. Vary per unit. C. remain the same per unit. b. vary inversely with activity per unit. D. remain the same in total amount. 21. A cost that is constant in total amount is always considered a(n) a. direct cost. B. indirect cost. C. variable cost. D. fixed cost. 22. As the quantity produced increases, fixed costs per unit are expected to a. Increase per unit. c. decrease per unit. b. stay the same per unit. D. None of the above. 23. The band of normal activity or output volume in which a specific relationship exists between activity or volume and cost is called the a. output specificity. c. cost driver. b. relevant range. D. total cost. 24. An average cost is also known as a(n) a. fixed cost. C. variable cost. b. unit cost. D. total cost.
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25. Ford Automotive Company is considered an example of a a. merchandiser. C. service company. b. manufacturer. D. wholesaler. 26. The cost of materials that have been started into production, but are not completely processed, would be found in which inventory account on the balance sheet? a. Direct materials inventory. C. Work-in-process inventory. b. Supplies inventory. D. Finished goods inventory. 27. Finished goods inventory costs represent the costs of goods that are a. waiting to be worked on. C. currently being worked on. b. waiting to be sold. D. already delivered to customers. 28. An example of an inventoriable cost would be a. direct materials. C. sales commissions. b. advertising flyers. D. shipping fees. 29. Prime costs would include a. direct material and direct labor costs. b. direct material costs and indirect manufacturing costs. c. direct labor costs and indirect manufacturing costs. d. direct material costs, direct labor costs, and indirect manufacturing costs.

Part 2: Exercises
Ex1. Classification of Salary Cost You have just been hired by Mercer Corporation to fill a position that was created in response to the upcoming launch of a new product. It is your responsibility to design an advertising campaign for this products debut in Mexico and Central America. The company is unsure how to classify your annual salary in its cost records. The companys cost analyst says that your salary should be classified as a manufacturing (product) cost; the controller says that it should be classified as a selling expense; and the president says that it doesnt matter which way your salary cost is classified. Required: 1. Which viewpoint is correct? Why? 2. From the point of view of the reported net operating income for the year, is the president correct in his statement that it doesnt matter which way your salary cost is classified? Explain. Ex. 2: Yuko Makiyama began growing miniature bonsai trees several years ago as a hobby. Her work is quite creative, and it has been so popular with friends and others that she has decided to quit her job in the food industry and grow bonsai trees full time. The salary from Yukos food industry job is $3,600 per month. Yuko will rent an airy, brightly-lit loft near her home to use as a place for growing the bonsai trees. The rent will be $350 per month. She estimates that the cost of seeds, earth, fertilizers and pots will be $5 for each finished bonsai tree. She will hire an experienced gardener to plant and water the bonsai trees at a
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labor rate of $10 per hour. To sell her bonsai trees, Yuko feels that she must launch an advertising campaign that focuses on hard-core gardeners. An advertising agency states that it will handle all advertising for a fee of $500 per month. Nurseries will sell the bonsai trees on consignment and will be paid a commission of $5 for each tree sold. Production equipment will be rented at a cost of $400 per month. Yuko has already paid the legal and filing fees associated with incorporating her business in the state. These fees amounted to $200. A small room has been located near town that Yuko will use as a sales office. The rent will be $225 per month. A phone installed in the room for taking orders will cost $20 per month. Yuko has some money in savings that is earning interest of $1,700 per year. These savings will be withdrawn and used to get the business going. For the time being, Yuko does not intend to draw any salary from the new company. Required: 1. Prepare an answer sheet with the following column headings: Period Name Product Cost (Selling and of the Variable Fixed Direct Direct Manufacturing Administrative) Opportunity Sunk Cost Cost Cost Materials Labor Overhead Cost Cost Cost List the different costs associated with the new company down the extreme left column (under the Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be Xs under several column headings for a single cost. (That is, a cost may be a fixed cost, a period cost, and a sunk cost; thus you would place an X under each of these column headings opposite the cost.) Under the Variable Cost column, list only those costs that would be variable with respect to the number of bonsai trees that are produced and sold. 2. All of the costs you have listed above, except one, would be differential costs between the alternatives of Yuko producing bonsai trees or staying with the food industry. Which cost is not differential? Explain. Exercise 3: Listed below are a number of costs found in organizations. 1. Wages of workers assembling computers. 11. Salespersons commissions. 2. Thread in a garment factory. 12. Insurance, finished goods warehouses. 3. Depreciation, executive autos. 13. Magazine subscriptions, factory lunchroom. 4. Ink used in book production. 14. Supervisors salary, factory. 5. Executive life insurance. 15. Property taxes, factory. 6. Shipping costs on merchandise sold. 16. Fringe benefits, assembly-line workers. 7. Wood used in producing furniture. 17. Zippers used in jeans production. 8. Lubricants for production equipment. 18. Boxes used for packaging television sets. 9. Wage of receptionist, executive offices. 19. Billing costs.
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10. Packing supplies for international shipments. 20. Advertising costs. Required: Prepare an answer sheet with column headings as shown below. For each cost item, indicate whether it would be variable or fixed with respect to the number of units produced and sold; and then whether it would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be treated as a direct cost or an indirect cost with respect to units of product. Three sample answers are provided for illustration. Manufacturing Selling Administrative (Product) Cost Cost Cost Direct Indirect X X X

Cost Item Direct labor............. Executive salaries ... Factory rent ............

Variable or Fixed V F F

Exercise 4: Data are provided below for four cases. Each case is independent of the others. Required: Supply the missing data in the following cases. Case 1 2 3 4 Schedule of Cost of Goods Manufactured Direct materials ............................... $ 7,200 $ 4,500 $ 8,000 $7,500 Direct labor ..................................... ? 3,900 7,000 6,000 Manufacturing overhead ................. 5,500 4,000 ? 4,900 Total manufacturing costs ............... 18,700 ? 19,500 ? Beginning work in process 1,000 ? 2,500 ? inventory ...................................... Ending work in process inventory .. ? 1,000 3,000 2,000 Cost of goods manufactured ........... $17,700 $13,400 $ ? $ ? Income Statement Sales ................................................ Beginning finished goods inventory ...................................................... Cost of goods manufactured ........... Goods available for sale .................. Ending finished goods inventory .... Cost of goods sold ...........................

$35,000 2,500 ? ? ? 17,200

$40,000 3,000 ? ? 1,200 ?

$15,000 ? ? ? 12,000 10,000

$38,000 4,000 19,300 ? 2,000 ?

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Gross margin ................................... Selling and administrative expenses ...................................................... Net operating income ......................

17,800 ? $15,800

? 9,200 $ ?

5,000 ? $ 3,000

? ? $11,100

Exercise 5: Various cost and sales data for Jaskot Company for the just completed year follow: Finished goods inventory, beginning $22,000 Finished goods inventory, ending .. $18,000 Depreciation, factory...................... $24,000 Administrative expenses ................ $36,000 Utilities, factory ............................. $15,000 Maintenance, factory...................... $12,000 Supplies, factory ............................ $6,000 Insurance, factory ........................... $5,000 Purchases of raw materials............. $102,500 Raw materials inventory, beginning $8,000 Raw materials inventory, ending ... $10,000 Direct labor .................................... $60,000 Indirect labor .................................. $18,000 Work in process inventory, beginning $10,000 Work in process inventory, ending $12,000 Sales ............................................... $400,000 Selling expenses ............................. $63,000 Required: 1. Prepare a schedule of cost of goods manufactured. 2. Prepare an income statement. 3. The company produced the equivalent of 10,000 units of product during the year just completed. What was the average cost per unit for direct materials? What was the average cost per unit for factory depreciation? 4. The company expects to produce 12,000 units of product during the coming year. What average cost per unit and what total cost would you expect the company to incur for direct materials at this level of activity? For factory depreciation? (In preparing your answer, assume that direct materials is a variable cost and that depreciation is a fixed cost that is computed on a straight-line basis.) 5. Explain to the president any difference in the average cost per unit between (3) and (4) above.