Chapter 2--Cost Terminology and Cost Behaviors

TRUE/FALSE
1. A cost object is anything for which management wants to collect or accumulate costs.
ANS: T

PTS: 1

DIF: Easy

OBJ: 2-1

DIF: Easy

OBJ: 2-1

DIF: Easy

OBJ: 2-1

2. A production plant could be a cost object.

ANS: T

PTS: 1

3. A specific product cannot be a cost object

ANS: F

PTS: 1

4. The portion of an assets value on the balance sheet is referred to as an expired cost.
ANS: F

PTS: 1

DIF: Easy

OBJ: 2-2

5. The portion of an asset that was consumed during a period is referred to an expired cost.
ANS: T

PTS: 1

DIF: Easy

OBJ: 2-2

6. A variable cost remains constant on a per-unit basis as production increases

ANS: T

PTS: 1

DIF: Easy

OBJ: 2-2

7. A fixed cost remains constant on a per-unit basis as production changes.

ANS: F

PTS: 1

DIF: Easy

OBJ: 2-2

8. The relevant range is valid for all levels of activity

ANS: F

PTS: 1

DIF: Easy

OBJ: 2-2

9. An indirect cost can be easily traced to a cost object.

ANS: F

PTS: 1

DIF: Easy

OBJ: 2-2

10. Both accountants and economists view variable costs as linear in nature.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-2

11. Fixed cost per unit varies directly with production.

ANS: F

PTS: 1

DIF: Easy

OBJ: 2-2

12. Variable cost per unit remains constant within the relevant range.
ANS: T

PTS: 1

DIF: Easy

OBJ: 2-2

13. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a
mixed cost.
ANS: F

PTS: 1

DIF: Easy

OBJ: 2-2

14. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a
step cost.
ANS: T

PTS: 1

DIF: Easy

OBJ: 2-2

15. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as
a mixed cost.
ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-2

16. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a
step cost.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-2

17. A predictor which has an absolute cause and effect relationship to a cost is referred to a cost driver.
ANS: T

PTS: 1

DIF: Easy

OBJ: 2-2

18. A mixed cost will be an effective cost driver.

ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-2

19. A variable cost will be an effective cost driver.

ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-2

20. Unexpired costs are reflected on the balance sheet.

ANS: T

PTS: 1

DIF: Easy

OBJ: 2-3

21. Expired costs are reflected on the balance sheet.

ANS: F

PTS: 1

DIF: Easy

OBJ: 2-3

22. Distribution costs are an example of product costs.

ANS: F

PTS: 1

DIF: Easy

OBJ: 2-3

23. Distribution costs are an example of period costs.

ANS: T

PTS: 1

DIF: Easy

OBJ: 2-3

24. Retailers generally have a much higher degree of conversion than do manufacturing or professional
firms.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-4

25. Retailers generally have a much lower degree of conversion than do manufacturing or professional
firms.
ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-4

26. In a service industry, direct materials are usually insignificant in amount and cannot easily be traced to
a cost object.
ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-5

27. In a service industry, direct materials are usually significant in amount and can be easily traced to a
cost object.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-5

28. There is an inverse relationship between prevention costs and failure costs.
ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-5

29. There is a direct relationship between prevention costs and failure costs.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-5

30. In an actual cost system, actual production overhead costs are accumulated in an Overhead Control
account and assigned to Work in Process at the end of the period.
ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-5

31. In an normal cost system, actual production overhead costs are accumulated in an Overhead Control
account and assigned to Work in Process at the end of the period.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-5

32. In a normal cost system, factory overhead is applied to Work in Process using a predetermined
overhead rate.
ANS: T

PTS: 1

DIF: Moderate

OBJ: 2-5

33. In an actual cost system, factory overhead is applied to Work in Process using a predetermined
overhead rate.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-5

34. In an actual cost system, overhead is assigned to Work in Process Inventory with a debit entry to the
account.
ANS: T

PTS: 1

DIF: Easy

OBJ: 2-5

35. In an actual cost system, overhead is assigned to Work in Process Inventory with a credit entry to the
account.
ANS: F

PTS: 1

DIF: Easy

OBJ: 2-5

36. It is not necessary to prepare the Cost of Goods Manufactured statement prior to preparing the Cost of
Goods Sold statement.
ANS: F

PTS: 1

DIF: Moderate

OBJ: 2-6

COMPLETION
1. Anything for which management wants to accumulate or collect costs is known as a
______________________.
ANS: cost object
PTS: 1

DIF: Easy

OBJ: 2-1

2. Costs that can be conveniently traced to a cost object are referred to as ____________ costs.
ANS: direct
PTS: 1

DIF: Easy

OBJ: 2-2

3. Costs that cannot be conveniently traced to a cost object are known as __________________ costs.
ANS: indirect
PTS: 1

DIF: Easy

OBJ: 2-2

4. A cost that remains unchanged in total within the relevant range is known as a _____________ cost.
ANS: fixed
PTS: 1

DIF: Easy

OBJ: 2-2

5. A cost that varies in total in direct proportion to changes in activity is known as a _______________
cost
ANS: variable
PTS: 1

DIF: Easy

OBJ: 2-2

6. The assumed range of activity that reflects the companys normal operating range is referred to as the
_____________________________.
ANS: relevant range
PTS: 1

DIF: Easy

OBJ: 2-2

7. A cost that remains constant on a per unit basis within the relevant range is a
________________________ cost.
ANS: variable

PTS: 1

DIF: Easy

OBJ: 2-2

8. A cost that varies inversely with the level of production is known as a _______________ cost.
ANS: fixed
PTS: 1

DIF: Easy

OBJ: 2-2

9. A cost that has both fixed and variable components is known as a __________________ cost.
ANS: mixed
PTS: 1

DIF: Easy

OBJ: 2-2

10. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a
___________ cost.
ANS: step
PTS: 1

DIF: Easy

OBJ: 2-2

11. Another name for inventoriable costs is ______________ costs.

ANS: product
PTS: 1

DIF: Easy

OBJ: 2-3

12. The three stages of production for a manufacturing firm are ______________, ________________,
and ______________________.
ANS: raw materials, work in process, finished goods
PTS: 1

DIF: Easy

OBJ: 2-4

13. Costs that are incurred to improve quality by precluding defects and improper processing are referred
to as ____________________ costs.
ANS: prevention
PTS: 1

DIF: Moderate

OBJ: 2-5

14. Costs incurred for monitoring or inspecting products are known as ____________________ costs.
ANS: appraisal
PTS: 1

DIF: Moderate

OBJ: 2-5

15. Costs that result from defective units, product returns, and complaints are referred to as
_______________________ costs.
ANS: failure
PTS: 1

DIF: Moderate

OBJ: 2-5

MULTIPLE CHOICE
1. The term "relevant range" as used in cost accounting means the range over which
a. costs may fluctuate.
b. cost relationships are valid.
c. production may vary.
d. relevant costs are incurred.
ANS: B

PTS: 1

DIF: Easy

OBJ: 2-2

2. Which of the following defines variable cost behavior?

Total cost reaction
to increase in activity
a.
b.
c.
d.

remains constant
remains constant
increases
increases

ANS: D

Cost per unit reaction

to increase in activity
remains constant
increases
increases
remains constant

PTS: 1

DIF: Easy

OBJ: 2-2

3. When cost relationships are linear, total variable prime costs will vary in proportion to changes in
a. direct labor hours.
b. total material cost.
c. total overhead cost.
d. production volume.
ANS: D

PTS: 1

DIF: Easy

OBJ: 2-2

4. Which of the following would generally be considered a fixed factory overhead cost?
Straight-line
depreciation
a.
b.
c.
d.
ANS: C

no
yes
yes
no

Factory
insurance
no
no
yes
yes

PTS: 1

Units-of-production
depreciation
no
yes
no
no

DIF: Easy

OBJ: 2-2

DIF: Easy

OBJ: 2-2

5. An example of a fixed cost is

a. total indirect material cost.
b. total hourly wages.
c. cost of electricity.
d. straight-line depreciation.
ANS: D

PTS: 1

6. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n)
a. expired cost.
b. fixed cost.
c. variable cost.

d. mixed cost.
ANS: B

PTS: 1

DIF: Easy

OBJ: 2-2

7. A(n) ________ cost increases or decreases in intervals as activity changes.

a. historical cost
b. fixed cost
c. step cost
d. budgeted cost
ANS: C

PTS: 1

DIF: Easy

OBJ: 2-2

8. When the number of units manufactured increases, the most significant change in unit cost will be
reflected as a(n)
a. increase in the fixed element.
b. decrease in the variable element.
c. increase in the mixed element.
d. decrease in the fixed element.
ANS: D

PTS: 1

DIF: Easy

OBJ: 2-2

9. Which of the following always has a direct cause-effect relationship to a cost?

a.
b.
c.
d.

Predictor

Cost driver

yes
yes
no
no

yes
no
yes
no

ANS: C

PTS: 1

DIF: Moderate

OBJ: 2-2

10. A cost driver

a. causes fixed costs to rise because of production changes.
b. has a direct cause-effect relationship to a cost.
c. can predict the cost behavior of a variable, but not a fixed, cost.
d. is an overhead cost that causes distribution costs to change in distinct increments with
changes in production volume.
ANS: B

PTS: 1

DIF: Easy

OBJ: 2-2

DIF: Easy

OBJ: 2-3

11. Product costs are deducted from revenue

a. as expenditures are made.
b. when production is completed.
c. as goods are sold.
d. to minimize taxable income.
ANS: C

PTS: 1

12. A selling cost is a(n)

product cost
a. yes
b. yes
c. no

period cost
yes
no
yes

inventoriable cost
no
no
no

d. no
ANS: C

yes

yes

PTS: 1

DIF: Easy

OBJ: 2-3

13. Which of the following is not a product cost component?

a. rent on a factory building
b. indirect production labor wages
c. janitorial supplies used in a factory
d. commission on the sale of a product
ANS: D

PTS: 1

DIF: Easy

OBJ: 2-3

14. Period costs

a. are generally expensed in the same period in which they are incurred.
b. are always variable costs.
c. remain unchanged over a given period of time.
d. are associated with the periodic inventory method.
ANS: A

PTS: 1

DIF: Easy

OBJ: 2-3

15. Period costs include

distribution costs
a.
b.
c.
d.

outside processing costs

yes
no
no
yes

ANS: A

sales commissions

no
yes
no
yes

PTS: 1

yes
yes
no
yes

DIF: Easy

OBJ: 2-3

16. The three primary inventory accounts in a manufacturing company are

a. Merchandise Inventory, Supplies Inventory, and Finished Goods Inventory.
b. Merchandise Inventory, Work in Process Inventory, and Finished Goods Inventory.
c. Supplies Inventory, Work in Process Inventory, and Finished Goods Inventory.
d. Raw Material Inventory, Work in Process Inventory, and Finished Goods Inventory.
ANS: D

PTS: 1

DIF: Easy

OBJ: 2-3

DIF: Easy

OBJ: 2-3

17. Cost of Goods Sold is an

a. unexpired product cost.
b. expired product cost.
c. unexpired period cost.
d. expired period cost.
ANS: B

PTS: 1

18. The indirect costs of converting raw material into finished goods are called
a. period costs.
b. prime costs.
c. overhead costs.
d. conversion costs.
ANS: C

PTS: 1

DIF: Easy

OBJ: 2-3

19. Which of the following would need to be allocated to a cost object?

a.
b.
c.
d.

direct material
direct labor
direct production costs
indirect production costs

ANS: D

PTS: 1

DIF: Easy

OBJ: 2-3

DIF: Easy

OBJ: 2-3

20. Conversion cost does not include

a. direct labor.
b. direct material.
c. factory depreciation.
d. supervisors' salaries.
ANS: B

PTS: 1

21. The distinction between direct and indirect costs depends on whether a cost
a. is controllable or non-controllable.
b. is variable or fixed.
c. can be conveniently and physically traced to a cost object under consideration.
d. will increase with changes in levels of activity.
ANS: C

PTS: 1

DIF: Moderate

OBJ: 2-3

22. Langley Company is a construction company that builds houses on special request. What is the proper
classification of the carpenters' wages?
Product
a.
b.
c.
d.

yes
yes
no
no

Period
yes
no
no
yes

ANS: B

Direct
no
yes
no
yes

PTS: 1

DIF: Easy

OBJ: 2-3

23. Langley Company is a construction company that builds houses on special request. What is the proper
classification of the cost of the cement building slab used?

a.
b.
c.
d.

Direct

Fixed

no
no
yes
yes

no
yes
yes
no

ANS: D

PTS: 1

DIF: Easy

OBJ: 2-3

24. Langley Company is a construction company that builds houses on special request. What is the proper
classification of indirect material used?
Prime
a. no
b. no
c. yes

Conversion
no
yes
yes

Variable
no
yes
yes

d. yes

no

no

ANS: B

PTS: 1

DIF: Easy

OBJ: 2-3

25. Which of the following costs would be considered overhead in the production of chocolate chip
cookies?
a. flour
b. chocolate chips
c. sugar
d. oven electricity
ANS: D

PTS: 1

DIF: Easy

OBJ: 2-3

26. All costs related to the manufacturing function in a company are

a. prime costs.
b. direct costs.
c. product costs.
d. conversion costs.
ANS: C

PTS: 1

DIF: Easy

OBJ: 2-3

27. Prime cost consists of

direct material
a.
b.
c.
d.

direct labor

overhead

yes
yes
no
yes

no
no
yes
yes

no
yes
yes
no

ANS: B

PTS: 1

DIF: Easy

OBJ: 2-3

28. Plastic used to manufacture dolls is a

prime cost
a.
b.
c.
d.

no
yes
yes
yes

ANS: D

product cost

direct cost

yes
no
yes
yes

yes
yes
no
yes

PTS: 1

fixed cost
yes
no
yes
no

DIF: Easy

OBJ: 2-3

29. The term "prime cost" refers to

a. all manufacturing costs incurred to produce units of output.
b. all manufacturing costs other than direct labor and raw material costs.
c. raw material purchased and direct labor costs.
d. the raw material used and direct labor costs.
ANS: D

PTS: 1

DIF: Easy

30. Conversion of inputs to outputs is recorded in the

a. Work in Process Inventory account.
b. Finished Goods Inventory account.
c. Raw Material Inventory account.
d. both a and b.

OBJ: 2-3

ANS: A

PTS: 1

DIF: Easy

OBJ: 2-5

31. In a perpetual inventory system, the sale of items for cash consists of two entries. One entry is a debit
to Cash and a credit to Sales. The other entry is a debit to
a. Work in Process Inventory and a credit to Finished Goods Inventory.
b. Finished Goods Inventory and a credit to Cost of Goods Sold.
c. Cost of Goods Sold and a credit to Finished Goods Inventory.
d. Finished Goods Inventory and a credit to Work in Process Inventory.
ANS: C

PTS: 1

DIF: Easy

OBJ: 2-5

32. The formula to compute cost of goods manufactured is

a. beginning Work in Process Inventory plus purchases of raw material minus ending
Work in Process Inventory.
b. beginning Work in Process Inventory plus direct labor plus direct material used plus
overhead incurred minus ending Work in Process Inventory.
c. direct material used plus direct labor plus overhead incurred.
d. direct material used plus direct labor plus overhead incurred plus beginning Work in
Process Inventory.
ANS: B

PTS: 1

DIF: Easy

OBJ: 2-6

33. The final figure in the Schedule of Cost of Goods Manufactured represents the
a. cost of goods sold for the period.
b. total cost of manufacturing for the period.
c. total cost of goods started and completed this period.
d. total cost of goods completed for the period.
ANS: D

PTS: 1

DIF: Easy

OBJ: 2-6

34. The formula for cost of goods sold for a manufacturer is

a. beginning Finished Goods Inventory plus Cost of Goods Manufactured minus ending
Finished Goods Inventory.
b. beginning Work in Process Inventory plus Cost of Goods Manufactured minus ending
Work in Process Inventory.
c. direct material plus direct labor plus applied overhead.
d. direct material plus direct labor plus overhead incurred plus beginning Work in Process
Inventory.
ANS: A

PTS: 1

DIF: Easy

OBJ: 2-6

35. Which of the following replaces the retailing component "Purchases" in computing Cost of Goods
Sold for a manufacturing company?
a. direct material used
b. cost of goods manufactured
c. total prime cost
d. cost of goods available for sale
ANS: B

PTS: 1

DIF: Easy

OBJ: 2-6

36. Costs that are incurred to preclude defects and improper processing are:
a. prevention costs
c. appraisal costs
b. detection costs
d. failure costs
ANS: A

PTS: 1

DIF: Moderate

OBJ: 2-5

37. Costs that are incurred for monitoring and inspecting are:
a. prevention costs
c. appraisal costs
b. detection costs
d. failure costs
ANS: C

PTS: 1

DIF: Moderate

OBJ: 2-5

38. Costs that are incurred when customers complain are:

a. prevention costs
c. appraisal costs
b. detection costs
d. failure costs
ANS: D

PTS: 1

DIF: Moderate

OBJ: 2-5

Mitchell Company
The following information has been taken from the cost records of Mitchell Company for the past
year:
Raw material used in production
Total manufacturing costs charged to production during the year (includes direct
material, direct labor, and overhead equal to 60% of direct labor cost)
Cost of goods available for sale
Selling and Administrative expenses
Inventories
Raw Material
Work in Process
Finished Goods

Beginning
$75
80
90

Ending
$ 85
30
110

39. Refer to Mitchell Company. The cost of raw material purchased during the year was
a. $316.
b. $336.
c. $360.
d. $411.
ANS: B
Beginning Inventory
+Purchases
=Goods Available for Sale
-Ending Inventory
Materials Used in Production
PTS: 1

75
336
411
(326)
85

DIF: Moderate

OBJ: 2-5

40. Refer to Mitchell Company. Direct labor cost charged to production during the year was
a. $135.
b. $216.
c. $225.
d. $360.
ANS: C
Total production costs

$686

$326
686
826
25

- Raw materials
Conversion Costs
Let x = Direct Labor
Let .60x = Factory Overhead
x + .60x
x
PTS: 1

$326
$360

$360
$225

DIF: Easy

OBJ: 2-5

41. Refer to Mitchell Company. Cost of Goods Manufactured was

a. $636.
b. $716.
c. $736.
d. $766.
ANS: C
Beginning WIP Inventory
$ 80
Costs of Production
686
less: Ending WIP Inventory (30)
Cost of Goods Manufactured $736
====
PTS: 1

DIF: Moderate

OBJ: 2-6

42. Refer to Mitchell Company. Cost of Goods Sold was

a. $691.
b. $716.
c. $736.
d. $801.
ANS: B
Beginning Finished Goods Inventory $ 90
Cost of Goods Manufactured
736
less: Ending Finished Goods Inventory (110)
Cost of Goods Manufactured
$716
====
PTS: 1

DIF: Moderate

OBJ: 2-6

Davis Company.
Davis Company manufactures wood file cabinets. The following information is available for June
2008:
Beginning
Raw Material Inventory
Work in Process Inventory
Finished Goods Inventory

Ending

$ 6,000
17,300
21,000

$ 7,500
11,700
16,300

43. Refer to Davis Company. Direct labor is $9.60 per hour and overhead for the month was $9,600.
Compute total manufacturing costs for June, if there were 1,500 direct labor hours and $21,000 of raw
material was purchased.
a. $58,500

b. $46,500
c. $43,500
d. $43,100
ANS: C
Raw Materials

Begin Inv
$6,000

Direct Labor
Overhead

PTS: 1

DIF: Moderate

Purch
Ending Inv
$21,000
$(7,500)
Rate
Hours
$
9.60
1,500

$19,500
14,400
9,600
$43,500

OBJ: 2-5

44. Refer to Davis Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600.
What are prime costs and conversion costs, respectively if there were 1,500 direct labor hours and
$21,000 of raw material was purchased?
a. $29,100 and $33,900
b. $33,900 and $24,000
c. $33,900 and $29,100
d. $24,000 and $33,900
ANS: B
Raw Materials

Begin Inv
$6,000.00

Direct Labor
Overhead

Purch
Ending Inv
$21,000
$(7,500)
Rate
Hours
$
9.60
1,500

$19,500
14,400
9,600

Prime Costs = Raw Materials + Direct Labor-- $19,500 + 14,400 = $33,900

Conversion Costs = Direct Labor + Factory Overhead--$14,400 + 9,600 = $24,000

PTS: 1

DIF: Moderate

OBJ: 2-5

45. Refer to Davis Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600.
If there were 1,500 direct labor hours and $21,000 of raw material purchased, Cost of Goods
Manufactured is:
a. $49,100.
b. $45,000.
c. $51,000.
d. $49,500.
ANS: A
Beginning WIP Inventory
Raw Materials
Direct Labor
Factory Overhead
Ending WIP Inventory
Cost of Goods Manufactured

PTS: 1

DIF: Moderate

$
$

OBJ: 2-6

19,500
14,400
9,600

17,300

43,500
(11,700)
$ 49,100

46. Refer to Davis Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600.
If there were 1,500 direct labor hours and $21,000 of raw material purchased, how much is Cost of
Goods Sold?
a. $64,500.
b. $59,800.
c. $38,800.
d. $53,800.
ANS: D
Beginning WIP Inventory
Raw Materials
Direct Labor
Factory Overhead
Ending WIP Inventory
Cost of Goods Manufactured
Beginning Finished Goods Inventory
Ending Finished Goods Inventory

PTS: 1

DIF: Moderate

$
$

19,500
14,400
9,600

17,300

43,500
(11,700)
$ 49,100
21,000
(16,300)
$ 53,800

OBJ: 2-6

47. Steelman Company manufacturers desks. The beginning balance of Raw Material Inventory was
$4,500; raw material purchases of $29,600 were made during the month. At month end, $7,700 of raw
material was on hand. Raw material used during the month was
a. $26,400.
b. $34,100.
c. $37,300.
d. $29,600.
ANS: A
Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$4,500 + 29,600 - 7,700 = X
X = $26,400
PTS: 1

DIF: Easy

OBJ: 2-5

48. Legend Company manufacturers tables. If raw material used was $80,000 and Raw Material
Inventory at the beginning and end of the period, respectively, was $17,000 and $21,000, what was
amount of raw material was purchased?
a. $76,000
b. $118,000
c. $84,000
d. $101,000
ANS: C
Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$17,000 + X - 21,000 = $80,000
X = $84,000
PTS: 1

DIF: Easy

OBJ: 2-5

49. Morris Company manufacturers computer stands. What is the beginning balance of Finished Goods
Inventory if Cost of Goods Sold is $107,000; the ending balance of Finished Goods Inventory is
$20,000; and Cost of Goods Manufactured is $50,000 less than Cost of Goods Sold?

a.
b.
c.
d.

$70,000
$77,000
$157,000
$127,000

ANS: A
Beg Fin Goods Invy + Cost of Goods Manufactured - Ending Fin Goods Invy = COGS
X
+ $57,000
- $20,000
= $107,000
X = $70,000
PTS: 1

DIF: Easy

OBJ: 2-6

Long Enterprises
Inventories:
Raw material
Work in process
Finished goods

March 1

March 31

$18,000
9,000
27,000

Additional information for March:

Raw material purchased
Direct labor payroll
Direct labor rate per hour
Overhead rate per direct labor hour

$15,000
6,000
36,000

$42,000
30,000
7.50
10.00

50. Refer to Long Enterprises. For March, prime cost incurred was
a. $75,000.
b. $69,000.
c. $45,000.
d. $39,000.
ANS: A
Raw Materials

Begin Inv
$18,000

Direct Labor

PTS: 1

DIF: Easy

Purch
$42,000
Rate
$
7.50

Ending Inv
$(15,000)
Hours
4,000

$45,000
30,000
$75,000

OBJ: 2-5

51. Refer to Long Enterprises. For March, conversion cost incurred was
a. $30,000.
b. $40,000.
c. $70,000.
d. $72,000.
ANS: C
Begin Inv
Direct Labor
Overhead

Purch
Ending Inv
$
7.50
4,000
Rate
Hours
$
10.00
4,000

30,000
40,000
$70,000

PTS: 1

DIF: Easy

OBJ: 2-5

52. Refer to Long Enterprises. For March, Cost of Goods Manufactured was
a. $118,000.
b. $115,000.
c. $112,000.
d. $109,000.
ANS: A
Beginning WIP Inventory
Raw Materials
Direct Labor
Factory Overhead
Ending WIP Inventory

PTS: 1

DIF: Easy

$
$

45,000
30,000
40,000

9,000

115,000
(6,000)
$ 118,000

OBJ: 2-6

SHORT ANSWER
1. Define relevant range and explain its significance.
ANS:
The relevant range is that range of activity over which a variable cost remains constant on a per-unit
basis and a fixed cost remains constant in total. Managers can review the various ranges of activity and
the related effects on variable cost (per-unit) and fixed cost (in total) to determine how a change in the
range will affect costs and, thus, the firm's profitability.
PTS: 1

DIF: Moderate

OBJ: 2-2

2. Define a variable cost and a fixed cost. What causes changes in these costs? Give two examples of
each.
ANS:
A variable cost is one that remains constant on a per-unit basis but varies in total with changes in
activity. Examples of variable costs include direct material, direct labor, and (possibly) utilities. A
fixed cost is one that remains constant in total but varies on a per-unit basis with changes in activity.
Examples of fixed costs include straight-line depreciation, insurance, and the supervisor's salary.
PTS: 1

DIF: Moderate

OBJ: 2-2

3. What is the difference between a product cost and a period cost? Give three examples of each. What is
the difference between a direct cost and indirect cost? Give two examples of each.
ANS:
A product cost is one that is associated with making or acquiring inventory. A period cost is any cost
other than those associated with making or acquiring products and is not considered inventoriable.
Students will have a variety of examples, but direct material, direct labor, and overhead are product
costs. Selling and administrative expenses are considered period costs. A direct cost is one that is
physically and conveniently traceable to a cost object. Direct material and direct labor are direct costs.
An indirect cost is one that cannot be conveniently traced to a cost object. Any type of overhead cost is
considered indirect.

PTS: 1

DIF: Moderate

OBJ: 2-3

4. What are three reasons that overhead must be allocated to products?

ANS:
Overhead must be allocated because it is necessary to (1) determine full cost, (2) it can motivate
managers, and (3) it allows managers to compare alternative courses of action.
PTS: 1

DIF: Moderate

OBJ: 2-3

5. Why should predetermined overhead rates be used?

ANS:
Predetermined overhead rates should be used for three reasons: (1) to assign overhead to Work in
Process during the production cycle instead of at the end of the period; (2) to compensate for
fluctuations in actual overhead costs that have no bearing on activity levels; and (3) to overcome
problems of fluctuations in activity levels that have no impact on actual fixed overhead costs.
PTS: 1

DIF: Moderate

OBJ: 2-3

6. List and explain three types of quality costs.

ANS:
Prevention costs--incurred to improve quality by precluding product defects and improper processing
from occurring.
Appraisal costs--incurred to find mistakes not eliminated through prevention.
Failure costs--can be internal (scrap and rework) or external (costs of returns, warranty costs).
PTS: 1

DIF: Moderate

OBJ: 2-5

PROBLEM
1. Given the following information for Graves Corporation, prepare the necessary journal entries,
assuming that the Raw Material Inventory account contains both direct and indirect material.
a.
b.
c.
d.
e.
f.

Purchased raw material on account $28,500.

Put material into production: $15,000 of direct material and $3,000 of indirect material.
Accrued payroll of $90,000, of which 70 percent was direct and the remainder was indirect.
Incurred and paid other overhead items of $36,000.
Transferred items costing $86,500 to finished goods.
Sold goods costing $71,300 on account for $124,700.

ANS:
a.
b.
c.
d.

RM Inventory
A/P
WIP Inventory
Manufacturing OH
RM Inventory
WIP Inventory
Manufacturing OH
Salaries/Wages Payable
Manufacturing OH

28,500
28,500
15,000
3,000
18,000
63,000
27,000
90,000
36,000

e.
f.

36,000

Cash
FG Inventory
WIP Inventory
A/R
Sales
CGS
FG Inventory

PTS: 1

86,500
86,500
124,700
124,700
71,300
71,300

DIF: Moderate

OBJ: 2-5

2. Prepare a Schedule of Cost of Goods Manufactured (in good form) for the Chandler Company from
the following information for June 20X8:
Inventories
Raw Material
Work in Process
Finished Goods

Beginning
$ 6,700
17,700
29,730

Ending
$ 8,900
22,650
19,990

Additional information: purchases of raw material were $46,700; 19,700 direct labor hours were
worked at $11.30 per hour; overhead costs were $33,300.
ANS:
Chandler Company
Schedule of Cost of Goods Manufactured
For the Month Ended June 30, 20X8
$ 17,700

Work in Process (June 1)

Raw Mat. (June 1)
Purchases
Raw Mat. Available
Raw Mat. (June 30)
Raw Mat. Used
Direct Labor (19,700 x $11.30)
Manufacturing Overhead
Total Manufacturing Costs
Total Goods in Process
Work in Process (June 30)
Cost of Goods Manufactured
PTS: 1

$ 6,700
46,700
53,400
(8,900)
$ 44,500
222,610
33,300
300,410
$318,110
(22,650)
$295,460

DIF: Moderate

OBJ: 2-6

3. In June 20X8, the Evans Company has Cost of Goods Manufactured of $296,000; beginning Finished
Goods Inventory of $29,730; and ending Finished Goods Inventory of $19,990. Prepare an income
statement in good form. (Ignore taxes.) The following additional information is available:
$ 40,500
19,700
475,600

Selling Expenses
Administrative Expenses
Sales
ANS:
Evans Company

Income Statement
For the Month Ended June 30, 20X8
$475,600

Sales
Cost of Goods Sold:
Finished Goods (June 1)
Cost of Goods Mf'd
Total Goods Available
Finished Goods (June 30)
Cost of Goods Sold
Gross Margin
Operating Expenses:
Selling
Administrative
Total Operating Expenses
Income from operations
PTS: 1

$ 29,730
296,000
$325,730
(19,990)
(305,740)
$169,860
$40,500
19,700
(60,200)
$109,660

DIF: Moderate

OBJ: 2-6

4. The following information is for the Cameron Manufacturing Company for November.
Inventories
Raw Material
Work in Process
Finished Goods

Beginning

Ending

$17,400
31,150
19,200

Direct Labor (21,000 DLH @ $13)

Raw Material Purchases
Indirect Labor
Factory Supplies Used
Other Expenses:
Depr.-Factory Equipment

$13,200
28,975
25,500

$120,000Insurance-Office
11,200Office Supplies Expense
350Insurance-Factory

Depr. Office Equipment

17,300Repair/Maintenance-Factory

Calculate total manufacturing costs, cost of goods manufactured, and cost of goods sold.
ANS:
Manufacturing Costs:
Raw Material (Nov. 1)
Purchases
Raw Material Available
Raw Material (Nov. 30)
Raw Material Used
Direct Labor (21,000 x $13)
Overhead:
Depr.-Factory Equipment
Repairs/Maintenance-Factory
Indirect Labor
Insurance-Factory
Factory Supplies Used
Total Overhead
Total Manufacturing Costs
Cost of Goods

$ 17,400
120,000
$137,400
(13,200)
$124,200
273,000
$17,300
7,400
11,200
1,770
350
38,020
$435,220

2,570
900
1,770
3,500
7,400

Manufactured:
Total Manufacturing Costs
Work in Process (Nov. 1)
Work in Process (Nov. 30)
Cost of Goods
Manufactured
Cost of Goods Sold:
Finished Goods (Nov. 1)
Cost of Goods
Manufactured
Total Goods Available
Finished Goods (Nov. 30)
Cost of Goods Sold
PTS: 1

$435,220
31,150
(28,975)
$437,395

$ 19,200
437,395
$456,595
(25,500)
$431,095

DIF: Moderate

OBJ: 2-6

5. From the following information for the Seabrook Company, compute prime costs and conversion
costs.
Inventories
Raw Material
Work in Process
Finished Goods

Beginning
$ 9,900
44,500
36,580

Ending
$ 7,600
37,800
61,300

Raw material purchased during the period cost $40,800; overhead incurred and paid or accrued for the
period was $21,750; and 23,600 direct labor hours were incurred at a rate of $13.75 per hour.
ANS:
Prime Costs:
Raw Material (Beginning)
Purchases
Raw Material Available
Raw Material (Ending)
Raw Material Used
Direct Labor
Prime Costs

$ 9,900
40,800
$50,700
(7,600)
(23,600 x $13.75)

Conversion Costs:
Direct Labor (Above)
Overhead
Conversion Costs
PTS: 1

$ 43,100
324,500
$367,600
$324,500
21,750
$346,250

DIF: Moderate

OBJ: 2-6

6. The following miscellaneous data has been collected for a manufacturing company for the most recent
year-end:
Inventories:
Raw material
Work in process
Finished goods
Costs recorded during the year:
Purchases of raw material

Beginning
$50,000
40,000
60,000
$195,000

Ending
$55,000
45,000
50,000

150,000
595,000

Direct labor
Cost of goods sold

Required: Prepare a cost of goods manufactured statement showing how all unknown amounts were
determined.
ANS:
BEGIN WIP
+ DM (1)
+ DL
+ OH
- END WIP
= COGM (2)

$ 40,000
190,000
150,000
?
(45,000)
$585,000

(1)

BEG RM
+ PURCHASE
- END RM
= DM

$ 50,000
195,000
(55,000)
$190,000

(2)

BEGIN FG
+ COGM
- END FG
= COGS

$ 60,000
?
(50,000)
$595,000

PTS: 1

DIF: Moderate

= $250,000

= $585,000

OBJ: 2-6

7. The following information was taken from the records of the Beaumont Corporation for the month of
July. (There were no inventories of work in process or finished goods on July 1.)
Units
Sales during month
Manufacturing costs for month:
Direct material
Direct labor
Overhead costs applied
Overhead costs under-applied
Inventories, July 31:
Work in process
Finished goods

8,000

Cost
$ ?
32,000
20,000
15,000
800

1,000
2,000

?
?

Indirect manufacturing costs are applied on a direct labor cost basis. The under-applied balance is due
to seasonal variations and will be carried forward. The following cost estimates have been submitted
for the work in process inventory of July 31: material, $3,000; direct labor, $2,000.
Required:
a.
b.
c.

Determine the number of units that were completed and transferred to finished goods during
the month.
Complete the estimate of the cost of work in process on July 31.
Compute cost of goods manufactured for the month.

d.
e.

Determine the cost of each unit completed during the month.

Determine the total amount debited to the Overhead Control accounts during the month.

ANS:
a.
b.

8,000 SOLD + 2,000 ENDING FG = 10,000 UNITS

$3,000
DM
2,000
DC
1,500 =$15,000/$20,000 x $2,000
OH
$6,500

c.

$32,000
20,000
15,000
(6,500)
$60,500

DM
DL
OH
- END WIP
= COGM

d.

COGM/COMPLE
TE UNITS =

e.

OH APPLIED
+ OH
UNDERAPPLIED
ACTUAL OH

$ 60,500

= $6.05/UNIT

10,000 UNITS

PTS: 1

DIF: Moderate

$15,000
800
$15,800

OBJ: 2-6

8. The Sherwood Groves Corporation had the following account balances:

Bal. 1/1
Bal. 12/31

Raw Material
30,000
420,000

60,000

Work in Process
Bal. 1/1
70,000
Direct material
320,000
Direct labor
110,000
Overhead
400,000
Bal. 12/31

Manufacturing Overhead
385,000

Factory Wages Payable

179,000 Bal.1/1

810,000

Bal.
12/31

Bal. 1/1

Finished Goods
40,000
?

Bal. 12/31

130,000

Cost of Goods Sold

?

Required:
a. What was the cost of raw material put into production during the year?
b. How much of the material from question 1 consisted of indirect material?
c. How much of the factory labor cost for the year consisted of indirect labor?
d. What was the cost of goods manufactured for the year?

10,000
175,000
6,000

e.
f.
g.
h.

What was the cost of goods sold for the year (before considering under- or overapplied
overhead)?
If overhead is applied to production on the basis of direct material, what rate was in effect
during the year?
Was manufacturing overhead under- or overapplied? By how much?
Compute the ending balance in the Work in Process Inventory account. Assume that this
balance consists entirely of goods started during the year. If $32,000 of this balance is direct
material cost, how much of it is direct labor cost? Manufacturing overhead cost?

ANS:
a.
b.
c.
d.
e.
f.
g.
h.

$30,000 + $420,000 - $60,000 = $390,000

$390,000 - $320,000 DM = $70,000
$175,000 - $110,000 DL = $65,000
$810,000
$40,000 + $810,000 - $130,000 = $720,000
$400,000/$320,000 = 125% DM Cost
$385,000
OH Actual
400,000
OH Applied
$ 15,000
OH Overapplied
$ 70,000 DM
$32,000
Beginning WIP
320,000
18,000
+ DM
DL (To Balance)
110,000
40,000
+ DC
FOH (1)
400,000 End WIP
$90,000
+ OH
(90,000)
- Ending WIP
$810,000 (1) $32,000 x 125% = $40,000
= COGM

PTS: 1

DIF: Moderate

OBJ: 2-6