Managerial Accounting: Tools For Business Decision-Making, Third Canadian Edition Test Bank

CHAPTER 2 MANAGERIAL ACCOUNTING SUMMARY OF QUESTIONS BY OBJECTIVES AND BLOOM’S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT 2 2 2 2 3 3 3 AP C K C K K K 29. 30. 31. 32. 33. 3 3 4 4 4 K C C K K 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 2 2 2 2 2 2 2 2 2 2 2 3 3 3 3 3 3 3 3 3 K K C AP AP AP AP K K K C K C C C C C C AP AP 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 3 3 3 3 3 3 3 3 3 3 4 4 4 4 4 4 4 AP AP AP C C K AP AP AN C C K C C K K k 140. 141. 142. 3 3-4 4 AP C AP 155. 156. 157. 158. 3 3 3 3 AP AP AP AP 159. 160. 161. 162. 3 3-4 3-4 4 AP AP AP AP 3 3 K K True-False Statements 1. 2. 3. 4. 5. 6. 7. 1 1 1 1 1 1 1 C K K K C K C 8. 9. 10. 11. 12. 13. 14. 1 1 1 2 2 2 2 K K K C C K K 15. 16. 17. 18. 19. 20. 21. 2 2 2 2 2 2 2 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 K K C C AP K K C K C K K K C C C K C C K 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 AP AP C C K C C K C C C C C AP C C C C AP C 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 131. 132 133. 1 1 1 C C C 134. 135. 136. 1 1 1 AP C C 137. 138. 139. 143. 144. 145. 146. 1 1 1 1 C C K C 147. 148. 149. 150. 1 1,3 1,3 2 C AP AP AP 151. 152. 153. 154. 163. 164. 1 1 K K 165. 166. 1 1 K K 171. 1 K 172. 2 AN 173. 1-2 AN C K K C C C K 22. 23. 24. 25. 26. 27. 28. Multiple Choice Questions 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 C C C AP K C AP AP AP AP AP AP AP C C C C C K K Brief Exercises 3 3 3 AN AN AP Exercises 2 2 3 3 AP AP AP AP Completion Statements 167. 168. 3 3 K K 169. 170. Matching Short Answer Essay Multi-Part Question 2-2 Test Bank for Managerial Accounting, Third Canadian Edition SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Item Type Item Type Item Type Item Type Item Type Item Type Item Type 68. 69. 70. 71. 72. 73. 74. 75. 76. 131. 132. MC MC MC MC MC MC MC MC MC BE BE 133. 134. 135. 136. 143. 144. 145. 146. 147. 148. 149. BE BE BE BE EX EX EX EX EX EX EX 163. 164. 165. 166. 171. 173. C C C C M MP 94. 95. 96. 97. 98. 99. 100. 101. MC MC MC MC MC MC MC MC 102. 103. 104. 150. 151. 152. 172. 173. MC MC MC EX EX EX ES MP 141. 148. 149. 153. 154. 155. 156. BE EX EX EX EX EX EX 157. 158. 159. 160. 161. 167. 168. EX EX EX EX EX C C 169. 170. C C 160. 161. 162. EX EX EX Study Objective 1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 34. TF TF TF TF TF TF TF TF TF TF MC 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. MC MC MC MC MC MC MC MC MC MC MC 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. MC MC MC MC MC MC MC MC MC MC MC 11. 12. 13. 14. 15. 16. 17. 18. TF TF TF TF TF TF TF TF 19. 20. 21. 22. 23. 24. 25. 77. TF TF TF TF TF TF TF MC 78. 79. 80. 81. 82. 83. 84. 85. MC MC MC MC MC MC MC MC 26. 27. 28. 29. 30. 105. 106. TF TF TF TF TF MC MC 107. 108. 109. 110. 111. 112. 113. MC MC MC MC MC MC MC 114. 115. 116. 117. 118. 119. 120. MC MC MC MC MC MC MC 31. 32. 33. TF TF TF 124. 125. 126. MC MC MC 127. 128. 129. MC MC MC 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. MC MC MC MC MC MC MC MC MC MC MC Study Objective 2 86. 87. 88. 89. 90. 91. 92. 93. MC MC MC MC MC MC MC MC Study Objective 3 121. 122. 123. 124. 137. 138. 139. MC MC MC MC BE BE BE Study Objective 4 Note: TF = True-False MC = Multiple Choice 130. 141. 142. C = Completion BE = Brief Exercise MC BE BE EX = Exercise M = Matching MP = Multi-part ES = Essay Managerial Accounting 2-3 CHAPTER STUDY OBJECTIVES 1. Define the three classes of manufacturing costs and differentiate between product costs and period costs. Manufacturing costs are typically classified as either (1) direct materials, (2) direct labour, or (3) manufacturing overhead. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials. The work of factory employees that can be physically and directly associated with converting raw materials into finished goods is considered direct labour. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. Product costs are costs that are a necessary and integral part of producing the finished product. Product costs are also called inventoriable costs. These costs do not become expenses under the matching principle until the inventory to which they attach is sold. Period costs are costs that are identified with a specific time period rather than with a saleable product. These costs relate to non-manufacturing costs and therefore are not inventoriable costs. 2. Explain how costs are affected by changes in the levels of business activity. Variable costs are costs that vary in total directly and proportionately with changes in the activity index. Fixed costs are costs that remain the same in total regardless of changes in the activity index. Mixed costs increase in total but not proportionately with changes in the activity level. One method that management may use is the high-low method. 3. Explain the difference between a merchandising and a manufacturing income statement. The difference between a merchandising and a manufacturing income statement is in the cost of goods sold section. A manufacturing cost of goods sold section shows beginning and ending finished goods inventories and the cost of goods manufactured. The cost of the beginning work in process is added to the total manufacturing costs for the current year to arrive at the total cost of work in process for the year. The ending work in process is then subtracted from the total cost of work in process to arrive at the cost of goods manufactured. 4. Explain the difference between a merchandising and a manufacturing balance sheet. The difference between a manufacturing and a merchandising balance sheet is in the current asset section. In the current asset section of a manufacturing company’s balance sheet, three inventory accounts are presented: finished goods inventory, work in process inventory, and raw materials inventory. 2-4 Test Bank for Managerial Accounting, Third Canadian Edition TRUE-FALSE STATEMENTS 1. Both direct material cost and indirect material cost are product costs. 2. Manufacturing costs that cannot be classified as direct material or direct labour are classified as operating expenses. 3. Raw materials are equal to direct materials. 4. Raw materials that cannot be conveniently and directly associated with a finished product, but are used in production, are called indirect materials. 5. The total cost of a finished product generally contains equal amounts of material, labour, and manufacturing overhead costs. 6. Direct material costs and direct labour costs are prime costs. 7. Indirect materials and indirect labour are both period costs. 8. Direct labour costs plus prime costs equals manufacturing overhead costs. 9. Total product costs are deducted from total cost of work in process to calculate cost of goods manufactured. 10. Product costs are inventoriable costs. 11. Variable costs are fixed on a per-unit basis and variable in total. 12. Fixed costs appear to vary on a per-unit basis but are fixed in total. 13. Cost behaviour analysis is the study of how total costs, concurrently are affected by changes in the level of business activity. 14. An activity level can be expressed in sales dollars, kilometres driven, units produced, number of dance classes taught or percentage of rooms occupied. 15. Variable costs vary exponentially with the changes in the company‘s activity level. Managerial Accounting 2-5 16. Within the relevant range a valid argument can be made for the assumption of linearity of variable costs 17. At the upper and lower limits of the relevant range of company activity, linearity of variable costs is a given. 18. The relevant range is reflective of the relevant range of products a company offers to its customers. 19. Fixed costs may jump (rather than remaining fixed) at incremental levels of activity. 20. Mixed costs are comprised of both fixed costs and variable costs, and as a result, mixed costs increase proportionately with an increase in activity level. 21. Mixed costs change in total, but not proportionately with the change in activity level. 22. An electricity bill is an example of mixed costs. The fixed portion represents the cost of having the service available and the variable cost is reflective of actual customer usage. 23. For future planning and predicting purposes, it is important for managerial accountants to separate fixed and variable costs within total mixed costs. 24. The high-low method is a quick means of separating fixed and variable costs. 25. What the high-low method may lack in precision, it makes up for in efficiency and ease of use. 26. Ending finished goods, work in process, and raw materials inventory appear on the balance sheet of a manufacturing company. 27. The work in process inventory appears on the balance sheet and the income statement of a manufacturing company. 28. In calculating gross profit for a manufacturing company, the cost of goods sold is deducted from net sales. 29. Finished goods inventory appears on a cost of goods manufactured schedule. 2-6 Test Bank for Managerial Accounting, Third Canadian Edition 30. If the ending work in process inventory is less than the beginning work in process inventory, then the cost of goods manufactured will be less than total manufacturing costs for the period. 31. Finished goods inventory for a manufacturing company is equivalent to merchandise inventory for a merchandising company. 32. Raw materials inventory is not an asset until it is used to make a product. 33. Finished goods inventory represents the cost of completed goods available for sale to customers. Managerial Accounting ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3. 4. 5. 6. Ans. T F F T F T Item 7. 8. 9. 10. 11. 12. Ans. F F F T T T Item 13. 14. 15. 16. 17. 18. Ans. F T F T F F Item 19. 20. 21. 22. 23. 24. Ans. F F T T T T Item 25. 26. 27. 28. 29. 30. Ans. T T F T F F Item 31. 32. 33. Ans. T F F 2-7 2-8 Test Bank for Managerial Accounting, Third Canadian Edition MULTIPLE CHOICE QUESTIONS 34. In which of the following categories do indirect materials belong? a. b. c. d. 35. Product Cost No Yes Yes Yes Manufacturing Overhead No No Yes Yes Period Cost Yes No No Yes Which one of the following is indirect labour considered? a. Product cost b. Nonmanufacturing cost c. Period cost d. Raw material cost 36. Which one of the following costs would be included in manufacturing overhead of a lawn mower manufacturer? a. The cost of the wheels b. The cost of the fuel lines that run from the motor to the gas tank c. Depreciation on the testing equipment d. The wages earned by motor assemblers 37. Which of the following would most likely be included in manufacturing overhead? a. Rent on the company‘s store b. Insurance on a delivery truck c. Rent on the company‘s factory d. an oil change on a delivery truck 38. For 2012, Sparkman Company has cost of goods manufactured of $500,000, beginning finished goods inventory of $25,000, and ending finished goods inventory of $20,000. How much is cost of goods sold? a. $505,000 b. $495,000 c. $545,000 d. $455,000 39. Which beginning and ending inventories appear on a cost of goods manufactured schedule? a. Raw materials only b. Raw materials and work in process only c. Raw materials, work in process, and finished goods d. Work in process only Managerial Accounting 2-9 40. Which of the following represents the correct order in which inventories are reported on a manufacturer‘s balance sheet? a. Raw materials, work in process, finished goods b. Work in process, finished goods raw materials c. Finished goods, work in process, raw materials d. Work in process, raw materials, finished goods 41. Into which one of the following accounts would the work of factory employees, that can be physically and directly associated with converting raw materials into finished goods, be categorized? a. Direct labour b. Indirect labour c. Manufacturing overhead d. Indirect materials 42. Which one of the following would not be classified as manufacturing overhead? a. Indirect materials b. Insurance on factory building c. Indirect labour d. Direct materials 43. Which one of the following is a product cost? a. Indirect labour b. Office salaries c. Sales person‘s salaries d. Advertising costs 44. A company uses sandpaper in its production process. How is the cost of the sandpaper classified? a. An insignificant expense that can be ignored b. A direct material c. A period cost d. A product cost 45. In which classification would the wages of a factory payroll clerk be classified? a. Raw materials b. Indirect labour c. Period cost d. Direct labour 46. Which one of the following is not a manufacturing cost? a. Advertising costs b. Cost of goods sold c. Manufacturing overhead d. Direct materials 2-10 Test Bank for Managerial Accounting, Third Canadian Edition 47. What criteria must be met in order to consider the work of factory employees to be direct labour? a. It must be promptly associated with converting materials into products. b. It must be physically associated with converting materials into products. c. It must be materially associated with converting materials into products. d. It must be periodically associated with converting materials into products. 48. Which one of the following is classified as direct labour? a. Flour in a bakery b. Wages of factory janitors c. Bottlers of cola in a bottling company d. Copy machine costs at a copy shop 49. In what category are lubricants that are used for wheel bearings on skateboards produced by a manufacturer categorized? a. Selling expense b. Indirect materials c. Miscellaneous expense d. Direct materials 50. Which one of the following is not another name for the term, manufacturing overhead? a. Period costs b. Factory overhead c. Indirect manufacturing costs d. Burden 51. Which product cost is most difficult to associate with a product? a. Direct labour b. Advertising c. Direct materials d. Manufacturing overhead 52. A company incurred manufacturing costs that were product costs, but they are not classified as either direct materials or direct labour. What are these called? a. Manufacturing overhead b. Selling and administrative expenses c. Period costs d. Marketing costs 53. Inventoriable costs are also referred to as: a. Product costs b. Administrative costs c. Period costs d. Recorded costs Managerial Accounting 2-11 54. Zirk, Inc. incurred cost of goods manufactured totalling $700,000, manufacturing overhead of $320,000, and direct materials totalling $40,000. How much is the amount of direct labour? a. Cannot be determined from the information provided. b. $340,000 c. $660,000 d. $700,000 55. Ranger Company reported total manufacturing costs of $65,000, manufacturing overhead totalling $13,000, and direct materials totalling $16,000. How much is direct labour cost? a. Cannot be determined from the information provided. b. $94,000 c. $29,000 d. $36,000 56. Which of the following are period costs? a. Income taxes and indirect materials b. Selling and administrative expenses c. Indirect labour d. Advertising and factory depreciation 57. How does a manufacturing company classify sales commissions? a. As indirect labour b. As product costs c. As manufacturing overhead d. As period costs 58. Which of the following are considered product costs? a. Period costs and administrative expenses b. Selling and administrative expenses c. Inventoriable costs and plant assets d. Direct labour costs and manufacturing overhead 59. When are period costs recorded on the income statement? a. When they occur b. When the product that they are associated with is sold c. At the discretion of management d. None of the above 60. What must occur for inventoriable costs to become expenses under the matching principle? a. The product must be completed and ready to sell. b. The product must be sold. c. All of the costs associated with manufacturing a product must be incurred. d. The product must have incurred labour. 2-12 Test Bank for Managerial Accounting, Third Canadian Edition 61. Which of the following could be considered either a product or a period cost depending on the purpose? a. Manufacturing overhead b. Direct labour c. Indirect materials d. depreciation 62. Where would you expect to find depreciation on factory equipment? a. Included with Depreciation Expense on the income statement b. In the manufacturing overhead section of the costs of goods manufactured schedule c. Only on the income statement as part of cost of goods sold d. As a period cost in the operating expense section of the income statement 63. Which one of the following represents a period cost? a. Company advertisement b. Depreciation of plant equipment c. Production manager‘s salary d. Direct materials 64. Which one of the following is most likely a direct material? a. sawdust used to soak up spills in a paint factory b. Lubricants for factory machinery c. paper used in the photocopy machine in the sales office d. circuit boards in a computer 65. Manufacturing overhead can be categorized as: a. A prime cost and a period cost. b. A conversion cost and a period cost. c. A prime cost and a period cost. d. A conversion cost and a product cost. 66. Which one of the following is not considered a ‗material‘ cost? a. Partially completed motor engines for a motorcycle plant b. Bolts used in manufacturing the compressor of an engine c. Rivets for the wings of a new commercial jet aircraft d. Lumber used to build tables 67. As production manager, Mr. B is asked to track the manufacturing cost per unit on the factory floor. Total manufacturing costs were $100,000 before considering factory maintenance salaries of $12,000 and $50,000 of factory depreciation. How much is the calculation of manufacturing cost per unit if 500 units had been produced in the current quarter? a. $224 b. $300 c. $200 d. $324 Managerial Accounting 2-13 68. Which one of the following is an example of a period cost? a. A change in benefits for the union workers who work in the Toronto plant of a Fortune 1000 manufacturer b. Workers‘ compensation insurance on factory workers wages allocated to the factory c. A processor used to produce computers d. A manager‘s salary for work performed in the corporate head office 69. Which of the following would most likely be viewed as indirect materials? a. Ball bearings associated with an industrial tractor wheel b. Axle grease associated with the suspension of a new car c. New tires for a commercial truck d. Cost of boring a cylinder in assembly 70. As Plant Controller, you are trying to determine the costs over which you have the most control on a day-to-day basis. Your goal is to achieve better profitability. The Plant Operations Manager suggests that overhead is the easiest area to directly reduce costs. Which of the following items would be classified as manufacturing overhead? a. Factory janitor b. General corporate liability insurance c. Cost of landscaping the corporate office d. The western division‘s vice president‘s salary 71. Which of the following is considered manufacturing overhead? a. Depreciation on the press that moulds the plastic into work in process b. The line worker‘s Christmas bonus designated by management c. Tools that were originally utilized for production but are currently being used by management to fix a copier in the upstairs corporate office d. The courier charge for delivering a new ball bearing joint for a robotic paint arm 72. A company loses it opening financial records in a fire. During the following year, it incurred costs of production of $250,000 and sold $300,000 in merchandise. It took an inventory count and found that it had $100,000 in product on hand. What should the company‘s opening inventory show before the fire? a. $50,000 b. $100,000 c. $150,000 d. Cannot be determined from the above information 73. Salaries of sales people who only sell one product should best be shown as: a. Fixed overhead. b. Variable overhead. c. Direct selling costs. d. Indirect selling costs. 2-14 Test Bank for Managerial Accounting, Third Canadian Edition 74 Which of the following is a direct cost of a hotel? a. Meals in the restaurant b. Room cleaning c. Room service d. Cleaning the lobby 75. Which of the following are period costs? a. Workers wages in the shipping department b. Workers wages paid for statutory holidays c. Workers wages in the plant maintenance department d. Workers wages on an assembly line 76. Which of the following statements is true? a. Advertising is a product cost and a plant manager‘s salary is a period cost. b. Advertising is a period cost and a plant manager‘s salary is a manufacturing overhead cost. c. Advertising is a period cost and a plant manager‘s salary is a period cost. d. Advertising is a product cost and a plant manager‘s salary is a manufacturing overhead cost. 77. Examples of fixed costs include all but one of the following a. Cost of factory rent for the 12 month contract term b. Cost of Janet‘s apartment rent during her 3rd year of university c. Cost of a car rental which includes a fee per km driven d. A one-week rental of a carpet cleaning machine 78. Variable costs a. vary in total as activity varies. b. vary on a per unit basis as activity varies. c. are unpredictable. d. None of the above. 79. Which of the following would most likely be considered direct labour? a. A worker installing components in a computer b. A maintenance worker c. A security guard d. A sales person 80. The cost of the management accountant working in the front office of a company is a a. Direct, variable, product cost. b. Fixed period cost. c. Fixed product cost. d. Indirect period cost. 81. Indirect labour is a: a. Direct, variable, product cost. Managerial Accounting b. c. d. 2-15 Direct, variable, period cost. Indirect, variable, product cost. Indirect, fixed or variable, product cost. 82. Which of the following would most likely be considered direct material? a. Wood used to make a chair b. Lubrication for factory machines c. Glue used to make a chair d. Cleaning products used in a factory 83. Manufacturing overhead is a a. Direct, variable, product cost. b. Direct, variable period costs. c. Indirect, variable, product cost. d. Indirect, fixed or variable product cost. 84. Fees for office cleaning and maintenance are a. Neither direct nor indirect. b. Fixed product costs. c. Variable product costs. d. Fixed or variable product costs. 85. Fees for office telephones are a. Fixed period costs. b. Mixed period costs. c. Variable period costs. d. Direct, fixed or variable period costs. 86. Property taxes for the entire manufacturing facility, including the front office and factory area are a. Both fixed and variable product costs. b. Both direct and indirect costs. c. Both a product and a period cost. d. None of the above. 87. The relevant range can be commonly understood to mean a. The normal range of output (activity) within which the company operates. b. The range wherein fixed costs are always fixed. c. The range wherein variable costs are strictly curvilinear. d. The range wherein fixed costs are strictly proportional to the level of activity. 88. Where there is a linear relationship between two variables a. The change in the dependent variable yields a predictable, constant change in the independent variable. b. The change in the independent variable yields a predictable, constant change in the dependent variable. 2-16 Test Bank for Managerial Accounting, Third Canadian Edition c. d. There is seldom a linear relationship between two variables. A change in the ―Y‖ variable yields a predictable, constant change in the ―X‖ variable. 89. Which of the following statements is true? a. In real life, the curvilinear nature of variable costs is questionable. b. In real life, fixed costs are fixed in total and do not change at various activity levels. c. Within the relevant range, there is rarely a straight-line relationship for both variable and fixed costs. d. Within the relevant range the linear assumption is valid and useful for cost behaviour analysis. 90. Outside of the relevant range, which of the following outcomes is unlikely? a. It may be difficult for management to change all fixed costs. b. Achieving cost efficiency may be difficult. c. Total fixed costs will not change. d. At a 0% activity level all fixed costs will cease. 91. A curvilinear relationship between variable costs and changes in activity levels suggests what? a. A strictly linear relationship between fixed costs and activity levels is implausible. b. A strictly curvilinear relationship between changes in activity levels and variable costs is possible only within the relevant range. c. Since the relationship between activity levels and variable costs is linear within the relevant range and less linear at lower and higher levels outside the relevant range, the straight-line (linear) relationship takes on a curvature in the real world. d. None of the above. 92. Mixed costs are a. Costs with both indirect and direct elements. b. Costs with both product and period elements. c. Costs with both fixed and variable elements. d. None of these. 93. Mixed costs a. Change in proportion to changes in activity level. b. Change in total in response to changes in activity level. c. Change proportionately and in total as a result of changes in activity level. d. None of these. 94. To be useful to management accountants for planning and predictive purposes, mixed costs a. Must be classified into their fixed and variable elements. b. Must be classified into their direct and indirect elements. c. Must be classified into their product and period elements. d. None of these. Managerial Accounting 2-17 95. The high-low method a. Is a useful means of predicting the highest cost a company will incur in the operating period. b. Is a useful means of separating fixed and variable elements from a mixed cost. c. Is more time-consuming than the scatter diagram method. d. Is more complex than the use of linear regression analysis. 96. Critical inputs in using the high-low method include all of the following except: a. Actual activity levels (production levels) for an operating period. b. Actual mixed costs (total costs) corresponding to the various activity levels. c. A calculator. d. An hypothesis for the slope. Use the following information for questions 97 through 100. Month Jan Feb Mar Apr May June July Aug # Machine Hours (X) 3,000 4,500 8,000 7,000 6,000 9,000 3,500 5,500 Maintenance Costs (Y) $440 $690 $510 $600 $550 $980 $840 $600 97. Which of the following choices represents the highest and lowest respective coordinates of activity level and corresponding total costs? a. (3,000 units, $440), (9,000 units, $980) b. (9,000 units, $980), (3,000 units, $440) c. ($3,000, 440 units), ($9,000, 980 units) d. ($9,000, 980 units), ($3,000, 440 units) 98. Using the high-low method, what is the slope for this set of data? a. $9 b. $0.09 c. $11.11 d. $540 99. What does the slope represent? a. The rate at which the X variable changes as a result of the Y variable b. The rate at which the Y variable changes as a result of the X variable c. The rate at which the dependent variable changes as a result of the fixed cost component d. The rate at which the independent variable changes as a result of changes in the dependent variable 2-18 Test Bank for Managerial Accounting, Third Canadian Edition 100. What is the equation of the line using the high-low method and this data? a. $980 = 170 + (0.09X) b. Y = $170 + (0.09 x 9,000) c. Y = 170+ ($0.09 X) d. X = 170+ ($0. 09 Y) 101. A high-low approach to establishing fixed and variable components of costs is most effective when information available is: a. Curvilinear. b. Erratic and highly fluctuating. c. Outside of the relevant range. d. Linear. 102. Inside the relevant range, what costs are hardest for management to change: a. Direct labour. b. Direct materials. c. Fixed production costs. d. Variable production costs. 103 The main difference between variable and fixed costs is: a. Variable costs can be controlled by management, while fixed costs are not. b. Variable costs change in small amounts while fixed costs never change. c. Total variable costs are variable in the relevant range and fixed in the long term, while fixed costs never change. d. Variable costs per unit are fixed in the relevant range and fixed costs per unit are variable. 104. In periods of higher than normal activity for a manufacturing company: a. Variable costs will decline but fixed costs will remain unchanged. b. Variable costs will increase and fixed costs will decline. c. Variable costs per unit may increase while fixed costs per unit may decline. d. Variable costs per unit may increase and fixed costs per unit may increase. 105. Which one of the following is the correct calculation of cost of goods sold for a manufacturing company? a. Beginning FG inventory – cost of goods manufactured – ending FG inventory b. Ending FG inventory – cost of goods manufactured + beginning FG inventory c. Beginning FG inventory + cost of goods purchased – ending FG inventory d. Beginning FG inventory + cost of goods manufactured – ending FG inventory 106. How does a manufacturing company report cost of goods manufactured? a. As a current asset on the balance sheet b. As a component of the raw materials inventory on the balance sheet c. As a component in the calculation of cost of goods sold on the income statement d. As an administrative expense on the income statement Managerial Accounting 2-19 107. If you want to know the amounts a company used to calculate, ‗Cost of goods manufactured,‘ where would you look? a. On the income statement b. On the balance sheet c. On both the balance sheet and income statement d. Only in the managerial accounting records 108. A merchandising company includes cost of goods purchased in its calculation of cost of goods sold. What is the counterpart used by a manufacturing company? a. Ending inventory b. Beginning inventory c. Cost of goods available for sale d. Cost of goods manufactured 109. Cost of goods sold applies to a. only merchandisers’ income statements. b. only manufacturers’ income statements. c. both manufacturers‘ and merchandisers’ income statements. d. manufacturers, merchandisers, and service companies. 110. How is the cost of goods manufactured calculated? a. Beginning WIP + direct materials used + direct labour + manufacturing overhead + ending WIP b. Direct materials used + direct labour + manufacturing overhead – beginning WIP + ending WIP c. Beginning WIP + direct materials used + direct labour + manufacturing overhead – ending WIP d. Direct materials used + direct labour + manufacturing overhead – ending WIP – beginning WIP 111. During 2012, “cost of goods manufactured” was less than the amount of “Total manufacturing costs” for the period. Which statement is true? a. Ending work in process inventory is greater than beginning work in process inventory. b. Ending work in process is less than beginning work in process inventory. c. Ending work in process is equal to the cost of goods manufactured. d. Ending work in process is less than beginning finished goods inventory. 112. Hardigan Manufacturing Company reported the following year-end information: beginning work in process inventory, $80,000; cost of goods manufactured, $980,000; beginning finished goods inventory, $50,000; ending work in process inventory, $70,000; and ending finished goods inventory, $40,000. How much is Haridgan‘s cost of goods sold for the year? a. $980,000 b. $990,000 c. $970,000 2-20 Test Bank for Managerial Accounting, Third Canadian Edition d. $1,000,000 Use the following information for questions 113-115. Caltreck Manufacturing Inc.’s accounting records reflect the following inventories: Dec. 31, 2012 Dec. 31, 2011 Raw materials inventory $100,000 $ 80,000 Work in process inventory 130,000 145,000 Finished goods inventory 125,000 115,000 During 2012, Caltreck purchased $950,000 of raw materials, incurred direct labour costs of $125,000, and incurred manufacturing overhead totalling $160,000. 113. How much raw materials is transferred to production during 2012 for Caltreck Manufacturing? a. $1,240,000 b. $970,000 c. $950,000 d. $930,000 114. How much is total manufacturing costs incurred during 2012 for Caltreck? a. $1,240,000 b. $1,255,000 c. $1,235,000 d. $1,250,000 115. Assume Caltreck Manufacturing‘s cost of goods manufactured for 2012 amounted to $1,200,000. How much would it report as cost of goods sold for the year? a. $1,210,000 b. $1,250,000 c. $1,325,000 d. $1,190,000 116. Hooter Manufacturing Company reported the following year-end information: Beginning work in process inventory Beginning raw materials inventory Ending work in process inventory Ending raw materials inventory Raw materials purchased Direct labour Manufacturing overhead $75,000 20,000 73,000 23,000 220,000 170,000 80,000 How much is Hooter Manufacturing‘s cost of goods manufactured for the year? a. $470,000 b. $465,000 c. $469,000 d. $472,000 Managerial Accounting 2-21 117. What amount is given by the sum of direct materials, direct labour, and manufacturing overhead incurred? a. Total cost of work in process b. Cost of goods available for sale c. Total manufacturing costs d. Cost of goods manufactured 118. What amount is given by the sum of the cost of the beginning work in process and the total manufacturing costs for the current year? a. Cost of goods manufactured b. Cost of goods available for sale c. Total cost of work in process d. Cost of goods sold 119. What are the components of total manufacturing costs? a. Direct materials and direct labour only b. Direct labour and manufacturing overhead only c. Manufacturing overhead only d. Direct materials, direct labour, and manufacturing overhead 120. Rezell Combines, Inc. has $4,000 of finished goods inventory as of December 31, 2012. If beginning finished goods inventory was $2,000 and cost of goods sold was $8,000, how much would Rezell report for cost of goods manufactured? a. $9,000 b. $2,000 c. $10,000 d. $6,000 121. At May 31, 2012, Smythe Inc. has $4,500 in beginning raw materials, $6,000 of direct labour. If manufacturing overhead was $10,500, total manufacturing costs was $50,500 and total raw material purchases were $36,000, how much is ending amount of raw materials? a. $36,000 b. $21,000 c. $40,500 d. $6,500 122. Costs of goods manufactured of SuperK Company are shown below. SuperK Company Cost of Goods manufactured Year Ending December 31, 2012 Beginning work in process: Direct materials: Beginning raw materials Raw material purchases $15,000 $14,000 22,000 2-22 Test Bank for Managerial Accounting, Third Canadian Edition Total raw materials available for use Ending raw materials Direct materials used Direct Labour Total manufacturing overhead Ending work in process Total manufacturing costs 36,000 5,500 30,500 6,000 10,500 18,000 $44,000 How much is the total manufacturing cost? a. $20,500 b. $23,000 c. $47,000 d. $44,000 123. In a manufacturing company, the cost of direct labour treated as an expense when: a. Products are sold. b. Products are transferred into work in process inventory. c. Wages are paid to the employees. d. At month end with accruals for wages. 124. What occurs when inventoriable costs are removed from the balance sheet? a. They increase operating expenses. b. They become cost of goods sold. c. They are reported as selling expenses. d. They are deducted from the sales account. 125. Where would you expect to find ending raw materials inventory? a. On the costs of goods manufactured schedule as an addition to raw materials purchases, and on the balance sheet b. On the costs of goods manufactured schedule as a subtraction from raw materials available for use, and on the balance sheet c. Only on the balance sheet d. Only the costs of goods manufactured schedule 126. Which one of the following does not appear on the balance sheet of a manufacturing company? a. Finished goods inventory b. Raw materials inventory c. Cost of goods manufactured d. Work in process inventory 127. What amount would you find on financial statements of merchandising companies that is referred to as finished goods inventory for a manufacturing company? a. Purchases b. Cost of goods purchased c. Merchandise inventory d. Raw materials inventory Managerial Accounting 2-23 128. How would you expect to see manufacturing inventories listed on a company‘s balance sheet? a. In alphabetical order b. In order of liquidity c. In order from largest to smallest d. Any order the company desires 129. Which of the following is a manufacturing activity? a. Finished goods being sold directly to the public b. Developing new products through research and development c. Converting raw materials into finished goods d. All of the above 130. What is work in process inventory generally described as? a. Costs applicable to units that have been started in production but are only partially completed b. Costs associated with the end stage of manufacturing that are almost always complete and ready for customers c. Costs strictly associated with direct labour d. Beginning stage production costs associated with labour costs dealing with bringing in raw materials from the shipping docks 2-24 Test Bank for Managerial Accounting, Third Canadian Edition ANSWERS TO MULTIPLE CHOICE QUESTIONS Item 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. Ans. c a c c a b a a d a d b a b Item 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. Ans. c b a d a a a d b d d a b d Item 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. Ans. b a d d a d d b a a c c b a Item 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. Ans. b c a a b d a d a b c a b c Item 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. Ans. c c c b a b c b b b c d c d Item 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117. Ans. c d c d d c c a b b b a a c Item 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. Ans. c d c d c a b b c c b c a Managerial Accounting 2-25 BRIEF EXERCISES Brief Exercise 131 Presented below are Truck Company‘s monthly manufacturing cost data related to its personal computer products. a. b. c. d. Utilities for manufacturing equipment Raw material (CPU, chips, etc.) Depreciation on manufacturing building Wages for production workers $570,000 73,000 320.000 770,000 Enter each cost item in the following table, placing an ―X‖ under the appropriate headings. Direct Materials Product Costs Direct Labour Factory Overhead a. b. c. d. Solution Brief Exercise 131 Direct Materials a. b. c. d. Product Costs Direct Labour Factory Overhead X X X X Brief Exercise 132 Determine whether each of the following costs should be classified as direct materials (DM), direct labour (DL), or manufacturing overhead (MO). a. b. c. d. ____Depreciation on equipment ____Table legs used in manufacturing tables ____Wages paid to factory workers ____Factory rent Solution Brief Exercise 132 a. MO b. DM c. DL d. MO 2-26 Test Bank for Managerial Accounting, Third Canadian Edition Brief Exercise 133 Indicate whether each of the following costs would be classified as prime or conversion costs. a. b. c. d. e. f. g. h. ____Raw materials used to make the product ____Direct labour used in the manufacturing of the product ____Factory utilities ____Direct labour used to unload raw materials from the supplier‘s truck ____Cleaning staff that work only in the factory ____Factory machinery maintenance ____Lubricants for the factory machinery ____ Supervisor of the production process Solution Brief Exercise 133 a. prime b. prime c. conversion d. prime e. conversion f. conversion g. conversion h. conversion Brief Exercise 134 Presented below are incomplete 2012 manufacturing cost data for Supreme Corporation. Determine the missing amounts. Direct Materials Used a. b. c. Direct Labour Overhead Factory Overhead Total Manufacturing Costs $89,000 $64,000 ? $23,000 $72,000 $32,000 ? $336,000 $278,000 $17,000 ? $117,000 Solution Brief Exercise 134 a. b. c. Direct Materials Used Direct Labour Overhead Factory Overhead Total Manufacturing Costs $17,000 $200,000 $117,000 $89,000 $64,000 $129,000 $23,000 $72,000 $32,000 $129,000 $336,000 $278,000 Brief Exercise 135 Presented below are EKP Inc.‘s monthly manufacturing cost data related to its wooden furniture products. a. Security $75,000 Managerial Accounting b. Factory wages c. Factory Utilities d. Wood 2-27 $120,000 $85,000 $210,000 Enter each cost item in the following table, placing an ‗X‘ under the appropriate headings. Direct Materials Product Costs Direct Labour Factory Overhead Product Costs Direct Labour Factory Overhead a. b. c. d. Solution Brief Exercise 135 Direct Materials a. b. c. d. X X X X Brief Exercise 136 Describe the main difference between direct materials and indirect materials that are used in any given production process. Solution Brief Exercise 136 The main difference is measurability. For most products, measuring materials used is important because it can be translated into a per unit measurement. This assists management in keeping track of the main amount of materials that are used in manufacturing the products themselves. Should any discrepancies occur in these measurements, management can take action to correct problems. Indirect materials are generally those items that are used in the process but cannot be easily assigned to each unit manufactured. Such items are adhesives, screws, washers and some covering materials such as paint. Management finds it more efficient to monitor such items on a volume rather than a per unit basis. Brief Exercise 137 Criba Manufacturing Company has the following data: direct labour $320,000, direct materials used $749,000, total manufacturing overhead $475,000, and beginning work in process $36,000. Calculate (a) total manufacturing costs and (b) total cost of work in process. Solution Brief Exercise 137 a. Direct labour Direct materials used Total manufacturing overhead Total manufacturing costs $ 320,000 749,000 475,000 $1,544,000 b. $ Beginning work in process 36,000 2-28 Test Bank for Managerial Accounting, Third Canadian Edition Total manufacturing costs Total cost of work in process 1,544,000 $1,580,000 Brief Exercise 138 Presented below are incomplete 2012 manufacturing cost data for Swartnez Corporation. Determine the missing amounts. Direct Materials Used $35,000 ? $28,000 a. b. c. Direct Labour $72,000 $57,000 ? Factory Overhead $27,000 $231,000 $186,000 Solution Brief Exercise 138 a. Direct materials used Direct labour Factory overhead Total manufacturing costs Total Manufacturing Costs ? $730,000 $632,000 $35,000 72,000 27,000 $134,000 b. Total manufacturing costs Less Direct labour Less Factory overhead Equals Direct materials used $730,000 (57,000) (231,000) $442,000 c. Total manufacturing costs Less Direct materials used Less Factory overhead Equals Direct labour $632,000 (28,000) (186,000) $418,000 Brief Exercise 139 Presented below are incomplete 2012 manufacturing cost data for Spondo Corporation. Determine the missing amounts. Direct Materials Used Direct Labour Overhead Factory Overhead Total Manufacturing Costs a. b. c. $72,000 $53,000 $116,000 $43,000 $90,000 $121,000 ? $292,000 $290,000 $38,000 $149,000 $53,000 Work in Process (1/1) Work in Process (12/31) $120,000 $86,000 ? $98,000 $463,000 ? Cost of Goods Manufactured ? $321,000 $715,000 Determine the missing amounts. Solution Brief Exercise 139 Total Manufacturing Costs a. b. c. $153,000 $292,000 $290,000 Work in Process (1/1) Work in Process (12/31) Cost of Goods Manufactured $120,000 $127,000 $463,000 $86,000 $98,000 $38,000 $187,000 $321,000 $715,000 Managerial Accounting 2-29 Brief Exercise 140 Raynor Manufacturing Company has the following data: Direct labour Direct materials used Total manufacturing overhead Ending work in process Beginning work in process $46,000 84,000 60,000 30,000 40,000 Calculate (a) total manufacturing costs and (b) cost of goods manufactured. Solution Brief Exercise 140 a. Direct labour Direct materials used Total manufacturing overhead Total manufacturing costs b. $46,000 84,000 60,000 $190,000 Beginning work in process Total manufacturing costs Less ending work in process Cost of goods manufactured $ 40,000 190,000 (30,000) $200,000 Brief Exercise 141 Distinguish between the main components of the income statement for a manufacturing company which makes clothing and a retail company that only buys and sells clothing. Solution Brief Exercise 141 The main difference lies in the manner in which products sold are highlighted in the income statement on the cost of goods section. The manufacturer shows the costs of goods that it sells as Cost of Goods Manufactured while the retail company shows its costs as Purchases. Where inventories are shown, the manufacturer shows its ending inventory as Finished Goods Inventory while the retailer shows it as Ending Merchandise Inventory. Brief Exercise 142 In alphabetical order below are current asset items for Sudler Company as of December 31, 2012. Prepare the current assets section of the company‘s balance sheet as of the same date. Accounts receivable Cash Finished goods Prepaid expenses Raw materials Work in process Solution Brief Exercise 142 Current Assets Cash Accounts receivable Inventories Raw materials $46,000 Work in process 37,000 $73,000 102,000 64,000 15,000 46,000 37,000 $ 102,000 73,000 2-30 Test Bank for Managerial Accounting, Third Canadian Edition Finished goods Prepaid expenses Total current assets 64,000 147,000 15,000 $337,000 Managerial Accounting 2-31 EXERCISES Exercise 143 The following categories are used by manufacturing companies for costs: DM DL MO — Direct Materials — Direct Labour — Manufacturing Overhead Presented below is a list of costs and expenses incurred in the factory by Bates Corporation, a manufacturer of recreational vehicles. ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ a. b. c. d. e. f. g. h. i. j. Property taxes on the factory land Rubber used in manufacturing Welder‘s wages Sandpaper used in production Factory supervisors‘ salaries Depreciation on factory machines Factory electric Carpeting for the recreational vehicles Tissue paper for the factory workers‘ washrooms Insurance on factory equipment Instructions Select the category to which each cost or expense belongs and write the abbreviation of the cost in the space provided. Solution Exercise 143 (4 min.) a. MO b. DM c. DL d. MO e. MO f. MO g. MO h. DM i. MO j. MO Exercise 144 2-32 Test Bank for Managerial Accounting, Third Canadian Edition Presented below are labels associated with costs. 1 — Product Cost 2 — Period Cost 3 — Inventoriable Cost Instructions For each cost listed below, identify all applicable cost labels by writing the number in the space provided. a. Advertising ________ b. Direct materials used ________ c. Sales salaries ________ d. Indirect factory labour ________ e. Repairs to office equipment ________ f. Factory manager’s salary ________ g. Direct labour used ________ h. Indirect materials ________ Solution Exercise 144 a. Advertising (3–4 min.) 2 b. Direct materials used 1, 3 c. Sales salaries 2 d. Indirect factory labour 1, 3 e. Repairs to office equipment 2 f. Factory manager’s salary 1, 3 g. Direct labour used 1, 3 h. Indirect materials 1, 3 Exercise 145 Assume you have just taken a position as controller for a new company that manufactures and sells wrought iron wall hangings. Although the founder of the company, who is the president and CEO, is a great artisan, she has very limited knowledge of accounting. Instructions To help your new boss better understand accounting for a manufacturing organization, write a memo to her in which you: (1) identify, (2) describe, and (3) provide examples of the three manufacturing costs and the three inventory accounts used in accounting for a manufacturing company. Solution Exercise 145 (8–10 min.) The three manufacturing costs are: Direct Materials, Direct Labour, and Manufacturing Overhead. Raw materials that can be physically and directly associated with the finished product during the manufacturing process are called direct materials. The iron used in making the wall hangings is Managerial Accounting 2-33 an example of direct materials. The work of factory employees that can be physically and directly associated with converting raw materials to finished goods is considered direct labour. Manufacturing overhead consists of costs that are indirectly associated with the manufacture of the finished product. These costs may also be manufacturing costs that cannot be classified as direct materials or direct labour. Manufacturing overhead includes indirect materials, indirect labour, and depreciation on factory buildings, and machinery, utilities, insurance, taxes and maintenance on factory facilities. The three inventory accounts are: raw materials, work in process, and finished goods. Raw materials inventory represents the cost of the materials and parts that are to be used in the manufacturing process. The iron purchased to make the wall hangings would be considered raw materials until the time it was put into production. Work in process is the cost applicable to units that have been started into production but are only partially complete. Wall hangings on the assembly line that are in various stages of completion would be work in process. The finished goods inventory represents the cost of completed goods that have not been sold. The cost of wall hangings that are completed but have not been sold would be finished goods. Exercise 146 Costs are often identified as either an inventoriable product cost or a period cost. Instructions For each item listed below, indicate in the space to the left whether the item would be considered an inventoriable cost or a period cost for a manufacturing company. Use the following code: I = Inventoriable cost P = Period cost ____ a. Factory supervisory salaries ____ b. Sales commissions ____ c. Income tax expense ____ d. Indirect materials used ____ e. Indirect labour ____ f. Office salaries expense ____ g. Property taxes on factory building ____ h. Sales manager’s salary ____ i. Factory wages ____ j. Direct materials used Solution Exercise 146 a. I b. P c. P d. I e. I f. P g. I (2-3 min.) 2-34 Test Bank for Managerial Accounting, Third Canadian Edition h. P i. I j. I Exercise 147 Payne Manufacturing Company incurs the following manufacturing costs and expenses during the month of June. a. Assembly line wages b. Raw materials used directly in product c. Depreciation on office equipment d. Property taxes on factory building e. Rent on factory building f. Sales commissions g. Depreciation on factory equipment h. Factory utilities i. Wages for factory maintenance workers j. Advertising k. Indirect materials used in production l. Factory manager’s salary Instructions Complete the following matrix by placing an X mark under the appropriate headings. Cost Item Direct Materials Direct Labour Manufacturing Overhead Period Costs a. b. c. d. e. f. g. h. i. j. k. l. Solution Exercise 147 (3–4 min.) Direct Direct Manufacturing Cost Item Materials Labour Overhead a X b. Period Costs X c. X d. X e. X Managerial Accounting f. 2-35 X g. X h. X i. X j. X k. X l. X Exercise 148 Arc Industries has the following components of its accounting information. Variable costs: Direct Production $500,000; Other Operating $300,000 Fixed costs: Direct Production $200,000; Other Operating $800,000 Sales for the year: $3,000,000 Instructions Assist the controller in preparing a statement that shows operating income while offering the most effective way of attaining information about the company‘s activities and its ultimate Operating Income. Solution Exercise 148 (8-10 min.) Sales Cost of sales: Variable $500,000 Fixed 200,000 Gross profit Other operating expenses Variable $300,000 Fixed 800,000 Operating Income $3,000,000 700,000 $2,300,000 1,100,000 $1,200,000 Exercise 149 Safety Supply Services Ltd. has the following components of its accounting information. Merchandise inventory: Beginning of Month $100,000 End of Month $180,000 Purchases of merchandise: $2,050,000 Sales in month: $3,000,000 Selling and administrative expenses: Selling $250,000 Administrative $300,000 Instructions Assist the controller in preparing a statement that shows operating income while offering the most effective way of attaining information about the company‘s activities and its ultimate Operating Income. Solution Exercise 149 (8-10 min.) 2-36 Test Bank for Managerial Accounting, Third Canadian Edition Sales Cost of goods sold: Beginning merchandise inventory Add: Purchases Goods available for sale Less: Ending merchandise inv. Gross Margin Selling and administrative expenses Selling Administrative Operating Income Exercise 150 M&H Ltd. has recorded the following costs: Month Units produced Cost A January 10,000 $50,000 February 9,000 45,000 March 12,000 60,000 $3,000,000 $100,000 2,050,000 2,150,000 180,000 $250,000 300,000 Cost B $100,000 100,000 100,000 1,970,000 $1,030,000 550,000 $480,000 Cost C $32,000 31,000 34,000 Instructions If M&H Ltd. produces 15,000 units in April, what would be the expected total cost for each of Cost A, Cost B and Cost C? Solution Exercise 150 (6-8 min.) Cost A: Total cost is changing as activity changes, but the cost per unit is constant. Therefore Cost A is a variable cost. Cost per unit = $50,000/10,000 units or $5/unit. Therefore if 15,000 units are produced, 15,000 X $5 = $75,000 Cost B: Total cost is constant as activity changes. Therefore Cost B is a fixed cost. Cost in April should equal $100,000. Cost C: Total cost is changing as activity changes, and cost per unit is changing as activity changes. Therefore Cost C is a mixed cost. Using the high-low method: ($34,000 – $31,000) / (12,000 – 9,000 units) = $1/unit $1(10,000 units) + FC = $32,000 FC = $32,000 – $10,000 FC = $22,000 For April: Total Cost = $22,000 + $1 X 15,000 units = $37,000 Managerial Accounting 2-37 Exercise 151 The Nick‘s Hotel has the following monthly costs: Rooms Rented 75 80 65 72 85 Costs $6,825 7,200 6,075 6,600 7,575 Instructions Identify the fixed and variable cost elements using the high-low method. Solution Exercise 151 (5-6 min.) Variable: $7,575 − $6,075 = $75 per room 85 – 65 $75 (65) + FC = $6,075 Fixed costs = $1,200 Exercise 152 Alpha Romeo fraternity has an annual alumni golf outing. A local caterer provides lunch and a tent. The fraternity pays a flat fee for the tent and an additional amount for each fraternity brother served. However, in the past the brothers have never been able to determine how much the caterer is going to charge. In an effort to determine how much the caterer will charge this year, the brothers have tracked the cost and attendance data over the past four years. Attendance 210 175 240 250 Caterer Cost $6,000 4,800 6,800 6,600 Instructions a. Use the high-low method to calculate the food cost per person. b. How much is the charge for the tent? Solution Exercise 152 (6–8 min.) a. Variable: $6,600 − $4,800 = $24 per person 250 − 175 b. $24 (250) + FC = $6,600 FC = $600 2-38 Test Bank for Managerial Accounting, Third Canadian Edition Exercise 153 Spawn Manufacturing Company has the following data at June 30, 2012: Inventories: Raw materials inventory Work in process inventory Finished goods inventory June 30 June 1 $25,000 $30,000 84,000 75,000 23,000 20,000 Other information for June: Total manufacturing costs Manufacturing overhead Direct labour incurred Sales $754,000 72,000 342,000 990,000 Instructions a. Prepare a schedule of cost of goods manufactured for the month of June. b. Indicate the balance sheet presentation of the June 30 inventories. Solution Exercise 153 (10–12 min.) a. Spawn Manufacturing Company Cost of Goods Manufactured For the Month Ended June 30, 2012 ——————————————————————————————————————— Beginning work in process (given) $75,000 Direct materials: Beginning raw materials (given) $30,000 Raw material purchases 365,000-30,000 335,000 Total raw materials available for use 365,000 340,000+25,000 Ending raw materials (given) 25,000 Direct materials used 754,000-342,000-72,000 340,000 Direct labour (given) 342,000 Manufacturing overhead (given) 72,000 Total manufacturing costs (given) 754,000 Less ending work in process (given) 84,000 Cost of goods manufactured 75,000+754,000$745,000 84,000 b. Current assets Raw materials inventory Work in process inventory Finished goods inventory Total inventories $25,000 84,000 23,000 $132,000 Exercise 154 Account balances from Jolly B Manufacturing Company‘s accounting records for the month ended December 31, 2012 appear below: Managerial Accounting Finished Goods Inventory, December 31 Factory Supervisory Salaries $ 75,350 80,000 Income Tax Expense Raw Materials Inventory, December 1 40,000 16,500 Work In Process Inventory, December 31 Sales Salaries Expense Factory Depreciation Expense Finished Goods Inventory, December 1 Raw Materials Purchases Work In Process Inventory, December 1 Factory Utilities Expense Direct Labour Raw Materials Inventory, December 31 Sales Returns and Allowances Indirect Labour 57,000 25,000 5,400 32,400 475,000 72,000 5,700 130,000 23,000 2,700 15,700 2-39 Instructions Prepare a schedule of cost of goods manufactured for Jolly B Manufacturing Company for the month ended December 31, 2012. Solution Exercise 154 (10–12 min.) Jolly B Manufacturing Company Cost of Goods Manufactured For the Month Ended December 31, 2012 Beginning work in process Direct materials: Beginning raw materials Raw material purchases Total raw materials available for use Ending raw materials Direct materials used Direct labour Manufacturing overhead: Factory supervisor‘s salary Indirect labour Factory utilities expense Factory Depreciation expense Total manufacturing overhead Total manufacturing costs Less ending work in process Cost of goods manufactured $ 72,000 $ 16,500 475,000 491,500 23,000 $ 468,500 130,000 $ 80,000 15,700 5,700 5,400 106,800 705,300 57,000 $ 648,300 Exercise 155 Manufacturing costs for Fantasia Company for two consecutive months are as follows: June 30, 2012 July 31, 2012 2-40 Test Bank for Managerial Accounting, Third Canadian Edition Beginning work in process Direct materials used Direct labour Manufacturing overhead Total manufacturing costs Ending work in process Cost of goods manufactured Beginning finished goods Cost of goods available for sale Ending finished goods Cost of goods sold $ 36,000 157,000 89,000 115,000 a. 43,000 b. c. 658,000 d. 515,000 e. $ 143,000 72,000 66,000 f. g. 289,000 h. i. 49,000 j. Instructions Indicate the missing amounts. (Show computations.) Solution Exercise 155 (8–10 min.) a. $115,000 + 157,000 + $89,000 = $361,000 b. $36,000 + $361,000 – $43,000 = $354,000 c. $658,000 – $354,000 = $304,000 d. $658,000 – $515,000 = $143,000 e. Equal to ending from June = $43,000 f. $143,000 + $72,000 + $66,000 = $281,000 g. $281,000 + $43,000 – $289,000 = $35,000 h. Equal to ending from June = $143,000 i. $143,000 + $289,000 = $432,000 j. $432,000 – $49,000 = $383,000 Exercise 156 A partial cost of goods manufactured schedule appears below for R Kelly Manufacturing: R Kelly Manufacturing Company Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012 Work in process Direct materials Raw materials inventory Raw materials purchases Raw materials available for use Raw materials inventory Direct materials used Direct labour $76,000 $ ? 186,000 ? 23,000 $203,000 ? Managerial Accounting Manufacturing overhead Indirect labour Factory depreciation Factory utilities Total overhead Total manufacturing costs Total cost of work in process Less: Work in Process Cost of goods manufactured 2-41 $15,000 27,000 7,000 ? ? ? 57,000 $475,000 Instructions Fill in the missing information on the cost of goods manufactured schedule of R Kelly Manufacturing Company: Solution Exercise 156 (6–9 min.) R Kelly Manufacturing Company Cost of Goods Manufactured Schedule For the Year Ended December 31, 2012 Work in process Direct materials Raw materials inventory Raw materials purchases Raw materials available for use Raw materials inventory Direct materials used Direct labour Manufacturing overhead Indirect labour Factory depreciation Factory utilities Total overhead Total manufacturing costs Total cost of work in process Less: Work in Process Cost of goods manufactured $76,000 $ 40,000 186,000 226,000 23,000 203,000 204,000 15,000 27,000 7,000 49,000 456,000 532,000 57,000 $475,000 Exercise 157 Data for the cost of direct materials for Landley, Inc. for the month ended March 31, 2012, are as follows: Materials inventory, March 1, 2012 $43,000 Materials inventory, March 31, 2012 41,000 During March, the company purchased $140,000 of raw materials on account from Earle Company and $52,000 of raw materials for cash from Shrink Company. In addition, $100,000 was paid on the Earle account balance. Instructions Calculate the cost of direct materials used during March. Solution Exercise 157 (5–7 min.) Raw materials inventory, March 1 $ 43,000 2-42 Test Bank for Managerial Accounting, Third Canadian Edition Raw materials purchases ($140,000 + $52,000) Total raw materials available for use Less: Raw materials inventory, March 31 Direct materials used during March 192,000 235,000 41,000 $194,000 Note: Payment on account is irrelevant to the direct materials used calculation. Exercise 158 The following costs and inventory data were taken from the accounts of Winsto Company for 2012: Inventories: Raw materials Work in process Finished goods January 1, 2012 $8,000 15,000 16,000 Costs incurred: Raw materials purchases Direct labour Factory rent Factory utilities Indirect materials (inventoried separately from other materials) Indirect labour Selling expenses Administrative expenses December 31, 2012 $ 7,000 13,000 12,000 $88,000 42,000 8,000 2,000 4,000 6,000 5,000 12,000 Instructions a. Prepare a schedule showing the amount of direct materials used in production during the year. b. Calculate the amount of manufacturing overhead incurred during the year. c. Prepare a schedule of Cost of Goods Manufactured for Winsto Company for the year ended December 31, 2012 in good form. d. Prepare the Cost of Goods Sold section of the Income Statement for Winsto Company for the year ended December 31, 2012 in good form. Solution Exercise 158 (12–15 min.) a. Raw materials inventory, beginning Raw materials purchases Raw materials available for use Raw materials inventory, ending Direct materials used b. Manufacturing overhead: Factory rent Factory utilities Indirect materials Indirect labour Total manufacturing overhead $ 8,000 88,000 96,000 7,000 $ 89,000 $ 8,000 2,000 4,000 6,000 $20,000 Managerial Accounting Winsto Company Schedule of Cost of Goods Manufactured Year Ending December 31, 2012 Work in process beginning Direct materials Raw materials inventory beginning $ 8,000 Raw materials purchases 88,000 Raw materials available for use 96,000 Raw materials inventory ending 7,000 Direct materials used Direct labour Manufacturing overhead Total manufacturing costs Total cost of work in process Less: Work in Process ending Cost of goods manufactured 2-43 c. $15,000 $89,000 42,000 20,000 d. Winsto Company Partial Income Statement Year Ending December 31, 2012 Finished goods inventory, January 1 Cost of goods manufactured Cost of goods available for sale Finished goods inventory, December 31 Cost of goods sold $ 16,000 153,000 169,000 12,000 $157,000 Exercise 159 Starwood Company reported the following amounts for 2012: Raw materials purchased Beginning raw materials inventory Ending raw materials inventory Beginning finished goods inventory Ending finished goods inventory Administrative expenses Direct labour used Selling and administrative expenses Beginning work-in-process inventory Ending work-in-process inventory Manufacturing overhead costs $120,000 16,000 5,000 11,000 8,000 12,000 44,000 21,000 17,000 16,000 36,000 Instructions a. Calculate the cost of materials used in production. b. Calculate the cost of goods manufactured. Solution Exercise 159 a. Beginning raw materials inventory Raw materials purchased = Materials available for use Less ending raw materials inventory $ 16,000 120,000 136,000 5,000 151,000 166,000 13,000 $153,000 2-44 Test Bank for Managerial Accounting, Third Canadian Edition = Materials used in production $131,000 Materials used in production (part A) Direct labour used Manufacturing overhead costs Total manufacturing costs Add beginning work in process Less ending work in process Cost of goods manufactured $131,000 44,000 36,000 211,000 17,000 (16,000) $212,000 b. Exercise 160 Halsey, the manufacturer of inexpensive printers, was organized in May, 2012. Halsey purchases toner cartridges used in the printers from a local distributor. Early in May, Halsey bought 41,000 cartridges at a cost of $20 each. During May, 36,000 cartridges were transferred from Raw Materials Inventory. Of the 36,000 cartridges withdrawn from Raw Materials Inventory, 4,000 were given to sales personnel to be given to customers as an incentive to buy a large quantity of printers. Another 1,000 cartridges were transferred to the corporate office to be used by members of the clerical staff. The remaining cartridges were transferred to production. Of the units started into production during May, 85 percent of them were completed. Eighty percent of the units completed during May were sold and shipped to customers. Instructions Determine the cost of cartridges to be found in each of the following accounts: a. Raw Materials Inventory b. Work in Process Inventory c. Finished Goods Inventory d. Cost of Goods Sold e. Selling Expenses f. Administrative Expenses Solution Exercise 160 (8–10 min.) a. Raw Materials Inventory (41,000 – 36,000) × $20 = $100,000 b. Work in Process Inventory (31,000 × .15) × $20 = 93,000 c. Finished Goods Inventory [(31,000 × .85) – (26,350 x .80)] x $20 = 105,400 d. Cost of Goods Sold (26,350 × .80 x $20) = 421,600 e. Selling Expenses (4,000 × $20) = 80,000 f. Administrative Expenses (1,000 × $20) = 20,000 $820,000 Exercise 161 Gooly, Inc. manufactures calculators. During June, Gooly‘s transactions and accounts included the following: Work in process inventory, beginning $8,800 Work in process inventory, ending 7,500 Indirect materials issued to production from raw materials 3,600 Raw materials inventory, beginning 4,600 Managerial Accounting Raw materials inventory, ending Sales Direct labour cost Manufacturing overhead Raw materials purchased Finished goods inventory, beginning Finished goods inventory, ending 2-45 5,800 42,000 55,000 49,600 143,500 12,300 11,600 Instructions a How much is the cost of direct materials issued to production during June? b. Calculate the cost of goods manufactured. c. How much is the cost of inventory on the May 31st balance sheet? Solution Exercise 161 a. Materials: Beginning inventory Add Raw material purchases Less Indirect materials issued Available to use Less ending raw materials Cost of materials used $ 4,600 143,500 (3,600) 144,500 (5,800) $138,700 b. Direct materials (part (a)) Direct labour Manufacturing overhead Total manufacturing costs Add beginning work in process Less ending work in process Cost of goods manufactured $138,700 55,000 49,600 243,300 8,800 (7,500) $244,600 c. Raw materials Work in process Finished goods Total inventory at May 31st $ 4,600 8,800 12,300 $25,700 Exercise 162 Listed below are current asset items for Dre Company at December 31, 2012. Prepare the current assets section of the balance sheet. (Include a complete heading.) Finished goods inventory Cash Prepaid expenses Accounts receivable $14,000 15,000 3,000 2,100 Short-term investments Raw materials inventory Work in process inventory Supplies on hand Solution Exercise 162 (5–8 min.) Dre Company (Partial) Balance Sheet December 31, 2012 Current assets $22,000 11,000 16,000 1,400 2-46 Test Bank for Managerial Accounting, Third Canadian Edition Cash Short-term investments Accounts receivable Inventories: Raw materials Work in process Finished goods Prepaid expenses Supplies on hand Total current assets $15,000 22,000 2,100 $11,000 16,000 14,000 41,000 3,000 1,400 $84,500 Managerial Accounting 2-47 COMPLETION STATEMENTS 163. The work of factory employees that can be physically and directly associated with converting raw materials into products is classified as ______________. 164. Indirect materials and indirect labour are classified as ______________. 165. Direct materials and direct labour are referred to as ______________ costs while direct labour and manufacturing overhead are often referred to as ______________ costs. 166. ___________________ is added to direct labour and manufacturing overhead to get total manufacturing costs for the current period. 167. A major difference between the income statements of a merchandising company and a manufacturing company is that the cost of goods section of a merchandising company shows cost of goods ______________, whereas a manufacturing company shows cost of goods ______________. 168. The ending work in process inventory is subtracted from the total cost of work in process to calculate ______________________. 169. A manufacturing company calculates cost of goods sold by adding cost of goods manufactured to the ___________________ and subtracting the __________________. 170. A manufacturing company usually has three inventory accounts which are (1)___________________, (2)___________________, and (3)___________________. 2-48 Test Bank for Managerial Accounting, Third Canadian Edition ANSWERS TO COMPLETION STATEMENTS 163. direct labour 164. manufacturing overhead 165. prime, conversion 166. Direct materials used 167. purchased, manufactured 168. cost of goods manufactured 169. beginning finished goods inventory, ending finished goods inventory 170. Finished Goods Inventory, Work in Process Inventory, Raw Materials Inventory Managerial Accounting 2-49 MATCHING Matching Question 171 A list of managerial accounting terms appears below: a. Prime Costs b. Inventoriable costs c. Cost behaviour analysis d. Activity index e. Conversion costs f. Period costs Instructions Match each of the terms with the statement that best describes the term. 1. ______ Costs that are matched with the revenue of a specific time period and charged to expenses as incurred. 2. ______ The sum of direct manufacturing labour costs and manufacturing overhead costs. 3. ______ The study of how specific costs respond to changes in the level of business activity. 4.______ Costs that are a necessary and integral part of producing the finished product. 5. ______ The sum of direct materials cost and direct labour costs. 6. ______ An activity that causes changes in the behaviour of costs. Solution Matching Question 171 1. f 2. e 3. c 4. b 5. a 6. d 2-50 Test Bank for Managerial Accounting, Third Canadian Edition SHORT-ANSWER ESSAY QUESTIONS Short Answer Essay 172 A manufacturing company makes the products that it sells. Briefly identify and define the cost elements that are incurred in making a product. After product cost elements are identified, how is the cost of goods manufactured for a period determined? Solution Short Answer Essay 172 Costs incurred to manufacture a product include direct materials which can be physically and directly associated with the finished product; direct labour, which is the work of factory employees which can be physically and directly associated with the finished product; and manufacturing overhead, those manufacturing costs which are indirectly associated with production of the finished product. Cost of goods manufactured is calculated by adding the cost of direct materials used, direct labour, and manufacturing overhead to the beginning work in process, and subtracting the ending work in process. Managerial Accounting 2-51 MULTI PART QUESTION Multi-part Question 173 Culpepper Computer Ltd. manufactures a hand held computer and has the following results for its recent year end: Computer per Unit Sales Data Selling price $1,500 Manufacturing Costs: Variable materials $500 Variable labour 128 Manufacturing overhead 480 1,108 Gross Margin $392 Selling, general and administrative expenses Variable $50 Fixed 150 200 Profit per unit $192 Each computer requires approximately 240 minutes of highly skilled labour time for assembly and testing. The bottleneck resource in the operation is labour hours. Workers are paid $32 per hour and no additional labour hours are available. Factory overhead, of which 25% is variable, is allocated to computers using labour hours since all the work in the factory is labour paced. The company sells 10,000 computers a year, which is the capacity dictated by labour hours availability. Recently Zucchini Computers offered to purchase 2,000 computers from Culpepper but with a custom feature. This feature will require 45 minutes of additional labour time and incur an additional $50 in materials for each computer. Selling, general and administrative costs would not change with this order. Instructions a. Compute the minimum price that Culpepper should charge Zucchini for each computer in this order. b. What other factors should Culpepper consider before it agrees to the order? Solution Multi-part Question 173 (20-25 min.) a. Variable cost of special order ($500 + 128 + 50 + 50) = $728.00 Additional time required (.75 hours x (128 + 120) / 4) = 46.50 Contribution margin foregone: Hours required for special order 2,000 x 4.75 = 9,500 Regular units lost 9,500 / 4 = 2,375 CM / regular unit $1,500 – 500 – 128 – 120 – 50 = $702 CM foregone (2,375 x $702) / 2,000 833.63 Minimum price of each unit of custom order $1,608.13 b. On the surface this looks like a good arrangement for Culpepper. But the company needs to look at the strategic aspects of the order. Can it take out 2,000 computers from its regular customer orders and expect to regain them once the special order is complete? Will its cost estimates be accurate, considering that there will be a learning curve from its workers who will have to adapt to making the new products? It appears that labour hours are already maxed out 2-52 Test Bank for Managerial Accounting, Third Canadian Edition and any difficulties with the new order could set back its own production schedules for its regular products. Alternatively, could this be a breakthrough into a whole new market for Culpepper and if so, would there be other companies that would wish to have custom orders made for them? Culpepper currently appears to be a manufacturer of one or two products and is set up to operate in this fashion; changing to a specialty manufacturer requires it to view its production capabilities in more of a job-order manner. This may mean more pressure on its sales force as well as on its production operations. Managerial Accounting 2-53 Legal Notice Copyright © 2012 by John Wiley & Sons Canada, Ltd. or related companies. All rights reserved. The data contained in these files are protected by copyright. This manual is furnished under licence and may be used only in accordance with the terms of such licence. The material provided herein may not be downloaded, reproduced, stored in a retrieval system, modified, made available on a network, used to create derivative works, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without the prior written permission of John Wiley & Sons Canada, Ltd.