Chapter 2-Basic Cost Management Concepts: Multiple Choice
Chapter 2-Basic Cost Management Concepts: Multiple Choice
Chapter 2-Basic Cost Management Concepts: Multiple Choice
MULTIPLE CHOICE
4. Which of the following would NOT be a cost that could be directly traced to a custom made piece of
furniture based upon physical observation?
a. the wood and upholstery materials that are in the final piece
b. the labor of the worker assembling the piece of furniture
c. the depreciation paid on factory equipment
d. the labor of the woodworker who finishes the wood of the piece
ANS: C PTS: 1 OBJ: 2-1
5. If physical observation can NOT be used to identify the exact amount of resources consumed by a cost
object, the next best approach is:
a. driver tracing
b. allocation
c. estimation
d. none of the above
ANS: A PTS: 1 OBJ: 2-1
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7. _______________ represents the resources given up that are expected to bring a current or future be-
nefit to the organization.
a. Cost
b. Expired cost
c. Expense
d. Loss
ANS: A PTS: 1 OBJ: 2-1
8. _______________ is(are) the cash or cash equivalent value sacrificed for goods and services that are
expected to bring a current or future benefit to the organization.
a. Expenses
b. Cost
c. An activity
d. A loss
ANS: B PTS: 1 OBJ: 2-1
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13. Traceability is a function of
a. an indirect relationship to the cost object.
b. distortion.
c. a causal relationship.
d. none of these.
ANS: C PTS: 1 OBJ: 2-1
14. Factors that cause changes in resource usage, activity usage, costs and revenues are called
a. indirect costs.
b. drivers.
c. assignments.
d. cost objects.
ANS: B PTS: 1 OBJ: 2-1
15. Which cost assignment method would likely assign the cost of an assembly-line supervisor when the
assembly line is the cost object?
a. driver tracing
b. direct tracing
c. allocation
d. arbitration
ANS: B PTS: 1 OBJ: 2-1
16. Which cost assignment method would likely assign the cost of heating in a plant that makes chairs and
go-carts when the chair product line is the cost object?
a. driver tracing
b. direct tracing
c. allocation
d. arbitration
ANS: C PTS: 1 OBJ: 2-1
17. Which cost assignment method would likely assign the cost of maintenance for machines in a depart-
ment that does cutting when the cutting activity is the cost object?
a. driver tracing
b. direct tracing
c. allocation
d. arbitration
ANS: A PTS: 1 OBJ: 2-1
18. Which of the following expenses incurred by a department store is a direct cost for the women's shoe
department?
a. the salespersons' commissions in the women's shoe department
b. the salaries for individuals working in the accounting department
c. the advertising expense for the service department
d. the allocated rent expense for the clothing department
ANS: A PTS: 1 OBJ: 2-1
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19. Which of the following costs incurred by a chair manufacturer would be traced to the product cost
through direct tracing?
a. the depreciation on factory equipment
b. the supervisor's salary
c. the insurance on the factory building
d. the woodworker's salary
ANS: D PTS: 1 OBJ: 2-1
21. The direct costs of operating a university computer center would NOT include
a. rent paid for computers.
b. a fair share of university utilities.
c. paper used by the center.
d. computer consultants' salaries.
ANS: B PTS: 1 OBJ: 2-1
22. Which of the following methods of assigning costs is based on convenience or some assumed linkage,
and reduces the overall accuracy of the cost assignments?
a. direct tracing
b. driver tracing
c. allocation
d. all of the above
ANS: C PTS: 1 OBJ: 2-1
23. Which of the following costs incurred by a bus manufacturer would NOT be directly attributable to the
finished product?
a. the wages paid to assembly-line production workers
b. the tires for buses
c. the windshields for buses
d. the depreciation on factory building
ANS: D PTS: 1 OBJ: 2-1
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25. Services differ from tangible products in which of the following dimensions?
a. intangibility
b. inseparability
c. perishability
d. all of the above
ANS: D PTS: 1 OBJ: 2-2
30. Which of the following costs would be included in value-chain product costs?
a. research and development
b. production
c. customer service
d. all of the above
ANS: D PTS: 1 OBJ: 2-2
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32. Product value-chain costs assist managers in meeting which of the following objectives?
a. product mix decisions
b. tactical profitability analysis
c. external financial reporting
d. strategic design decisions
ANS: A PTS: 1 OBJ: 2-2
33. Which of the following costs would NOT be included in operating product costs?
a. research and development
b. production
c. marketing
d. all of the above
ANS: A PTS: 1 OBJ: 2-2
34. Which of the following costs would be included in traditional product costs used for external report-
ing?
a. research and development
b. production
c. marketing
d. all of the above
ANS: B PTS: 1 OBJ: 2-2
37. Which of the following costs incurred by a furniture manufacturer would be a product cost?
a. lumber
b. office salaries
c. commissions paid to sales staff
d. controller's salary
ANS: A PTS: 1 OBJ: 2-2
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39. Which of the following costs is a period cost for a manufacturing company?
a. controller's salary
b. wages of machine operators
c. insurance on factory equipment
d. fringe benefits for factory employees
ANS: A PTS: 1 OBJ: 2-2
42. If total warehousing cost for the year amounts to $350,000, and 40% of the warehousing activity is as-
sociated with finished goods and 60% with direct materials, how much of the cost would be charged as
a product cost?
a. $70,000
b. $140,000
c. $210,000
d. $350,000
ANS: C
SUPPORTING CALCULATIONS:
$350,000 × 0.60 = $210,000
43. All of Jill Enterprise's operations are housed in one building with the costs of occupying the building
accumulated in a separate account. The total costs incurred in May amounted to $24,000. The com-
pany allocates these costs on the basis of square feet of floor space occupied. Administrative offices,
sales offices, and factory operations occupy 9,000, 6,000, and 30,000 square feet, respectively. How
much will be classified as a product cost for May?
a. $4,800
b. $3,200
c. $16,000
d. $24,000
ANS: C
SUPPORTING CALCULATIONS:
[30,000/(9,000 + 6,000 + 30,000)] × $24,000 = $16,000
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44. Which of the following costs would be included as part of direct materials in the production of an auto-
mobile?
a. glue for a sticker applied to the automobile
b. steel
c. gasoline used to fuel machines in production
d. none of these
ANS: B PTS: 1 OBJ: 2-2
47. Which of the following costs would be included as part of direct labor?
a. a cutter in the production of shelving
b. a materials handler
c. an assembly-line supervisor
d. a janitor
ANS: A PTS: 1 OBJ: 2-2
48. Which of the following costs would be included as part of factory overhead?
a. depreciation of plant equipment
b. paint used for product finish
c. depreciation on the corporation's office building
d. paper used in the production of books
ANS: A PTS: 1 OBJ: 2-2
49. Which of the following items would NOT be classified as part of factory overhead of a firm that makes
sailboats?
a. factory supplies used
b. canvas used in sail
c. depreciation of factory buildings
d. indirect materials
ANS: B PTS: 1 OBJ: 2-2
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51. Which of the following would NOT be included in the conversion cost of an automobile?
a. Steel
b. Assembly worker wages
c. Depreciation on the machinery
d. Paint used for trim work
ANS: A PTS: 1 OBJ: 2-2
52. Expenditures that are aimed at developing new products and processes or modifying existing products
are called:
a. marketing costs
b. administrative costs
c. research and development costs
d. conversion costs
ANS: C PTS: 1 OBJ: 2-2
53. All of the following costs are included in factory overhead EXCEPT
a. factory supplies.
b. indirect labor.
c. plant foreman's salary.
d. direct labor.
ANS: D PTS: 1 OBJ: 2-2
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58. An example of a nonproduction cost is
a. wages paid to assembly-line employees.
b. manufacturing supplies.
c. insurance on manufacturing facilities.
d. the treasurer's salary.
ANS: D PTS: 1 OBJ: 2-2
59. _______________ are expensed in the period in which they are incurred.
a. Direct materials
b. Product costs
c. Factory overhead
d. Nonproduction costs
ANS: D PTS: 1 OBJ: 2-2
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65. _______________ are expensed in the period in which they are incurred.
a. Direct materials
b. Product costs
c. Noninventoriable costs
d. Inventoriable costs
ANS: C PTS: 1 OBJ: 2-2
67. A company has purchased some steel to use in the production of steel railings. If this steel has NOT
been put into production, it would be classified as
a. direct materials inventory.
b. factory supplies.
c. work-in-process inventory.
d. finished goods inventory.
ANS: A PTS: 1 OBJ: 2-3
69. Which of the following costs would NOT be included in calculating inventory values under the ab-
sorption-costing basis?
a. direct materials
b. fixed overhead
c. selling and administrative expenses
d. direct labor
ANS: C PTS: 1 OBJ: 2-3
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71. Which of the following accounts would appear on the financial statements of only a manufacturing
firm?
a. bonds payable
b. materials inventory
c. prepaid insurance
d. retained earnings
ANS: B PTS: 1 OBJ: 2-3
73. The merchandise inventory in a merchandising business corresponds most closely to which of the fol-
lowing items in a manufacturing firm?
a. materials inventory
b. cost of goods available for sale
c. cost of goods manufactured
d. finished goods inventory
ANS: D PTS: 1 OBJ: 2-3
75. Production costs that are NOT attached to units that are sold are reported as:
a. selling expenses
b. cost of goods sold
c. administrative costs
d. inventory
ANS: D PTS: 1 OBJ: 2-3
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76. Information from the records of Place, Inc., for December 2010 was as follows:
Sales $820,000
Selling and administrative expenses 140,000
Direct materials purchases 176,000
Direct labor 200,000
Factory overhead 270,000
Direct materials, December 1 24,000
Work in process, December 1 50,000
Finished goods, December 1 46,000
Direct materials, December 31 28,000
Work in process, December 31 56,000
Finished goods, December 31 38,000
The net income for the month of December is
a. $644,000.
b. $36,000.
c. $636,000.
d. $180,000.
ANS: B
SUPPORTING CALCULATIONS:
77. Information from the records of the Cain Corporation for August 2009 was as follows:
Sales $1,230,000
Selling and administrative expenses 210,000
Direct materials used 264,000
Direct labor 300,000
Factory overhead 405,000
Inventories
August 1, 2009 August 31, 2009
Direct materials $36,000 $42,000
Work in process 75,000 84,000
Finished goods 69,000 57,000
The conversion costs are
a. $960,000.
b. $1,179,000.
c. $705,000.
d. $564,000.
ANS: C
SUPPORTING CALCULATIONS:
$300,000 + $405,000 = $705,000
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78. Information from the records of the Scully Company for July 2010 was as follows:
Sales $307,500
Selling and administrative expenses 52,500
Direct materials used 66,000
Direct labor 75,000
Factory overhead 101,250
Inventories
July 1, 2010 July 31, 2010
Direct materials $ 8,000 $10,500
Work in process 18,750 21,000
Finished goods 17,250 14,250
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81. Inventory balances for Ray, Inc., in March 2010 were as follows:
March 1, 2010 March 31, 2010
Raw materials $1,125 $ 875
Work in process 2,000 1,550
Finished goods 4,500 3,750
During March, purchases of direct materials were $1,500. Direct labor and factory overhead costs were
$2,500 and $3,500, respectively.
Conversion costs for March were
a. $6,000.
b. $7,500.
c. $7,750.
d. $8,200.
ANS: A
SUPPORTING CALCULATIONS:
$2,500 + $3,500 = $6,000
82. Inventory balances for the James Enterprises in February 2009 were as follows:
February 1, 2009 February 28, 2009
Raw materials $ 27,000 $21,000
Work in process 48,000 37,200
Finished goods 108,000 90,000
During February, purchases of direct materials were $36,000. Direct labor and factory overhead costs
were $60,000 and $84,000, respectively.
Prime costs for February were
a. $81,000.
b. $87,000.
c. $96,000.
d. $102,000.
ANS: D
SUPPORTING CALCULATIONS:
($27,000 + $36,000 - $21,000) + $60,000 = $102,000
83. The sum of the total additions to work in process during a period is
a. total manufacturing costs added.
b. factory overhead applied.
c. material used.
d. cost of goods manufactured.
ANS: A PTS: 1 OBJ: 2-3
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85. Cost of goods sold equals cost of goods manufactured
a. when finished goods inventories remain constant.
b. when work-in-process inventories remain constant.
c. plus beginning work-in-process inventory minus ending work-in-process inventory.
d. when materials inventories remain constant.
ANS: A PTS: 1 OBJ: 2-3
87. Inventory balances for Rude, Inc., in April 2010 were as follows:
April 1, 2010 April 30, 2010
Materials $ 9,000 $ 7,000
Work in process 16,000 12,400
Finished goods 36,000 30,000
During April, purchases of direct materials were $18,000. Direct labor and factory overhead costs were
$20,000 and $28,000, respectively.
88. Selected data concerning the past year's operations of the Beach Corporation are as follows:
Selling and administrative expenses $225,000
Direct materials used 397,500
Direct labor (50,000 hours) 450,000
Factory overhead application rate 8 per DLH
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copied, or distributed without the prior consent of the publisher.
Inventories
Beginning Ending
Direct material $ 75,000 $ 67,500
Work in process 112,500 135,000
Finished goods 60,000 37,500
The cost of direct materials purchased is
a. $397,500.
b. $390,000.
c. $367,500.
d. $405,000.
ANS: B
SUPPORTING CALCULATIONS:
$397,500 + $67,500 - $75,000 = $390,000
89. Selected data concerning the past year's operations of the Karl Enterprises are as follows:
Selling and administrative expenses $75,000
Direct materials used 265,000
Direct labor (25,000 hours) 300,000
Factory overhead application rate 16 per DLH
Inventories
Beginning Ending
Direct materials $50,000 $45,000
Work in process 75,000 90,000
Finished goods 40,000 25,000
What is the cost of goods manufactured?
a. $965,000
b. $1,115,000
c. $950,000
d. $955,000
ANS: C
SUPPORTING CALCULATIONS:
$265,000 + $300,000 + $400,000 + $75,000 - $90,000 = $950,000
91. Selected data concerning the past year's operations of the Wood Corporation are as follows:
Selling and administrative expenses $300,000
Direct materials used 530,000
Direct labor (100,000 hours) 600,000
Factory overhead application rate 5 per DLH
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copied, or distributed without the prior consent of the publisher.
Inventories
Beginning Ending
Work in process $150,000 $160,000
Finished goods 80,000 50,000
The cost of goods sold is
a. $1,630,000.
b. $1,880,000.
c. $1,600,000.
d. $1,650,000.
ANS: D
SUPPORTING CALCULATIONS:
$530,000 + $600,000 + $500,000 + $150,000 - $160,000 + $80,000 - $50,000 = $1,650,000
93. Information from the records of the Tyler Enterprises for March 2010 was as follows:
Sales $41,000
Direct labor 10,000
Selling and administrative expenses 7,000
Direct materials purchases 6,000
Factory overhead 13,500
Inventories
March 1, 2010 March 31, 2010
Direct materials $1,200 $1,400
Work in process 2,500 2,800
Finished goods 2,300 1,900
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copied, or distributed without the prior consent of the publisher.
Tyler Enterprises' cost of goods manufactured in March is
a. $29,300.
b. $29,700.
c. $29,200.
d. $29,000.
ANS: D
SUPPORTING CALCULATIONS:
($1,200 + $6,000 - $1,400) + $10,000 + $13,500 + $2,500 - $2,800 = $29,000
95. Newton Company recently had a fire in its accounting office, destroying most of its records. Only the
following information could be salvaged for 2009:
Direct labor $400,000
Factory overhead 200,000
Cost of goods sold 800,000
Work in process, January 1 80,000
Finished goods, January 1 160,000
Work in process, December 31 100,000
Finished goods, December 31 120,000
The cost of direct materials used in production during 2009 is
a. $140,000.
b. $180,000.
c. $200,000.
d. $260,000.
ANS: B
SUPPORTING CALCULATIONS:
$800,000 + $120,000 - $160,000 + $100,000 - $80,000 - $400,000 - $200,000 = $180,000
96. The cost of goods sold for a manufacturing firm for the month of January was $90,000. The finished
goods inventory was $15,000 on January 1 and $17,500 on January 31. Beginning and ending work-in-
process inventories were $20,000 and $25,000, respectively. What was the cost of goods manufactured
during January?
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a. $92,500
b. $90,000
c. $87,500
d. $97,500
ANS: A
SUPPORTING CALCULATIONS:
$90,000 + $17,500 - $15,000 = $92,500
97. Which of the following is not an example of a difference between the income statement of a service or-
ganization and the income statement of a manufacturing organization?
a. A service company will never have a work in process
b. The service company will not have a finished goods inventory
c. Fulfillment costs may be added to cost of goods sold in a service company
d. Research and development expenses are not usually a major component of a service or-
ganization
ANS: A PTS: 1 OBJ: 2-3
98. Assume the following information for Knight Corporation for the year ended December 31, 2010:
Sales $2,250
Cost of goods manufactured for the year 1,350
Beginning finished goods inventory 450
Ending finished goods inventory 495
Selling and administrative expenses 300
What is the cost of goods sold for the year ended December 31, 2010?
a. $1,305
b. $1,605
c. $1,350
d. $1,650
ANS: A
SUPPORTING CALCULATIONS:
$1,350 + 450 - $495 = $1,305
99. Assume the following data for Gross, Inc., for February:
Beginning finished goods inventory $ 60,000
Beginning work-in-process inventory 40,000
Ending work-in-process inventory 80,000
Ending finished goods inventory 50,000
Factory overhead costs 200,000
Direct materials used 160,000
Direct labor 100,000
What is the cost of goods manufactured for February?
a. $470,000
b. $420,000
c. $460,000
d. $430,000
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ANS: B
SUPPORTING CALCULATIONS:
$160,000 + $100,000 + $200,000 + $40,000 - $80,000 = $420,000
101. Which of the following items would NOT appear on an income statement of a service organization?
a. selling expenses
b. cost of goods sold
c. administrative expenses
d. gross margin
ANS: B PTS: 1 OBJ: 2-3
102. Which of the following items is NEVER relevant to the cost flows of a service organization?
a. finished goods inventory
b. materials inventory
c. work-in-process inventory
d. All of these are always relevant.
ANS: A PTS: 1 OBJ: 2-3
103. Assume the following data for Graham Services, an architecture firm, for February:
Beginning materials inventory $ 20,000
Beginning work-in-process inventory 40,000
Ending work-in-process inventory 50,000
Ending materials inventory 10,000
Actual overhead costs 100,000
Direct materials used 60,000
Direct labor 200,000
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copied, or distributed without the prior consent of the publisher.
What is the cost of services sold for February?
a. $370,000
b. $350,000
c. $360,000
d. $330,000
ANS: B
SUPPORTING CALCULATIONS:
$60,000 + $200,000 + $100,000 + $40,000 - $50,000 = $350,000
Figure 2-1
An appliance repair shop purchased materials costing $9,000 in May. The beginning inventory of ma-
terial parts was $4,500 and the ending inventory of material parts was $4,000. Payments for direct
labor for May totaled $27,000, secretarial costs were $2,000, and overhead of $5,000 was incurred. In
addition, $5,000 was spent on advertising and $2,000 for the franchise name. Revenue for May was
$50,000.
104. Refer to Figure 2-1. What is the cost of services sold for May?
a. $41,500
b. $43,500
c. $50,500
d. $40,500
ANS: A
SUPPORTING CALCULATIONS:
$9,000 + $4,500 - $4,000 + $27,000 + $5,000 = $41,500
105. Refer to Figure 2-1. What is the gross margin for May?
a. $41,500
b. $43,500
c. $1,500
d. $8,500
ANS: D
SUPPORTING CALCULATIONS:
COSS = $9,000 + $4,500 - $4,000 + $27,000 + $5,000 = $41,500
106. _______________ is (are) a cost accounting system that uses only unit-based activity drivers to assign
costs to cost objects.
a. Activity-based management
b. Activity-based costing system
c. Functional-based cost management system
d. Both a and b
ANS: C PTS: 1 OBJ: 2-4
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107. Which of the following would be associated with a functional-based cost accounting information sys-
tem?
a. setup costs assigned to products using the number of setups as the driver
b. purchasing costs assigned to products using number of direct labor hours as the activity
driver
c. customer service costs assigned to products using the number of complaints as the activity
driver
d. materials handling costs assigned to products using the number of moves as the activity
driver
ANS: B PTS: 1 OBJ: 2-4
109. Which of the following items would be associated with both a functional-based cost accounting in-
formation system and an activity based cost information system?
a. Overhead is assigned on a plant-wide rate based on direct labor hours.
b. Customer service costs are assigned to products using number of complaints as the activity
driver.
c. Direct labor cost is assigned to products using direct tracing.
d. None of these.
ANS: C PTS: 1 OBJ: 2-4
111. _______________ focuses on the management of activities with the objective of improving the value
received by the customer and the profit received by providing this value.
a. Activity-based management
b. Contemporary cost control
c. Functional-based cost management system
d. JIT
ANS: A PTS: 1 OBJ: 2-4
112. In a cost management system, the process view does NOT include
a. resources.
b. activities.
c. driver analysis.
d. performance analysis.
ANS: A PTS: 1 OBJ: 2-4
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113. In a cost management system, the cost view does NOT include
a. resources.
b. activities.
c. driver analysis.
d. products and customers.
ANS: C PTS: 1 OBJ: 2-4
116. Which of the following is NOT a trait of a functional-based cost management system?
a. unit-based drivers
b. focus on managing activities
c. allocation-intensive
d. narrow and rigid product costing
ANS: B PTS: 1 OBJ: 2-4
119. The optimal level in the trade-off between measurement and error costs is when
a. measurement costs are greater than error costs.
b. measurement costs are less than error costs.
c. measurement costs equal error costs.
d. the total of measurement costs and error costs are maximized.
ANS: C PTS: 1 OBJ: 2-4
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120. Error costs can be defined as:
a. the costs associated with the measurements required by the cost management system
b. unit costs assigned based on activities
c. the costs associated with making poor decisions based on bad cost information
d. none of the above
ANS: C PTS: 1 OBJ: 2-4
PROBLEM
1. What are the three important dimension differences between tangible products and services.
ANS:
Tangible products are goods produced by converting raw materials through the use of labor and capital
inputs such as plant, land, and machinery. Services are tasks or activities performed for a customer or
an activity performed by a customer using an organization’s products or facilities. Services differ from
tangible products on three important dimensions. Intangibility means buyers of services can not see,
feel, hear, or taste a service before it is bought. Perishability means that services can not be stored. In-
separability means that producers and buyers must usually be in direct contact for an exchange to take
place.
2. Explain the differences between direct tracing, driver tracing, and allocation.
ANS:
Direct tracing is the process of identifying and assigning costs to a cost object that are specifically or
physically associated with the cost object.
Driver tracing is assigning costs using drivers, which are causal factors. The driver approach relies on
identification of factors that allegedly capture the causal relationship.
Allocation is the assignment of indirect costs to cost objects based on convenience or assumed link-
ages.
3. Classify the following costs incurred by a step railing manufacturing company as direct materials, dir-
ect labor, factory overhead, or period costs:
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ANS:
a. Direct labor f. Factory overhead
b. Period g. Period
c. Factory overhead h. Factory overhead
d. Direct materials i. Factory overhead
e. Period j. Period
4. Big Foot Athletics designs and manufactures running shoes. A new model of shoes, Fast Track, has
been developed and is ready for production.
Required:
Which costs will the production manager collect from the value chain, and how would these costs be
used in different decisions?
a. traditional product costs
b. operating product costs
c. value-chain product costs
ANS:
Production costs would be included in all of these definitions.
a. traditional product costs: Direct materials, direct labor and manufacturing overhead
are the traditional product costs. They would be used for
external reporting, budgeting, and control of costs.
b. operating product costs: In addition to the traditional product costs, marketing and
customer service costs would be considered in analyzing
profitability of the product. Strategic questions about the
operating design, i.e., materials and plant layout, would be
addressed. The focus is on the revenue and cost of Fast
Track.
c. value-chain product costs: Production costs of Fast Track must be viewed in relation
to other products. Strategic pricing and product mix de-
cisions must be made. The profitability of all the product
lines is at issue.
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What is amount of
a. Direct labor
b. Direct materials
c. Factory Overhead
d. Period Costs
ANS:
a. Direct Labor = Assembly Worker Wages $110,000
b. Direct Materials = Lumber $150,000
c. Factory Overhead = Utilities paid on the factory $75,000
+ Depreciation on factory overhead $66,000
+ Maintenance worker wages $32,000
+Indirect Materials $75,000
Total Overhead $248,000
d. Period Costs = Utilities paid on the corporate office + Company President Wages =
$50,000 + $89,000 = $139,000
6. Information from the records of the Fisher Enterprises for the month of March 2010 was as follows:
Inventories
March 1, 2010 March 31, 2010
Direct materials $24,000 $26,100
Work in process 6,300 9,600
Finished goods 15,000 17,100
Required:
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ANS:
a. Fisher Enterprises
Statement of Cost of Goods Manufactured
For the Month of March 2010
Direct materials:
Beginning inventory $ 24,000
Add: Purchases 54,000
Materials available $ 78,000
Less: Ending inventory 26,100
Direct materials used in production $ 51,900
Direct labor
Manufacturing overhead: 31,200
Indirect labor $ 15,000
Depreciation on machinery 9,000
Rent on factory 21,000 45,000
Total manufacturing costs added $128,100
Add: Beginning work-in-process inventory 6,300
Total costs in process $134,400
Less: Ending work-in-process inventory 9,600
Cost of goods manufactured $124,800
b. Fisher Enterprises
Income Statement
For the Month of March 2010
Sales $165,900
Less: Cost of goods sold:
Add: Cost of goods manufactured $124,800
Beginning inventory finished goods 15,000
Cost of goods available for sale $139,800
Less: Ending inventory finished goods 17,100 122,700
Gross margin $ 43,200
Less: Selling and administrative expenses 18,900
Operating income $ 24,300
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7. The following information pertains to Davis, Inc.:
Direct materials purchases $ 62,400
Beginning direct materials 10,400
Factory overhead 58,400
Beginning work in process 10,600
Cost of goods manufactured 164,000
Ending finished goods 20,000
Gross margin 21,000
Selling and administrative expenses 7,000
Beginning finished goods 16,000
Ending work in process 8,000
Ending direct materials 12,400
Direct labor ?
Direct materials used ?
Net income (loss) ?
Total manufacturing costs added ?
Cost of goods sold ?
Sales ?
Required:
Determine the following values:
a. Net income
b. Total manufacturing costs added
c. Cost of goods sold
d. Sales
e. Direct materials used
f. Direct labor
ANS:
a. $21,000 - $7,000 = $14,000
b. $164,000 + $8,000 - $10,600 = $161,400
c. $16,000 + $164,000 - $20,000 = $160,000
d. $21,000 + $160,000* = $181,000
e. $10,400 + $62,400 - $12,400 = $60,400
f. $161,400** - $60,400*** - $58,400 = $42,600
*Found in c.
**Found in b.
***Found in e.
8. Information about Carter Company for the year ending December 31, 2010, was as follows:
Sales $300,000
Selling and administrative expenses 18,000
Net income 8,000
Beginning inventories:
Direct materials 20,000
Work in process 18,000
Finished goods 62,000
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Ending direct materials is 20 percent larger than beginning direct materials. Ending work in process is
half of the beginning work in process. Ending finished goods increased by $8,000 during the year.
Prime costs and conversion costs are 70 percent and 60 percent of total manufacturing costs added, re-
spectively. Materials purchases are $133,200.
Required:
a. Prepare a statement of cost of goods manufactured for December.
b. Prepare an income statement for December.
ANS:
a.
Carter Company
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2010
Direct materials:
Beginning inventory* $ 20,000
Add: Purchases 113,200
Materials available $133,200
Less: Ending inventory* ($20,000 × 1.20) 24,000
Direct materials used in production $109,200
Direct labor [(.7 × 273,000) - 109,200] 81,900
Manufacturing overhead [(.6 × 273,000) -81,900] 81,900
Total manufacturing costs added $273,000
Add: Beginning work-in-process inventory* 18,000
Total costs in process $291,000
Less: Ending work-in-process inventory* ($18,000 × 0.50) 9,000
Cost of goods manufactured $282,000
b.
Carter Company
Income Statement
For the Year Ended December 31, 2010
Sales* $300,000
Less: Cost of goods sold:
Add: Cost of goods manufactured $282,000
Beginning inventory finished goods* 62,000
Cost of goods available for sale $344,000
Less: Ending inventory finished goods* ($62,000 + $8,000) 70,000 274,000
Gross margin $ 26,000
Less: Selling and administrative expenses* 18,000
Net income* $ 8,000
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9. Best Corporation incurred the following costs:
Required:
Calculate the following values:
a. Direct materials used
b. Cost of goods manufactured
c. Cost of goods sold
d. Net income
ANS:
a. $17,000 + $185,000 - $15,000 = $187,000
b. $187,000 + $200,000 + $25,000 + $10,000 + $5,000 + $9,000 + $8,000 - $13,000 = $431,000
c. $18,000 + $431,000 - $24,000 = $425,000
d. $650,000 - $425,000 - $100,000 = $125,000
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Required:
Calculate the following values:
a. Direct materials used
b. Cost of goods manufactured
c. Cost of goods sold
d. Net income
ANS:
a. $51,000 + $555,000 - $45,000 = $561,000
b. $561,000 + $600,000 + $75,000 + $30,000 + $15,000 + $27,000 + $24,000 - $39,000 =
$1,293,000
c. $54,000 + $1,293,000 - $72,000 = $1,275,000
d. $1,950,000 - $1,275,000 - $300,000 = $375,000
11. The cost of goods sold for the Tricky Corporation for the month of June 2009 was $450,000. Work-in-
process inventory at the end of June was 95 percent of the work-in-process inventory at the beginning
of the month. Overhead is 80 percent of the direct labor cost. During the month, $110,000 of direct
materials were purchased. Revenues for Tricky were $600,000, and the selling and administrative
costs were $70,000. Other information about Tricky's inventories and production for June was as fol-
lows:
Ending inventories-June 30
Direct materials $ 19,000
Work in process ?
Finished goods 105,000
Beginning inventories-June 1
Direct materials $ 22,200
Work in process 40,000
Finished goods 208,500
Required:
a. Prepare a cost of goods manufactured and cost of goods sold statements.
b. Prepare an income statement.
c. What are the prime costs, conversion costs, and period costs?
ANS:
a. DM used = $22,200 + $110,000 - $19,000 = $113,200
CGM = $450,000 + $105,000 - $208,500 = $346,500
Tricky Corporation
Statement of Cost of Goods Manufactured
For June 2009
Direct materials:
Beginning inventory* $ 22,200
Add: Purchases* 110,000
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Materials available $132,200
Less: Ending inventory* 19,000
Direct materials used in production $113,200
Direct labor below 128,500
Manufacturing overhead ($128,500 × 0.80) 102,800
Total manufacturing costs added $344,500
Add: Beginning work-in-process inventory* 40,000
Total costs in process $384,500
Less: Ending work-in-process inventory ($40,000 × 0.95) 38,000
Cost of goods manufactured (from COGS statement) $346,500
b. Tricky Company
Cost of Goods Sold Statement
For June 2009
Tricky Company
Income Statement
For June 2009
Sales* $600,000
Less: Cost of goods sold*:
Add: Cost of goods manufactured $346,500
Beginning inventory finished goods* 208,500
Cost of goods available for sale $555,000
Less: Ending inventory finished goods* 105,000
Cost of Goods Sold 450,000
Gross margin $150,000
Less: Selling and administrative expenses* 70,000
Net income $ 80,000
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c. Conversion costs = direct labor and overhead = $231,300
= $128,500 + $102,800 = $231,300
Prime costs = DM + DL = $113,200 + $128,500 = $241,700
Period costs = $70,000
12. Home Designs Company designs decks, gazebos, and play equipment for residential homes. The fol-
lowing was provided for the year ended June 30, 2009:
Direct labor $600,000
Direct material purchases 40,000
Administrative 130,000
Overhead 75,000
Selling 265,000
Beginning direct materials inventory 20,000
Beginning designs in process 14,000
Ending direct materials inventory 10,000
Ending designs in process 39,000
The average design fee is $700. There were 2,000 designs processed during the year.
Required:
a. Prepare a statement of cost of services sold.
b. Prepare an income statement.
c. Discuss three differences between services and tangible products.
ANS:
a. Home Designs Company
Cost of Services Sold
June 30, 2009
Beginning materials $ 20,000
Purchases 40,000
Materials available 60,000
. Ending materials - 10,000
Materials used 50,000
Direct labor 600,000
Overhead 75,000
Beginning design in process 14,000
Ending designs in process -39,000
Cost of Services Sold $700,000
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c. Services have three attributes that are not possessed by tangible products:
intangibility, perishability, and inseparability.
13. Describe several of the major differences between a functional-based cost management system and an
activity-based cost management system.
ANS:
The functional-based cost accounting system assumes that all costs can be classified as fixed or vari-
able with respect to changes in the units or volume of product produced.
The activity-based cost management system's objective is to improve the quality, content, relevance,
and timing of information.
Functional-based Activity-based
1. Unit-based drivers 1. Unit and nonunit-based drivers
2. Allocation-intensive 2. Tracing-intensive
3. Narrow and rigid product costing 3. Broad, flexible product costing
4. Focus on managing costs 4. Focus on managing activities
5. Sparse activity information 5. Detailed activity information
6. Maximization of individual 6. Systemwide performance
unit performance maximization
7. Uses financial measures of 7. Uses both financial and
performance nonfinancial measures of
performance
14. Define activity-based management. In your answer, present the activity-based management model in
good form.
ANS:
Activity-based management focuses on the management of activities with the objective of improving
the value received by the customer and the profit received by providing this value; it includes driver
analysis, activity analysis, and performance evaluation and draws on activity-based costing as a major
source of information. Exhibit 2-13 in the text presents the model.
15. In choosing a cost management system, the controller must balance the total costs of implementing
such systems. What costs must be balanced to determine total cost? How do functional-based and
activity-based cost systems balance the trade-offs?
ANS:
Error costs and measurement costs must be considered in choosing a cost management system. Activ-
ity-based cost management has greater measurement costs due to analyzing many activities but has
greater accuracy and fewer error costs. Functional-based cost systems have lower measurement
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costs but higher error costs. Controllers must assess the need for accuracy in costing, pricing, and man-
aging profitability.
16. The following items (partial list) are associated with a functional-based cost accounting information
system, an activity-based cost accounting information system, or both:
Required:
1. For an activity-based cost system, classify the items into one of the following categories:
a. interrelated parts
b. processes
c. objectives
d. inputs
e. outputs
f. user actions
2. How would the choices differ between the two systems? What are the costs and benefits of
each?
ANS:
1. The activity-based cost accounting system:
a. interrelated parts: cost accounting personnel, computer
b. processes: cost assignment: direct tracing of materials, driver tracing of purchasing
costs (orders), materials handling cost (moves)
c. objectives: costing out of products
d. inputs: direct materials cost, purchasing cost, materials handling cost
e. outputs: product cost report
f. user actions: make-or-buy decision
2. The difference in the costing systems is found in the processes. A functional-based cost system
would not use nonunit drivers such as moves and orders to assign overhead but would use a
unit driver like direct labor hours. There is increased accuracy of the cost assignments in an
activity-based system, and a more comprehensive idea of costs may be used for decision mak-
ing.
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The activity-based cost accounting system is more expensive to develop but has the benefit of
more comprehensive uses for cost information. The functional-based cost system is simpler
and less expensive to implement but the information generated is less versatile.
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