Chapter 1-Introduction To Cost Accounting: Multiple Choice

CHAPTER 1—INTRODUCTION TO COST ACCOUNTING
MULTIPLE CHOICE
1. The business entity that converts purchased raw materials into finished goods by using labor,
technology, and facilities is a:
a. Manufacturer.
b. Merchandiser.
c. Service business.
d. Not-for-profit service agency.
ANS: A
The business entity that converts purchased raw materials into finished goods by using labor,
technology, and facilities is a manufacturer.
PTS: 1 DIF: Easy REF: P. OBJ: Introduction
NAT: IMA 4 - Business Applications TOP: AACSB - Analytic
2. The business entity that purchases finished goods for resale is a:
a. Manufacturer.
b. Merchandiser.
c. Service business.
d. For-profit service business.
ANS: B
The business entity that purchases finished goods for resale is a merchandiser.

3. The type of merchandiser who purchases goods from the producer and sells to stores who sell to the
consumer is a:
a. Manufacturer.
b. Retailer.
c. Wholesaler.
d. Service business.
ANS: C
The type of merchandiser that purchases goods from the producer and sells to the retailer is a
wholesaler.
4. Examples of service businesses include:
a. Airlines, architects, and hair stylists.

b. Department stores, poster shops, and wholesalers.
c. Aircraft producers, home builders, and machine tool makers.
d. None of these are correct.
ANS: A
Examples of service businesses include airlines, architects, and hair stylists.
PTS: 1 DIF: Moderate REF: P. OBJ: Introduction
NAT: IMA 4 - Business Applications TOP: AACSB - Reflective
5. ISO 9000 is a set of international standards for:
a. determining the selling price of a product.

b. cost control.
c. quality management.
d. planning,
ANS: C
ISO 9000 is a set of international standards for quality management.
NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic
6. Unit cost information is important for making all of the following marketing decisions except:
a. Determining the selling price of a product.

b. Bidding on contracts.
c. Determining the amount of advertising needed to promote the product.
d. Determining the amount of profit that each product earns.
ANS: C
Unit cost information is used in determining selling price, bidding on contracts and determining product
profitability, but would not have a bearing on determining how much the product would need to be
advertised.
PTS: 1 DIF: Moderate REF: P. OBJ: 1
NAT: IMA 3B - Strategic Marketing TOP: AACSB - Analytic
7. The process of establishing objectives or goals for the firm and determining the means by which they
will be met is:
a. controlling.
b. analyzing profitability.
c. planning.
d. assigning responsibility.
ANS: C
The process of establishing goals and objectives for a firm is planning. Controlling, analyzing
profitability and assigning responsibility are functions that take place after the planning process to
determine whether or how successfully goals have been obtained.
PTS: 1 DIF: Easy REF: P. OBJ: 1
NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic
8. Control is the process of monitoring the company’s operations to determine whether the company’s
objectives are being achieved. Effective control is achieved through all of the following except:
a. periodically measuring and comparing company results.

b. assigning responsibility for costs to employees responsible for those costs.
c. constantly monitoring employees to ensure they do exactly as they are told.
d. taking necessary corrective action when variances warrant doing so.
ANS: C
While periodically measuring and comparing company results, assigning responsibility for those results
to employees and taking necessary corrective action are all part of control; it does not include
constantly monitoring employees to make sure they are following directions.
NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic
9. Aaron Smith is the supervisor of the Machining Department of Bennett Corporation. He has control over
and is responsible for manufacturing costs traced to the department. The Machining Department is an
example of a(n):
a. cost center.
b. inventory center.
c. supervised work center.
d. worker’s center.
ANS: A
The criteria for a cost center are 1) a reasonable basis on which manufacturing costs may be traced and
2) a person who has control over and is accountable for many of the costs charged to that center.
NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

10. Which of the following items of cost would be least likely to appear on a performance report based on
responsibility accounting for the supervisor of an assembly line in a large manufacturing situation?
a. Direct labor
b. Indirect materials
c. Selling expenses
d. Repairs and maintenance
ANS: C
Selling expenses would be least likely to appear on a performance report, because the supervisor would
not have responsibility for the sales function.
11. Which of the following items of cost would be least likely to appear on a performance report based on
responsibility accounting for the supervisor of an assembly line in a large manufacturing situation?
a. Direct labor
b. Supervisor's salary
c. Materials
d. Repairs and maintenance
ANS: B
A supervisor's salary would be least likely to appear on a performance report, because that person's
salary is determined by the company and is not controllable by the supervisor.
PTS: 1 DIF: Hard REF: P. OBJ: 1
12. Responsibility accounting would most likely hold a manager of a manufacturing unit responsible for:
a. cost of raw materials.

b. quantity of raw materials used.
c. the number of units ordered.
d. amount of taxes incurred.
ANS: B
In responsibility accounting the manager of a cost center is only responsible for those costs and activities
that manager controls. A manufacturing manager would not likely be responsible for the cost of the
materials (the purchasing manager would have that responsibility), the number of units ordered (that
would be driven by demand) or the taxes incurred.
13. Which of the following statements best describes a characteristic of a performance report prepared for
use by a production line department head?
a. The costs in the report should include only those controllable by the department head.
b. The report should be stated in dollars rather than in physical units so the department
head knows the financial magnitude of any variances.
c. The report should include information on all costs chargeable to the department,
regardless of their origin or control.
d. It is more important that the report be precise than timely.
ANS: A
The performance report should include only those costs controllable by the department head. It should
also be timely and should include production data as well as dollar amounts.
14. Joshua Company prepares monthly performance reports for each department. The budgeted amounts
of wages for the Finishing Department for the month of August and for the eight-month period ended
August 31 were $12,000 and $100,000, respectively. Actual wages paid through July were $91,500, and
wages for the month of August were $11,800. The month and year-to-date variances, respectively, for
wages on the August performance report would be:
a. $200 F; $8,500 F
b. $200 F; $3,300 U
c. $200 U; $3,300 U
d. $200 U; $8,500 F
ANS: B
Calculation of monthly variance:
Budgeted wages for August $12,000
Actual wages for August 11,800
Variance for August $ 200 F
Calculation of year-to-date variance:
Budgeted wages for the eight-month period ended August 31 $100,000
Actual wages for the eight-month period ended August 31 (91,500 + 11,800) 103,300
Variance for eight-month period ended August 31 $ 3,300 U
15. As a result of recent accounting scandals involving companies such as Enron and World Com, the
Sarbanes-Oxley Act of 2002 was written to protect shareholders of public companies by improving
a. management accounting.
b. corporate governance.
c. professional competence.
d. the corporate legal process.
ANS: B
The Sarbanes-Oxley act was written primarily to improve the corporate governance of publicly held
companies.

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics
16. Which of the following is not a key element of the Sarbanes Oxley Act to improve corporate
governance?
a. The establishment of the Public Company Accounting Oversight Board

b. Requiring a company’s annual report to contain an internal control report that includes
management’s opinion on the effectiveness of internal control
c. Severe criminal penalties for retaliation against “whistleblowers”
d. Requiring that the company’s performance reports are prepared in accordance with
generally accepted accounting principles
ANS: D
The Sarbanes-Oxley Act does not require that companies prepare performance reports in accordance
with generally accepted accounting principles.
17. Cost accounting differs from financial accounting in that financial accounting:
a. Is mostly concerned with external financial reporting.

b. Is mostly concerned with individual departments of the company.
c. Provides the additional information required for special reports to management.
d. Puts more emphasis on future operations.
ANS: A
Items (b) through (d) are characteristics of cost accounting, whereas Item (a) is a feature of financial
accounting.
NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective

18. Taylor Logan is an accountant with the Tanner Corporation. Taylor’s duties include preparing reports
that focus on both historical and estimated data needed to conduct ongoing operations and do long-
range planning. Taylor is a(n)
a. certified financial planner.

b. management accountant.
c. financial accountant.
d. auditor.
ANS: B
A management accountant prepares reports that focus on both historical and estimated data that are
used to conduct ongoing operations and do long-range planning. Financial accountants prepare
financial statements needed by external users to evaluate a business, while auditors conduct
examinations on those financial statements. A certified financial planner is a consultant that helps
individuals with financial planning, including investment advice.
19. The following data were taken from Mansfield Merchandisers on January 31:
Merchandise inventory, January 1 $ 90,000
Sales salaries 35,000
Merchandise inventory, January 31 65,000
Purchases 560,000
What was the Cost of goods sold in January?
a. $585,000
b. $650,000
c. $620,000
d. $535,000
ANS: A
Merchandise Inventory, January 1 $ 90,000

Plus Purchases 560,000
Merchandise Available for Sale $650,000
Less Merchandise Inventory, January 31 65,000
Cost of Goods Sold $585,000
NAT: IMA 2B - Cost Management TOP: AACSB - Analytic
20. Umberg Merchandise Company’s cost of goods sold last month was $1,350,000. the Merchandise
Inventory at the beginning of the month was $250,000 and there was $325,000 of Merchandise
Inventory at the end of the month. Umberg’s merchandise purchases were:
a. $1,350,000
b. $1,275,000
c. $1,425,000
d. $1,675,000
ANS: C
Merchandise purchases added to Merchandise Inventory at the beginning of the month results in the
merchandise available for sale. At the end of the month, these goods either remain in Merchandise
Inventory or are sold, which results in Cost of Goods Sold, so the total of ending Merchandise Inventory
and Cost of Goods Sold is also the merchandise available for sale. Therefore, the equation can be
rearranged to compute the merchandise purchases as follows:
Cost of Goods Sold $1,350,000
Plus Ending Merchandise Inventory 325,000
Merchandise Available for Sale 1,675,000
Less Beginning Merchandise Inventory 250,000
Merchandise Purchases $1,425,000

21. Ashley Corp. had finished goods inventory of $50,000 and $60,000 at April 1 and April 30, respectively,
and cost of goods manufactured of $175,000 in April. Cost of goods sold in April was:
a. $165,000
b. $175,000
c. $185,000
d. $225,000
ANS: A
Finished Goods Inventory, April 1 $ 50,000
Plus Cost of Goods Manufactured 175,000
Finished Goods Available for Sale 225,000
Finished Goods Inventory, April 30 60,000
22. The balance in Kayser Manufacturing Company’s Finished Goods account at November 30 was $825,000.
Its November cost of goods manufactured was $2,350,000 and its cost of goods sold in November was
$2,455,000. What was the balance in Kayser’s Finished Goods at November 1?
a. $435,000
b. $640,000
c. $710,000
d. $930,000
ANS: D
Cost of goods manufactured added to Finished Goods at the beginning of the month results in the
finished goods available for sale. At the end of the month, these goods either remain in Finished Goods
or are sold, which results in Cost of Goods Sold, so the total of ending Finished Goods and Cost of Goods
Sold is also the finished goods available for sale. Therefore, the equation can be rearranged to compute
the beginning balance in Finished Goods as follows:
Plus Finished Goods Inventory, November 30 825,000
Finished Goods Available for Sale 3,280,000
Less Cost of Goods Manufactured 2,350,000
Finished Goods Inventory, November 1 $ 930,000
23. Inventory accounts for a manufacturer include all of the following except:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: A
Inventory accounts for a manufacturer include Materials, Work in Process, and Finished Goods.
Merchandise Inventory is the inventory account for a merchandiser.
24. For a manufacturer, the total cost of manufactured goods completed but still on hand is:
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: B
Merchandise Inventory refers to inventory held by a merchandising operation. Finished goods are
goods completed, but still on hand, while Work in Process are goods which have been started and are in
various stages of production, but are not yet completed. Materials are items which have been
purchased and on hand to be used in the manufacturing process, but have not yet been issued into
production.
25. For a manufacturer, manufacturing costs incurred to date for goods in various stages of production, but
not yet completed is:
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: C
production.
26. For a manufacturer, the cost of all materials purchases and on hand to be used in the manufacturing
process is:
b. Finished Goods.
c. Work in Process.
d. Materials.
ANS: D
production.
27. In the financial statements, Materials should be categorized as:
a. Revenue.
b. Expenses.
c. Assets.
d. Liabilities.
ANS: C
Materials are included in inventory, which is an asset on the balance sheet because it has a future
benefit.
28. A(n) __________ requires estimating inventory balances during the year for interim financial statements
and shutting down operations to count all inventory items at the end of the year.
a. periodic inventory system

b. inventory control account
c. perpetual inventory system
d. inventory cost method
ANS: A
A periodic inventory system requires a company to make estimates of inventory balances throughout
the year, and a complete physical count of inventory at the end of the year. A perpetual inventory
system provides a continuous record of purchases, issues and inventory balances. The inventory
balances are verified with periodic counts of selected inventory items throughout the year.
29. Witt Company, like most manufacturers, maintains a continuous record of purchases, materials issued
into production and balances of all goods in stock, so that inventory valuation data is available at any
time. This is an example of a(n)
a. perpetual inventory system.

b. inventory control account.
c. periodic inventory system.
d. inventory cost method.
ANS: A
A perpetual inventory system maintains a continuous record of purchases, issues and inventory
balances. A periodic inventory system requires a physical count of all inventory at the end of the year
and estimates of inventory balances throughout the year when preparing interim financial statements.
NAT: IMA 2B - Cost Management TOP: AACSB - Reflective
30. Which of the following is most likely to be considered an indirect material in the manufacture of a sofa?
a. Lumber
b. Glue
c. Fabric
d. Foam rubber
ANS: B
While glue would be included in the finished product, its cost would be relatively insignificant, therefore,
it would not be cost effective to trace its cost to specific products.
31. The Macke Company’s payroll summary showed the following in November:
Sales department salaries $10,000
Supervisor salaries 20,000
Assembly workers’ wages 25,000
Machine operators’ wages 35,000
Maintenance workers’ wages 15,000
Accounting department salaries 5,000
What is the amount that would be included in direct labor in November?
a. $25,000
b. $60,000
c. $95,000
d. $120,000
ANS: B
Assembly workers and machine operators would be considered direct labor.
Assembly workers’ wages $25,000
Total direct labor $60,000
The supervisors and maintenance workers would be included in overhead, while the sales and
accounting department salaries would be included in selling and administrative expense.

32. The Macke Company’s payroll summary showed the following in November:
Sales department salaries $10,000
Supervisor salaries 20,000
Accounting department salaries 5,000
What is the amount that would be included in factory overhead in November?
a. $20,000
b. $35,000
c. $95,000
d. $120,000
ANS: B
The supervisors’ salaries and maintenance workers’ wages would be included in factory overhead.
Supervisors’ salaries $20,000
The wages of the assembly workers and machine operators would be included in direct labor, while the
sales and accounting department salaries would be included in selling and administrative expense.
33. Factory overhead includes:
a. Indirect labor but not indirect materials.

b. Indirect materials but not indirect labor.
c. All manufacturing costs, except indirect materials and indirect labor.
d. All manufacturing costs, except direct materials and direct labor.
ANS: D
Factory overhead includes all manufacturing costs except direct materials and direct labor.
34. A typical factory overhead cost is:
a. Freight out.
b. Stationery and printing.
c. Depreciation on machinery and equipment.
d. Postage.
ANS: C
Depreciation on machinery and equipment is a factory overhead cost because it is a manufacturing cost
that is not direct labor or direct material. The other three items are marketing or administrative
expenses.
35. Factory overhead would include:
a. Wages of office clerk.

b. Sales manager’s salary.
c. Supervisor’s salary.
d. Tax accountant’s salary.
ANS: C
The supervisor’s salary is considered indirect labor because the supervisor is required for the
manufacturing process, but does not work directly on the units being manufactured. Indirect labor is
included in factory overhead. The office clerk’s wages, sales manager’s salary and tax accountant’s
salary are marketing or administrative costs.
36. The term "prime cost" refers to:
a. The sum of direct labor costs and all factory overhead costs.
b. The sum of direct material costs and direct labor costs.
c. All costs associated with manufacturing other than direct labor costs and direct material
costs.
d. Manufacturing costs incurred to produce units of output.
ANS: B
The term "prime cost" refers to the sum of direct materials costs and direct labor costs.
37. The following data are from Burton Corporation, a manufacturer, for the month of September:
Direct materials used $135,000
Supervisors’ salaries 6,000
Sales office rent and utilities 22,000
Machine depreciation 35,000
Secretary to the Chief Executive Officer salary 3,000
Factory insurance 15,000
Compute the prime costs.

a. $344,000
b. $135,000
c. $335,000
d. $256,000
ANS: C
Prime costs include direct materials and direct labor. Of the salaries and wages listed, only the wages of
the machine operators would be considered direct labor as they are the only employees listed who
would actually work on the products themselves.
Total prime costs $335,000
38. The term "conversion costs" refers to:
a. The sum of direct labor costs and all factory overhead costs.
b. The sum of direct material costs and direct labor costs.
c. All costs associated with manufacturing other than direct labor costs.
d. Direct labor costs incurred to produce units of output.
ANS: A
The term "conversion costs" refers to the sum of direct labor costs and all factory overhead costs.
39. The following data are from Burton Corporation, a manufacturer, for the month of September:
Sales office rent and utilities 22,000
Secretary to the Chief Executive Officer salary 3,000
Compute the conversion costs.
a. $335,000
b. $209,000
c. $281,000
d. $256,000
ANS: D
Conversion costs include direct labor and factory overhead costs, including indirect labor. Of the salaries
and wages listed, only the machine operators are considered direct labor as they are the only employees
listed who would actually work on the products themselves. The supervisors are considered factory
overhead because their efforts are essential to the manufacturing process, however they do not actually
work on the products themselves. The sales office costs and the salary of the secretary would be
marketing and administrative expenses as they do not contribute to the manufacturing process.
Machine operators’ wages $200,000
Total conversion costs $256,000

40. Payroll is debited and Wages Payable is credited to:
a. Pay the payroll taxes.

b. Record the payroll.
c. Pay the payroll.
d. Distribute the payroll.
ANS: B
When the payroll is recorded, Payroll is debited and Wages Payable is credited. When payroll taxes are
paid, the various liability accounts are debited and Cash is credited. When the payroll is paid, Wages
Payable is debited and Cash is credited. When the payroll is distributed, Work in Process, Factory
Overhead, and Selling and Administrative Expenses are debited and Payroll is credited.
41. Which of the following is not a cost that is accumulated in Work in Process?
a. Direct materials
b. Administrative expense
c. Direct labor
d. Factory overhead
ANS: B
Administrative expense is not a manufacturing cost, so it would not be included in Work in Process.
42. At a certain level of operations, per unit costs and selling price are as follows: manufacturing costs, $50;
selling and administrative expenses, $10; selling price, $80. Given this information, the mark-on
percentage to manufacturing cost used to determine selling price must have been:
a. 40 percent.
b. 60 percent.
c. 33 percent.
d. 25 percent.
ANS: B
Selling price - Manufacturing costs

= Mark-on percentage
Manufacturing costs
$80 - $50
= 60%
$50
43. Mountain Company produced 20,000 blankets in June to be sold during the holiday season. The
manufacturing costs were:
Direct materials $125,000
Direct labor 55,000
Factory overhead 60,000
Selling expense 25,000
Administrative expense 30,000
The cost per blanket is:
a. $6.25.
b. $9.00.
c. $12.00.
d. $14.75.
ANS: C
Direct labor 55,000
Total manufacturing costs $240,000
$240,000 / 20,000 units = $12.00 cost per unit
44. Mountain Company produced 20,000 blankets in June to be sold during the holiday season. The
manufacturing costs were:
Direct labor 55,000
Management has decided that the mark-on percentage necessary to cover the product’s share of selling
and administrative expenses and to earn a satisfactory profit is 30%. The selling price per blanket should
be:
a. $12.00.
b. $15.60.
c. $23.60.
d. $31.20.
ANS: B

Direct labor 55,000
$240,000 / 20,000 units = $12.00 cost per unit
$12.00 x 30% = $3.60 + $12.00 = $15.60
45. The statement of costs of goods manufactured shows:
a. Office supplies used in accounting office.

b. Deprecation of factory building.
c. Salary of sales manager.
d. Rent paid on finished goods warehouse.
ANS: B
The depreciation of the factory building is a cost necessary to manufacture goods. The office supplies,
sales manager’s salary and warehouse rent are marketing and administrative costs and would not be
included in the Statement of Cost of Goods Manufactured.
46. Selected data concerning the past fiscal year's operations (000's omitted) of the Stanley Manufacturing
Company are presented below:
INVENTORIES
Beginning Ending
Materials $ 90 $ 85
Work in process 50 65

Finished goods 100 90
Other data:
Direct materials used $365
Total manufacturing costs charged to production during
the year (includes direct materials, direct labor, and factory
overhead) 680
Cost of goods available for sale 765
Selling and general expenses 250
Assuming Stanley does not use indirect materials, the cost of materials purchased during the year
amounted to:
a. $455.
b. $450.
c. $365.
d. $360.
ANS: D
Materials purchased added to Materials inventory at the beginning of the month results in the materials
available for use. During the year, the materials are used or they remain in the Materials inventory at
the end of the year, so the total of materials used and ending Materials inventory is also the total of the
amount of materials available. Therefore, the equation can be rearranged to compute the materials
purchases as follows:
Add ending inventory of materials 85
Materials available during the year $450
Less beginning inventory of materials 90
Purchases of materials during the year $360

INVENTORIES
Beginning Ending
Materials $ 90 $ 85
Other data:
overhead) 680
The cost of goods manufactured during the year was:
a. $735.
b. $710.
c. $665.
d. $705.
ANS: C
Beginning work in process inventory $ 50
Add total manufacturing costs during the year 680
Total $730
Less ending work in process inventory 65
Cost of goods manufactured during the year $665

INVENTORIES
Beginning Ending
Materials $ 90 $ 85
Other data:
overhead) 680
The cost of goods sold during the year was:
a. $730.
b. $775.
c. $675.
d. $765.
ANS: C
Beginning finished goods inventory $100
Add cost of goods manufactured during the year ($680 + $50 - $65) 665
Total cost of goods available for sale $765
Less ending finished goods inventory 90

Cost of goods sold during the year $675
49. Which of the following production operations would be most likely to employ a job order system of cost
accounting?
a. Candy manufacturing
b. Crude oil refining
c. Printing text books
d. Flour Milling
ANS: C
Printing would be most likely to employ a job order system of cost accounting due to the number of
custom jobs involved. The manufacture of candy, the vulcanizing of rubber, and the refining of crude oil
would normally be a continuous process of producing like goods and would be accounted for under the
process cost system.
50. A law firm wanting to track the costs of serving different clients may use a:
a. process cost system.

b. job order cost system.
c. cost control system.
d. standard cost system.
ANS: B
Professional firms use job order cost systems to track the costs of serving different clients.

51. When should process costing techniques be used in assigning costs to products?
a. In situations where standard costing techniques should not be used

b. If products manufactured are substantially identical
c. When production is only partially completed during the accounting period
d. If products are manufactured on the basis of each order received
ANS: B
Process costing techniques should be used in assigning costs to products if the product is composed of
mass-produced units that are substantially identical.
52. An industry that would most likely use process costing procedures is:
a. Beverage.
b. Home Construction.
c. Printing.
d. Shipbuilding.
ANS: A
Beverage production usually consists of continuous output of homogeneous products for which process
costing is used. The other three industries would utilize job order costing because each product or
group of products is made to order.
53. A standard cost system is one:
a. that provides a separate record of cost for each special-order product.

b. that uses predetermined costs to furnish a measurement that helps management make
decisions regarding the efficiency of operations.
c. that accumulates costs for each department or process in the factory.
d. where costs are accumulated on a job cost sheet.
ANS: B
A standard cost system uses predetermined standard costs to furnish a measurement that helps
management make decisions regarding the efficiency of operations.
54. In job order costing, the basic document for accumulating the cost of each job is the:
a. Job cost sheet.

b. Requisition sheet.
c. Purchase order.
d. Invoice.
ANS: A
In job order costing, the basic document to accumulate the cost of each job is the job cost sheet.
55. Under a job order cost system of accounting, the entry to distribute payroll to the appropriate accounts
would be:
a. Debit-Payroll
Credit-Wages Payable
b. Debit-Work in Process
Debit-Factory Overhead
Debit-Selling and Administrative Expense

Credit-Payroll
c. Debit-Work in Process
Debit-Finished Goods
Debit-Cost of Goods Sold
Credit-Payroll
d. Debit-Work in Process
Debit-Factory Overhead
Debit-Selling and Administrative Expense
Credit-Wages Payable
ANS: B
Payroll is credited when the amounts are distributed to the appropriate accounts. Those accounts
include Work in Process for direct labor, Factory Overhead for indirect labor and Selling and
Administrative Expense for salaries and wages incurred outside of the factory.
56. Under a job order system of cost accounting, the dollar amount of the entry to transfer inventory from
Work in Process to Finished Goods is the sum of the costs charged to all jobs:
a. In process during the period.

b. Completed and sold during the period.
c. Completed during the period.
d. Started in process during the period.
ANS: C
When jobs are completed during the period, Finished Goods is debited and Work in Process is credited
for the cost of the completed jobs.
57. Under a job order system of cost accounting, Cost of Goods Sold is debited and Finished Goods is
credited for a:
a. Transfer of materials to the factory.

b. Shipment of completed goods to the customer.
c. Transfer of completed production to the finished goods storeroom.
d. Purchase of goods on account.
ANS: B
When completed goods are shipped to customers, Cost of Goods Sold is debited and Finished Goods is
credited.
58. The Institute of Management Accountants (IMA) Statement of Professional Practice includes all of the
following standards except:
a. Confidentiality.
b. Commitment.
c. Integrity.
d. Competence.
ANS: B
The four IMA Professional Standards are: Competence, Confidentiality, Integrity and Credibility.
PTS: 1 DIF: Easy REF: Appendix OBJ: 2

59. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice,
performing professional duties in accordance with relevant laws, regulations and technical standards is a
component of which standard?
a. Competence
b. Confidentiality
c. Integrity
d. Credibility
ANS: A
Performing technical duties in accordance with relevant laws, regulations and technical standards is a
component of the competence standard.
PTS: 1 DIF: Moderate REF: Appendix OBJ: 2
60. According to the Institute of Management Accountants (IMA) Statement of Ethical Professional Practice,
under the Integrity Standard, each member has the responsibility to:
a. Communicate information fairly and objectively.

b. Keep information confidential.
c. Mitigate actual conflicts of interest.
d. Maintain an appropriate level of professional competence.
ANS: C
Under the Integrity Standard, IMA members have the responsibility to mitigate actual conflicts of
interest and avoid apparent conflicts of interest.
61. Tom Jones, a management accountant, was faced with an ethical conflict at the office. According to the
Institute of Management Accountants’ Statement of Professional Practice, the first action Tom should
pursue is to:
a. follow his organization’s established policies on the resolution of such conflict.

b. contact the local newspaper.
c. contact the company’s audit committee.
d. consult an attorney.
ANS: A
When faced with ethical issues, one should follow the organization’s established policies on the
resolution of such conflict. If these policies do not resolve the ethical conflict, one should consider
discussing the matter with one’s supervisor or, if it appears he or she is involved, other internal sources.
It is not appropriate to contact parties outside the organization unless it is the authorities if one believes
there is a violation of the law.
PROBLEM
1. Prepare a performance report showing both month and year-to-date data for Post Manufacturing’s
Machining Department for February, 2011 using the following data:
January February
Budgeted Data:
Machinists’ wages $6,200 $5,600
Supplies 3,200 3,000
Depreciation 2,000 2,000
Utilities 1,500 1,400
Actual Data:
Machinists’ wages $6,120 $5,650
Supplies 3,300 3,180
Depreciation 2,000 2,000
Utilities 1,580 1,390

ANS:
Post Manufacturing - Machining Department
Performance Report
For Period Ended February 28, 2011
Expense Budget Actual Variance
Feb Year-to- Februar Year-to- Februar Year-to-

ruary Date y Date y Date
Machinists’ wages $ 5,600 $11,800 $ 5,650 $11,700 $ 50 U $ 100 F
Supplies 3,000 6,200 3,180 6,480 180 U 280 U
Depreciation 2,000 4,000 2,000 4,000 -- --
Utilities 1,400 2,900 1,390 2,970 10 F 70 U
Total $12,000 $24,900 $12,220 $25,150 $ 220 U $ 250 U
2. The following data were taken from the general ledger of Data Corp., a retailer of computers and
accessories:
Merchandise Inventory, August 1 $ 323,000
Merchandise Inventory, August 31 296,000
Purchases 1,684,000
Compute the cost of goods sold for the month of August.
ANS:
Merchandise Inventory, August 1 $ 323,000
Plus Purchases 1,684,000

Merchandise Available for Sale 2,007,000
Less Merchandise Inventory, August 31 296,000
3. The following data were taken from the general ledger and other data of Spargus Manufacturing on May
31:
Work in Process, May 1 $ 75,000
Finished Goods, May 1 82,000
Materials purchased in May 122,000
Cost of goods manufactured in May 455,000
Marketing and administrative costs in May 64,000
Finished Goods, May 31 78,000
Work in Process, May 31 94,000
Compute the cost of goods sold for Spargus Manufacturing, selecting the appropriate items from the list
provided.
ANS:
Finished Goods Inventory, May 1 $ 82,000
Cost of Goods Available for Sale 537,000
Less Finished Goods Inventory, May 31 78,000

4. The following data were taken from Middletown Merchandisers on July 31, for the first month of its
fiscal year:
Merchandise Inventory, July 31 $ 25,000
Purchases 735,000
Cost of Goods Sold 750,000
Compute the inventory at July 1.
ANS:
Plus Merchandise Inventory, July 31 25,000
Equals Cost of Goods Available for Sale $775,000
Less Purchases 735,000
Equals Merchandise Inventory, July 1 $ 40,000
5. Campus Carriers Co. manufactures and sells backpacks to college students. Campus Carriers operates a
factory in Small Town and two stores in College Town and University City. Classify the following costs
incurred by Campus Carriers as Direct Materials, Direct Labor, Factory Overhead or Selling and
Administrative Expense.
a. Rent paid to lease the store in College Town.
b. Canvas fabric.
c. Wages paid to students distributing advertising fliers in University City.

d. Sewing machine operator’s wages.
e. Building depreciation on the factory building.
f. Thread.
g. The cost of transporting the backpacks from the factory in Small Town to the
University City store.
h. Depreciation of the racks and shelves at the College Town Store.
i. Factory manager’s salary.
j. Security guard at the factory.
k. Store manager’s salary.
l. Electricity to power sewing machines.
m. Electricity to light the College Town store.
ANS:
a. Selling and administrative expense would include costs related to stores.
b. Direct material - canvas would be used to make back packs.
c. Selling and administrative expense would include advertising.
d. Direct labor - sewing machine operators are “touch” labor.
e. Factory overhead - depreciation is a factory expense that cannot be traced directly to the
products.
f. Factory overhead. While thread is included in the final product, the cost is
insignificant and would be accounted for as an indirect cost.
g. Selling and administrative expense. Transportation is incurred outside of the factory.
h. Selling and administrative expense would include costs relating to the stores.
i. Factory overhead - the factory manager’s salary is a factory cost that cannot be traced directly
to products.
j. Factory overhead - the security guard’s salary is a factory cost that cannot be traced directly to
products.
k. Selling and administrative expense would include all costs related to the stores.
l. Factory overhead - electricity to run the machines is a factory cost that cannot be traced directly
to products..
m. Selling and administrative expense would include all costs related to the stores.
6. The following inventory data relate to the Reta Company:
INVENTORIES
Beginning Ending
Finished goods $80,000 $100,000
Work in process 65,000 70,000
Direct materials 60,000 64,000
Revenues and costs for the period:
Sales $740,000
Cost of goods available for sale 650,000
Total manufacturing costs 575,000
Direct materials used 164,000
Selling and administrative expenses 51,000

Compute the following for the year:
a. Direct materials purchased

b. Direct labor costs incurred
c. Cost of goods sold
d. Gross profit
ANS:
(a)
Direct materials used during the period $164,000
Add inventory of direct materials at the end of the period 64,000
Direct materials available during the period $228,000
Less inventory of direct materials at the beginning of the period 60,000
Direct materials purchased during the period $168,000
(b)
Total manufacturing costs incurred during the period $575,000
Less: Direct materials used $164,000
Factory overhead incurred 154,000 318,000
Direct labor costs incurred during the period $257,000
(c)
Cost of goods available for sale $650,000
Less finished goods inventory at the end of the period 100,000
Cost of goods sold during the period $550,000
(d)
Sales $740,000
Cost of goods sold 550,000
Gross profit $190,000
PTS: 1 DIF: Hard REF: P. OBJ: 4,5
7. The following inventory data relate to the Reta Company:
INVENTORIES
Beginning Ending
Finished goods $80,000 $100,000
Direct materials 60,000 64,000
Revenues and costs for the period:
Sales $740,000
Direct materials used 164,000
Prepare journal entries for the following, making any necessary computations:
a. Purchase of materials on account

b. Issuance of materials into production
c. Transfer the cost of completed work to Finished Goods
d. Record the sale of the goods on account and the related cost of goods sold.
ANS:
(a)
Direct materials used during the period $164,000
Add inventory of direct materials at the end of the period 64,000
Direct materials available during the period $228,000
Less inventory of direct materials at the beginning of the period 60,000
Direct materials purchased during the period $168,000
Materials 168,000
Accounts Payable 168,000
(b)
Work in Process 164,000
Materials 164,000
(c)
Work in Process Inventory, beginning of the period $ 65,000
Plus Total Manufacturing Costs 575,000
$640,000
Less Work in Process Inventory, end of the period 70,000
Cost of Goods Manufactured $570,000
Finished Goods 570,000
(d)
Finished Goods Inventory, beginning of the period $ 80,000
Cost of Goods Available for Sale $650,000
Less Finished Goods Inventory, end of the period 100,000
Accounts Receivable 740,000
Sales 740,000
PTS: 1 DIF: Hard REF: P. OBJ: 4,5
8. Following is a list of costs incurred by the Sitka Products Co. during the month of June:
Direct materials used $12,000 Expired insurance $3,000
Indirect materials used 3,000 Utilities 800
Direct labor employed 20,000 Repairs 700
Indirect labor employed 4,500 Depreciation expense

Selling expenses 6,000 --Machinery and equipment 1,200
Prepare the journal entries necessary to record the issuance of materials, the distribution of labor cost,
the recording of factory overhead, and the entry transferring Factory Overhead to Work in Process.
ANS:
Work in Process (Direct Materials) 12,000
Factory Overhead (Indirect Materials) 3,000
Materials 15,000
Work in Process (Direct Labor) 20,000
Factory Overhead (Indirect Labor) 4,500
Payroll 24,500
Factory Overhead 5,700
Prepaid Insurance 3,000
Accounts Payable (Utilities) 800
Accounts Payable (Repairs) 700
Accumulated Depreciation (Machinery and Equipment) 1,200
9. The following data was taken from the general ledger and other records of Martinez Manufacturing Co.
at July 31, the end of the first month of operations in the current fiscal year:
Sales $50,000
Materials inventory (July 1) 15,000
Work in process inventory (July 1) 20,000
Finished goods inventory (July 1) 28,000
Materials purchased 21,000
Direct labor cost 12,500
Factory overhead (including $5,000 of indirect materials used and $2,500 of

indirect labor cost)
11,500
Selling and administrative expense 8,000
Inventories at July 31:

Materials 16,000
Work in process 18,000
Finished goods 30,000
a. Prepare a statement of cost of goods manufactured.

b. Determine the cost of goods sold for the month.
ANS:
(a)
Martinez Manufacturing Co.
Statement of Cost of Goods Manufactured
For the Month Ended July 31, 20--
Direct Materials:
Inventory, July 1 $15,000
Purchases 21,000
Total cost of available materials $36,000
Less inventory, July 31 16,000
Cost of materials used $20,000
Less indirect materials used 5,000
Cost of direct materials used in production $15,000
Direct labor 12,500
Factory overhead:
Indirect materials $ 5,000
Indirect labor 2,500

Other 4,000
Total factory overhead 11,500
Total manufacturing cost $39,000
Add work in process inventory, July 1 20,000
Total $59,000
Less work in process inventory, July 31 18,000
Cost of goods manufactured during the month $41,000
(b)
Finished goods inventory, July 1 $28,000
Add cost of goods manufactured during July 41,000
Goods available for sale $69,000
Less finished goods inventory, July 31 30,000
Cost of goods sold $39,000
10. The following data was taken from the general ledger and other records of Marwick Manufacturing Co.
at January31, the end of the first month of operations in the current fiscal year:
Sales $650,000
Inventories at January 31:

Materials inventory 20,000
Work in process inventory 32,000
Finished goods inventory 54,000
Inventories at January 1:
Materials 25,000

Materials purchased 154,000
Labor Costs:
Sales personnel salaries 52,000
Depreciation:
Factory building 73,000
Sales office 28,000
Indirect materials used 3,000
Factory utilities 67,000
a. Prepare a statement of cost of goods manufactured.

b. Determine the cost of goods sold for the month.
ANS:
(a)
Marwick Manufacturing Co.
Statement of Cost of Goods Manufactured
For the Month Ended January 31, 20--
Direct Materials:
Inventory, January 1 $25,000
Purchases 154,000
Total cost of available materials $179,000
Less inventory, July 31 20,000
Cost of materials used $159,000
Less indirect materials used 3,000

Cost of direct materials used in production $156,000
Direct labor 185,000
Factory overhead:
Indirect materials $ 3,000
Indirect labor (Supervisors) 30,000
Depreciation 73,000
Utilities 67,000
Total factory overhead 173,000
Total manufacturing cost $514,000
Add work in process inventory, January 1 29,000
Total $543,000
Less work in process inventory, January 31 32,000
Cost of goods manufactured during the month $511,000
(b)
Finished goods inventory, January 1 $48,000
Add cost of goods manufactured during July 511,000
Goods available for sale $559,000
Less finished goods inventory, January 31 54,000
11. Custom Cabinets Inc. manufactures goods on a job order basis. During the month of November, three
jobs were started. (There was no work in process at the beginning of the month.) Jobs 401 and 402
were completed and sold for $14,500 and $19,000, respectively, during the month; Job 403 was still in
process at the end of November.
The following data are taken from the job cost sheets for each job. Factory overhead charges include a
total of $900 of indirect materials and $600 of indirect labor. One work in process control account is
used.
Job 401 Job 402 Job 403

Direct materials $3,200 $3,800 $2,000
Direct labor 2,400 3,500 1,500
Factory overhead 1,250 2,000 850
Prepare a journal entry to record each of the following:
a. Materials used
b. Factory wages and salaries earned
c. Factory Overhead transferred to Work in Process
d. Jobs completed
e. Jobs sold
ANS:
(a)
Work in Process (3,200 + 3,800 + 2,000) 9,000
Factory Overhead 900
Materials 9,900
(b)
Work in Process (2,400 + 3,500 + 1,500) 7,400
Payroll 8,000
(c)
Work in Process (1,250 + 2,000 + 850) 4,100
(d)
Work in Process* 16,150
* Jobs completed:
401 (3,200 + 2,400 + 1,250) $ 6,850
402 (3,800 + 3,500 + 2,000) 9,300
Total $16,150
(e)
Accounts Receivable (14,500 + 19,000) 33,500
Sales 33,500
12. The Shawshank Manufacturing Co. uses a job order cost system of accounting. The following
information was taken from the books of the company after all posting had been completed at the end
of January:
Jobs Direct Direct Factory Units
Completed Materials Cost Labor Cost Overhead Completed

101 $1,800 $2,000 $1,000 200
102 1,235 1,250 890 150
104 900 850 350 100
a. Prepare the journal entries to allocate the costs of materials, labor, and factory
overhead to each job and to transfer the costs of jobs completed to Finished Goods.
b. Compute the total production cost of each job.
c. Compute the unit cost of each job.
d. Compute the selling price per unit for each job, assuming a mark-on percentage of
40 percent.
ANS:
(a)
Work in Process--Job 101 1,800
Work in Process--Job 104 900
Materials 3,935
Payroll 4,100

(b)
Total
Jobs Direct Direct Factory Production
Completed Materials Cost Labor Cost Overhead Cost

101 $1,800 $2,000 $1,000 $4,800
102 1,235 1,250 890 3,375
104 900 850 350 2,100
Total $3,935 $4,100 $2,240 $10,275
(c)
Unit Cost:
Job 101 ($4,800 / 200) $24.00
Job 102 ($3,375 / 150) $22.50
Job 104 ($2,100 / 100) $21.00
(d)
Selling Price Per Unit:

Job 101 ($24.00  40%) + $24.00 $33.60
Job 102 ($22.50  40%) + $22.50 $31.50
Job 104 ($21.00  40%) + $21.00 $29.40

CHAPTER 2—ACCOUNTING FOR MATERIALS
MULTIPLE CHOICE
1. An effective cost control system should include:
a. An established plan of objectives and goals to be achieved.

b. Regular reports showing the difference between goals and actual performance.
c. Specific assignment of duties and responsibilities.
d. All of these are correct.
ANS: D
An effective cost control system should include an established plan of goals and objectives, reports
comparing budgeted goals to actual performance, and assignment of specific duties and responsibilities
to operating personnel.
NAT: IMA 1C - Internal Controls TOP: AACSB - Analytic
2. To effectively control materials, a business must maintain:
a. Limited access.
b. Combination of duties.
c. Safety stock.
ANS: A
To control materials a business must maintain limited access, segregation of duties, and accuracy in
recording.

3. Janet is the purchasing agent at Frameco Manufacturing. Her duties include vendor selection and
ordering materials. Due to a recent economic downturn and resulting cut backs, Janet has been assigned
the additional duty or preparing receiving reports after comparing the goods received to the purchase
order. This is an example of:
a. unlimited access to materials.

b. independence of assigned functions.
c. misappropriation of assets.
d. a lack of segregation of duties.
ANS: D
Because Janet’s job as a purchasing agent involves preparing the purchase orders and she is also
comparing items received to the purchase orders, there is a lack of segregation of duties. This increases
the potential for the misappropriation of assets, but there is not enough information given to determine
that a misappropriation has indeed occurred.
NAT: IMA 1C - Internal Controls TOP: AACSB - Reflective
4. Marley Company hired a consultant to help improve its operations. The consultant’s report stated that
Marley’s inventory levels are excessive and cited several negative consequences to Marley as a result.
Which of the following was not cited in the report?
a. Possible other uses for working capital now tied up in inventory

b. Production stoppages due to parts not being available
c. Higher property taxes and insurance costs
d. Large quantities of obsolete materials
ANS: B
It is important to maintain inventories of sufficient size and variety to meet production needs. However,
if Marley’s inventories are excessive, it is likely that parts are available for production, but the excess
inventory is resulting in higher costs related to holding those items such as property taxes and insurance
and potential losses from obsolescence or deterioration. Funds invested in inventories could be used
for other purposes.
NAT: IMA 3A - Strategic Management TOP: AACSB - Reflective

5. The data used to calculate the order point include all of the following except:
a. the costs of placing an order.

b. the rate at which the material will be used.
c. the estimated time interval between the placement and receipt of an order.
d. the estimated minimum level of inventory needed to protect against stockouts.
ANS: A
Calculating an order point is based on usage, lead time and safety stock. The cost of placing an order is
used in determining the economic order quantity.
NAT: IMA 3A - Strategic Management TOP: AACSB - Reflective
6. Sully Company uses 3,000 yards of canvas each day to make tents. It usually takes ten days from the
time Sully orders the material to when it is received. If Sully’s desired safety stock is 12,000 yards, what
is Sully’s order point?
a. 12,000 yards
b. 21,000 yards
c. 30,000 yards
d. 42,000 yards
ANS: D
3,000 (daily usage) x 10 (lead time) 30,000

Safety stock 12,000
Order point 42,000
NAT: IMA 3A - Strategic Management TOP: AACSB - Analytic
7. What is the objective of the economic order quantity (EOQ) model for inventory?
a. To minimize order costs or carrying costs, whichever are higher
b. To minimize order costs or carrying costs and maximize the rate of inventory turnover
c. To minimize the total order costs and carrying costs over a period of time
d. To order sufficient quantity to economically meet the next period's demand
ANS: C
If the demand for the product can be determined because it is predictable, the essence of any EOQ
model for inventory is to minimize the total order costs and also minimize the total carrying costs.
8. Order costs would include all of the following except:
a. Receiving clerk’s wages.

b. Storeroom keeper’s wages.
c. Purchasing department’s telephone bill.
d. Transportation in.
ANS: B
Costs related to the purchase and receipt of materials are considered order costs while costs related to
the storage and maintenance of materials are considered storage costs. The storeroom keeper’s wages
would be a storage cost.
9. Expected annual usage of a particular raw material is 1,200,000 units, and standard order size is 10,000
units. The invoice cost of each unit is $145, and the cost to place one purchase order is $105. The
estimated annual order cost is:
a. $12,000.
b. $17,400.
c. $12,600.
d. $800,000.
ANS: C
Annual order cost = Number of orders  Per order cost
= 1,200,000 units  $105

10,000 units
= 120 orders  $105

= $12,600
10. Carrying costs would include all of the following except:
a. Warehouse rent.
b. Inspection employees’ wages.
c. Losses due to obsolescence.
d. Property taxes.
ANS: B
Costs related to the purchase and receipt of materials are considered order costs while costs related to
the storage and maintenance of inventory are considered storage costs. Inspection would typically
happen upon receipt of goods making this an order cost.
11. The following data refer to various annual costs relating to the inventory of a single-product company
that requires 10,000 units per year:
Cost per unit
Order cost $ .05
Transportation-in on purchases .18
Storage .16
Insurance .10
Total per year

Interest that could have been earned on alternate investment of funds $800
What is the annual carrying cost per unit?
a. $ .21
b. $ .29
c. $ .34
d. $ .44
ANS: C
The carrying costs will consist of the per unit costs for storage, insurance, and interest on the inventory
investment.
Carrying costs:
Storage $.16
Insurance .10
Interest $800
= .08
Units required 10,000
Carrying costs $.34

12. The following data pertains to Western Company’s materials inventory:
Number of pounds required annually 16,000

Cost of placing an order $20
Annual carrying cost per pound of material $4
What is Western Company’s EOQ?
a. 4,000 pounds
b. 800 pounds
c. 400 pounds
d. 200 pounds
ANS: C
= 400
13. Expected annual usage of a particular raw material is 180,000 units, and standard order size is 12,000
units. The invoice cost of each unit is $300, and the cost to place one purchase order is $80. Assuming
the company does not maintain safety stock, the average inventory is:
a. 10,000 units.
b. 7,500 units.
c. 15,000 units.
d. 6,000 units.
ANS: D
Average inventory = 12,000 (standard-size order)

2
= 6,000 units
14. Gedye Company has correctly computed its economic order quantity at 500 units; however,
management feels it would rather order in quantities of 600 units. How should Gedye's total annual
order cost and total annual carrying cost for an order quantity of 600 units compare to the respective
amounts for an order quantity of 500 units?
a. Higher total order cost and lower total carrying cost

b. Lower total order cost and higher total carrying cost
c. Higher total order cost and higher total carrying cost
d. Lower total order cost and lower total carrying cost
ANS: B
If orders were placed for 600 units instead of EOQ of 500 units, fewer purchase orders would have to be
placed to acquire the total units required for production, thereby reducing the total order cost.
However, due to the larger number of units ordered each time, the number of units stored would be
greater and a higher total carrying cost would result.
NAT: IMA 3A - Strategic Planning TOP: AACSB - Reflective
15. The personnel involved in the physical control of materials includes all of the following except the:
a. Purchasing agent.
b. Receiving clerk.
c. Cost accountant.
d. Production department supervisor.
ANS: C
The cost accountant has the responsibility for the accounting records pertaining to inventory valuation
but not for the physical materials.
NAT: IMA 1C - Internal Controls TOP: AACSB - Reflective
16. The employee who is responsible for preparing purchase requisitions is most likely the:
a. Storeroom keeper.
b. Purchasing agent.
c. Production supervisor.
d. Receiving clerk.
ANS: A
The storeroom keeper is usually the employer responsible for preparing purchase requisitions when the
stock is running low to notify the purchasing agent that the inventory needs to be replenished.
17. Sam Jones works at Seeker, Inc. Sam’s duties include identifying where materials can be obtained most
economically, placing orders and verifying invoices and approving them for payment. Sam is a(n):
a. receiving clerk.
b. accounts payable clerk.
c. purchasing agent.
d. production supervisor.
ANS: C
The duties described are those of a purchasing agent. The receiving clerk counts and identifies materials
received and prepares a receiving report. The accounts payable clerk is responsible for issuing payment
to vendors. The production supervisor is responsible for preparing materials requisitions for materials
needed for production.
NAT: IMA 2B - Cost Management TOP: AACSB Reflective
18. The form used to notify the purchasing agent that additional materials are needed is known as a:
a. Purchase order.
b. Vendor's invoice.
c. Receiving report.
d. Purchase requisition.
ANS: D
The storeroom keeper prepares a purchase requisition to notify the purchasing agent that additional
materials are needed.
19. The form prepared by the purchasing agent and sent to the vendor to obtain materials is known as a:
a. Materials requisition.
b. Purchase requisition.
c. Purchase order.
d. Vendor's invoice.
ANS: C
The purchase order is prepared by the purchasing agent and sent to the vendor to order materials.
20. A receiving report would include all of the following information except:
a. What the shipment contained.

b. The purchase order number.
c. The customer.
d. The date the materials were received.
ANS: C
It is unlikely the receiving report would contain the customer name; however, a listing of what the
shipment contained, the purchase order number and the date of the receipt would be necessary
information used in matching the receiving report to the vendor’s invoice and the purchase order.
21. Listed below are steps of purchasing and receiving materials:
1. The receiving clerk prepares a receiving report.
2. Purchase requisitions are prepared to notify the purchasing agent that additional
materials are needed.
3. The purchase of merchandise is recorded by the accounting department.
4. The purchasing agent completes a purchase order.
In which order would these events typically happen?
a. 4, 2, 3, 1
b. 2, 4, 3, 1
c. 2, 4, 1, 3
d. 4, 2, 1, 3
ANS: C
The storeroom keeper will prepare a purchase requisition to notify the purchasing agent that additional
materials are needed. The purchasing agent will then complete a purchase order and send it to the
vendor. When the goods are received, the receiving clerk will prepare a receiving report which is
compared to the vendor’s invoice and the purchase order. At that time, the accounting department will
record the purchase of the inventory items in the general ledger.
22. The duties of the purchasing agent would include all of the following except:
a. Placing purchase orders.

b. Counting and identifying materials received.
c. Compiling information that identifies vendors and prices.
d. Verifying invoices and approving them for payment.
ANS: B
The receiving clerk is responsible for counting and identifying the materials received.
23. The form that serves as authorization to withdraw materials from the storeroom is known as the:
a. Materials requisition.
b. Purchase order.
c. Purchase requisition.
d. Returned materials report.
ANS: A
The materials requisition is prepared by the production department supervisor or an assistant and is
presented to the storeroom keeper as authorization for the withdrawal of materials.
24. If a company receives a larger quantity of goods than had been ordered and keeps the excess for future
use, a(n)______________ is prepared to notify the vendor of the amount of increase to accounts
payable in the invoice.
a. credit memorandum
b. return shipping order
c. debit memorandum
d. additional purchase order
ANS: A
A Debit or credit memorandum may be issued when the shipment of materials does not match the
purchase order and the invoice. In this case, since more materials than ordered and billed were
received, the company would issue a credit memorandum to increase accounts payable.
25. The Bisset Corporation uses Raw Material A in a manufacturing process. Information as to balances on
hand, purchases, and requisitions of Raw Material A is given in the following table.
Raw Material A
Transactio Number of Unit Price Balance of

n Units Units
Date
Jan. 1 Beginning balance 100 $1.40 100
Jan. 24 Purchased 300 $1.55 400
Feb. 8 Issued 80 320
Mar. 16 Issued 140 180
Jun. 11 Purchased 150 $1.62 330
Aug. 18 Issued 130 200
Sep. 6 Issued 110 90
Oct. 15 Purchased 150 $1.70 240
Dec. 29 Issued 140 100

If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, the March 16 issue will
consist of:
a. 20 units @ $1.40 and 120 units @ $1.55.

b. 100 units @ $1.40 and 40 units @ $1.55.
c. 140 units @ $1.55.
d. 100 units @ $1.55 and 40 units @ $1.40.
ANS: A
On a FIFO basis, 20 of the units issued on March 16 would have been assigned a cost of $1.40 per unit
and the remaining 120 units issued on that date would have been assigned a cost of $1.55 per unit as
follows:
Number of Units issued on Units issued on

Units February 8 March 16
Unit Price
Beginning Balance 100 $1.40 80 20

Jan. 24 Purchase 300 $1.55 120
Raw Material A

n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330
Oct. 15 Purchased 150 $1.70 240
If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, the September 6 issue
will consist of:
a. 10 units @ $1.40, 80 units @ $1.55 and 20 units @ $1.62.

b. 50 units @ $1.40 and 60 units @ $1.55.
c. 110 units @ $1.55.
d. 50 units @ $1.55 and 60 units @ $1.62.
ANS: D
On a FIFO basis, 50 of the units issued on September 6 would have been assigned a cost of $1.55 per
unit and the remaining 60 units issued on that date would have been assigned a cost of $1.62 per unit as
follows:
Number of Units Units Units Units

Units issued on issued on issued on issued
Unit Price
Feb. 8 Mar. 16 Aug. 18 on Sep.6
Beginning Balance 100 $1.40 80 20

Jan. 24 Purchase 300 $1.55 120 130 50
Jun. 11 Purchase 150 $1.62 60

Raw Material A

n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330
Oct. 15 Purchased 150 $1.70 240
If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, 200 units on hand on
August 18 will consist of:

b. 100 units @ $1.55 and 100 units @ $1.62.
c. 150 units @ $1.62 and 50 units @ $1.55.
d. 200 units @ $1.55.
ANS: C
On a FIFO basis, 50 of the units on hand at August 18 would have been assigned a cost of $1.55 per unit
and the remaining 150 units on hand at that date would have been assigned a cost of $1.62 per unit as
follows:
Number of Units Units Units Units in
Units issued on issued on issued on Inventory
Unit
Feb. 8 Mar. 16 Aug. 18 on Aug.18
Price
Beginning Balance 100 $1.40 80 20 --

Jan. 24 Purchase 300 $1.55 120 130 50
Jun. 11 Purchase 150 $1.62 150
28. The inventory method which results in the prices paid for earliest purchases assigned to cost of goods
sold is:
a. First-in, first-out.
b. Last-in, first-out.
c. Last-in, last-out.
d. Moving average.
ANS: A
First-in, first-out (FIFO) results in the oldest costs being assigned to cost of goods sold.
29. The inventory method which results in the most recent costs being assigned to inventory on hand at the
end of the period is:
d. Moving average.
ANS: A
First-in, first-out (FIFO) results in the most recent costs being assigned to ending inventory because the
oldest costs are assigned to issues first.
Raw Material A

n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330
Oct. 15 Purchased 150 $1.70 240
If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the March 16 issue will
consist of:
a. 20 units @ $1.40 and 120 units @ $1.55.

b. 100 units @ $1.40 and 40 units @ $1.55.
c. 140 units @ $1.55.
d. 100 units @ $1.55 and 40 units @ $1.40.
ANS: C
On a LIFO basis, the 140 units issued on March 16 would have been assigned a cost of $1.55 per unit as
follows:
Number of Units issued on Units issued on

Units February 8 March 16
Unit Price
Beginning Balance 100 $1.40

Jan. 24 Purchase 300 $1.55 80 140
Raw Material A

n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330

Oct. 15 Purchased 150 $1.70 240
If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the September 6 issue
will consist of:

b. 110 units @ $1.55.
c. 50 units @1.55 and 60 units @ 1.62.
d. 20 units @ $1.62 and 90 units @ $1.55.
ANS: A
On a LIFO basis, 20 of the units issued on September 6 would have been assigned a cost of $1.62 per
unit, 80 of the units issued would have been assigned a cost of $1.55 per unit and the remaining 10 units
issued on that date would have been assigned a cost of $1.40 per unit.
Number of Units Units Units Units

Units issued on issued on issued on issued
Unit Price
Feb. 8 Mar. 16 Aug. 18 on Sep.6
Beginning Balance 100 $1.40 10

Jan. 24 Purchase 300 $1.55 80 140 80
Jun. 11 Purchase 150 $1.62 130 20
Raw Material A
n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330
Oct. 15 Purchased 150 $1.70 240
If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the 200 units in
inventory at August 18 will consist of:
a. 50 units @ $1.62 and 150 units @ $1.55.

b. 100 units @ $1.40 and 100 units @ $1.55.
c. 20 units @ $1.62, 80 units @ $1.55 and 100 units @ $1.40.
d. 100 units @ $1.40, 60 units @ $1.55 and 40 units @ $1.62.
ANS: C
On a LIFO basis, 20 of the units in inventory at August 18 would have been assigned cost per unit of
$1.62, 80 of the units on hand would have been assigned a cost per unit of $1.55 and the remaining 100
units in inventory on that date would have been assigned a unit cost of $1.40 as follows:
Number of Units Units Units Units in

Units issued on issued on issued on Inventory
Unit Price
Feb. 8 Mar. 16 Aug. 18 Aug. 18
Beginning Balance 100 $1.40 100
Jan. 24 Purchase 300 $1.55 80 140 80
Jun. 11 Purchase 150 $1.62 130 20
33. The inventory method which results in the most recent cost being assigned to cost of goods sold is:
d. Moving average.
ANS: B
Last-in, first-out (LIFO) results in the most recent costs being assigned to cost of goods sold.
34. The inventory method which results in the prices paid for the earliest purchases being assigned to
inventory on hand at the end of the period is:
d. Moving average.
ANS: B
Last-in, first-out (LIFO) results in the oldest costs being assigned to ending inventory because the most
recent costs are assigned to issues first.

Raw Material A

n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330
Oct. 15 Purchased 150 $1.70 240
If a perpetual inventory record of Raw Material A is maintained on a moving average basis, the 140 units
issued on March 16 will have a unit cost of:
a. $1.5125.
b. $1.475.
c. $1.55.
d. $1.4375.
ANS: A
On a moving average basis, the 140 units issued on March 16 would have a unit cost of $1.5125 as
follows:
Number of
Units
Unit Price Total Cost
Beginning Balance 100 $1.40 $140.00

Jan. 24 Purchase 300 $1.55 465.00
400 $605.00
Average cost for both the February 8 and March 16 issue would be $1.5125 ($605 / 400 units).
Raw Material A

n Units Units
Date
Jan. 24 Purchased 300 $1.55 400
Jun. 11 Purchased 150 $1.62 330
Oct. 15 Purchased 150 $1.70 240

If a perpetual inventory record of Raw Material A is maintained on a moving average basis, the 330
items in inventory on June 11 will have a unit cost of:
a. $1.51.
b. $1.5233.
c. $1.5614.
d. $1.5125.
ANS: C
On a moving average basis, the 330 units in inventory on June 11 would be assigned a cost per unit of
$1.5614 as follows:
Number of
Units
Unit Price Total Cost
Beginning Balance 100 $1.40 $140.00

Jan. 24 Purchase 300 $1.55 465.00
400 $605.00 605.00/400 = 1.5125
Feb. 8 Issue 80 $1.5125 121.00
Mar. 16 Issue 140 $1.5125 211.75
180 272.25
Jun. 11 Purchase 150 $1.62 243.00
330 $515.25
Average cost per unit for the June 11 inventory would be $1.5614 ($515.25 / 330 units).

37. In a period of rising prices, the use of which of the following cost flow methods would result in the
lowest tax liability?
a. FIFO
b. LIFO
c. Weighted average cost
d. Moving average cost
ANS: B
Under the LIFO method, the most recent purchases, which were the most expensive, would be
considered to be the goods sold. This would result in higher cost of goods sold, thus lower gross
margins which in turn would result in lower income taxes.
38. In a period of rising prices, the use of which of the following cost flow methods would result in the
lowest cost of goods sold?
a. FIFO
b. LIFO
c. Weighted average cost
d. Moving average cost
ANS: A
Under the FIFO method, the earliest purchases, which were least the expensive, would be considered to
be the goods sold. Thus, cost of goods sold would be lower.
39. When selecting a method of inventory costing, a company must consider all of the following except:
a. federal and state income tax regulations.

b. current economic conditions.
c. the flow of materials.
d. its rate of inventory turnover.
ANS: C
The flow of materials does not dictate the flow of costs. Companies must consider tax regulations and
current economic conditions, including the rate of inflation, particularly as they relate to LIFO. In
addition, companies that turn over inventory rapidly may not be as concerned as companies that hold
inventory for longer periods of time as the impact of rising prices will not be as dramatic.
40. At the end of the period, the balance in the Materials account should represent
a. the cost of materials purchased.

b. the cost of materials on hand.
c. the cost of materials issued into production.
d. the cost of materials included in Work in Process and Finished Goods.
ANS: B
At the end of the period, the balance in the Materials account should represent the cost of materials on
hand. Materials purchased increase the Materials account while materials that have been issued into
production, which would be included in Work in Process, Finished Goods and Cost of Goods Sold, would
have decreased the Materials account.
41. The general ledger entry to record the purchase of materials is:
a. Debit-Purchases Received
Credit-Purchase Orders Outstanding

b. Debit-Materials
Credit-Purchase Orders Outstanding
c. Debit-Purchases Received
Credit-Accounts Payable
d. Debit-Materials
Credit-Accounts Payable
ANS: D
The Materials account is debited and Accounts Payable is credited when materials are purchased.
Purchase orders are not recorded in the general ledger.
42. The journal entry to record undamaged direct materials returned to the storeroom would be:
a. Debit - Materials
Credit - Finished Goods
b. Debit - Factory Overhead
Credit - Work in Process
c. Debit - Materials
Credit - Factory Overhead
d. Debit - Materials

ANS: D
The entry to record the return of direct materials to the storeroom is the reverse of the entry that is
made when the materials are issued to production.
43. If the amount of materials on hand at the end of the period is less than the control account balance, the
control account balance should be decreased by the following entry:
a. Debit - Work in Process
Credit - Materials
b. Debit - Materials
Credit - Factory Overhead
c. Debit - Materials
d. Debit - Factory Overhead
Credit - Materials
ANS: D
If the amount of materials on hand per the physical count is less than the control account balance, the
balance should be decreased by a debit to a factory overhead account (usually called Inventory Short
and Over), because differences may be due to damage, theft or errors and usually cannot be easily
identified with a specific job, and a credit to Materials.

44. Inventory levels for firms using JIT inventory systems compared to firms not using JIT will be:
a. Higher for both work in process and finished goods.

b. Higher for work in process and finished goods but lower for raw materials.
c. Lower for raw materials, work in process, and finished goods.
d. Higher for finished goods but lower for raw materials and work in process.
ANS: C
Manufacturers using just-in-time inventory systems will maintain lower inventory levels for all three
types of inventories. Materials are delivered in time to be placed in production. Work in Process
inventories are minimized by eliminating inventory buffers between work cells and Finished Goods
inventories are eliminated because items are produced as customers order them.
45. Just-in-time production techniques:
a. Require inventory buffers between work centers.

b. Were first utilized by U.S. manufacturers and later exported to Japan.
c. Produce goods for inventory with the hope that demand for these goods will then be
created.
d. Require a high degree of cooperation and coordination between supplier and
manufacturer.
ANS: D
A just-in-time inventory system is a “pull” inventory system ultimately driven by customer demand so
goods are not produced in the hope of selling them. In addition, inventory buffers are minimized as
production on units in one manufacturing cell is started only when the subsequent operation requests
them. For a just-in-time inventory system to be effective, suppliers must be in close proximity to
customers to enable the delivery of raw materials to coincide with production's need for them.

46. Harrison Industries produces 4,000 lunch boxes each day. The average number of units in work in
process is 12,000, having an average cost of $60,000. The annual carrying costs relating to inventory are
10%.
Consultants have determined that the work in process could be reduced by as much as a third by
rearranging the factory floor. What is the current throughput time?
a. Eight hours
b. One day
c. Two days
d. Three days
ANS: D
Throughput is the amount of time it takes a unit to get through the system.
Units in work in process = 12,000 = 3 days.
Daily production 4,000
process is 12,000, having an average cost of $60,000. The annual carrying costs related to inventory are
10%.
rearranging the factory floor. What would the throughput time be if Harrison implements the
recommended changes?
a. Twelve hours
b. One day
c. Two days
d. Three days
ANS: C
Throughput is the amount of time it takes a unit to get through the system.
Units in work in process = 12,000 = 3 days x 1/3 = 1 day reduction
Daily production 4,000
Three days less one day = two days
process is 12,000, having an average cost of $60,000. The annual carrying costs related to inventory are
10%.
rearranging the factory floor. What would the reduction in annual carrying costs be if Harrison is able to
implement the recommended changes?
a. $2,000
b. $1,500
c. $6,000
d. $4,000
ANS: A
Carrying cost = Average work in process inventory x carrying cost percentage
Existing situation - $60,000 x 10% = $6,000
Inventory reduction $60,000 x 1/3 = $20,000 reduction
New average inventory = $60,000 - $20,000 = $40,000 x 10% = $4,000

$6,000 - $4,000 = $2,000 reduction
49. The accounting system used with JIT manufacturing is called:
a. Backflush costing.
b. The push system.
c. Perpetual inventory costing.
d. First-in, first-out.
ANS: A
The accounting system used with JIT is called backflush costing.
50. In a backflush accounting system, a single account is used for the following:
a. Work in process and finished goods inventories.

b. Finished goods inventories and cost of goods sold.
c. Factory overhead and raw materials.
d. Raw materials and work in process inventories.
ANS: D
In a backflush accounting system, a single account, Raw and In Process is used because in just-in-time or
JIT manufacturing, materials are delivered directly into production.
51. Under a backflush accounting system, the following entry is made when products are completed:
a. Debit-Finished Goods
Credit-Work In Process
b. Debit-Cost of Goods Sold
Credit-Raw and In Process
Credit-Conversion Costs
c. Debit-Finished Goods
Credit-Raw and In Process
Credit-Conversion Costs
d. Debit-Cost of Goods Sold
Credit-Finished Goods
ANS: C
Finished goods are debited when goods are completed under backflush accounting, similar to other
accounting systems. However, work in process is not credited, as that account does not exist under
backflush accounting.
52. All of the following methods may be used to account for the revenue from scrap sales except:
a. Credit Factory Overhead, if the scrap cannot be identified with a specific job.
b. Credit Materials, if the scrap would have been able to be recycled.
c. Credit Work in Process, if the scrap is identified with a specific job.
d. Credit Scrap Revenue, which is included in the “Other Income” section of the income
statement.
ANS: B
Scrap is a by-product of production. It would not be appropriate to credit materials because materials
would have been credited when the materials were put into production. Depending on the
circumstances, it would be appropriate to credit Factory Overhead, Work in Process or Scrap Revenue.
53. Rowe Co.'s Job 401 for the manufacture of 2,200 wagons was completed during August at the unit costs
presented below. Final inspection of Job 401 disclosed 200 wagons coats that were sold to a jobber for
$6,000.
Direct materials $24
Direct labor 18
Factory overhead 14
$56
Assume that the spoilage loss is charged to all production during August. What would be the journal
entry to record the spoilage?
a. Factory Overhead 11,200
b. Spoiled Goods Inventory 6,000
c. Spoiled Goods Inventory 6,000
d. Spoiled Goods Inventory 11,200

ANS: C
When the spoilage loss is charged to all of production, the market value of the spoiled goods is charged
to Spoiled Goods Inventory, but the cost of the job in work in process is reduced by the entire cost of the
spoiled items. The difference is a loss, which is charged to Factory Overhead.
Cost of spoiled items (200 x $56) $11,200
Market value of spoiled units 6,000
Amount charged to Factory Overhead $ 5,200
presented below. Final inspection of Job 401 disclosed 200 spoiled wagons that were sold to a jobber
for $6,000.
Direct labor 18
Factory overhead 14
$56
Assume that the spoilage loss is attributable to the exacting specifications of Job 401 and is charged to
this specific job. What would be the journal entry to record the spoilage?
b. Spoiled Goods Inventory 6,000

c. Spoiled Goods Inventory 6,000
d. Spoiled Goods Inventory 6,000
ANS: B
When the spoilage loss is charged to the specific job on which the spoilage occurred, the market value of
the spoilage is charged to Spoiled Goods Inventory and the cost of the job in work in process is reduced
by the same amount.
presented below. Final inspection of Job 401 disclosed 200 spoiled wagons that were sold to a jobber
for $6,000.
Direct labor 18
Factory overhead 14
$56
Assume that spoilage loss is attributable to the exacting specifications of Job 401 and is charged to this
specific job. What would be the unit cost of the good wagons produced on Job 401?
a. $56.00
b. $58.60
c. $53.00
d. $48.18
ANS: B
When the spoilage loss is charged to the specific job on which the spoilage occurred, the cost of
producing the good units includes the cost of producing all units less the amount received for the
spoilage:
(2,200 x $56) - $6,000

= $58.60
2,000
56. During March, Hart Company incurred the following costs on Job 122 for the manufacture of 200
motors:
Original cost accumulation:

Direct labor 900
$4,850
Direct costs of reworking 10 units:

Direct materials $ 100
Direct labor 180
Factory overhead 270
$ 550
Assume the rework costs are to be spread over all jobs that go through the production cycle. What is
the journal entry needed to record the rework costs?
a. Work in Process 550
Materials 100
Payroll 180
b. Materials 100
Payroll 180
Work in Process 550
c. Factory Overhead 550
Materials 100
Payroll 180
d. Spoiled Goods Inventory 550
Work in Process 550
ANS: C
When the costs of correcting defective work is to be spread over all jobs, the material, labor and factory
overhead costs are charged to Factory Overhead.
motors:

Direct labor 900
$4,850
Direct labor 180
$ 550
If the defects resulted from the exacting specifications of the order, what is the journal entry needed to
record the rework costs?
a. Work in Process 550
Materials 100
Payroll 180
b. Materials 100
Payroll 180
Work in Process 550
c. Factory Overhead 550
Materials 100
Payroll 180
d. Spoiled Goods Inventory 550
Work in Process 550
ANS: A
When the costs of correcting defective work is to due to the exacting specifications of the order, the
material, labor and factory overhead costs are charged to that specific job in Work in Process.

motors:

Direct labor 900
$4,850

Direct labor 180
$ 550
The rework costs were attributable to the exacting specifications of Job 122, and the full rework costs
were charged to this specific job. What is the cost per finished unit of Job 122?
a. $25.00
b. $23.50
c. $27.00
d. $24.00
ANS: C
Original cost $4,850
Rework materials 100
Rework labor 180
Rework overhead 270
Total cost $5,400
Unit cost ($5,400/200) $27

PROBLEM
1. Xander Company anticipates that usage of Component T will be 100 units daily, which equates to around
25,000 for the year. The material is expected to cost $5 per unit. Once an order is placed with its
vendor, it takes five days to receive the goods, and the cost of placing each order is $50. As a result,
Xander keeps 1,000 units on hand to avoid stockouts. The carrying cost associated with each unit is $10.
a. Compute the order point.

b. Determine the most economical order quantity.
ANS:
(a) Order point = Expected usage during lead time + Safety stock
= (100 units  5 days) + 1,000
= 1,500 units
(b)

2. The Reddog Company predicts that 3,200 units of material will be used during the year. The expected
daily usage is 15 units, there is an expected lead time of 10 days, and there is a safety stock of 200 units.
The material is expected to cost $4 per unit. It is estimated that it will cost $25 to place each order. The
annual carrying cost is $1 per unit.
a. Compute the order point.

b. Determine the most economical order quantity by use of the formula.
c. Compute the total cost of ordering and carrying at the EOQ point.
ANS:
(a) Order point = Expected usage during lead time + Safety stock
= (15 units  10 days) + 200
= 350 units
(b)
(c) Annual ordering cost = Number of orders  Cost per order
= 3,200 Annual usage

 $25
400 EOQ
= 8  $25 = $200
Annual carrying cost = Average inventory  Carrying cost per unit

Average inventory = (1/2  EOQ) + Safety Stock
= (1/2  400) + 200 = 400
Annual carrying cost = 400  $1.00 = $400
3. The materials account of the Herbert Company reflected the following changes during August:
Balance, August 1 18 units @ $200
Received, August 2 6 units @ $210
Issued, August 8 8 units
Assuming that Herbert Company maintains perpetual inventory records, calculate the cost of the ending
inventory at August 31 and the cost of the units issued in August using the FIFO method.
ANS:
Received Issued Balance

Unit Unit Unit
Price Price Price
Date Quantity Amount Quantity Amount Quantity Amount
8/1 18 200 3,600
8/2 6 210 1,260 18 200
6 210 4,860
8/8 8 200 1,600 10 200
6 210 3,260
8/15 10 222 2,220 10 200
6 210
10 222 5,480
8/27 10 200 2,000
5 210 1,050 1 210 210
10 222 2,220
Ending Inventory:
11 units having a total cost of $2,430 (1 unit x $210) + (10 units x $222)
Cost of Units Issued:
23 units having a total cost of $4,650 (1,600 + 2,000 + 1,050)
inventory at August 31 and the cost of the units issued in August using the LIFO method.
ANS:

Unit Unit Unit
Price Price Price
8/1 18 200 3,600
8/2 6 210 1,260 18 200
6 210 4,860
8/8 2 200 400
6 210 1,260 16 200 3,200
8/15 10 222 2,220 16 200
10 222 5,420
8/27 5 200 1,000
10 222 2,220 11 200 2,200
Ending Inventory:
11 units having a total cost of $2,200 (11 x $200)
23 units having a total cost of $4,880 (400 + 1,260 + 1,000 + 2,220)
inventory at August 31 and the cost of the units issued in August using the moving average method.
ANS:

Unit Unit Unit
Price Price Price
8/1 18 200.00 3,600
8/2 6 210.00 1,260 24 202.50 4,860
8/8 8 202.50 1,620 16 202.50 3,240
8/15 10 222.00 2,220 26 210.00 5,460
8/27 15 210.00 3,150 11 210.00 2,310
Ending Inventory:
11 units having a total cost of $2,310
23 units having a total cost of $4,770 (1,620 + 3,150)
Unit cost calculations:
4,860 / 24 = 202.50
5,460 / 26 = 210.00
6. The materials account of the Flynn Company reflected the following changes during May:
Balance, May 1 500 units @ $10
Received, May 5 300 units @ $12
Issued, May 10 400 units

Received, May 15 200 units @ $15
Issued, May 25 300 units
Assuming that Flynn Company maintains perpetual inventory records, calculate the ending inventory at
May 31 and the cost of the units issued in May using each of the following methods:
(a) First in, first out (FIFO)
(b) Last in, first out (LIFO)
(c) Moving average
ANS:
(a) FIFO:

Unit Unit Unit
Price Price Price
5/1 500 10 5,000
5/5 300 12 3,600 500 10
300 12 8,600
5/10 400 10 4,000 100 10
300 12 4,600
5/15 200 15 3,000 100 10
300 12
200 15 7,600
5/25 100 10 1,000
200 12 2,400 100 12
200 15 4,200
Ending Inventory:
300 units having a total cost of $4,200 (100 units x $12) + (15 units x $15)

700 units having a total cost of $7,400 (4,000 + 1,000 + 2,400)
(b) LIFO:

Unit Unit Unit
Price Price Price
5/1 500 10 5,000
5/5 300 12 3,600 500 10
300 12 8,600
5/10 100 10 1,000
300 12 3,600 400 10 4,000
5/15 200 15 3,000 400 10
200 15 7,000
5/25 100 10 1,000
200 15 3,000 300 10 3,000
Ending Inventory:
300 units having a total cost of $3,000 (300 x $10)
700 units having a total cost of $8,600 (1,000 + 3,600 + 1,000 + 3,000)
(b) Moving Average:

Unit Unit Unit
Price Price Price
5/1 500 10 5,000
5/5 300 12 3,600 800 10.75 8,600
5/10 400 10.75 4,300 400 10.75 4,300
5/15 200 15 3,000 600 12.17 7,300
5/25 300 12.17 3,650 300 12.17 3,650
Ending Inventory:
300 units having a total cost of $3,650
700 units having a total cost of $7,950 (4,300 + 3,650)
Unit cost calculations:
8,600 / 800 = 10.75
7,300 / 600 = 12.16667
7. The following accounts are maintained by the Sprague Manufacturing Company in its general ledger:
Materials, Work in Process, Factory Overhead, and Accounts Payable. The materials account had a debit
balance of $40,000 on November 1. A summary of material transactions for November shows:
(1) Materials purchased on account, $62,000

(2) Direct materials issued, $58,500
(3) Direct materials returned to storeroom, $1,200
(4) Indirect materials issued, $3,600
(5) Indirect materials returned to storeroom, $550
(6) Materials on hand were $200 less than the stores ledger balance
a. Prepare journal entries to record the materials transactions.

b. Post the journal entries to T-accounts.
c. What is the balance of the materials account on November 30?
ANS:
(a) (1) Materials 62,000
(2) Work in Process 58,500
Materials 58,500
(3) Materials 1,200
(4) Factory Overhead 3,600
Materials 3,600
(5) Materials 550
(6) Factory Overhead 200
Materials 200
(b)
Materials Accounts Payable
Bal. 40,000 | (2) 58,500 | (1) 62,000
(1) 62,000 | (4) 3,600
(3) 1,200 | (6) 200
(5) 550 |
103,750 | 62,300
Work in Process Factory Overhead
(2) 58,500 | (3) 1,200 (4) 3,600 | (5) 550
(6) 200 |
(c) The balance of the materials account = $103,750 - $62,300
= $ 41,450
8. The following decisions and transactions were made for the Sanders Company in May:
May 1 The production manager informed the storeroom keeper that the forecasted usage of
Component X is 3,000 units. There are 1,500 units on hand, each having a unit cost of $20. The
company maintains a minimum stock of 1,000 units. The storeroom keeper notifies the
purchasing agent that the company will need 2,500 units of X to meet May’s production needs
and maintain a minimum inventory of 1,200 units.
May 3 The purchasing agent checks with a number of vendors and orders 2,500 units of Component X.
Unfortunately, the price has gone up to $25.
May 7 The shipment of Component X is received and inspected. The units are in good condition and
the company received the number of units it ordered.
May 9 The invoice covering Component X is received from the vendor and approved for payment.
May 21 The May 9 invoice is paid in full.
May 31 During the month, 2,950 units of Component X are issued to production. The company uses
FIFO costing and a job order cost system.
May 31 An inventory of the storeroom is taken at the end of the day and there are 1,040 units of
Component X on hand.
(a) Prepare a table to answer the following questions:
(1) What forms, if any, were used?

(2) What entry, if any, was recorded?
(b) Calculate the balance in the Materials account at May 31.
ANS:
Date Form Account Debit Credit

May 1 Purchase requisition No entry
May 3 Purchase order No entry
May 7 Receiving report No entry
May 9 None Materials 62,500
May 21 Approved voucher Accounts Payable * 62,500
Cash 62,500
May 31 Materials requisition Work in Process ** 66,250
Materials 66,250
May 31 Inventory report Factory Overhead *** 250
Materials 250
* 2,500 units x $25 = $62,500
** FIFO Basis:
Beginning Inventory 1,500 units @ $20 30,000
Received 2,500 units @ $25 62,500
Total available 4,000 units 92,500

Issued (2,950 units) (1,500) units @ $20 (30,000)
(1,450) units @ $25 (36,250)
Per perpetual records @ May 31 1,050 units @ $25 26,250
Per physical inventory @ May 31 1,040
Inventory adjustment needed 10 units@ $25
** (1,500 x $20) + (1,450 x $25) = $66,250
*** 10 x $25 = $250
(b) Units in inventory at May 31 = 1,040 units @ $25 = $26,000 per above
PTS: 1 DIF: Hard REF: P. OBJ: 2, 3
9. The Outdoor Manufacturing Company produces sporting equipment. The company maintains a single
raw materials inventory account for both direct and indirect materials. The following information came
from the factory ledger accounts for December:
Raw Materials, December 1 $ 45,500
Work in Process, December 1 125,000
Finished Goods, December 1 175,000
Raw materials purchases (during December) 623,000
Repairs and maintenance 37,200
Indirect materials 16,700
Utilities 63,200
Supervisors' salaries 18,300
Raw Materials, December 31 43,600
Work in Process, December 31 135,000

Finished Goods, December 31 150,000
Compute the cost of direct materials used during the month of December.
ANS:
Raw materials inventory, December 1 $ 45,500
Raw materials purchases 623,000
Total materials available $668,500
Less: Raw materials inventory, December 31 43,600
Raw materials used $624,900
Less: Indirect materials used 16,700
Instructor Note: This question relates concepts from chapter 2 to those learned in chapter 1.
10. Hawkins Company, which uses backflush costing, had the following transactions during the month of
June:
(a) Purchased raw materials on account, $350,000.

(b) Requisitioned raw materials to production, $330,000.
(c) Distributed direct labor costs, $52,300.
(d) Manufacturing overhead incurred, $107,000. (Use Various Credits for the account
in the credit part of the entry.)
Prepare journal entries to record the above transactions.
ANS:
(a) Raw and In-Process 350,000
(b) No entry
(c) Conversion Costs 52,300
Payroll 52,300
(d) Conversion Costs 107,000
Various Credits 107,000
11. Gilday Furniture Inc. produces custom furniture. Wood chips are an inevitable by-product of the cutting
process, and are considered scrap. Gilday is unable to use this scrap; however, the company has an
agreement to sell the scrap at market prices to a local company that processes the wood chips to make
industrial fillers.
Record the entries required for scrap under each of the following conditions:
(a) The revenue received for scrap is to be treated as other income. The market value of wood chips is
stable and is currently $200 per ton. The company has seven tons on hand.
(b) The revenue received for scrap is to be treated as a reduction in manufacturing cost, but cannot be
identified with a specific job. A firm price is not determinable for the scrap until it is sold. It is
eventually sold for cash of $800.
(c) The revenue received for scrap is to be treated as a reduction in manufacturing cost, and five tons of
scrap are related to a special job where the company made numerous round tables. The market value
of wood chips is stable and is currently $200 per ton.
ANS:
(a) Scrap Materials 1,400
Scrap Revenue 1,400
Cash (or Accounts Receivable) 1,400
Scrap Materials 1,400
(b) Cash (or Accounts Receivable) 800
(c) Scrap Materials 1,000
Cash (or Accounts Receivable) 1,000
Scrap Materials 1,000
12. The Reardon Company manufactures novelty toys. In June, 400 of these toys were completed on Job
Order No. 2525. On final inspection, 20 toys were rejected and transferred to the spoiled goods
inventory to be sold at $2 each.
Costs recorded on Job Order No. 2525 follow:
Direct labor 1,400
Prepare the journal entries to record the following:

a. Charges for materials, labor, and factory overhead for Job Order No. 2525
b. Cost of the spoiled work, the transfer of the cost of the good toys to Finished
Goods, and the sale of the imperfect toys, if the loss on spoilage is charged to all
jobs worked on during the period
c. Cost of the spoiled work, the transfer of the cost of the good toys to Finished
Goods, and the sale of the imperfect toys, if the loss on spoilage is to be charged to
Job Order No. 2525 only. (Round the new unit cost to the nearest whole cent, and
assume part b, above, has not occurred.)
ANS:
(a) Work in Process ($3,800/400 = $9.50) 3,800
Materials 1,600
Payroll (direct labor) 1,400
(b) Spoiled Goods (20  $2) 40
Work in Process (20  $9.50) 190
Finished Goods (380  $9.50) 3,610
Cash 40
Spoiled Goods 40
(c) Spoiled Goods 40
Work in Process 40
Finished Goods (380  $9.90*) 3,762

Cash 40
Spoiled Goods 40
* $3,800 - $40
= $9.895 rounded
380
13. Kami company manufactures engine components. During the previous month, the Company
manufactured 12,000 units of Component XRB for Job 3524 and incurred the following unit costs:
Direct materials $32.00
Direct labor 9.00
Factory overhead 6.00
When the units were tested after production, 300 units did not meet specifications and needed further
polishing work. The unit cost of correcting the defects was:
Direct labor 3.00
a. Prepare the journal entries to record the cost to correct the defective work under each of the
following scenarios:
1. If the cost of correcting the defective work is spread over all jobs that go through
the production cycle
2. If the defects resulted from the exacting specifications of Job 3524
b. Under Scenario 2 above, calculate the cost per unit of Job 3524.
ANS:
(a.)
(1.) Factory Overhead (($3.00 + 2.00) x 300) 1,500
Payroll (direct labor) ($3.00 x 300) 900
Factory Overhead ($2.00 x 300) 600
(2.) Work in Process (Job 3524) 1,500
Payroll 900
(b.)
Number of units produced 12,000
Original cost per unit ($32.00 + 9.00 + 6.00) $ 47.00
Total original cost $564,000
Plus cost of correcting defective work 1,500
Total cost of Job 3524 $565,500
Cost per unit of Job 3524 ($565,500 / 12,000) $ 47.125
CHAPTER 3—ACCOUNTING FOR LABOR
MULTIPLE CHOICE
1. At a plant where car doors were manufactured, all of the following would be classified as direct labor
except:
a. Machinists.
b. Assembly workers.
c. Maintenance personnel.
d. Painters.
ANS: C
Maintenance workers, while integral to the manufacturing process as they keep the machinery
maintained, are not direct laborers because they do not actually add value to the product. Machinists,
assembly workers and painters would all add value to the manufacture of a car door.
2. All of the following personnel would be classified as indirect labor except the:
a. machinist.
b. supervisor.
c. fork lift driver.
d. plant janitor.
ANS: A
The machinist would most likely be a direct laborer. The supervisor, fork lift driver and plant janitor,
while part of the manufacturing process, do not add value to the goods being produced.
3. All of the following are characteristics of hourly wage plans except:
a. They provide no extra recognition for doing more than the minimum required.
b. They are easy to apply.
c. They establish a definite rate per hour for each employee.
d. They encourage employees to sacrifice quality in order to maximize earnings.
ANS: D
Hourly wage plans pay a fixed rate per hour, so they are easy to apply, but they do not provide any
incentive to do more than what is required, nor do they encourage employees to work so fast as to
sacrifice quality.
4. A wage plan based solely on an employee's quantity of production is known as a(n):
a. Modified wage plan.

b. Hourly-rate plan.
c. Incentive wage plan.
d. Piece-rate plan.
ANS: D
A piece-rate plan bases an employee's earnings strictly on the number of units produced.
5. Wage plans that encourage employees to work harder and earn more by producing a high level of
output are known as:
a. Modified wage plans.

b. Salary wage plans.
c. Piece-rate plans.
d. Hourly-rate plans.
ANS: C
Piece-rate plans encourage employees to work harder and earn more by producing more or by meeting
and exceeding quotas.
6. Under a modified wage plan, an employee earns $.75 for each finished unit and is guaranteed $10 per
hour as a minimum wage. If the daily quota is 100 units, on a particular day when an employee
completes 85 units and works 8 hours, the amount of the make-up guarantee will be:
a. $80.00
b. $72.25
c. $16.25
d. $5.00
ANS: C
Make-up guarantee = ($10  8 hours) - ($.75  85 pieces) = $16.25
7. Under a modified wage plan, Jim Phillips works an eight-hour day and earns $.50 for each finished unit
he produces in excess of 200 units. However, he is guaranteed $12.50 per hour as a minimum wage. His
production this week was a follows:
Monday 220 units

Tuesday 180 units
Wednesday 200 units
Thursday 200 units
Friday 190 units
How much was the make-up guarantee paid to Jim this week?
a. $10
b. $5
c. $15
d. $12.50
ANS: C
The make-up guarantee is $15 as follows:
Hours Pieces Earnings @ Earnings @ Make-up Payroll

Worked Finished $12.50/hr $.50/unit Guarantee Earnings
Monday 8 220 $100 $110 $110
Tuesday 8 180 100 90 $10 100
Wednesday 8 200 100 100 100
Thursday 8 200 100 100 100
Friday 8 190 100 95 5 100
$500 $495 $15 $510
8. Under a modified wage plan, Jim Phillips works an eight-hour day and earns $.50 for each finished unit
he produces in excess of 200 units. However, he is guaranteed $12.50 per hour as a minimum wage. His
production this week was a follows:
Monday 220 units

Tuesday 180 units
Wednesday 200 units
Thursday 200 units
Friday 190 units
What were Jim’s total earnings this week?

a. $500
b. $510
c. $495
d. $515
ANS: B
Jim’s total earnings were $510 as follows:

Monday 8 220 $100 $110 $110
Tuesday 8 180 100 90 $10 100
Wednesday 8 200 100 100 100
Thursday 8 200 100 100 100
Friday 8 190 100 95 5 100
$500 $495 $15 $510
9. Under a modified wage plan, an employee working an eight-hour day earns $.40 for each finished unit
and is guaranteed $20 per hour as a minimum wage. At what level should the daily quota be set?
a. 160 units
b. 400 units
c. 500 units
d. 640 units
ANS: B
Daily wage = $20 x 8 hours = $160.
Units made in a day to reach $160 at a rate of $.40 = $160 / $.40 = 400 units
10. Idle time should be treated as follows:
a. It should be recorded along with the reason for it, and charged to Factory Overhead.
b. It should be charged to the job from which the employee took a break.
c. It should be documented and the employee should not be paid for that time.
d. It should be allocated to the various manufacturing departments and the supervisors
should decide how to handle it.
ANS: A
Idle time should be recorded and charged to Factory Overhead as it does not add value to any specific
jobs.
11. The file for each factory employee that shows the time the employee spent on each job, as well as time
spent as indirect labor is the:
a. labor time record.

b. payroll record.
c. employee’s earnings record.
d. labor cost summary.
ANS: A
Each factory employee’s time will be summarized on a labor time record. The labor cost summary
reports the total payroll distribution. The payroll record and employee’s earnings record relate to the
payment of payroll rather than the timekeeping function.

12. The departmental responsibilities of the payroll function include all of the following except:
a. Reviewing the labor hours on the time record for accuracy.

b. Summarizing the period’s payroll data.
c. Keeping a record of earnings for each employee.
d. Computing deductions and withholdings for each employee.
ANS: A
Items (b), (c), and (d) are the responsibilities of the payroll function, whereas item (a) is the
responsibility of the production supervisor.
13. The file that serves as a basis for reporting payroll information to governmental agencies and preparing
Form W-2 is the:
a. labor time record.

b. payroll record.
c. employee’s earnings record.
d. labor cost summary.
ANS: C
The employee’s earnings record is a cumulative record of employee earnings needed to calculate payroll
taxes. It also serves as the basis for reporting salary and wage information to government agencies.
14. An analysis of total labor costs into work in process and factory overhead components is recorded on
a(n):
a. Labor cost summary.

b. Payroll record.
c. Individual production report.
d. Employee earnings record.
ANS: A
An analysis of labor costs into their work in process and factory overhead components is recorded on a
labor cost summary.
15. An employee regularly earns $12 per hour for an 8-hour day with time-and-a-half for overtime hours.
Assuming that the employee works a 10-hour day, the amount of overtime premium is:
a. $36.
b. $18.
c. $12.
d. $6.
ANS: C
Overtime premium = 2 hours  $6 = $12
16. If the amount of overtime premium is to be charged to all jobs worked on during the period as a result
of random scheduling of jobs, the debit will be to:
a. Factory Overhead.
b. Payroll.
c. Work in Process.
d. Accrued Payroll.
ANS: A
By charging the overtime premium to factory overhead, all jobs worked on during the period share the
cost.
17. David Andrews works at the Neal Company where he makes $12 per hour with “time-and-a-half” for
overtime. For the week ended January 8, David worked 45 hours as follows:
Job 417 34 hours

Job 532 11 hours
Assuming the overtime was due to priority scheduling for Job 532, how much will be charged to Job
532?
a. $147
b. $132
c. $198
d. $162
ANS: D
Regular wages 11 hrs. x $12 $132
Overtime premium 5 hrs. x $ 6 30
$162
18. The Dehl Company payroll for the first week in January was $12,000. The amount of income tax
withheld was 12 percent and the FICA, state unemployment, and federal unemployment tax rates were
8 percent, 5 percent, and 1 percent, respectively. The amount of the employees' withholding taxes are:
a. $1,680.
b. $2,400.
c. $1,440.
d. $3,120.
ANS: B
Employees' withheld taxes = (12% + 8%) $12,000 = $2,400. The state and federal unemployment taxes
are the employer’s responsibility, as is the FICA employer’s portion.
19. The payroll summary for EVB Inc. for the period August 3 - 10 is as follows:
Factory Sales and Admin.

Employees Employees
Total
Gross Earnings $80,000 $25,000 $105,000
Withholding and deductions:

FICA 6,400 2,000 8,400
Income taxes 10,600 5,000 15,600
Union dues 400 - 400
Total 17,400 7,000 24,400
Net earnings $62,600 $18,000 $80,600
The entry to record payroll would be:
a. Payroll 105,000
FICA Payable 8,400
Employees Income Tax Payable 15,600
Union Dues Payable 400

Wages Payable 80,600
b. Work in Process 80,000
Payroll 105,000
c. Factory Overhead 80,000
Selling and Administrative Expense 25,000
FICA Payable 8,400
d. Payroll 105,000
ANS: A
The entry to record the payroll would be:
Payroll 105,000
FICA Payable 8,400
Cash 80,600
20. The payroll summary for EVB Inc. for the period August 3 - 10 is as follows:
Factory Sales and Admin.
Employees Employees
Total
Gross Earnings $80,000 $25,000 $105,000
Withholding and deductions:

FICA 6,400 2,000 8,400
Income taxes 10,600 5,000 15,600
Union dues 400 - 400
Total 17,400 7,000 24,400
Net earnings $62,600 $18,000 $80,600
The entry to record the payment of earnings to the employees would include:
a. A debit to payroll for $105,000.

b. A credit to wages payable for $80,600.
c. A debit to wages payable for $80,600.
d. A credit to cash of $105,000.
ANS: C
The entry to record the payment of earnings to the employees would be:
Cash 80,600
21. Joel Williams works at Allentown Company where he assembles components for small appliances and
earns $16 per hour with “time-an-a-half” for overtime. During the week ended July 25, Joel worked 43
hours as follows:
Job XBRL 20.5 hours
Job FASB 14.5 hours
Idle time due to power outage 2.0 hours
Machine maintenance 6.0 hours
The amount of Joel’s wages that will be charged to the Work in Process account, assuming that the
overtime worked was due to a rush order on the FASB job is:
a. $560
b. $608
c. $584
d. $680
ANS: C
Job XBRL 20.5 hrs. x $16 $328
Job FASB 14.5 hrs. x $16 232
Overtime premium 3.0 hrs. x $ 8 24
Total $584
22. Joel Williams works at Allentown Company where he assembles components for small appliances and
earns $16 per hour with “time-an-a-half” for overtime. During the week ended July 25, Joel worked 43
hours as follows:
Job XBRL 20.5 hours

Job FASB 14.5 hours
Idle time due to power outage 2.0 hours
Machine maintenance 6.0 hours
The amount of Joel’s wages that will be charged to Factory Overhead assuming the overtime is due to
the random scheduling of jobs is:
a. $120
b. $152
c. $40
d. $128
ANS: B
Idle time 2 hrs. x $16 $ 32
Machine maintenance 6 hrs. x $16 96
Overtime premium 3 hrs. x $ 8 24
Total $152
23. Daktari Enterprises’ Schedule of Earnings and Payroll Taxes for April is as follows:
Gross FICA FUTA SUTA Total

Earnings 8% 1% 4% Taxes
Non-Factory Employees:
Sales $ 10,000 $ 800 $ 100 $ 400 $ 1,300
Administrative 7,000 560 70 280 910
17,000 1,360 170 680 2,210
Factory Employees:
Direct Labor:
Regular 80,000 6,400 800 3,200 10,400
Overtime Premium 5,000 400 50 200 650
Indirect Labor 30,000 2,400 300 1,200 3,900

115,000 9,200 1,150 4,600 14,950
Total $132,000 $10,560 $1,320 $5,280 $17,160
Assuming overtime was the result of random scheduling of jobs, the entry to distribute payroll would
include:
a. A debit to Payroll for $132,000.

b. A credit to Wages Payable for $114,800.
c. A debit to Factory Overhead for $35,000.
d. A debit to Work in Process for $85,000
ANS: C
The entry to distribute payroll would be:
Sales Salaries 10,000
Administrative Salaries 7,000
Payroll 132,000
If overtime is the result of random scheduling of jobs, the overtime premium is charged to Factory
Overhead along with Indirect Labor (5,000 + 30,000).
24. The Dehl Company payroll for the first week in January was $12,000. The amount of income tax
withheld was 12 percent and the FICA, state unemployment, and federal unemployment tax rates were
8 percent, 5 percent, and 1 percent, respectively. The amount of the employer's payroll taxes are:
a. $3,120.
b. $1,440.
c. $ 720.
d. $1,680.
ANS: D
Employer's payroll taxes = (8% + 5% + 1%) $12,000 = $1,680. Income tax withheld is the responsibility of
the employee, as is the employees’ portion of FICA.
25. Daktari Enterprises’ Schedule of Earnings and Payroll Taxes for April is as follows:

Sales $ 10,000 $ 800 $ 100 $ 400 $ 1,300
17,000 1,360 170 680 2,210
Factory Employees:
Direct Labor:
Regular 80,000 6,400 800 3,200 10,400
Indirect Labor 30,000 2,400 300 1,200 3,900
115,000 9,200 1,150 4,600 14,950
Total $132,000 $10,560 $1,320 $5,280 $17,160
Assuming overhead is a result of the random scheduling of jobs, the entry to record and distribute the
employer’s payroll taxes would include:
a. A debit to Factory Overhead for 14,950.

b. A debit to FICA Expense of $10,560.
c. A credit to Payroll of $132,000.
d. A debit to Work in Process for $11,050.
ANS: A
The entry to record and distribute payroll taxes would be:
Payroll Tax Expense - Sales Salaries 1,300
Payroll Tax Expense - Administrative Salaries 910
FICA Tax Payable 10,560
Federal Unemployment Tax Payable 1,320
State Unemployment Tax Payable 5,280
Generally, payroll taxes on direct labor wages are charged to Factory Overhead for the purpose of
convenience.
26. Of the following taxes, the only one that the employer pays in entirety is:
a. State income tax.

b. State unemployment tax.
c. FICA tax.
d. Federal income tax.
ANS: B
Items (a) and (d) are paid only by the wage earner, Item (c) is paid by both employer and employee,
whereas state unemployment taxes are paid only by the employer.

27. The payroll for the week ended January 8 is $15,000 with 15 percent withheld for employee income
taxes and 8 percent for FICA taxes. The total amount of taxes to be remitted by the employer for this
payroll would be:
a. $2,250.
b. $1,200.
c. $3,450.
d. $4,650.
ANS: D
The taxes remitted would be:
Employees' income taxes $2,250
Employee FICA 1,200
Employer FICA 1,200
Total $4,650
28. An accrued expense such as Wages Payable can best be described as an amount:
a. Paid and not currently matched with earnings.

b. Not paid and not currently matched with earnings.
c. Not paid and currently matched with earnings.
d. Paid and currently matched with earnings.
ANS: C
An accrued expense is best described as an unpaid expense that has been incurred in a period in which
earnings from the expense have been realized. Therefore, the expense incurred but not paid should be
matched to the earnings of the same period.

29. Toshlin issues financial statements June 30th. If payroll was $30,000 through June 30th and wages
were to be paid on July 5, what is the correct journal entry on June 30th?
Assume FIT = 15%, FICA = 8%, SUTA = 6%, FUTA = 1%,
a. No entry is required.
b. Payroll 30,000
c. Payroll 30,000
Federal Income Tax 4,500
FICA Taxes Payable 2,400
d. Payroll 30,000
Federal Income Tax 4,500
FICA Taxes Payable 2,400
SUTA 1,800
FUTA 300
ANS: B
When the financial statement date does not match the payroll period, an accrual must be made.
Employer taxes would also be recorded on June 30th. The employees’ taxes are not reported because
they do not affect the financial statements total liabilities or income. The company would however,
have to prepare an entry to record the accrual for the employer’s portion of payroll taxes.

30. Harmony Company has accrued payroll costs of $50,000 for the period May 28 - 31 as follows:
Administrative salaries $ 5,000
Sales salaries 5,000
Direct labor 30,000
$50,000
Other Information:
(a) The FICA rate is 8% of the first $100,000 of wages. None of the employees has reached this
maximum.
(b) The company is responsible for state and federal unemployment taxes on the first $8,000 of wages.
All of the employees have previously reached this maximum.
(c) Payroll taxes are spread over all jobs.
What entry would be necessary to accrue payroll taxes for the period of May 28 - 31?
b. Payroll Tax Expense - Sales 400
Payroll Tax Expense - Administrative 400
c. Payroll Tax Expense 4,000
d. Payroll Tax Expense - Sales 400
Payroll Tax Expense - Administrative 400

ANS: D
Payroll tax expense - sales 5,000 x 8% = 400
Payroll tax expense - administrative 5,000 x 8% = 400
Factory overhead (30,000 + 10,000) x 8% = 3,200
The FICA of all factory employees would be charged to Factory Overhead as benefits are to be spread to
all jobs. If the benefits were to be charged to specific jobs, then a debit of $2,400 would be made to
Work in Process for the direct labor portion.
31. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous
Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April 30
fell on Thursday. Payroll costs for the week ended May 1 follow:
Non Factory:
Sales $ 5,000
Administrative 10,000
$15,000
Factory:
Direct labor $25,000
Overtime premium 2,500
$42,500
$57,500
Excluding payroll taxes, what amount should be accrued to the payroll account for the period ended
April 30?
a. $57,500
b. $46,000
c. $42,500
d. $34,000
ANS: B
If April 30 is Thursday, four days of the payroll fall in April and one in May.
$57,500 / 5 days = $11,500 per day x 4 days = $46,000
32. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous
Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April 30
fell on Thursday. Payroll costs for the week ended May 1 follow:
Non Factory:
Sales $ 5,000
Administrative 10,000
$15,000
Factory:
$42,500
$57,500
Excluding payroll taxes, how much of the accrued payroll at April 30 should be charged to Factory
Overhead?
a. $17,500
b. $26,000
c. $14,000
d. $34,000
ANS: C
If April 30 is Thursday, four days of the payroll fall in April and one in May.
Indirect labor $15,000
Total payroll relating to factory overhead $17,500
$17,500 / 5 days = $3,500 per day x 4 days = $14,000
33. The entry made in November to reverse the entry that was made to accrue October payroll would be:
a. Debit - Wages Payable
Credit - Cash
b. Debit - Wages Payable
Credit - Payroll
c. Debit - Factory Overhead
Credit - Payroll
d. Debit - Payroll
Credit - Wages Payable
ANS: B
The entry to accrue payroll is:
Debit - Payroll
Credit - Wages Payable
This entry is reversed in the following month.
34. Which of the following items relating to direct labor employees might be charged to specific jobs in work
in process rather than factory overhead?
a. Make-up guarantee
b. Idle time
c. Shift premiums
d. Fringe benefits
ANS: D
In some cases, workers’ fringe benefits, including holiday pay, are charged to jobs with the workers’
wages. However, many companies charge benefits to Factory Overhead as it is not cost effective to
charge the benefits to jobs.
35. Jay Vato works at Batwing Industries from midnight until 8:00 AM. His normal wage rate is $17 per
hour, while Ben Phillips, who does the same job from 8:00 AM until 4:00 PM makes $15 per hour. Since
Ben and Jay have the same seniority within the plant, the difference in pay is due to a(n):
a. overtime premium.
b. production bonus
c. make-up guarantee.
d. shift premium.
ANS: D
Employers who run shifts other than day shifts often pay shift premiums for those shifts which are
designed to attract workers to the less desirable shifts. Shift premiums compensate employees on the
“swing” or “graveyard” shifts for the lifestyle adjustments necessary to work those shifts, even though
productivity is usually not as high as that of the workers on normal day shifts.
36. Features of a 401(k) plan include all of the following except:
a. Pension benefits are based on past earnings and length of service with the company.
b. The employer may match a certain portion of the employee’s investment.
c. Taxes are deferred on wages invested in the plan.
d. Investments may be made in company stock, mutual funds or other investment vehicles.
ANS: A
A 401(k) plan is a defined contribution plan which means that the plan specifies the amount of
contributions that can be made to the plan by the employee and employer, but the amount of benefits
is tied to the amounts contributed and performance of the investments. Option (a.) above is a
characteristic of a defined benefit plan.
NAT: IMA 2B- Cost Management TOP: AACSB - Reflective
37. John Elton, who is classified as direct labor, earns $1,000 per week and is entitled to four weeks of
vacation and 10 holidays each year. How much should be accrued for his vacation each week?
a. $76.92
b. $80.00
c. $83.33
d. $40.00
ANS: C
Total vacation pay per year = $1,000 x 4 weeks = $4,000
Weeks over which vacation is earned = 52 - 4 = 48
$4,000 / 48 weeks = $83.33 per week
38. John Elton, who is classified as direct labor, earns $1,000 per week and is entitled to four weeks of
vacation and 10 holidays each year. How much should be accrued for his holiday pay each week?
a. $38.46
b. $40.00
c. $46.67
d. $130.00
ANS: C
Daily pay = $1,000 / 5 = $200
Annual holiday pay = $200 x 10 = $2,000
Weeks over which holiday pay is earned = 52 - 4 = 48
$2,000 / 48 weeks = $46.67 per week

39. A factory worker earns $500 per week and will receive a $2,000 bonus at year-end, a 2-week paid
vacation, and 5 paid holidays. The combined amount of the accruals for bonus, vacation, and holiday
pay in the weekly payroll would be:
a. $20.00.
b. $70.00.
c. $40.00.
d. None of the above.
ANS: B
Bonus: $2,000 / 50 weeks = $40 per week

Vacation pay: $500 x 2 weeks = $1,000 / 50 weeks = $20 per week
Holiday pay: $500 / 5 days = $100 per day  5
= $500 / 50 weeks
= $10 per week
Total accrual = $40 + $20 + $10 = $70
Note that the fringe benefits will be earned over the 50 weeks worked since the worker has 2 weeks
vacation.
PROBLEM
1. Management of the Von Machine Company requests that you calculate the effect of two different wage
payment plans upon employee earnings and also on the unit labor cost of Product A.
The following information is available:

(1) The hourly rate is $9.00.
(2) The labor rate per piece of Part X, if the employee is paid on a piece-rate basis, is
$.30.
Ten pieces of Part X are required for one unit of Product A. The plant works a 6-day week and an 8-hour
day, totaling 48 hours per week. No overtime premium pay is to be considered in your analysis.
During a selected week, the following pieces of Part X were produced:
Part X
Day Quantities Produced

1 150
2 200
3 240
4 180
5 300
6 200
An agreement with the union requires a minimum rate of $6.50 per clock hour be paid to employees.
a. Calculate the labor cost each day of the week for an employee under:
(1) the hourly-rate plan.
(2) the piece-rate plan.
b. If the company could anticipate a steady production level of 250 units of Part X each day,
which plan would you recommend to the company’s management? Why?
ANS:
(a) (1) Hourly-Rate Plan:

8 (hours per day)  $9 = $72 per day
(2) Piece-Rate Plan:
Legal Amount
Day Earned Min.* Paid

1 150  $.3 $45.00 $52 $52
2 200  .3 60.00 52 60
3 240  .3 72.00 52 72
4 180  .3 54.00 52 54
5 300  .3 90.00 52 90
6 200  .3 60.00 52 60
*8 (hours per day)  $6.50 = $52 per day.
(b) If the company were to produce 250 units of Part X each day, the hourly rate would
result in a cost of $.288 per unit ($72 / 250), while the piece rate would cost $.30 for
each unit produced. The hourly rate should be recommended because of the lower cost
per unit.
2. Becky Graham earns $15 per hour for up to 300 units of production per eight-hour day. If she produces
more than 300 pieces per day, she will receive an additional piece rate of $.40 per unit. A summary of
her work week follows:
Hours Worked Pieces Finished

Monday 8 350
Tuesday 8 280
Wednesday 8 320
Thursday 8 290
Friday 8 300
(a) Determine Graham’s earnings for each day and for the week.
(b) Prepare the journal entry to distribute the payroll for the week.
ANS:
(a) Graham’s earnings are calculated as follows:

Monday 8 350 $120 $140 $140
Tuesday 8 280 120 112 $ 8 120
Wednesday 8 320 120 128 128
Thursday 8 290 120 116 4 120
Friday 8 300 120 120 120
$600 $616 $12 $628
(b)
Work in Process 616

Factory Overhead 12
Payroll 628
PTS: 1 DIF: Moderate REF: P. OBJ: 1, 3
3. Payroll records for selected employees of Tomco Industries for the forty-sixth week of the year are as
follows:
Salary or Gross
wage based Wages
Income
on 40 hour through
Tax
week Hours 45th week
Withheld
Worked
Employee Classification
R. Shuey President $3,000 40 $600 $135,000
K. Dye Sales Manager 2,500 40 500 98,000
J. Rudnick Direct Labor 800 42 100 4,500
L. Guzzino Direct Labor 600 46 150 28,000
A. Busse Indirect Labor 400 44 80 7,800
Employees are paid time-and-a-half for overtime.
Employer payroll tax rates are as follows:
FICA: 8% of first $100,000 of salary or wages
FUTA: 1% of first $8,000 of salary or wages
SUTA: 4% of first $8,000 of salary or wages
Calculate:
(a) Total gross payroll for the selected employees.
(b) Total employer payroll taxes for the selected employees.
ANS:
(a)
Regular Wages Overtime

or Salary Premium
Employee Total Computations
Shuey $3,000 $3,000
Dye 2,500 2,500
Rudnick 840 20 860 800/40=20; 42x20=840; 2x10=20
Guzzino 690 45 735 600/40=15; 46x15=690; 6x7.50=45
Busse 440 20 460 400/40=10; 44x10=440; 4x5=20
Total $7,555
(b)
Cumulative Cumulative
Earnings Earnings Earnings
Employee Week 45 Week 46 Week 46 FICA FUTA SUTA Total

Shuey $135,000 $3,000 $138,000 $ - $ - $ - $ -
Dye 98,000 2,500 100,500 160.00 - - 160.00
Rudnick 4,500 860 5,360 68.80 8.60 34.40 111.80
Guzzino 28,000 735 28,735 58.80 - - 58.80
Busse 7,800 460 8,260 36.80 2.00 8.00 46.80
Total $324.40 $10.60 $42.40 $377.40
Computations:
Shuey has already exceeded the FICA limit of $100,000 and the unemployment tax limit of $8,000, so
the company does not have any payroll tax expense.
Dye has already exceeded the unemployment tax limit of $8,000. This week’s payroll pushes his
cumulative earnings above $100,000, but the portion between $98,000 and $100,000 or $2,000 is
subject to the 8% FICA tax of $160.00.
Rudnick has not hit either limit as yet, so his total earnings for the week of $860 are subject to all taxes.
FICA - $860 x 8% = $68.80; FUTA - $860 x 1% = $8.60; SUTA $860 x 4% = $34.40.
Guzzino has exceeded the $8,000 limit for unemployment taxes, but his earnings are subject to FICA
taxes - $735 x 8% = $58.80.
Busse’s earnings are subject to FICA ($460 x 8% = $36.80), but only $200 of his earnings are subject to
the unemployment taxes ($8,000 limit - $7,800). FUTA - $200 x 1% = $2.00; SUTA - $200 x 4% = $8.
4. Jerrod Sampson is paid $10 an hour for 40 hours a week, with time-and-a-half for overtime and double-
time for Sundays and holidays. Overtime premium is charged to Factory Overhead.
Using the labor-time record below:
a. Compute Jerrod’s total earnings for the week.
b. Present the journal entry to distribute Jerrod’s total earnings.
SUTA = 4%, FUTA = 1%, FICA = 8%, FIT = 10%
Sun Mon Tues Wed Thur Fri Sat Total
F28 4 4 4 4 4 4 4 28
M14 3 2 5 6 16
Idle 1 1 4 6
Total 4 8 7 9 8 10 4 50
ANS:
a. $570
Regular Pay $500 (50 hours x $10)
Premium $ 70 (4 hours x $10) + (6 hours x $5)
b. Work in Process* 440
Factory Overhead** 130
Payroll 570
* Work in Process: (28 hours x $10 ) + (16 hours x $10 ) = $440
** Factory Overhead: (6 hours x $10) + $70 overtime premium = $130
5. The Wagner Company’s Schedule of Earnings and Payroll Taxes for May is summarized as follows:
Sales $ 8,000 $ 640 $ 80 $ 320 $1,040
Administrative 9,000 720 90 360 1,170
17,000 1,360 170 680 2,210
Factory Employees:
Direct Labor:
Regular 32,000 2,560 320 1,280 4,160
Idle time 3,000 240 30 120 390
Indirect Labor 18,000 1,440 180 720 2,340
58,000 4,640 580 2,320 7,540
Total $75,000 $6,000 $750 $3,000 $9,750
(a) Prepare the journal entry to distribute payroll under each of the following scenarios:
(1) Overtime resulted from priority scheduling of Job 3bX for which the company
received a rush order.
(2) Overtime resulted from random scheduling of jobs.
(b) Prepare the journal entry to record and distribute the employer’s payroll taxes.
ANS:
(a)
(1) Sales Salaries 8,000
Work in Process (32,000 + 5,000) 37,000
Factory Overhead (18,000 + 3,000) 21,000
Payroll 75,000
Since the overtime resulted from a rush order, the overtime premium would be charged to the job
(Work in Process). Idle time is charged to Factory Overhead as it can not be allocated to any one job.
(2) Sales Salaries 8,000
Factory Overhead (18,000 + 3,000 + 5,000) 26,000
Payroll 75,000
Since overtime was the result of random scheduling of jobs, the overtime premium would be charged to
Factory Overhead.
(b) Factory Overhead 7,540
Payroll Tax Expense - Sales Salaries 1,040
Payroll Tax Expense - Admin. Salaries 1,170
Federal Unemployment Tax Payable 750
6. The following payroll summary is prepared for the Sothern Manufacturing Company for the week ending
March 29:
Direct labor:
Job No. 200 $10,300
Job No. 201 7,000
Job No. 202 6,500

Total gross payroll $30,000
Payroll taxes and insurance are to be computed as follows:
Employee's Employer's
Share Share
Federal income tax withheld $4,300
State unemployment tax 5.0%
Federal unemployment tax 1.0%
FICA tax 8.0% 8.0%
Disability insurance .5% .25%
Workmen's compensation insurance 2.0%
Prepare the general journal entries to:
a. Record the payroll.

b. Pay the payroll.
c. Distribute the payroll to the appropriate accounts.
d. Record the employer's share of payroll tax expense. (All of the employees work in
the factory.)
ANS:
(a) Payroll 30,000
FICA Tax Payable (30,000 x 8%) 2,400
Federal Income Tax Withheld 4,300
Disability Insurance Withheld (30,000 x .5%) 150
Wages Payable (30,000 - 2,400 - 4,300 - 150) 23,150

To record payroll.
(b) Wages Payable 23,150
Cash 23,150
(c) Work in Process 23,800
Factory Overhead (Indirect Labor) 6,200
Payroll 30,000
To distribute payroll.
(d) Factory Overhead 4,875
FICA Tax Payable (30,000 x 8%) 2,400
Disability Insurance Withheld (30,000 x .25%) 75
State Unemployment Tax Payable (30,000 x 5%) 1,500
Federal Unemployment Tax Payable (30,000 x 1%) 300
Workmen's Compensation
Insurance Payable (30,000 x 2%) 600
To record employer's share of payroll associated
costs.
7. Tyler Jacob is paid $15 per hour for a 40-hour work week with time-and-a-half for overtime, which is not
charged to specific jobs. For the week of March 4 - 10, Tyler’s labor time record was as follows:
Mon Tues Wed Thur Fri Sat Total

Job B280 8 5 6 10 10 2 41
Machine maintenance 4 2 1 7
Total 8 9 8 10 10 3 48
Other Information:
Tyler’s year-to-date wages as of March 3 were $7,500. He contributes $20 weekly for his health
insurance premiums.
Current tax rates in effect are: FIT withholding rate - 10%; FICA - 8% on the first $100,000 of wages;
SUTA - 4% on the first $8,000 of wages; and FUTA - 1% on the first $8,000 of wages.
(a) Calculate Tyler’s gross and net pay.
(b) Prepare the journal entries necessary to
(1) Record Tyler’s payroll
(2) Pay Tyler’s payroll
(3) Distribute Tyler’s payroll to the appropriate accounts
(c) Calculate the employer’s payroll taxes and prepare the journal entry to record them employer’s
portion of payroll taxes
ANS:
(a)
Gross pay:
48 hours x $15.00/hr. $720.00

8 hours x $ 7.50/hr. (15.00/.5) 60.00
Total gross pay $780.00
Deductions:
FIT Withholding $780 x 10% $ 78.00
FICA - Employee portion $780 x 62.40

8%
Health insurance premium 20.00
Total deductions $160.40

Net Pay $619.60
(b)
Payroll 780.00
Employees’ Income Tax Payable 78.00

FICA Tax Payable 62.40
Health Insurance Premium Payable 20.00
Wages Payable 619.60
To record payroll
Work in Process (41 hrs. x $15) 615.00
Factory Overhead (7 hrs. x $15) + $60 (Overtime) 165.00
Payroll 780.00
To distribute payroll
Wages Payable 619.60
Cash 619.60
To record payment of payroll
(c)
Year-to-date payroll, March 3 $7,500
Earnings March 4 - 10 780
Year-to-date payroll, March 10 $8,280
Subject to FUTA and SUTA 8,000
Not subject to FUTA and SUTA $ 280
Amount of earnings March 4 - 10 subject to unemployment taxes = $780 - 280 = $500
Employer’s payroll taxes:

FICA (per above) $62.40
SUTA ($500 x 4%) 20.00
FUTA ($500 x 1%) 5.00
Factory Overhead 87.40
FICA Tax Payable 62.40

State Unemployment Tax Payable 20.00
Federal Unemployment Tax Payable 5.00
To record employer’s payroll taxes
8. The Tidle Manufacturing Company uses a job order cost system. Factory wages are paid on a straight
hourly basis with indirect labor getting $8.50 an hour and direct labor getting $10.00 an hour.
During the week of January 7, the following hours were worked:
Direct Indirect
Cutting Department 2,200 250
Splicing Department 2,400 200
Sanding Department 1,850 125
Joining Department 4,250 325
Salaries and wages are paid weekly, with administrative salaries totaling $16,500 and salesperson's
salaries totaling $12,200.
The following deductions are to be considered:
FICA tax 8.0%
Federal income tax 12.0%
State income tax 2.0%
Federal unemployment tax 1.0%
State unemployment tax 5.0%
Prepare journal entries to record:

a. The payroll.
b. The payment of the payroll.
c. The payroll distribution.
d. The employer's payroll tax expense.
ANS:
(a) Payroll* 143,350.00
FICA Tax Payable ($143,350 x 8% ) 11,468.00
Federal Income Tax Withheld ($143,350 x 12%) 17,202.00
State Income Tax Payable ($143,350 x 2% ) 2,867.00
Salaries and Wages Payable 111,813.00
To record payroll.

*(10,700 x $10) + (900 x $8.50) + $16,500 + $12,200
(b) Salaries and Wages Payable 111,813.00
Cash 111,813.00
To pay payroll.
(c) Work in Process (10,700 x $10 ) 107,000.00
Factory Overhead (900 x $8.50) 7,650.00
Administrative Salaries 16,500.00
Sales Salaries 12,200.00
Payroll 143,350.00
To distribute payroll.
(d) Factory Overhead* 16,051.00
Payroll Tax Expense**--

Sales and Administrative Salaries 4,018.00
FICA Tax Payable ($143,350 x 8%) 11,468.00
Federal Unemployment Tax Payable ($143,350 x 1%) 1,433.50
State Unemployment Tax Payable ($143,350 x 5%) 7,167.50
To record employer's share of payroll taxes.

*($107,000 + $7,650) x (8% + 1% + 5%) = $16,051
**($16,500 + $12,200) x (8% + 1% + 5%) = $4,018
9. Ken Astor is a factory worker at Flox Co. earning $27.00 per hour. Astor is eligible for five paid holidays
and six weeks vacation and is paid “time-and-a-half” for overtime. Astor’s earnings so far this year are
$45,000.
Tax rates are as follows:
Employee income tax 15% on all earnings
FICA 8% on first $100,000 of earnings
FUTA 1% on first $8,000 of earnings
SUTA 4% on first $8,000 of earnings
Assuming Ken worked 46 hours this week, calculate the total expense to Flox Co for this weeks, wages,
payroll taxes and fringe benefits.
ANS:
Wages: Total
Regular wages $27 x 46 hr. $1,242.00
Overtime premium $13.50 x 6 hr. 81.00 $1,323.00
Employer payroll tax *
FICA $1,323 x 8% 105.84

Fringe benefits **
Vacation $27 x 40 hours = 1,080 x 6 = 6,480/46 = 140.87
Holiday 5 days paid = 1,080/46 23.48
$1,593.19
* Astor has already exceed the unemployment tax limits.
** Since Astor has 6 weeks of vacation, he is earning his benefits over the 46 weeks he works.
10. Tacy Company’s Schedule of Earnings and Payroll taxes for the period ended March 28 - 31 to be paid
April 5 follow:
Total
payroll
Gross
taxes
Wages
FICA SUTA FUTA
Non-factory:
Sales $ 7,500 $ 600 $ 240 $ 60 $ 900
11,500 920 352 88 1,360
Factory:
Direct labor 52,000 4,160 2,080 520 6,760
Overtime premium 4,500 360 180 45 585
Indirect labor 10,000 800 400 100 1,300
66,500 5,320 2,660 665 8,645
$78,000 $6,240 $3,012 $753 $10,005
Prepare the journal entries to:

(a) Accrue the payroll in the appropriate period
(b) Distribute the accrued payroll in the appropriate period
(c) Recognize related accrued employer’s payroll taxes in the appropriate period
assuming payroll taxes are spread over all jobs produced.
ANS:
The following journal entries would be recorded in March
(a) Payroll 78,000
To accrue payroll for the period Mar. 28 - 31
(b) Work in Process 52,000
Factory Overhead (10,000 + 4,500) 14,500
Sales Salaries 7,500
Payroll 78,000
To distribute payroll for period Mar. 28 - 31
(c) Factory Overhead 8,645
Payroll Tax Expense - Sales Salaries 900
Payroll Tax Expense - Administrative Salaries 460
Federal Unemployment Tax Payable 753
To recognize employer’s payroll taxes for the

period Mar. 28 - 31.

11. A direct laborer in a factory earns $1,000 each week. In addition, she will receive a $2,500 bonus at year
end, a two-week paid vacation, and seven paid holidays.
Prepare the entry to distribute her wages and the costs and liabilities related to bonus, vacation, and
holiday pay. (Round all amounts to two decimal places.)
ANS:
Work in Process $1,000
Factory Overhead (bonus) 50
Factory Overhead (vacation) 40
Factory Overhead (holiday pay) 28
Payroll 1,000
Bonus Liability* 50
Vacation Pay Liability** 40
Holiday Pay Liability*** 28
* Bonus: $2,500 / 50 weeks = $50 per week

** Vacation: $1,000 x 2 weeks = $2,000 / 50 = $40 per week
*** Holiday pay: $1,000 / 5 days = $200 per day  7
= $1,400
$1,400 / 50 weeks = $28 per week
CHAPTER 4—ACCOUNTING FOR FACTORY OVERHEAD
MULTIPLE CHOICE
1. Factory overhead includes:
a. Indirect labor but not indirect materials.

b. All manufacturing costs except direct materials and direct labor.
c. All manufacturing costs.
d. Indirect materials but not indirect labor.
ANS: B
Factory overhead includes all manufacturing costs, except direct materials and direct labor. Because of
the variety and number of items that can be classified as factory overhead, this "except" definition is
often used to define and classify factory overhead costs and expenses.
2. Which of the following costs would be included in factory overhead in the manufacture of a student’s
desk?
a. The wages of the operator of the machine that bends the metal legs of the desk into
shape.
b. The wages of the forklift operator who moves finished desks to the finished goods
warehouse.
c. The cost of the plastic used to form the writing surface.
d. The wages of the worker who assembles the components.
ANS: B
The plastic used to form the writing surface of the desk is a direct material as it can be traced directly to
the finished product. The wages of the machine operator and the assembly worker are direct labor
costs as they add value to the product. The wages of the forklift operator would be classified as indirect
labor as s/he does not actually work on the products themselves. Indirect labor is included in factory
overhead.

3. Which of the following costs would not be included in factory overhead in the manufacture of a
student’s desk?
a. The oil used to maintain the machinery.

b. The salary of the supervisor of the Assembly department.
c. The metal used to form the legs of the desk.
d. The wages of personnel who perform inspections of incoming materials.
ANS: C
The metal used to form the legs of the desk would be a direct material, and therefore would not be
included as factory overhead.
4. Costs that vary in proportion to direct volume changes are:
a. variable costs.
b. factory overhead costs.
c. semi-variable costs.
d. personnel costs.
ANS: A
Costs that vary in proportion to changes in volume are variable costs.
5. The following cost is an example of a variable factory overhead cost:
a. Plant utilities.
b. Material handling costs.
c. Salary of the plant manager.
d. Factory supplies.
ANS: D
The cost of factory supplies is considered variable because the cost moves in proportion with production
volumes. The salary of the plant manager is a fixed cost as it remains constant despite changes in plant
volumes. Plant utilities are a Type B semi-variable cost because this cost includes both fixed and
variable components. The material handling costs are a Type A semi-variable, or step-variable, cost
because the cost remains constant over a range of production then abruptly changes.
6. Variable overhead costs include all of the following except:
a. Electricity to power machinery.

b. Factory supplies.
c. Rental of factory building.
d. Small tools.
ANS: C
The rent paid for the factory would not vary with production levels. The costs of electricity, indirect
materials and small tools would increase as production levels increased.
7. Fixed factory overhead costs include:
a. Property taxes.
b. Plant manager’s salary.
c. Factory insurance.
d. All of the these are correct.
ANS: D
Fixed factory overhead costs include factory property taxes, plant manager’s salary, insurance on factory
and equipment.
8. Fixed overhead cost includes all of the following except:
a. Electricity to heat and light the factory.

b. Depreciation on machinery computed based on the units of production basis.
c. The plant manager’s salary.
d. The salary of the security guard at the front door.
ANS: B
Depreciation calculated based on the number of hours the equipment is used is a variable cost.
9. Factory overhead:
a. Can be a variable cost or a fixed cost.

b. Is a prime cost.
c. Can only be a fixed cost.
d. Includes all factory labor.
ANS: A
Factory overhead includes variable costs, such as indirect materials and power expenses, and fixed
costs, such as depreciation, property taxes, and insurance. Prime costs include direct labor and direct
materials. All factory labor is incorrect because this would also include direct labor.
10. Costs that change in relation to volume changes, but not in direct proportion to those changes, are
known as:
a. Variable costs.
b. Semivariable costs.
c. Fixed costs.
d. Curvilinear costs.
ANS: B
One type of semivariable costs change in total as volume changes, but not in direct proportion to such
changes.
11. Consider the following costs:
I. The cost of electricity which is used to power machinery and light the plant.
II. Depreciation on the building which houses both the factory and the sales office.
Which of the following statements is true?
a. Only statement I is an example of a semivariable cost.

b. Only statement II is an example of a semivariable cost.
c. Both statements I and I are examples of semivariable costs.
d. Neither statement I nor II is an example of a semivariable cost.
ANS: A
The electricity cost has both fixed and variable components, making it a semivariable cost. The building
depreciation is a fixed cost which has both manufacturing and selling cost components.
12. Which of the following statements about semivariable costs is not true?
a. They first have to be broken down into their fixed and variable components before they
can be used to predict costs at different levels of volume.
b. They are sometimes called mixed costs.
c. They vary in direct proportion to volume changes.
d. They may remain constant over a range of production, then abruptly change.
ANS: C
Variable costs vary in direct proportion to volume changes.
13. Methods for separating semivariable costs into their fixed and variable components include all of the
following except the:
a. High-low method.
b. Allocation method.
c. Scattergraph method.
d. Observation method.
ANS: B
The high-low, scattergraph and observation methods are all methods used to separate semivariable
costs into their fixed and variable components.
14. The method of analyzing the behavior of semivariable costs that relies heavily on the ability of an
observer to detect a pattern of cost behavior by reviewing past cost and volume data is the:
a. High-low method.
b. Method of least squares.
c. Scattergraph method.
ANS: D
The observation method, also called the account analysis method, is the method of analyzing the
behavior of semivariable costs that relies heavily on the ability of an observer to detect a pattern of cost
behavior by reviewing past cost and volume data.
15. The method of analyzing cost behavior that uses two data points to first determine the variable cost per
unit and then the total fixed cost is the:
a. Method of least squares.

b. Scattergraph method.
c. High-low method.
ANS: C
The high-low method analyzes cost behavior by using two data points to first determine the variable
cost per unit and then the total fixed cost.
16. Nutt Industries electricity costs and machine hours over a six-month period follow:
Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600

June 2,200 5,000
Using the high-low method, what is the estimated electricity cost per machine hour?
a. $.60
b. $1.67
c. $1.00
d. $.80
ANS: A
Variable cost:
Machine Hours Electricity Costs

High volume 3,000 $5,400
Low volume 2,000 4,800
Difference 1,000 $ 600
Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour
17. Nutt Industries electricity costs and machine hours over a six-month period follow:
Machine Electricity
Hours Cost
January 2,000 $4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000

May 2,800 5,600
June 2,200 5,000
Using the high-low method, what is the formula that can be used to estimate electricity costs at
different levels of volume?
a. Electricity costs = $2,800 + ($1.00 x number of machine hours)

b. Electricity costs = $2,600 + ($1.00 x number of machine hours)
c. Electricity costs = $400 + ($1.67 x number of machine hours)
d. Electricity costs = $3,600 + ($.60 x number of machine hours)
ANS: D
Variable cost:
Machine Hours Electricity Costs

High volume 3,000 $5,400
Low volume 2,000 4,800
Difference 1,000 $ 600
Variable cost per labor hour = $600 / 1,000 hours = $.60/machine hour
Fixed cost:
2,000 Hours 3,000 Hours

Cost $4,800 $5,400
Variable @ $.60/hour 1,200 1,800
Difference $3,600 $3,600
Electricity costs = $3,600 + ($.60 x number of machine hours)

18. After the observations of cost and production data are plotted on graph paper, a line is drawn by visual
inspection representing the trend shown by most of the data points using the:
a. Observation method.
b. High-low method.
c. Method of least squares.
d. Scattergraph method.
ANS: D
Using the scattergraph method, the observations of cost and production data are plotted on graph
paper, and then a line is drawn by visual inspection representing the trend of most of the data points.
19. A major disadvantage of the scattergraph method of analyzing cost behavior is:
a. It bases its solution on only two observations.

b. It results in its analyzed cost being treated as either fixed or variable, based on which
type of behavior it more closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.
ANS: C
(a) is a disadvantage of the high-low method.
(b) is a disadvantage of the observation method.
(d) is an advantage of the scattergraph method.

20. Victoria is a budget analyst at Young Industries. She used the least squares regression method to
separate the plant’s monthly utilities cost into its fixed and variable components. The results were as
follows:
Y = 3,250 + .054 X
X = the number of units produced
R2 = .892
Which of the following statements is not true about Victoria’s cost model?
a. Y represents the total semi-variable cost.

b. The total monthly fixed utilities costs are $3,250.
c. X is referred to as the dependent variable.
d. The equation Y = 3,250 + .054 X would be represented as a straight line on a graph.
ANS: C
X is referred to as the independent variable. Y is the dependent variable because its value depends on
X.
follows:
Y = 3,250 + .054 X
R2 = .892
How should Victoria interpret the R 2 of .892?
a. The equation is a better predictor of fixed costs than of variable costs 89.2% of the time.
b. The equation will accurately predict utility costs 89.2% of the time.
c. Fixed costs make up 89.2% of the total semi-variable cost in any given month.
d. The number of units produced explains 89.2% of the variation in the plant utilities cost.
ANS: D
R2 refers to how much of the variability in the dependent variable, in this case the utilities cost, is
explained by changes in the dependent variable, which is the number of units produced.
NAT: IMA 2A - Budget Preparation TOP: AACSB - Reflective
22. Flexible budgeting is a reporting system wherein the:
a. Budget shows estimated costs at different levels of production volume.

b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Statements included in the budget report vary from period to period.
ANS: A
Flexible budgeting separates costs into fixed and variable elements and shows estimated costs at
different levels of production volume.
NAT: IMA 2A- Budget Preparation TOP: AACSB - Analytic
23. Stanforth Company’s flexible budget for 50,000 units shows $100,000 and $150,000 in variable and fixed
costs, respectively. At 60,000 units, the flexible budget would show:
a. Variable costs of $150,000 and fixed costs of $150,000.

b. Variable costs of $120,000 and fixed costs of $180,000.
c. Variable costs of $100,000 and fixed costs of $180,000.
d. Variable costs of $120,000 and fixed costs of $150,000.
ANS: D
Variable costs per unit = $100,000/50,000 = $2 per unit.
60,000 units x $2 = $120,000. Fixed costs of $150,000 remain constant.
24. Venus Company has developed the following flexible budget formula for annual indirect labor cost:
Total annual cost = $12,000 + $.25 / unit
Operating budgets for the current month are based on 5,000 units. Indirect labor costs included in this
monthly planning budget are:
a. $13,250.
b. $1,250.
c. $3,200.
d. $2,250.
ANS: D
Indirect labor cost for month:

Fixed costs ($12,000 / 12) $1,000
Variable costs (5,000 units  $.25) 1,250
Total $2,250
follows:
Y = 3,250 + .054 X
R2 = .892
Based on these results, the December budget for plant utilities cost if Young Industries plans to produce
100,000 units in that month would be:
a. $5,400
b. $8,650
c. $3,250
d. $8,920
ANS: B
If the plant plans to produce 100,000 units:
Y = 3,250 + .054 (100,000)
Y = 3,250 + 5,400
Y = 8,650
26. When preparing a flexible budget for factory overhead costs, what will occur to fixed costs (on a per-unit
basis) as production increases?
a. Fixed costs per unit will increase.

b. Fixed costs are not considered in flexible budgeting.
c. Fixed costs per unit will decrease.
d. Fixed costs per unit will remain unchanged.
ANS: C
As production increases, the fixed cost per unit decreases because the total fixed cost is spread over a
larger number of units.
27. If a company uses a factory overhead ledger, at the end of the month, an accountant should:
a. close the accounts in the factory overhead ledger to Work in Process.

b. total the accounts in the factory overhead ledger and compare the total to the balance in
the Factory Overhead control account.
c. prepare a schedule of fixed costs.
d. All of the above are true.
ANS: B
At the end of the month, the accounts in the factory overhead ledger should be added up and the total
compared to the balance in the Factory Overhead control account.
28. Which of the following statements is true?
I. An expense-type factory overhead analysis spreadsheet makes it possible to distribute expenses on a

departmental basis as they are incurred.
II. A department-type factory overhead analysis worksheet makes it possible to distribute expenses on
a departmental basis as they are incurred.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
ANS: C
Both the expense-type and the department-type factory overhead analysis spreadsheets make it
possible to distribute expenses on a departmental basis as they are incurred because they contain the
same information.
29. The most appropriate basis for allocating the factory building rent to specific departments would be the:
a. Number of machines in each department.

b. Number of employees in each department.
c. Square footage of each department.
d. Amount of time the plant manager spends in the department.
ANS: C
Factory rent should be allocated to departments based on the amount of space each department
occupies within the factory.
30. The report that is prepared after the posting is completed at the end of the accounting period that
shows the items of expense by department and in total, and is used to prove the balance of the Factory
Overhead Control account is the:
a. Schedule of Fixed Cost.

b. Summary of Factory Overhead.
c. Flexible Budget.
d. Subsidiary Ledger.
ANS: B
The Summary of Factory Overhead shows the items of expense by department and in total and is used
to prove the balance of the Factory Overhead Control account.

31. Which of the following is most likely to be considered a service department in a manufacturing plant?
a. Assembly
b. Maintenance
c. Finishing
d. Fabrication
ANS: B
A maintenance department is a service provided to direct production departments, such as those listed
in answers a, c, and d.
32. In a factory, all of the following would be considered service departments except:
a. Inspection and Packing

b. Assembly
c. Power
d. Human Resources
ANS: B
Inspection and Packing, Power and Human Resources all represent service departments. Assembly is a
production department.
33. Which of the following statements about service departments and their costs is not true?
a. Service departments rarely provide services to other service departments.

b. Some service departments may be able to precisely measure the services it provides to
other departments.
c. Service department costs should be included in total product costs.
d. Allocation of service department costs should be made on an equitable basis.
ANS: A
It is common for service departments such as Plant Maintenance, Human Resources or Power to provide
services to other service departments.
34. The number of workers in the departments served would most likely be the basis for distributing the
cost of which service department?
a. Human Resources
b. Tool Room
c. Building Maintenance
d. Machine Shop
ANS: A
The number of workers in the departments served would be an appropriate basis to distribute the costs
of the Human Resource Department to other departments.
35. Kilowatt hours would be an appropriate basis for distributing the cost of which of the following service
departments to production departments?
a. Power
b. Machine Maintenance
c. Human Resources
d. Building Maintenance
ANS: A
Kilowatt hours is a measure of the power used, so this would be an appropriate basis with which to
distribute the costs of the Power Department.
36. The method of distributing service department costs to production departments which makes no
attempt to determine the extent to which one service department renders its services to another
department is the:
a. Direct distribution method.

b. Sequential distribution method.
c. Service department distribution method.
d. Algebraic distribution method.
ANS: A
The direct distribution method distributes service department costs to production departments without
regard to any services the service departments render to each other.
37. The method of distributing service department costs to production departments which distributes
service department costs regressively to other service departments, and then to production
departments is the:
a. Direct distribution method.

b. Sequential distribution method.
c. Service department distribution method.
d. Algebraic distribution method.
ANS: B
The sequential distribution method distributes service department costs regressively to other service
departments and then to production departments.
38. The method of distributing service department costs to production departments that takes into
consideration that service departments not only may provide service to but also may receive service
from other service departments is the:
a. direct distribution method.

b. sequential distribution method.
c. service department distribution method.
d. algebraic distribution method.
ANS: D
The method of distributing service department costs that takes into account the services that service
departments both provide to and receive from other service departments is the algebraic method.
39. The preferred sequence for distributing the cost of service departments to production departments
when using the sequential distribution method is:
a. to distribute the cost of the service department with the largest total overhead cost first.
b. to always distribute the cost of the Human Resources Department first.
c. to distribute the costs of the service departments to the production department having
the largest amount of overhead cost first.
d. to distribute the costs of the service department that services the greatest number of
departments first.
ANS: D
The preferred sequence for distributing the cost of service departments when using the sequential
distribution method is to distribute the cost of the service department that services the greatest number
of departments first. If there is uncertainty as to which department’s costs should be distributed to the
other service departments first, then the service department with the largest total overhead cost should
be distributed first.
40. The Lucas Manufacturing Company has two production departments (fabrication and assembly) and
three service departments (general factory administration, factory maintenance, and factory cafeteria).
A summary of costs and other data for each department, prior to allocation of service department costs
for the year ended June 30, appears below:
The costs of the general factory administration department, factory maintenance department, and
factory cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number
of employees, respectively.
General
Factory Factory Factory
Fabrication Assembly Admin. Maint. Cafeteria

Direct labor costs: $1,950,000 $2,050,000
Direct material costs: $3,130,000 $ 950,000
Factory overhead costs: $1,650,000 $1,850,000 $80,000 $67,500 $58,000
Direct labor hours: 237,690 387,810
Number of employees: 160 128 20 42 25
Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800
Assuming that Lucas elects to distribute service department costs to production departments using the
direct distribution method, the amount of general factory administration department costs that would
be allocated to the assembly department would be (round all final calculations to the nearest dollar):
a. $30,400.
b. $25,650.
c. $0.
d. $49,600.
ANS: D
General Factory Administration allocates its costs based on direct labor hours.
General Factory Administration Costs

Direct labor hours:
Fabrication 237,690
Assembly 387,810
Total 625,500
Allocation to Assembly Department:

387,810 / 625,500  $80,000 = $49,600
for the year ended June 30, appears below.
General


Assuming that Lucas elects to distribute service department costs to production departments using the
direct distribution method, the amount of factory maintenance department costs that would be
allocated to the fabrication department would be (round all final calculations to the nearest dollar):
a. $22,804.
b. $15,000.
c. $27,000.
d. $14,674.
ANS: C
Factory Maintenance allocates its total costs based on square footage.
Factory Maintenance Costs

Square Footage of:
Fabrication 20,000
Assembly 30,000
Total 50,000
Allocation to Fabrication Department:

20,000 / 50,000  $67,500 = $27,000
42. The Jason Manufacturing Company has two production departments (millwright and assembly) and
three service departments (general factory administration, factory maintenance, and factory
development). A summary of costs and other data for each department, prior to allocation of service
department costs for the year ended March 30, appears below.
factory development department are allocated on the basis of direct labor hours, square footage
occupied, and number of employees, respectively.
General
Millwright Assembly Admin. Maint. Devel.

Assuming that Jason elects to use the sequential method to distribute service department costs
(starting with factory development), what would be the amount of factory development that would be
allocated to the factory maintenance department?
a. $ 9,100.
b. $ 4,350.
c. $29,640.
d. $0.
ANS: A
Factory Development allocates its costs based on the number of employees.
Factory Development Costs

Number of Employees:
Millwright 210
Assembly 255
General Factory Adm. 51

Factory Maintenance 84
Total 600
Allocation to Factory Maintenance Department:

84 / 600  $65,000 = $9,100
for the year ended June 30, appears below:
General

Assuming that Lucas elects to use the sequential method to distribute service department costs
(starting with the factory cafeteria), what would be the amount of factory cafeteria costs that would be
allocated to the factory maintenance department?
a. $3,314
b. $6,960
c. $5,800
d. $0
ANS: B
Factory Cafeteria allocates its costs based on the number of employees.
Factory Cafeteria Costs

Number of Employees:
Fabrication 160
Assembly 128
General Factory Adm. 20
Factory Maintenance 42
Total 350
Allocation to Factory Maintenance Department:

42 / 350  $58,000 = $6,960
44. Once the amounts of the service department allocations have been determined, a journal entry should
be prepared to record the distributions, the result of which is:
a. debit balances in the Factory Overhead accounts of the production departments for
which the total agrees to the total amount of factory overhead incurred.
b. credit balances in the Factory Overhead accounts of the production departments for
which the total agrees to the total amount of factory overhead incurred.
c. debit balances in the Factory Overhead accounts of the service departments for which
the total agrees to the total amount of factory overhead incurred.
d. credit balances in the Factory Overhead accounts of the service departments for which
the total agrees to the total amount of factory overhead incurred.
ANS: A
Once the allocations have been determined, journal entries are made to either close the Factory
Overhead control account or the Factory Overhead accounts for the service departments to Factory
Overhead accounts for each of the production departments. This enables the application of factory
overhead to Work in Process using predetermined rates for each department.
45. A predetermined factory overhead rate is computed by dividing
a. Actual overhead cost by actual activity.

b. Actual overhead cost by budgeted activity.
c. Budgeted overhead by actual activity.
d. Budgeted overhead by budgeted activity.
ANS: D
Overhead needs to be allocated through a period of time. Actual costs and activity per period are not
known until the period is done.
46. Meger Manufacturing uses the direct labor cost method for applying factory overhead to production.
The budgeted direct labor cost and factory overhead for the previous fiscal year were $1,000,000 and
$800,000, respectively. Actual direct labor cost and factory overhead were $1,100,000 and $825,000,
respectively.
What was Meger’s predetermined factory overhead rate?
a. 80%
b. 125%
c. 75%
d. 133%
ANS: A
Predetermined factory overhead rate = Budgeted factory overhead
Budgeted direct labor cost
$800,000/$1,000,000 = 80%
$800,000, respectively.
During the year, the company started and completed Job 352A, which had direct material and labor
costs of $32,000 and $45,000, respectively. What was the cost of Job 352A?
a. $77,000
b. $81,000
c. $102,600
d. $113,000
ANS: D
$800,000/$1,000,000 = 80%
Direct material $ 32,000
Direct labor 45,000
Applied factory overhead - $45,000 x 80% 36,000
Total job cost $113,000

48. The Owens Company uses the direct labor hour method of applying factory overhead to production.
The budgeted factory overhead last year was $200,000, and there were 40,000 machine hours and
50,000 direct labor hours budgeted. Job 84 was started and completed during the period. Direct
materials costing $900 were incurred. Twenty-five direct labor hours were worked at a cost of $350,
and 40 machine hours were incurred. What is the amount of factory overhead applied to Job 84?
a. $200
b. $100
c. $160
d. $125
ANS: B
Predetermined overhead rate = Budgeted factory overhead
Budgeted direct labor hours
$200,000/ 50,000 hours = $4/ direct labor hour x 25 hours = $100
49. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a
budgeted volume of 60,000 direct labor hours. During the period, Mason started and completed Job
B25, which incurred 200 labor hours at a cost of $2,200, and $5,000 of direct materials. What was the
cost of Job B25?
a. $7,400
b. $8,000
c. $7,250
d. $13,800
ANS: B
Budgeted direct labor hours
$240,000/ 60,000 hours = $4/ direct labor hour
Direct material $5,000
Direct labor 2,200
Applied factory overhead - 200 hours x $4 800
50. Which of the following statements about using the direct labor hour method of applying factory
overhead to production is false?
a. It may not be as accurate as the direct labor cost method if factory overhead primarily
consists of items more closely tied to employee wages, such as benefits.
b. The application base could be substantially smaller than when direct labor cost is used.
c. It is the most appropriate method for a highly automated department.
d. The amount of factory overhead applied is not affected by the mix of labor rates.
ANS: C
It would be more appropriate to use the machine hour method of applying factory overhead in a highly
automated environment.
51. When a manufacturing company has a highly automated manufacturing plant, what is probably the
most appropriate basis of applying factory overhead costs to work in process?
a. Machine hours
b. Cost of materials used
c. Direct labor hours
d. Direct labor dollars
ANS: A
In a highly automated plant, the actual factory costs assigned to products through a predetermined rate
would be more accurately allocated by a machine-hour application method.
NAT: IMA 2B- Cost Management TOP: AACSB - Reflective
52. The Owens Company uses the machine hour method of applying factory overhead to production. The
budgeted factory overhead last year was $200,000, and there were 40,000 machine hours budgeted.
Job 84 was started and completed during the period. Direct materials costing $900 were incurred.
Twenty-five direct labor hours were worked at a cost of $350, and 40 machine hours were incurred.
What was the cost of Job 84?
a. $1,450
b. $1,375
c. $1,250
d. $1,290
ANS: A
Budgeted machine hours
$200,000/ 40,000 hours = $5/ machine hour
Direct material $ 900
Direct labor 350
Applied factory overhead - 40 hours x $5 200

53. Activity-based costing considers non-volume-related activities that create costs such as:
a. Direct labor usage.

b. Machine operations.
c. Consumption of indirect materials and energy usage.
d. Machine setups and product design changes.
ANS: D
(D) Activity-based costing considers non-volume related activities that create costs such as machine
setups and product design changes.
54. To successfully employ an ABC system, a company must first identify:
a. Non-volume related activities in the factory that create costs.

b. Cost drivers.
c. Cost pools.
d. Overhead allocation rates.
ANS: A
To successfully employ an activity-based costing system, a company must first identify non-volume
related activities in the factory that create costs. Once these have been identified, cost drivers and cost
pools can be identified in order to calculate overhead calculation rates.
55. A cost driver is:

a. An overhead or activity rate.
b. A basis used to allocate each of the activity cost pools.
c. The estimated cost of each activity pool.
d. Used only to allocate non-volume-related costs.
ANS: B
A cost driver is a basis used to allocate each of the activity cost pools.
56. The Mason Corporation budgeted overhead at $240,000 for the period for Department A based on a
budgeted volume of 60,000 direct labor hours. At the end of the period, the factory overhead control
account for Department A had a debit balance of $260,000; actual direct labor hours were 63,000.
What was the under- or over applied factory overhead for the period?
a. $12,000 overapplied
b. $ 8,000 overapplied
c. $ 8,000 underapplied
d. $12,000 underapplied
ANS: C
Predetermined rate: $240,000/60,000 (DLH) = $4.00

Actually applied: 63,000 (DLH)  $4.00 = $252,000
Applied factory overhead $252,000
Actual factory overhead 260,000
Underapplied overhead $ (8,000)
NAT: IMA 2B- Cost Management TOP: AACSB - Analytic

$800,000, respectively. Actual direct labor cost and factory overhead were $1,100,000 and $825,000,
respectively.
What is the amount of under- or overapplied factory overhead?
a. $25,000 overapplied
b. $55,000 overapplied
c. $80,000 overapplied
d. $50,000 underapplied
ANS: B
$800,000/$1,000,000 = 80%
Applied factory overhead = $1,100,000 x 80% $880,000
Actual factory overhead incurred 825,000
Overapplied factory overhead $ 55,000
58. The Owens Company uses the machine hour method of applying factory overhead to production. The
budgeted factory overhead last year was $200,000, and there were 40,000 machine hours budgeted.
Actual machine hours incurred during the period were 38,000, and actual factory overhead was
$215,000. What was the amount of under- or overapplied factory overhead?
a. $10,000 underapplied
b. $15,000 underapplied
c. $25,000 underapplied
d. $10,000 overapplied
ANS: C
Budgeted machine hours
$200,000/ 40,000 hours = $5/ machine hour
Applied factory overhead = 38,000 x $5 $190,000
Underapplied factory overhead $(25,000)
59. Overapplied overhead will always result when a predetermined factory overhead rate is employed and:
a. Overhead incurred is more than overhead applied.

b. Overhead incurred is less than overhead applied.
c. Production is greater than sales.
d. Actual overhead costs are more than expected.
ANS: B
Whenever the overhead incurred (charges to factory overhead) is less than the overhead credited to
factory overhead through the application rate, the result will be overapplied overhead.
60. Spencer Company had overapplied factory overhead of $5,000 last year. Which of the following
statements is not true?
a. A higher level of production may have been achieved than budgeted for.
b. The Work in Process account was overcharged for the costs of factory overhead incurred
during the period.
c. The actual factory overhead expenses may have been less than budgeted for the
operating level achieved.
d. Assuming the amount is not material enough to distort net income, Cost of Goods Sold
should be increased by this amount.
ANS: D
If factory overhead is overapplied, Work in Process was overcharged for the costs of Factory Overhead
incurred during the period. This may have been due to higher production levels or lower than budgeted
expenses. Overcharging Work in Process for overhead results in higher total product costs; therefor,
Cost of Goods sold should be decreased to offset those higher costs.
61. If over- or underapplied factory overhead would materially distort net income if the entire amount was
charged to Cost of Goods Sold, it should be:
a. Carried forward in the overhead control account from year to year.

b. Eliminated by changing the predetermined factory overhead rate in subsequent years.
c. Apportioned among the work in process inventory, the finished goods inventory, and the
cost of goods sold.
d. Treated as a special gain or loss occurring during the year.
ANS: C
When the amount of over- or underapplied overhead would distort net income if the entire amount was
charged to Cost of Goods Sold, it should be allocated to work in process, finished goods, and costs of
goods sold exclusively.
62. Cooper Company had overapplied factory overhead of $2,000 last year. Assuming the amount was
considered small enough not to materially distort net income, the entries needed to close factory
overhead are:
Applied Factory Overhead 2,000
b. Factory Overhead 2,000
Under- and Overapplied
c. Factory Overhead 2,000
Under- and Overapplied Factory
Overhead 2,000
d. Factory Overhead 2,000
ANS: C
After closing the Applied Factory Overhead account into the Factory Overhead Account, the Factory
Overhead Account will have a credit balance of $2,000. A debit for $2,000 will be needed to close the
Factory Overhead Account into the Under- and Overapplied Factory Overhead Account, which will be
credited for $2,000. A debit of $2,000 will then be needed to close the Under- and Overapplied Factory
Overhead account to Cost of Goods Sold, which will be credited for $2,000.
63. The entry to apply factory overhead to jobs includes:
a. a debit to Applied Factory Overhead.

b. a debit to Work in Process.
c. a credit to Work in Process.
d. a debit to Cost of Goods Sold.
ANS: B
The entry to apply factory overhead to jobs is:
Debit - Work in Process
Credit - Applied Factory Overhead
PROBLEM
1. Kater Company manufactures shelving units. The company receives pre-cut wood, drills holes in the
wood so that movable shelves may be installed, then assembles and paint the units. Classify each of the
following items of factory overhead as either fixed or variable cost.
a. Janitorial service (an outside service, not company employees)
b. Supervisor of the Drilling Department

c. Oil used to lubricate drill press machines
d. Propane for forklift trucks used to move the material from the Drilling Department to the
Assembly Department
e. Natural gas used to heat the plant
f. Security guard
g. Drill bits used in the drilling department
h. Insurance on factory building
i. Electricity to power drill press machines
j. Rent of factory building
ANS:
a. Fixed. A janitorial service is most likely hired for a nightly cleaning, regardless of production
volume.
b. Fixed. The cost of supervisors is likely to remain constant unless production volumes increase
significantly.
c. Variable. The higher the production volume, the more the presses will run and more oil will be
required to lubricate them.
d. Variable. The higher the production volume, the more the forklifts will be needed to move
materials to the Assembly Department.
e. Fixed. Heating costs will not vary in proportion to production volumes.
f. Fixed. Increased production volumes will not necessitate additional security, which is dictated
more by plant size, location and type of business.
g. Variable. Drill bits wear out as they are being used. Increased production volumes will call
for an increased number of drill bits.
h. Fixed. Insurance premium based on value of building, not on production volumes.
i. Variable. Increased production volumes will necessitate increased electricity usage.
j. Fixed. Building rental determined by contract, not production volumes.
2. Santorini Ltd. has accumulated the following data over a six-month period:
Indirect Labor Indirect Labor

Hours Cost
January 500 $ 9,500
February 400 9,000
March 600 10,000
April 800 12,000
May 700 11,000
June 650 10,500
Determine the formula that could be used to determine Santorini’s indirect labor cost at various levels
of production using the high-low method.
ANS:
Variable cost:
Labor Hours Labor Costs

High volume 800 $12,000
Low volume 400 9,000
Difference 400 $ 3,000
Variable cost per labor hour = $3,000 / 400 hours = $7.50/labor hour
Fixed cost:
400 Hours 800 Hours
Cost $9,000 $12,000
Variable @ $7.50/hour 3,000 6,000
Difference $6,000 $ 6,000
Santorini’s cost formula:
Indirect labor costs = $6,000 + ($7.50 x number of indirect labor hours)
3. The following are the results of the least squares regression method which was run to separate the fixed
and variable components of the Zulli Corporation’s monthly factory utility costs using the number of
products produced:
y = 49,222.2992 + 5.09 x
R2 = .97765
a) Assume Zulli budgets production of 5,400 units in June, what should budgeted utility costs be?
b) Explain what R2 means. Is this equation a good predictor of utility costs?
ANS:
a) Budgeted utility costs at 5,400 units of production (rounded to the nearest dollar):
y = 49,222 + 5.09 (5,400)
y = 49,222 + 27,486
y = 76,708
b) R2 = .97765 means that 97.8% of the variation in the utility cost is explained by the variation in the
number of units produced. This is very high and it is an indication that units of production are a good
variable to use in explaining changes in utilities cost.
4. Domino Bakery has the following budget at 1,000,000 dozen donuts baked:
Variable factory overhead 200,000
Fixed factory overhead 180,000
$930,000
(1) Compute the cost per dozen donuts at 1,000,000 dozen.
(2) Develop the budget for 1,200,000 dozen donuts.
(3) Compute the cost per dozen donuts at 1,200,000 dozen.
(4) Explain why the difference in the cost per dozen occurs at the different levels of volume.
ANS:
(1) Cost per dozen = $930,000/1,000,000 dozen = $.93/dozen donuts
(2)
Budget @
1,200,000 dozen
Cost per dozen
Direct materials 300,000/1,000,000 = .30/dozen $ 360,000
Direct labor 250,000/1,000,000 = .25/dozen 300,000
Variable factory overhead 200,000/1,000,000 = .20/dozen 240,000
$1,080,000
(3) Cost per dozen = $1,080,000/1,200,000 dozen = $.90/dozen donuts

(4) The cost per dozen decreases as volume increases because fixed costs are spread over a larger
number of units.
5. Dean Corporation has two service departments, Power and Maintenance, and two production
departments, Painting and Polishing. The following data have been estimated for next year’s
operations:
Department: Direct Charges Kilowatt Hours Used Square Footage

Power $450,000 20,000 10,000
Maintenance 120,000 50,000 5,000
Painting 235,000 100,000 30,000
Polishing 265,000 150,000 20,000
Requirements:
(1) a) For which service department would you use kilowatt hours to allocate service costs.
b) For which service department would you use square footage to allocate service costs.
(2) Distribute the service department costs using the direct distribution method.
(3) Prepare the journal entries to distribute the costs of the service departments to the production
departments given the results of your calculations.
ANS:
(1) It would be more appropriate to distribute Power department costs using kilowatt hours and
distribute maintenance costs using square footage.
(2) Direct Distribution Method:
Power Maintenance Painting Polishing Total

Total direct charges 450,000 120,000 235,000 265,000 1,070,000
Power distribution
(kilowatt hrs.)
Painting
100,000 x $1.80*
180,000
Polishing
150,000 x 1.80
270,000
Maintenance
distribution (sq. ft.)
Painting
30,000 x $2.40** 72,000
Polishing
20,000 x 2.40
_______ 48,000
487,000 583,000 1,070,000
* $450,000/(100,000 + 150,000) labor hours = $1.80/kilowatt hour
** $120,000/(30,000 + 20,000) square feet = $2.40/square foot
(3)
Factory Overhead - Painting 180,000
Factory Overhead - Polishing 270,000
Factory Overhead - Power 450,000
Factory Overhead - Maintenance 120,000

6. Dean Corporation has two service departments, Power and Maintenance, and two production
departments, Painting and Polishing. The following data have been estimated for next year’s
operations:
Department: Direct Charges Kilowatt Hours Used Square Footage

Power $450,000 20,000 10,000
Maintenance 120,000 50,000 5,000
Painting 235,000 100,000 30,000
Polishing 265,000 150,000 20,000
Requirements:
(1) Distribute the service department costs using the sequential distribution method.
Distribute the Power Department first.
(2) Prepare the journal entries to distribute the costs of the service departments to the production
departments given the results of your calculations.
ANS:
(1) Sequential Distribution Method:
Power Maintenance Painting Polishing Total

Total direct charges 450,000 120,000 235,000 265,000 1,070,000
Power distribution
(kilowatt hrs.)
Maintenance 75,000
50,000 x $1.80* 195,000
Painting
100,000 x $1.80
150,000
Polishing
150,000 x 1.80
225,000
Maintenance
Painting
30,000 x $3.90** 117,000
Polishing
20,000 x 3.90
_______ 78,000
502,000 568,000 1,070,000
* $450,000/(50,000 + 100,000 + 150,000) labor hours = $1.50/kilowatt hour
(2)
Factory Overhead - Power 450,000
7. Perry Company has two service departments, Maintenance and Human Resources, and two production
departments, Machining and Assembly. The following data have been estimated for next year’s
operations:
Department: Direct Charges Square Footage Labor Hours

Human Resources $135,000 -- --
Maintenance 100,000 -- 5,000
Machining 275,000 2,000 20,000
Assembly 225,000 3,000 25,000

The Human Resources Department services all departments.
Requirements:
(1) Distribute the service department costs using the direct distribution method.
(2) Distribute the service department costs using the sequential distribution method with the
department servicing the greatest number of other departments being distributed first.
(3) Using the results from the direct distribution method, calculate the predetermined factory
overhead rate for the machining department using labor hours as the basis.
ANS:
(1) Direct Distribution Method:
Human
Resources
Maintenance Machining Assembly Total
Total direct charges 135,000 100,000 275,000 225,000 735,000
Human resources
distribution (labor
hrs.)
Machining
60,000
20,000 x $3.00*
Assembly
25,000 x 3.00 75,000
Maintenance
Machining
2,000 x $20.00** 40,000
Assembly
3,000 x 20.00
_______ 60,000
375,000 360,000 735,000
* $135,000/(20,000 + 25,000) labor hours = $3.00/labor hour

(2) Sequential Distribution Method
Human
Resources
Maintenance Machining Assembly Total
Total direct charges 135,000 100,000 275,000 225,000 735,000
Human resources
distribution (labor
hrs.)
Maintenance
13,500
5,000 x $2.70* 113,500
Machining 54,000
20,000 x 2.70
Assembly
25,000 x 2.70 67,500
Maintenance
Machining
2,000 x $22.70** 45,400
Assembly
3,000 x 22.70
_______ 68,100
374,400 360,600 735,000
* $135,000/(5,000 + 20,000 + 25,000) labor hours = $2.70/labor hour
(3) $375,000/20,000 = $18.75/labor hour
Note to instructor: To reduce the difficulty of the problem, assign requirements 1 and 3 only, or
requirement 2 only.
8. You have been hired by Thompson Waterfall Manufacturing. Your first task is examine different
distribution methods for applying factory overhead to the various production orders that are processed
during a year.
The following information was taken from the annual budget:
Direct labor hours 80,000
Machine hours 160,000
Manufacturing costs:
Direct materials 190,000
Electric power 46,000
Payroll taxes 12,800
Machine maintenance and repair 10,200
Factory supplies 17,000
Factory heat and light 15,000
Depreciation, taxes, and insurance:

Factory buildings 124,000
Machinery 310,000
$1,190,000
Determine the following factory overhead application rates under each of the following
methods:
a.
(1) Direct labor cost
(2) Direct labor hours
(3) Machine hours
b. Prepare a schedule showing the prime cost and total cost of Order 329 with the factory
overhead costs applied on each of the three bases; Job Cost Sheet 329 shows the
following: raw materials, $6,200; direct labor, 6,000 hours and $29,000; machine hours,
2,800.
ANS:
(a) Factory overhead costs:

Indirect labor $ 65,000

Machinery 310,000
$600,000
(1) Direct labor cost: $600,000/$400,000 = 150%
(2) Direct labor hours: $600,000/80,000 = $7.50/hour
(3) Machine hours: $600,000/160,000 = $3.75/hour
(b) ORDER 329
Direct Direct
Labor Labor Machine

Cost Hours Hours
Raw materials $ 6,200 $ 6,200 $ 6,200
Direct labor 29,000 29,000 29,000
Factory overhead:
150%  $29,000 43,500
6,000 hours  $7.50 45,000
2,800 hours  $3.75 10,500
$78,700 $80,200 $45,700
9. Factory overhead for the Praeger Company has been estimated as follows:
Fixed overhead $122,500
Variable overhead $90,000
Budgeted direct labor hours 42,500
Production for the month was 90 percent of the budget, and actual factory overhead totaled $175,000.
Calculate:
a. The predetermined factory overhead rate.

b. The under- or overapplied factory overhead.
ANS:
$122,500 + $90,000 $5.00

(a) Predetermined overhead rate = =
42,500 DLH DLH
(b) Applied overhead (38,250 hrs*  $5.00/DL hr) $191,250
Actual overhead 175,000
Overapplied factory overhead $ 16,250
* 42,500 budgeted hours x 90% actual production level = 38,250 hours
10. The controller has asked you to examine different distribution methods for applying factory overhead to
the various production orders that are processed during a year.
The following information was taken from the annual budget:

Machinery 320,200
$1,335,000
Actual results for the year follow:
Direct labor $ 540,000
Direct material 200,000
$1,365,000
a. Determine the following factory overhead application rates under each of the following
methods:
(3) Machine hours
b. Determine the under- or overapplied factory overhead under each of the following
methods:
(3) Machine hours
ANS:
(a) Factory overhead costs:



Machinery 320,200
$630,000
Predetermined factory overhead rates:

(1) Direct labor cost: $630,000/$525,000 = 120%
(2) Direct labor hours: $630,000/84,000 hours = $7.50/hour
(3) Machine hours: $630,000/120,000 hours = $5.25/hour
(b) Applied factory overhead:
(1) Direct labor cost: $540,000 x 120% = $648,000
(2) Direct labor hours: 85,000 hours x $7.50/hour = $637,500
(3) Machine hours: 110,000 hours x $5.25/hour = $577,500
Under- or overapplied factory overhead:
Direct labor Direct labor Machine

hours
cost hours
Applied factory overhead $648,000 $637,500 $577,500
Actual factory overhead 625,000 625,000 625,000
Over-(Under)applied factory
overhead $ 23,000 $ 12,500 $(47,500)
11. Jarcly Manufacturing Company uses activity-based costing. The factory overhead budget for the coming
period is $1,053,000, consisting of the following:
Cost Pool Budgeted Amount

Supervision $ 320,000
Machine usage 420,000
Machine setups 187,000
Design changes 126,000
Totals $1,053,000
The potential allocation bases and their estimated amounts were as follows:
Allocation Base Budgeted Amount

Number of design changes 35
Number of setups 110
Machine hours 6,000
a. Determine the overhead rate for each cost pool, using the most appropriate
allocation base for each pool.
b. Job 80130 required $45,000 for direct materials, $20,000 for direct labor, 2,000
direct labor hours, 800 machine hours, five setups, and four design changes.
Determine the cost of Job 80130.
ANS:
(a) Supervision: $320,000 / 10,000 = $32 -- direct labor hour

Machine usage: $420,000 / 6,000 = $70 -- machine hour
Machine setups: $187,000 / 110 = $1,700 -- setup
Design changes: $126,000 / 35 = $3,600 -- design change
(b) Direct materials $ 45,000
Direct labor 20,000
Supervision ($32  2,000) 64,000
Machine usage (800  70) 56,000
Machine setups (5  1,700) 8,500
Design changes (4  3,600) 14,400
Total $207,900
12. Estimates made for a production department of the Automate Company for the month of October
show:
Budgeted factory overhead for hours worked $17,360
Estimated direct labor hours 3,100
Factory overhead is applied on the basis of direct labor hours. On October 31, the records show these
actual figures:
Actual overhead incurred $18,625
Direct labor hours worked 3,425

Prepare the entry or entries to 1) apply factory overhead to production; 2) record actual factory
overhead incurred assuming all items were purchased from vendors; 3) close out the two factory
overhead account balances to set up the overapplied or underapplied factory overhead; and 4) to close
the balance in under- or overapplied factory overhead to Cost of Goods Sold.
ANS:
Under- and Overapplied Factory Overhead 555
Under- and Overapplied Factory Overhead 555
Cost of Goods Sold 555
CHAPTER 5—PROCESS COST ACCOUNTING--GENERAL PROCEDURES
MULTIPLE CHOICE
1. A cost center in a process cost system is a:
a. Unit to which costs are accumulated.

b. Job.
c. Specific product.
d. Employee.
ANS: A
A cost center is a unit to which costs are accumulated.
NAT: IMA 2B - Cost Center TOP: AACSB - Analytic
2. Which of the following firms is least likely to use process costing?
a. A yogurt manufacturer.
b. A refiner of petroleum products.
c. A computer manufacturer.
d. A manufacturer of concrete products.
ANS: C
Makers of computers use job costing due to diversified product lines. The other firms produce
homogeneous products in continuous production.
3. Process costing techniques should be used in assigning costs to products:
a. If the product is manufactured on the basis of each order received.

b. In all manufacturing situations.
c. When production is only partially completed during the accounting period.
d. If the product is composed of mass-produced homogeneous units.
ANS: D
Process costing techniques should be used in assigning costs to products if the product is composed of
mass-produced homogeneous units.
4. Which of the following characteristics applies to process costing?
a. Differentiated products are provided on a special order basis.

b. Cost are accumulated by department.
c. Cost are accumulated by jobs.
d. Direct labor workers must keep detailed records as to the jobs on which they worked.
ANS: B
In a process costing system, costs may be accumulated by department, not by job; therefore requiring
more detailed labor records. Job costing would be used for special order items.
5. Characteristics that job order costing and process costing have in common include all of the following
except:
a. The use of predetermined factory overhead rates.

b. Each can be used by service firms.
c. The costs of materials and labor are charged to the departments where they are
incurred.
d. The primary objective is to complete a unit cost for products.
ANS: C
Charging the costs of material and labor to the departments in which they are incurred is a characteristic
of process costing. In job order costing, these costs are charged directly to jobs.

6. A true process costing system could make use of each of the following except:
a. Predetermined factory overhead rates.

b. Individual jobs.
c. Cost centers.
d. General ledger control accounts.
ANS: B
A true process costing system would not make use of individual jobs. Both process and job order cost
accounting systems can use predetermined factory overhead rates, cost centers, and responsibility
accounting.
7. All of the following could be included in the cost of a product located in the final production department
of a multi-step process except:
a. The costs of materials, labor and overhead identifiable with that department.
b. Marketing and distribution costs.
c. The costs of service departments that have been allocated to production departments.
d. The costs of prior production departments.
ANS: B
Marketing and distribution costs are not product costs.
8. Daniel LLC incurred cost of $43,000 for material, $26,000 for labor, and $23,000 for factory overhead.
There was no beginning or ending work in process. 5,000 units were completed and transferred out.
The unit cost for labor is:
a. $ 8.60
b. $ 5.20
c. $ 18.40
d. $ 4.60
ANS: B
Labor unit cost: $26,000 / 5,000 = 5.20
9. Daniel LLC incurred cost of $43,000 for material, $26,000 for labor, and $23,000 for factory overhead.
There was no beginning or ending work in process. 5,000 units were completed and transferred out.
The cost per unit is:
a. $ 8.60
b. $ 5.20
c. $ 18.40
d. $ 4.60
ANS: C
Material $43,000
Labor 26,000
Total costs $92,000
Divided by the number of units 5,000
Cost per unit $18.40

10. Using the average cost method of process costing, the computation of manufacturing cost per
equivalent unit considers:
a. Current costs only.

b. Current costs plus cost of beginning work in process inventory.
c. Current costs plus cost of ending work in process inventory.
d. Current costs less cost of beginning work in process inventory.
ANS: B
The average cost method of process costing considers current cost plus cost of beginning work in
process inventory.
11. The number of whole units that could have been completed during a period, using the production costs
incurred during that period is called:
a. Standard production.
b. Equivalent production.
c. Total units.
d. Manufactured units.
ANS: B
The number of whole units that could have been completed during a period, using the production costs
incurred during that period is called equivalent production.
12. A characteristic of a process cost accounting system is:
a. Costs are accumulated by order.

b. Work in process inventory is restated in terms of equivalent production.
c. It is used by a company manufacturing custom machinery.
d. None of these is correct.
ANS: B
With a process costing system, work in process inventory is restated in terms of equivalent production,
which represents the number of whole units that could have been completed during the period. Costs
are accumulated by order in a job order cost system, which would be used, for example, by a company
manufacturing custom machinery. Standard costs can be used with job order or process systems.
13. All of the following are characteristics of a production report except:
a. It includes the number of units completed during the period.

b. It includes the costs incurred by the department during the period.
c. It includes the number of units in ending work-in-process and the estimated stage of
completion.
d. The department manager completes the report on a monthly basis.
ANS: B
The production report is prepared by the department manager monthly and contains information about
the number of units completed and on hand. It does not contain information about department costs.
14. The cost of an equivalent unit is equal to:
a. A unit of work in process inventory.

b. The amount of cost necessary to start a unit of production into work in process.
c. The cost necessary to complete one unit of production.
d. A unit of work in process inventory.
ANS: C
An equivalent unit of cost is equal to the amount of cost necessary to complete one unit of production.
An equivalent of material or conversion cost is the amount of these elements that is required to
complete one unit of a manufactured product. For example, if 10 units are 50 percent completed, in
terms of equivalency, they are equivalent to 5 units 100 percent completed.
15. The production report for Phillips Industries, which had no beginning inventory at the beginning of the
month, included the following information for September:
Number of Units Completion

Units started in production 81,000
Units transferred to finished goods 72,000
If the equivalent units for September’s production were 77,400, how many units were in process at the
end of the month, and how complete were they?
a. 9,000; 30%
b. 9,000; 60%
c. 3,000; 90%
d. 6,000; 90%
ANS: B
Less: Units transferred to finished goods 72,000
Ending units in process 9,000
If Phillips started 81,000 units during the month, and transferred 72,000 to finished goods, 9,000 units
would be left in ending inventory. Further, if equivalent units of production are equal to 77,400, the
equivalent units of ending Work in Process would be 5,400 (77,400 - 72,000).
5,400 / 9,000 = 60% The units in ending Work in Process are 60% complete.
16. If there is no beginning work in process inventory and the ending work in process inventory is 90
percent complete, the number of equivalent units would be:
a. The same as the units placed in process.

b. The same as the units completed.
c. Less than the units placed in process.
d. Less than the units completed.
ANS: C
Proof: Units
In process, beginning of period None
Placed in process 10,000
Completed and transferred 9,000
Work in process, end of period 1,000
Stage of completion 90%
Equivalent production:
Completed during period 9,000
Equivalent units of work in process, end of period (1,000 units, 90%
completed) 900
Total equivalent production 9,900

17. An error was made in the computation of the stage of completion of the current year's ending work in
process inventory. The error resulted in assigning a lower stage of completion to each component of
the inventory than actually was the case. What is the resultant effect of this error upon:
(1) The computation of equivalent units in total?

(2) The computation of costs per equivalent unit?
(3) Costs assigned to cost of goods completed for the period?
(1) (2) (3)
a. Understate Overstate Overstate
b. Understate Understate Overstate
c. Overstate Understate Understate
d. Overstate Overstate Understate
ANS: A
As computed
Proof: Actual incorrectly

Equivalent units in ending work in process 2,000 1,000
Equivalent units in goods completed 20,000 20,000
Total equivalent units 22,000 21,000 (u)

Production cost $462,000 $462,000
Unit cost (Production cost / Total equivalent units) $ 21.00 $ 22.00 (o)
Cost of goods completed: 20,000 units  $21 unit
cost $420,000
20,000 units  $22 unit cost $440,000 (o)

18. Which of the following is not a duty of the cost accountant in a process cost system?
a. Estimating the stage of completion of in-process units at the end of the month.
b. Collecting the periodic production costs.
c. Preparing the journal entries to record the factory operations.
d. Computing the amount of equivalent units.
ANS: A
The production supervisor prepares the production report which contains estimates of the stage of
completion of ending work in process.
19. The cost of production summary for Maha Industries follows:
Maha Industries
Cost of Production Summary
For the Month Ended May 31, 20--
Cost of production for month:

Materials $ 8,000
Labor 4,000
Total costs to be accounted for $15,000
Unit output for month:

Finished and transferred to Finished goods
during month 3,500
Equivalent units of work in process, end of

month (2,000 units, 25% completed) 500
Unit cost for month:

Materials ($8,000 / 4,000) $2.00
Labor ($4,000 / 4,000) 1.00
Factory overhead ($3,000 / 4,000) .75
Total $3.75
Inventory costs:
Cost of goods finished and transferred to
Finished goods during month: (3,500  $3.75) $13,125
Cost of work in process, end of month:

Materials (2,000  .25  $2.00) $1,000
Labor (2,000  .25  $1.00) 500
Factory overhead (1,000  .25  $.75) 375 1,875
Total production costs accounted for $15,000
What is the journal entry to record materials issued into production?
a. Finished goods 8,000
Materials 8,000
b. Work-in-process 8,000
Materials 8,000
c. Work-in-process 1,000
Materials 1,000
d. Materials 8,000
Accounts payable 8,000
ANS: B
The entry to record materials issued into production is:
Work-in-process 8,000
Materials 8,000

Maha Industries

Materials $ 8,000
Labor 4,000

during month 3,500


Materials ($8,000 / 4,000) $2.00
Labor ($4,000 / 4,000) 1.00
Total $3.75
Inventory costs:

Materials (2,000  .25  $2.00) $1,000
Labor (2,000  .25  $1.00) 500

What is the journal entry to record the distribution of labor to production?
Payroll 4,000
b. Work in process 4,000
Overhead 4,000
c. Work in process 4,000
Payroll 4,000
d. Payroll 4,000
Accrued payroll 4,000
ANS: C
The entry to record the distribution of labor to production is:
Payroll 4,000
Maha Industries

Materials $ 8,000
Labor 4,000

during month 3,500


Materials ($8,000 / 4,000) $2.00
Labor ($4,000 / 4,000) 1.00
Total $3.75
Inventory costs:

Materials (2,000  .25  $2.00) $1,000
Labor (2,000  .25  $1.00) 500
What is the journal entry to record factory overhead applied to production?
a. Work in process 3,000
b. Factory overhead 3,000
Various accounts 3,000
c. Work-in-process 375
d. Factory overhead 375
Work in process 375
ANS: A
The entry to record factory overhead applied to production is:
Maha Industries

Materials $ 8,000
Labor 4,000

during month 3,500


Materials ($8,000 / 4,000) $2.00
Labor ($4,000 / 4,000) 1.00
Total $3.75
Inventory costs:

Materials (2,000  .25  $2.00) $1,000
Labor (2,000  .25  $1.00) 500
What is the journal entry to record completed production and transfer to the warehouse?
b. Finished goods 1,875
c. Finished goods 3,000
d. Finished goods 13,125
ANS: D
The entry to completed production and transfer to the warehouse is:

23. In a given process costing system, the equivalent units of production are computed using the average
cost method. The percentage of completion for the current period only is included in the calculation of
the:
Beginning Work in Ending Work in
Process Inventory Process Inventory
a. No No
b. No Yes
c. Yes No
d. Yes Yes
ANS: B
In computing equivalent units of production, the percentage of completion of the current period is used
only in the calculation of the ending work in process inventory.
24. Lily Corporation uses process costing to calculate the cost of manufacturing pool systems. Beginning
work in process included 7,000 units 50 percent complete. During the month 15,000 units were
completed, 1,400 units remain in work in process at 80 percent complete. Using the average cost
method, the equivalent units are:
a. 14,000
b. 18,720
c. 16,120
d. 19,900
ANS: C
Units output for the month:

Finished during month 15,000
month (1,400 x 80% completed) 1,120
16,120
25. Norma Company had 10,000 units in work in process at January 1 that were 50 percent complete.
During January, 25,000 units were completed. At January 31, 6,000 units remained in work in process
that were 75 percent complete. Using the average cost method, the equivalent units for January were:
a. 31,000.
b. 29,500.
c. 35,000.
d. 36,000.
ANS: B

Equivalent units of work in process, end of month
(6,000 units, 75% completed) 4,500
29,500
26. The records of Andrews Company reflect the following data:
Work in process, beginning of the month - 4,500 units; 1 / 3 completed at a cost of $2,400 for materials,
$825 for labor, and $3,000 for overhead.
Production costs for the month - materials - $20,695; labor - $13,050; overhead - $41,500
Units completed and transferred to finished goods - 35,000
Work in process, end of month - 3,000 units; 3 / 4 completed
Compute the equivalent units of production.
a. 32,750
b. 37,250
c. 38,000
d. 36,500
ANS: B
Units completed and transferred to finished goods (35,000 x 100%) 35,000

Ending in process (3,000 x 3 / 4) 2,250
Equivalent units of production 37,250
27. The beginning work in process inventory is 60 percent complete, and the ending work in process
inventory is 45 percent complete. The dollar amount of the production cost included in the ending work
in process inventory (using the average cost method) is determined by multiplying the average unit costs
by what percentage of the total units in the ending work in process inventory?
a. 100 percent
b. 60 percent
c. 55 percent
d. 45 percent
ANS: D
The dollar amount of production cost included in the ending work in process inventory is determined by
multiplying the average unit costs by the percentage of completion of the ending work in process
inventory (45 percent).
28. The Kluesner Company started the month of June with 3,000 units in process which were 60%
completed. The company started 25,000 units during June, and at the end of the month had 2,500 units
on hand which were 40% completed. The number of units transferred to finished goods during June
was:
a. 25,000
b. 28,500
c. 24,500
d. 25,500
ANS: D
Beginning units in process 3,000
Plus: Units started in production 25,000
Total units to account for 28,000
Less: Units transferred to finished goods ???
If Kluesner started the month with 3,000 units in process and started 25,000 more, there are 28,000
units to account for. Those units were either completed and transferred to finished goods during the
month or still in process at the end of the month. The number of units transferred would have been
25,500 (28,000 - 2,500).
29. The production report for Marck Company included the following information for August:
Ending units in process 2,700 70%
How many units were in process at the beginning of the month?
a. 1,700
b. 1,000
c. 4,400
d. 5,400
ANS: C
Beginning units in process ???
Plus: Units started in production 44,500
If Marck transferred 46,200 units to finished goods during the month and had 2,700 units in process at
the end of the month, there were 48,900 units to account for during the month (46,200 + 2,700). If
Marck started 44,500 units during the month, it must have had 4,400 in beginning in process (48,900 -
44,500).
30. The production report for Matthews, Inc. included the following information for May:

Beginning units in process 7,800 20%

Ending units in process 5,600 40%
How many units were started during the period?
a. 43,100
b. 58,700
c. 47,500
d. 50,900
ANS: A
Plus: Units started in production ???
If Matthews transferred 45,300 units to finished goods during the month and had 5,600 units in process
at the end of the month, there were 50,900 units to account for during the month (45,300 + 5,600). If
Matthews started the month with 7,800 units in process, it must have started 43,100 (50,900 - 7,800).
31. Michael Company had 2,000 units in work in process at January 1 that were 80 percent complete.
During January, 15,000 units were completed. At January 31, 4,000 units remained in work in process
that were 40 percent complete. Using the average cost method, how many units were started during
January?
a. 21,000
b. 18,200
c. 17,000
d. 19,000
ANS: C
Units in beginning work-in-process 2,000
Units started during month ???
Total units worked on during month 19,000
Units completed during month 15,000
Units in ending work-in-process 4,000
Ending work-in-process and units completed during the month total 19,000 units. 19,000 units less
2,000 units equal 17,000 units.
What is the unit cost for material?
a. $.66
b. $.59
c. $.56
d. $.62
ANS: D
Cost of material in beginning work in process $ 2,400
Material costs for the current month 20,695
Total material costs $23,095
Units completed and transferred to finished goods (35,000 x 100%) 35,000
Unit cost of material = $23,095 / 37,250 = $.62
What is the cost per equivalent unit?
a. $2.24
b. $2.02
c. $2.38
d. $2.15
ANS: A
Cost of beginning work in process:

Material $ 2,400
Labor 825
Factory Overhead 5,000 $ 8,225
Production costs for the current month:

Material $20,695
Labor 13,050
Factory Overhead 41,500 75,245
$83,470
Units completed and transferred to finished goods (35,000 x 100% ) 35,000
Cost per equivalent unit = $83,470 / 37,250 = $2.24
34. Information concerning the materials used in the Mixing Department in October is as follows:
Units Materials Costs

Work in Process, October 1 11,700 $ 4,100
Units started during October 43,300 22,900
Units completed and transferred to next department 45,00

0
during October
Work in Process, October 31 10,000
If the ending work-in-process inventory is 50% complete, using the average cost method, what was the
materials cost in Work in Process at October 31?
a. $2,644
b. $2,700
c. $4,330
d. $4,811
ANS: B
(B) Units in Work in Process, October 31:
Units in process, October 31 10,000
Percentage of completion 50%
Equivalent units in process 5,000
Total materials cost

=
Units completed plus ending inventory
($4,100 + $22,900) = $27,000 = $.54 per unit

(45,000 + 5,000) 50,000
Materials cost for Work in Process, October 31:
5,000 units  $.54 = $2,700
35. Information for the month of January concerning Department A, the first stage of Cando Corporation's
production cycle, follows:
Materials Conversion
Beginning work in process $17,200 $16,400
Current costs 50,000 34,000
Total costs $67,200 $50,400
Equivalent units using average cost method 112,000 112,000
Average unit costs $ 0.60 $ 0.45
Goods completed 100,000 units
Ending work in process 24,000 units
The ending work in process is 50 percent complete. How would the total costs accounted for be
distributed using the average cost method?
Goods Ending Work
Completed in Process
a. $105,000 $12,600
b. $ 67,200 $14,400
c. $ 67,200 $50,400
d. $105,000 $14,400
ANS: A
Cost of the completed goods:

Materials (100,000  $.60) $ 60,000
Conversion costs (100,000  $.45) 45,000
Total cost of completed goods $105,000
Cost of ending work in process:

Materials (24,000 x 50%  $.60) $ 7,200
Conversion costs (24,000 units  50%  $.45) 5,400
Total cost of ending work in process $ 12,600

36. Howell Company uses the average cost method of process costing. Howell had 1,000 units in beginning
work-in-process which were 75% complete. Costs associated with this inventory were $3,200. When
calculating the cost per equivalent unit for the month of June, Howell’s controller should:
a. Not consider the $3,200 as those costs were incurred in a prior period.
b. Calculate the cost to complete the 1,000 items in beginning work-in-process separately.
c. Include the $3,200 with the current month’s cost to arrive at total cost for production to
date.
d. Include the equivalent units to complete the beginning work-in-process inventory to
arrive at the equivalent units for the period.
ANS: C
When using the average cost method, the costs associated with the beginning work-in-process inventory
should be added to the current month’s cost to arrive at the total cost of production to date. This
amount is then divided by the equivalent production for the month. The equivalent production is
amount of units completed added to the equivalent units of ending inventory (units in ending work-in-
process x the stage of completion).
37. Information concerning the materials used in the Mixing Department in October is as follows:
Units Materials Costs

Work in Process, October 1 11,700 $ 4,100
Units started during October 43,300 22,900
Units completed and transferred to next department
during October 45,000

If the ending work-in-process inventory is 50% complete, using the average cost method, what was the
materials cost in Work in Process at October 31?
a. $2,644
b. $2,700
c. $4,330
d. $4,811
ANS: B
(B) Units in Work in Process, October 31:
In process, October 1 11,700
Started during October 43,300
Units transferred 45,000
Units in process, October 31 10,000
Percentage of completion 50%
Equivalent units in process 5,000
Total materials cost

=
Units completed plus ending inventory
($4,100 + $22,900) = $27,000 = $.54 per unit

(45,000 + 5,000) 50,000
Materials cost for Work in Process, October 31:
5,000 units  $.54 = $2,700

38. In a production cost report using process costing, transferred-in costs are similar to:
a. Material added at the beginning of the process.

b. Conversion costs added during the process.
c. Costs transferred to the next process.
d. Costs included in beginning inventory.
ANS: A
The costs transferred in from another department are treated in a manner similar to materials added in
a department at the very beginning of processing in the department. They are finished units of the
preceding department but will require additional processing in the department to which they were
transferred.
39. What are transferred-in costs as used in a process cost accounting system?
a. Labor that is transferred from another department within the same plant instead of
hiring temporary workers from the outside
b. Costs that have been incurred in a prior department on units that have been moved into
a subsequent department
c. Supervisory salaries that are transferred from an overhead cost center to a production
cost center
d. Ending work in process inventory of a previous process that will be used in a succeeding
process
ANS: B
Transferred-in costs, as used in a process cost system, represent the cost of the production of a previous
internal process or department subsequently used in a succeeding internal process.

40. The Columbus Company has three departments A, B and C. Material requisitions amounted to $10,000,
$8,000 and $5,000, respectively, for departments A, B and C. In addition, $2,000 of indirect materials
were used during the period. What is the entry to record the materials used during the period?
a. Work-in-process 23,000
Materials - Department A 10,000
Materials - Department B 8,000
Materials - Department C 5,000
b. Work-in-process - Department A 10,000
Work-in-process - Department B 8,000
Work-in-process - Department C 5,000
Materials 23,000
c. Work-in-process - Department A 10,000
Materials 25,000
d. Work-in-process 23,000
Materials 25,000
ANS: C
The entry to record the use of the materials in departments A, B and C and the indirect materials is:
Work-in-process - Department A 10,000
Factory overhead 2,000*
Materials 25,000
*Indirect materials
41. Wolf Company has two departments, Mixing and Curing. The following information is available for
September:
Cost per
equivalent unit
Mixing Department: Number of units
Transferred to the curing 9,000 $2.00
department
Ending work in process inventory
70 % completed 4,000 $2.00
Curing Department:
Completed and transferred out 8,000 $3.00
30% completed 5,000 $3.00
The entry to record the transfer of inventory from the mixing to the curing department is:
a. Work in process - Curing 18,000
Work in process - Mixing 18,000
c. Work in process - Mixing 5,600
Work in process - Curing 5,600
d. Work in process - Curing 18,000

Transferred in costs 18,000
ANS: A
The entry to transfer the cost of inventory from the mixing to the curing department is:
Work in process - Curing 18,000*
* 9,000 x $2.00
42. Wolf Company has two departments, Mixing and Curing. The following information is available for
September:
Cost per
equivalent unit
Mixing Department: Number of units
Transferred to the curing 9,000 $2.00
department
70 % complete 4,000 $2.00
Curing Department:
Completed and transferred out 8,000 $3.00
30% complete 5,000 $3.00
The entry to record the transfer of inventory from the curing department to the warehouse is:

c. Work in process - Curing 24,000
d. Work in process - Curing 4,500
ANS: B
The entry to record the completion of production and transfer of the goods to the finished goods
warehouse is:
Finished goods 24,000*
* 8,000 x $3.00
43. The Assembly Department is the second stage of Pine Company's production cycle. On May 1, the
beginning work in process contained 15,000 units that were 40 percent complete. During May, 85,000
units were transferred in from the first stage of Pine's production cycle and 80,000 units were
completed and transferred to Finished Goods. On May 31, the ending work in process contained 20,000
units that were 75 percent complete. Using the average cost method, the equivalent units of the
Assembly Department are:
Transferred-In Conversion
Costs Materials Costs
a. 85,000 70,000 70,000
b. 100,000 80,000 80,000
c. 100,000 95,000 95,000
d. 120,000 100,000 100,000
ANS: C
Units
Transferred-in costs:
Units completed and transferred out 80,000
Ending work in process: (20,000 x 100% completed) 20,000
Equivalent units 100,000
Material and Conversion Costs:

Units completed and transferred (see above) 80,000
Ending work in process: (20,000 x 75% complete) 15,000
44. The Assembly Department is the second stage of Pine Company's production cycle. On May 1, the
beginning work in process contained 15,000 units that were 40 percent complete. During May, 85,000
units were transferred in from the first stage of Pine's production cycle. On May 31, the ending work in
process contained 20,000 units that were 75 percent complete. Using the average cost method, the
equivalent units of the Assembly Department are:
Transferred-In Conversion
Costs Materials Costs
a. 85,000 70,000 70,000
b. 100,000 80,000 80,000
c. 100,000 95,000 95,000
d. 120,000 100,000 100,000
ANS: C
Units
Cost flow analysis:
Units in beginning work in process 15,000
Transferred in during month 85,000
Total units worked on 100,000
Less ending work-in-process 20,000
Units transferred out 80,000
Units completed and transferred out (see above) 80,000
Ending work in process: (20,000 x 100% completed) 20,000
Material and Conversion Costs:

Units completed and transferred (see above) 80,000
Ending work in process: (20,000 x 75% complete) 15,000
45. Department B had 1,000 units in beginning work-in-process which had transferred in costs of $2,500
from Department A associated with them. During the period, 12,000 more units having costs of $36,000
were transferred in to Department B from Department A. What is the unit cost for the period of costs
transferred from Department A.
a. $2.00
b. $2.75
c. $2.96
d. $3.00
ANS: C
When costs transferred in have different unit costs in different periods, these costs must be averaged as
follows:
Units Costs
Beginning work-in-process 1,000 $ 2,500
Current period 12,000 36,000
13,000 $38,500
Cost per unit = 38,500 / 13,000 = $2.96
PROBLEM
1. Daniel LLC incurred the following cost in the month of October:
Material $55,000
Labor $46,000
Factory Overhead $23,000
There was no beginning inventory. Ending work in process was 10,000 units at 50 percent complete.
15,000 units were completed and transferred out.
Prepare a cost of production summary for the month, assuming Daniel uses the average cost method of
process costing.
ANS:
Daniel LLC
For the Month Ended October 31, 20--

Materials $ 55,000
Labor 46,000
Total cost to be accounted for $124,000
Unit output for the month

Equivalent units of work in process, end

of month (10,000 units, one-half completed) 5,000

Material ($55,000 /20,000) $2.75
Labor (46,000 / 20,000) 2.30
Factory Overhead (23,000 / 20,000) 1.15
Total $6.20
Inventory Costs:
Cost of goods finished during month (15,000 x 6.20) $ 93,000

Material (10,000 x 1/2 x 2.75) $ 13,750
Labor ( 10,000 1/2 2.30) 11,500
Factory Overhead ( 10,000 1/2 1.15) 5,750 31,000
Total production cost accounted for $124,000

2. Using the data presented below, determine the figures that should be inserted in the blank spaces.
Beginning Units Equivalent

units in transferred to units of
Units started
process finished goods production
in production
Ending units in process
a 700 3,200 ________ 600 - 1/3 completed ______
b _____ 2,300 ________ 400 - 1/2 completed 2,450
c 1,200 4,500 5,100 __________________ 5,500
d 1,000 _______ 8,200 ___ - 1/2 completed 8,800
e 2,200 _______ 2,400 500 - 4/5 completed ______
ANS:
(a) Stage of
completion
Units Equivalent Units
Beginning units in process 700
+ Units started in production 3,200
= Total units to account for 3,900
- Units transferred to finished __??? 100% ???

goods
= Ending units in process 600 1/3 200
???
The units transferred to finished goods is equal to 3,300 (3,900 - 600), therefore the equivalent units of
production is equal to 3,500 (3,300 + 200).
(b) Stage of
Units completion Equivalent Units
Beginning units in process ???
= Total units to account for ???
- Units transferred to finished __??? 100% ???

goods
2,450
The number of units transferred to finished goods is 2,250 (2,450 - 200).
The total number of units to account for is 2,650 (2,250 + 400), therefore the number of units in
beginning work-in-process is 350 (2,650 - 2,300).
(c) Stage of
completion
= Total units to account for 5,700
- Units transferred to finished 5,100 100% 5,100

goods
= Ending units in process ??? ??? ???
5,500
The number of equivalent units for ending work-in-process is 400 (5,500 - 5,100).
The number of units in ending work-in-process is 600 (5,700 - 5,100), therefore, the stage of completion
of the ending work-in-process is 2/3 (400 / 600).
(d) Stage of
completion
+ Units started in production ???


goods
= Ending units in process ??? 1/2 ???
8,800
The number of equivalent units for ending work-in-process is 600 (8,800 - 8,200).
The number of units in ending work-in-process is 1,200 (600 / (1/2)), therefore, the number of units to
account for is 9,400 (8,200 + 1,200) and the number of units started in production is
8,400 (9,400 - 1,000).
(e) Stage of
completion
+ Units started in production ???

goods
???
The number of equivalent units is 2,800 (2,400 + 400).
The total number of units to account for is 2,900 (2,400 + 500), therefore the number of units started in
production is 700 (2,900 - 2,200).
3. The records of Jordan Company reflect the following data:

Work in process, beginning of the month - 4,500 units; 30% completed at a cost of $16,700 for
materials, $7,600 for labor, and $10,400 for overhead.
Production costs for the month - materials - $54,300 labor; - $25,400; overhead - $34,600
Work in process, end of month - 5,000 units; 40% completed
Calculate the unit cost for the month for materials, labor and factory overhead.
ANS:
Units completed and transferred to finished goods (18,000 x 100% ) 18,000
Ending in process (5,000 x 40%) 2,000
Factory
Overhead
Material Labor
Costs in beginning in process $16,700 $ 7,600 $10,400
Production costs for month 54,300 25,400 34,600
Total costs $71,000 $33,000 $45,000
Equivalent units - 20,000

Cost per unit $3.55 $1.65 $2.25
4. Consider the following cost of production summary for Carrigan Products for May. Prepare the journal
entries to record the production activity.
Carrigan Products
Cost of work in process, beginning of month:

Materials $ 8,200
Labor 5,500
Factory overhead 2,000 $15,700

Materials $24,000
Labor 17,600
Factory overhead 16,900 58,500

during month 2,000


Materials [($8,200 + $24,000) / 2,800] $ 11.50
Labor [($5,500 + $17,600) / 2,800] 8.25
Factory overhead [($2,000 + $16,900) / 2,800] 6.75
Total $ 26.50
Inventory costs:

Materials (1,000  .8  $11.50) $ 9,200
Labor (1,000  .8  $8.25) 6,600
Factory overhead (1,000  .8  $6.75) 5,400 21,200

ANS:
Materials 24,000
To record requisition of materials
Payroll 17,600
To record distribution of labor
To record application of factory overhead

To record the completion of goods
5. The Paul Manufacturing Company uses the process cost system and the average cost method. The
following production data are for the month of April, 20--.
Production Costs
Work in process, beginning of month:

Materials $ 4,350
Labor 3,200
Factory overhead 1,902 $ 9,452
Costs incurred during month:

Materials $43,200
Labor 32,304
Total $103,976
Production Report
Units
In process, beginning of month 500
Finished and transferred during month 11,900
Work in process, end of month 1,200
Prepare a cost of production summary for the month.
ANS:
Paul Manufacturing Company
For the Month Ended April 30, 20--

Materials $ 4,350
Labor 3,200

Materials $43,200
Labor 32,304


Finished and transferred to finished goods during month 11,900

(1,200 units, 65% completed) 780

Materials [($4,350 + $43,200) / 12,680] $3.75
Labor [($3,200 + $32,304) / 12,680] 2.80
Total $8.20
Inventory costs:
Cost of goods finished and transferred to finished goods
during month (11,900  $8.20) $ 97,580

Materials (1,200  .65  $3.75) $2,925
Labor (1,200  .65  $2.80) 2,184
6. The Joan Company uses the process cost system and average cost method. The following production
data are for the month of July, 20--.
Production Costs

Materials $18,500
Labor 8,750

Materials $93,500
Labor 42,450
Total $201,600
Production Report
Units
In process, beginning of month 4,000
(a) Prepare a cost of production summary for the month.
(b) Prepare the journal entries to record production for the month
ANS:
(a)
Joan Company

Materials $ 18,500
Labor 8,750

Materials $ 93,500
Labor 42,450

Finished and transferred to finished goods during month 28,000

(10,000 units, one-half completed) 4,000

Materials [($18,500 + $93,500) / 32,000] $3.50
Labor [($8,750 + $42,450) / 32,000] 1.60
Total $6.30
Inventory costs:
Cost of goods finished and transferred to finished goods
during month (28,000  $6.30) $176,400

Materials (10,000  .4  $3.50) $14,000
Labor (10,000  .4  $1.60) 6,400
(b)
Materials 93,500
Payroll 42,450

Note to instructor: The difficulty of this problem can be reduced by eliminating requirement (b).
7. Asia, Inc., manufactures one product in two departments on a continuous basis and uses the average
cost method of process cost accounting. The following information was reported for the month of
August, 20--:
Production Costs
Cutting Assembly
Department Department
Cost in Cutting Department $ 8,700
Materials $ 8,600 $ 585
Labor 4,200 1,600
Factory overhead 3,500 $ 16,300 1,000 3,185

Materials $61,400 $ 5,595
Labor 26,425 12,820
Factory overhead 22,750 110,575 8,064 28,570

Total $126,875
In addition, the cost of production summary for the Assembly Department follows:
Asia, Inc.
Cost of Production Summary--Assembly Department
For the Month Ended August 31, 20--

Cost in Assembly Department:

Materials $ 585
Labor 1,600
Factory overhead 1,000 3,185 $ 11,885
Cost of goods received from Cutting

Department during month 116,000

Materials $ 5,595
Labor 12,820

Finished and transferred to stockroom
8,000
during month
of month (600 units, 40% completed) 240

Materials [($585 + $5,595) / 8,240] $ .75
Labor [($1,600 + $12,820) / 8,240] 1.75

Total $ 3.60
Inventory costs:
Cost of goods finished and transferred
to stockroom during month:
Cost in Cutting Dept. (8,000 x $14.50) $116,000
Cost in Assembly Dept. (8,000 x $ 3.60) 28,800
Total (8,000 x $18.10) $144,800

Cost in Cutting Dept. (600  $14.50) $ 8,700
Cost in Assembly Dept.:

Materials (600  40%  $.75) $180
Labor (600  40%  $1.75) 420
Factory overhead (600  40%  $1.10) 264 864 9,564
Prepare the journal entries to record production.
ANS:
Work-in-process - Cutting Department 61,400

Work-in-process - Assembly Department 5,595
Materials 66,995

Payroll 39,245


To record transfer of production from
Department A to Department B

8. Asia, Inc., manufactures one product in two departments on a continuous basis and uses the average
cost method of process cost accounting. The following information was reported for the month of
August, 20--:
Production Costs
Cutting Assembly
Materials $ 8,600 $ 585
Labor 4,200 1,600
Factory overhead 3,500 $ 16,300 1,000 3,185

Materials $61,400 $ 5,595
Labor 26,425 12,820
Total $126,875
Production Report
Cutting Assembly
In process, beginning of month 1,100 600
Finished and transferred during month 8,000 8,000
Work in process, end of month 1,500 600
Stage of completion 50% 40%
Prepare a cost of production summary for each department for the month.
ANS:
Asia, Inc.
Cost of Production Summary--Cutting Department

Materials $ 8,600
Labor 4,200

Materials $61,400
Labor 26,425

Finished and transferred to Assembly Department
during month 8,000


Materials [($8,600 + $61,400)/ 8,750] $ 8.00
Labor [($4,200 + $26,425) / 8,750] 3.50
Total $14.50
Inventory costs:
to Assembly Department during month (8,000  $14.50)
$116,000

Materials (1,500  50%  $8.00) $ 6,000
Labor (1,500  50%  $3.50) 2,625
Factory overhead (1,500  50%  $3.00) 2,250 10,875
Asia, Inc.
Cost of Production Summary--Assembly Department

Cost in Assembly Department:

Materials $ 585
Labor 1,600
Cost of goods received from Cutting

Department during month 116,000

Materials $ 5,595
Labor 12,820

8,000
during month
of month (600 units, 40% completed) 240

Materials [($585 + $5,595) / 8,240] $ .75
Labor [($1,600 + $12,820) / 8,240] 1.75
Total $3.60
Inventory costs:
to stockroom during month:
Cost in Cutting Dept. (8,000 x $14.50) $116,000
Cost in Assembly Dept. (8,000 x $ 3.60) 28,800
Total (8,000 x $18.10) $144,800

Cost in Cutting Dept. (600  $14.50) $ 8,700
Cost in Assembly Dept.:

Materials (600  40%  $.75) $180
Labor (600  40%  $1.75) 420
Factory overhead (600  40%  $1.10) 264 864 9,564
Note to instructor: Difficulty could be modified by requiring the cost of production summary for one
department only.
9. Gordon Products manufactures one product in two departments on a continuous basis and uses the
average cost method of process cost accounting. The following information was reported for the month
of May, 20--:
Production Costs
Department A Department B
Work in process, beginning
of month:
Cost in Department A $ 1,900
Materials $ 4,200 $ 1,900
Labor 3,500 1,600
Factory overhead 1,800 $ 9,500 750 4,250

Materials $74,425 $60,225
Labor 56,625 51,650
Total $175,750
Production Report
Department A Department B
In process, beginning of month 1,600 200
Finished and transferred

during month 18,000 17,000
Work in process, end of month 1,000 1,200
Stage of completion 50% 60%
a) Prepare a cost of production summary for Department A for the month.

b) Prepare a cost of production summary for Department B for the month.
c) Prepare the journal entries to record production.
ANS:
(a)
Gordon Products
Cost of Production Summary--Department A

Materials $ 4,200
Labor 3,500

Materials $74,425
Labor 56,625

Finished and transferred to Department B
during month 18,000


Materials [($4,200 + $74,425) / 18,500] $4.25
Labor [($3,500 + $56,625) / 18,500] 3.25
Total $9.50
Inventory costs:
Department B during month: (18,000  $9.50) $171,000

Materials (1,000  .5  $4.25) $ 2,125
Labor (1,000  .5  $3.25) 1,625
(b)
Gordon Products
Cost of Production Summary--Department B

Cost in Dept. A $ 1,900
Cost in Dept. B:
Materials $1,900
Labor 1,600
Factory overhead 750 4,250 $ 6,150
Cost of goods received from Dept A.

during month 171,000

Materials $60,225
Labor 51,650

during month 17,000

720
of month (1,200 units, 60% completed)

Materials [($1,900 + $60,225) / 17,720] $3.51
Labor [($1,600 + $51,650) / 17,720] 3.01
Factory overhead [($750 + $17,000) / 17,720] 1.00
Total $7.52
Inventory costs:
stockroom during month:
Cost in Dept. A (17,000  $9.50) $161,500
Cost in Dept. B (17,000  7.52) 127,840
Total (17,000  $17.02) $289,340

Cost in Dept. A (1,200  $9.50) $ 11,400
Cost in Dept. B:
Materials (1,200  60%  $3.51) $2,527
Labor (1,200  60%  $3.01) 2,167
Factory overhead
(1,200  60%  $1.00) 720 5,414 16,814
Total production costs accounted for $306,154*

* Rounding Difference
(c)

Materials 134,650

Payroll 108,275


To record transfer of production from
Department A to Department B


10. Howard Corporation has two production departments. Curing has 12,000 units in process at the
beginning of the period, 3 / 4 complete. During the period, 45,000 units were received from Crushing,
48,000 units were transferred to Finished Goods, and 9,000 units were in process at the end of the
period, 2/ 3 complete. Cost information was as follows:
Cost of beginning Work in Process:

Cost in Crushing $ 21,640
Cost in Curing:
Materials 8,810
Labor 1,190
Costs during the month:

Cost of goods received from Crushing $ 85,520
Cost in Curing:
Materials 53,830
Labor 10,690
a. Determine the unit cost for the month in Curing.
b. Determine the total cost of the products transferred to Finished Goods.
c. Determine the total cost of the ending Work in Process inventory.
ANS:
a.
Finished and transferred to Finished Goods 48,000
Equivalent units of production of Work in
Process (9,000 units x 2 / 3 completed) 6,000
Unit cost per month:

Cost from Crushing Department
Beginning inventory (12,000 units) $ 21,640
Transferred in this month (45,000 units) 85,520
Average cost per unit (57,000 units) 107,160 $1.88
Cost in Curing:
Materials {(8,810 + 53,830) / 54,000] $1.16
Labor [(1,190 + 10,690) / 54,000] .22
Factory overhead [(2,420 + 17,560) / 54,000] .37
$1.75
b.
Cost of goods transferred to Finished Goods:
Cost in Crushing (48,000 x 1.88) $ 90,240
Cost in Curing (48,000 x 1.75) 84,000
Total finished and transferred to Finished Goods $174,240
c.
Cost of Work in Process, end of month:
Cost in Crushing (9,000 x $1.88) $ 16,920
Materials (9,000 x 2 / 3 x $1.16) 6,960
Labor (9,000 x 2 / 3 x $.22) 1,320
Factory overhead (9,000 x 2 / 3 x .37) 2,220
Total costs in Work in Process, end of month 27,420

CHAPTER 6—PROCESS COST ACCOUNTING--ADDITIONAL PROCEDURES
MULTIPLE CHOICE
1. The following information is available for the month of April from the First department of the Armque
Corporation:
Units
Work in process, April 1 (50% complete) 90,000
Started in April 250,000
Transferred to Second Department in April 280,000
Materials are added in the beginning of the process in the First department. Using the average cost
method, what are the equivalent units of production for the month of April?
a. 310,000 250,000
b. 250,000 295,000
c. 340,000 316,000
d. 340,000 304,000
ANS: D
Materials:
Equivalent units of work in process, end of month (60,000 units, 40%

completed, all materials) 60,000
Total 340,000
Labor and factory overhead:

Finished and transferred during April 280,000
Work in process, end of April (70,000 units, 40% completed) 24,000
Total 304,000
2. The following information is available for the month of August from the First department of the Twigg
Corporation:
Units
Work in process, August 1 (60% complete) 50,000
Started in August 190,000
Materials are added in the beginning of the process in the First department. Using the average cost
method, what are the equivalent units of production for the month of August?
a. 192,000 240,000
b. 190,000 192,000
c. 240,000 208,000
d. 240,000 192,000
ANS: D
Work in process, August 1 50,000

Total processed during August 240,000
Finished and transferred during August 160,000
Materials:

Total 240,000

Work in process, end of August (80,000 units, 40% completed) 32,000
Total 192,000
3. Information concerning Department A of Ali Company for the month of June is as follows:
Materials
Units Costs
Work in process, beginning of month 20,000 $14,550
Started in June 85,000 $66,300
Units completed 90,000
All materials are added at the beginning of the process. Using the average cost method, the cost
(rounded to two places) per equivalent unit for materials for June is:
a. $0.74.
b. $0.90.
c. $0.77.
d. $0.78.
ANS: C
Units completed during June 90,000
Units in process, June 30 with all materials 15,000
Equivalent production for materials 105,000
Materials cost:
Work in process, beginning of June $14,550
Added during June 66,300
Total materials cost $80,850
$80,850 / 105,000 units = cost per equivalent unit $ .77
4. Plemmon Company adds materials at the beginning of the process in the forming department, which is
the first of two stages of its production cycle. Information concerning the materials used in the forming
department in April follows:
Materials
Units Costs
Work in process at April 1 15,000 $ 8,000
Units started during April 60,000 $38,500
during April 65,000
Using the average cost method, what is the materials cost of the work in process at April 30 (rounded to
nearest dollar)?
a. $7,154
b. $6,200
c. $7,750
d. $6,417
ANS: B
Units
Beginning work in process 15,000
Started 60,000
Total 75,000
Less completed 65,000
Ending work in process (complete as to material) 10,000
Unit cost (See calculation below) $ .62
Materials cost in ending work in process $ 6,200
Units completed during April 65,000
Units in process, April 30 with all materials 10,000
Materials cost:
Work in process, April 1 $ 8,000
Costs added during April 38,500
Total materials cost for period $46,500
Corporation:
Units
Materials are added at the end of the process in the First department. Using the average cost method,
what are the equivalent units of production for the month of April?
a. 304,000 250,000
b. 280,000 295,000
c. 340,000 316,000
d. 280,000 304,000
ANS: D
Materials:

completed, no materials) 0
Total 280,000

Finished and transferred during April 280,000
Total 304,000

6. The following information is available for the month of August from the First department of the Twigg
Corporation:
Units
Materials are added at the end of the process in the First department. Using the average cost method,
what are the equivalent units of production for the month of August?
a. 192,000 160,000
b. 160,000 192,000
c. 160,000 208,000
d. 240,000 192,000
ANS: B
Total processed during August 240,000
Materials:

Total 160,000

Work in process, end of August (80,000 units, 40% completed) 32,000
Total 192,000
7. During June, Birch Bay Company's Department B equivalent unit product costs computed under the
average cost method were as follows:
Materials $2
Conversion $3
Transferred-in $5
Materials are introduced at the end of the process in Department B. There were 4,000 units (60 %
complete as to conversion costs) in work in process at June 30. The total costs assigned to the June 30
work in process inventory should be:
a. $20,000.
b. $24,800.
c. $27,200.
d. $35,200.
ANS: C
4,000 units @ $5 $20,000
Conversion costs:
4,000 units (60% complete) @ $3 7,200
$27,200
Because materials are introduced at the end of the process, no materials cost would be included in the
ending work in process.
8. Van Pelt Company uses the average cost method of process costing. The production report for the
Mixing department follows:
In process, beginning of period 1,000 units
800 units - materials 50% complete; conversion costs 40%

complete
200 units - materials 25% complete; conversion costs 15%
complete
Placed in process during period 5,000 units
Transferred to packing department 4,800 units
In process, end of period 1,200 units
700 units - materials 75% complete; conversion costs 50% complete

500 units - materials 25% complete; conversion costs 20% complete
What are the equivalent units for:
Materials Conversion Costs
a. 5,650 5,450
b. 5,450 5,250
c. 4,850 4,400
d. 5,400 5,220
ANS: B
Conversion
Costs
Material
Completed and transferred to packing department 4,800 4,800
Ending work-in-process:
700 x 75% - Material 525
350
700 x 50% - Conversion costs
500 x 25% - Material 125
500 x 20% - Conversion costs 100
5,450 5,250
9. Normal losses that occur in the manufacturing process are properly classified as:
a. Extraordinary items.
b. Product costs.
c. Period costs.
d. Deferred charges.
ANS: B
Normal losses are properly classified as product costs and considered as part of the total cost of
production.
10. Stanley Company adds materials at the beginning of the process in Department M. Data concerning the
materials used in the March production follows:
Units
Work in process at March 1 15,000
Started during March 38,000
Completed and transferred to next department during March 37,000
Normal spoilage incurred 2,000
Work in process at March 31 14,000
Using the average cost method, the equivalent units for the materials unit cost calculation are:
a. 38,000.
b. 51,000.
c. 55,000.
d. 37,000.
ANS: B
Units completed and transferred 37,000
Ending work in process with all materials 14,000
51,000
11. Materials are added at the start of the process in McKay Company's blending department, the first stage
of the production cycle. The following information is available for the month of July:
Units
Work in process, July 1 (60% complete as to conversion costs) 50,000
Started in July 200,000
Transferred to the next department 195,000
Lost in production 15,000
Work in process, July 31 (50% complete as to conversion costs) 40,000

Under McKay's cost accounting system, the costs incurred on the lost units are absorbed by the
remaining good units. Using the average cost method, what are the equivalent units for the materials
unit cost calculation?
a. 210,000
b. 195,000
c. 250,000
d. 235,000
ANS: D
Units completed and transferred 195,000
Ending work in process with all materials 40,000
235,000
12. In a process cost system, the cost attributable to abnormal losses that occur due to unexpected
circumstances such as machine operator error should be assigned to:
a. Ending work in process inventory.

b. Cost of goods manufactured and ending work in process inventory in the ratio of units
worked on during the period to units remaining in work in process inventory.
c. A separate loss account in order to highlight production inefficiencies
d. Cost of good manufactured (transferred out)
ANS: C
Losses from abnormal spoilage should be assigned to a separate account. These should be treated as a
period cost.
13. If the amount of loss in a manufacturing process is abnormal, it should be classified as a:

a. Period cost.
b. Deferred charge.
c. Joint cost.
d. Product cost.
ANS: A
Abnormal loss should be classified as a period cost (charged to expense of the current period and
reflected separately on the income statement).
NAT: IMA 2E - External Financial Reporting TOP: AACSB - Analytic
14. What losses should not affect the recorded cost of inventories?
a. Normal losses
b. Abnormal losses
c. Seasonal losses
d. Standard losses
ANS: B
Abnormal losses should not affect the recorded cost of inventories because they are charged off as a
period cost rather than being included in the cost of manufactured goods.
15. In a process cost system, how is the unit cost affected in a production cost report when materials are
added in a department subsequent to the first department and the added materials result in additional
units?
a. It causes an increase in the preceding department's unit cost that necessitates an

adjustment of the transferred-in unit cost.
b. It causes a decrease in the preceding department's unit cost that necessitates an
c. It causes an increase in the preceding department's unit cost but does not necessitate an
d. It causes a decrease in the preceding department's unit cost but does not necessitate an
ANS: B
If added materials result in additional units, it causes a decrease in the preceding department's unit cost
and necessitates an adjustment of the transferred-in cost because there are more units over which to
spread this cost.
16. Boyce Company manufactures chemicals. Chemical agent ABX is refined in the Refining department
and, after it is transferred to the Mixing department, a reactive agent is added to it. In May, 25,000
gallons of ABX having a cost of $100,000 were transferred from the refining to the Mixing department
where 15,000 gallons of the reactive agent were added. When calculating the inventory costs in the
Mixing department, what will the cost per unit relating to gallons transferred in from the Refining
department be?
a. $4.00
b. $2.50
c. $3.75
d. $6.67
ANS: B
Gallons transferred in from the Refining Department 25,000
Additional gallons of reactive agent added in Mixing 15,000
Total gallons 40,000
Cost of ABX - $100,000 / 40,000 gallons = $2.50

17. In order to compute equivalent units of production using the FIFO method of process costing, work for
the period must be broken down to units:
a. Completed from beginning inventory, started and completed during the month, and units
in ending inventory.
b. Completed during the period and units in ending inventory.
c. Started during the period and units transferred out during the period.
d. Processed during the period and units completed during the period.
ANS: A
In computing equivalent production under the FIFO method, work for the period must be broken down
to units completed from beginning inventory, units started and completed during the month, and units
in ending inventory.
18. Material is added at the beginning of a process in a process costing system. The beginning work in
process inventory for this process this period was 30 percent complete as to conversion costs. Using the
first-in, first-out method of costing, the total equivalent units for material for this process during this
period are equal to the:
a. Units started this period in this process.

b. Beginning inventory this period for this process.
c. Units started this period in this process plus the beginning inventory.
d. Units started this period in this process plus 70 percent of the beginning inventory.
ANS: A
With the FIFO method of costing, equivalent units for materials would be the units started in process
this period because the beginning work in process would have been complete as to materials. The proof
follows:
Beginning work in process, 20% completed 5,000
Units started 25,000

30,000
Units transferred out 22,000
Ending work in process 8,000
Units started and completed (25,000 started

less 8,000 remaining in ending work in 17,000
process
Ending work in process 8,000
Equivalent units of material:

Needed to complete beginning work in 0
process
Started and completed (17,000 x 100%) 17,000
Ending work in process (8,000 x 100%) 8,000
Equivalent units of material 25,000
19. Under which of the following conditions will the first-in, first-out method of process costing produce the
same cost of goods manufactured amount as the average cost method?
a. When goods produced are homogeneous in nature

b. When there is no beginning inventory
c. When there is no ending inventory
d. When beginning and ending inventories are each 50 percent complete
ANS: B
When there is no beginning inventory, the FIFO method and the average cost method will both produce
the same cost of goods manufactured amount because equivalent production and unit costs will be the
same.
20. The average cost method of process costing differs from the FIFO method of process costing in that the
average cost method:
a. Requires that ending work in process inventory be stated in terms of equivalent units of
production.
b. Can be used under any cost-flow assumption.
c. Does not consider the degree of completion of beginning work in process inventory when
computing equivalent units of production.
d. Considers the ending work in process inventory only partially complete.
ANS: C
The average cost method of process costing does not consider the degree of completion of beginning
work in process inventory when computing equivalent units of production, while the FIFO method does.
21. Regina Manufacturing uses the FIFO method of process costing. The production report for the Curing
Department, where the materials are added at the beginning of the period, for September was as
follows:
In process, beginning of the period 3,000 units

Stage of completion 30 %
Transferred to stockroom during period 12,000 units

In process, end of the period 6,000 units
The number of units started and completed during the period was:
a. 12,000
b. 9,000
c. 15,000
d. 6,000
ANS: B
Units finished during the period 12,000

Less units in process at beginning of period 3,000
Units started and completed during period 9,000
22. Regina Manufacturing uses the FIFO method of process costing. The production report for the Curing
Department, where the materials are added at the beginning of the period, for September was as
follows:
In process, beginning of the period 3,000 units

Transferred to stockroom during period 12,000 units

In process, end of the period 6,000 units
The number of equivalent units for conversion costs during the period was:
a. 13,500
b. 16,500
c. 12,300
d. 14,700
ANS: A
Units finished during the period 12,000
Less units in process at beginning of period 3,000
Units started and completed during period 9,000
Needed to finish beginning work in process
(3,000 x 70%) 2,100

Started and completed during period 9,000
Ending work in process (6,000 x 40%) 2,400
Equivalent units for conversion costs 13,500
Corporation:
Units
Materials are added in the beginning of the process in the First department. Using the first-in, first-out
a. 250,000 259,000
b. 340,000 259,000
c. 280,000 271,000
d. 250,000 271,000
ANS: A
Materials:
To complete beginning units in process (materials were 100% complete) 0
Units started and finished during the month (250,000 started - 60,000 in ending
190,000
WIP)
Total 250,000

To complete beginning units in process (conversion costs were 50% complete) 45,000
190,000
WIP)
Total 259,000
24. Information concerning Department A of Ali Company for the month of June is as follows:
Materials
Units Costs
Work in process, beginning of month 20,000 $14,550
Started in June 85,000 $66,300
Units completed 90,000

All materials are added at the beginning of the process. Using the first-in, first-out method, the cost
(rounded to two places) per equivalent unit for materials for June is:
a. $0.63.
b. $0.90.
c. $0.77.
d. $0.78.
ANS: D
To complete beginning units in process (all had 100% of materials) 0
Units started and completed during the month (85,000 started - 15,000 in ending
70,000
WIP)
Units in process, June 30 with all materials 15,000
Equivalent production for materials in period 85,000
Materials cost:
Added during June $66,300
25. Plemmon Company adds materials at the beginning of the process in the forming department, which is
the first of two stages of its production cycle. Information concerning the materials used in the forming
department in April follows:
Materials
Units Costs
Work in process at April 1 15,000 $ 8,000
Units started during April 60,000 $38,500

during April 65,000
Using the FIFO method, what is the materials cost of the work in process at April 30 (rounded to nearest
dollar)?
a. $7,154
b. $6,200
c. $7,750
d. $6,417
ANS: D
Units
Started 60,000
Total 75,000
Less completed 65,000
Ending work in process (complete as to material) 10,000
Unit cost (See calculation below) $ .6417
Materials cost in ending work in process $ 6,417
To complete beginning in process units (materials all 100%) 0
Units started and finished during month (60,000 started - 10,000 in ending
50,000
WIP)
Units in process, April 30 with all materials 10,000
Materials cost:
Costs added during June $38,500

Corporation:
Units
Materials are added at the end of the process in the First department. Using the first-in, first-out
a. 250,000 259,000
b. 280,000 259,000
c. 340,000 271,000
d. 280,000 271,000
ANS: B
Materials:
To complete beginning units in process (materials were 0% complete) 90,000
190,000
WIP)
Total 280,000

To complete beginning units in process (conversion costs were 50% complete) 45,000
190,000
WIP)
Total 259,000
27. During June, Birch Bay Company's Department B equivalent unit product costs computed under the FIFO
method were as follows:
Materials $2
Conversion $3
Transferred-in $5
Materials are introduced at the end of the process in Department B. There were 4,000 units (60 %
complete as to conversion costs) in work in process at June 30. The total costs assigned to the June 30
work in process inventory should be:
a. $20,000.
b. $24,800.
c. $27,200.
d. $35,200.
ANS: C
4,000 units @ $5 $20,000
Conversion costs:
4,000 units (60% complete) @ $3 7,200
$27,200
Because materials are introduced at the end of the process, no materials cost would be included in the
ending work in process.
28. When two products are produced during a common process, what is the factor that determines whether
the products are joint products or one principal product and a by-product?
a. Potential marketability for each product

b. Amount of work expended in the production of each product
c. Management policy
d. Relative total sales value
ANS: D
The relative total sales value is the determining factor in deciding whether a product is a joint product or
a by-product. Products with relatively little value are by-products.
29. If two or more products share a common process before they are separated, the joint costs should be
allocated in a manner that:
a. Assigns a proportionate amount of the total cost to each product by means of a

quantitative basis.
b. Maximizes total earnings.
c. Minimizes variations in a unit of production cost.
d. Does not introduce an element of estimation into the process of accumulating costs for
each product.
ANS: A
An allocation method is usually selected that will assign a portion of a given total cost to each of the
products that are sharing a physical part of the total item. A quantitative method is chosen that will
least affect the gross profit percentage differences among these products.
30. Each of the following is a method by which to allocate joint costs except:
a. Chemical or engineering analysis.

b. Relative sales value.
c. Relative weight, volume, or linear measure.
d. Relative marketing costs.
ANS: D
Joint costs would not be allocated according to relative marketing costs because marketing costs are not
necessarily incurred directly in proportion to production costs.
31. Joint costs are commonly allocated based upon relative:
a. Sales value.
b. Marketing costs.
c. Conversion costs.
d. Prime costs.
ANS: A
Joint costs are commonly allocated based upon relative sales value. Profitability, conversion costs, and
prime costs do not necessarily have a direct relationship to production costs.

32. Budde Chemicals produces two industrial chemical compounds, X15 and Z24, from the same process,
which last year, cost $300,000. Budde produced 15,000 gallons of X15, which sells for $40 per gallon
and 45,000 gallons of Z24, which sells for $20 per gallon. Using the relative sales method, how much of
the joint cost should be allocated to X15?
a. $100,000
b. $200,000
c. $60,000
d. $75,000
ANS: A
Percent Assignment
sales of joint
Selling Ultimate
value
price sales value costs
Product Gallons
X15 15,000 $40 $ 400,000 33.3% $100,000
Z24 45,000 $20 800,000 66.7% 200,000
$1,200,000 $300,000
33. If a company produces two products, A and B, from a joint process, and B requires additional processing
after the split-off in order to be salable, how is the joint cost allocated to B determined?
a. The costs of the additional processing are ignored in allocating joint costs.
b. The costs of the additional processing are subtracted from the joint costs allocated to B.
c. The relative sales value used to allocate the joint cost are determined after the costs of
further processing are subtracted from the ultimate sales value of B.
ANS: C
The relative sales value used to determine joint costs is determined by subtracting the costs of further
processing from the ultimate sales value of B.
and 45,000 gallons of Z24, which sells for $20 per gallon. After the split-off point, X15 required
additional processing costing $200,000 to make it salable. Using the adjusted sales method, how much
of the joint cost should be allocated to X15?
a. $100,000
b. $240,000
c. $60,000
d. $75,000
ANS: C
Percent Assignment
sales of joint
Selling Ultimate Costs after Sales value at
value
price sales split-off costs
Produc Gallons split-off
t value
X15 10,000 $40 $400,000 $200,000 $ 200,000 20% $ 60,000
Z24 40,000 $20 800,000 0 800,000 80% 240,000
$1,200,000 $200,000 $1,000,000 $300,000
and 45,000 gallons of Z24, which sells for $20 per gallon. Using the physical units method, how much of
the joint cost should be allocated to X15?
a. $100,000
b. $225,000
c. $60,000
d. $75,000
ANS: D
Assignment of
joint
Selling Percentage
price of total costs
Product Gallons
gallons
X15 $40 15,000 25% $ 75,000
Z24 $20 45,000 75% 225,000
60,000 $300,000
36. Which of the following statements best describes a by-product?
a. A product with a value that can easily and accurately be determined.

b. A product that has a greater value than the main product.
c. A product created along with the main product whose sales value does not cover the cost
of its production.
d. A product that usually produces a small amount of revenue when compared to the main
product revenue.
ANS: D
A by-product is a product that usually produces a small amount of revenue when compared to the main
product revenue.

37. Which of the following is most likely to be accounted for as a by-product?
a. Heating oil resulting from processing crude oil at a refinery.

b. Cream resulting from processing raw milk at a dairy.
c. Sawdust resulting from processing lumber at a lumber mill.
d. Ground beef resulting from processing beef at a meat packer.
ANS: C
Of the choices above, it is most likely that sawdust would have very little sales value compared to the
lumber being processed.
38. Which of the following is not an acceptable method for accounting for by-products in a joint
manufacturing process?
a. Costs before the split-off point are allocated to by-products.

b. The estimated sales value of the by-product reduces the cost of the main product.
c. The joint costs allocated to by-products are included in an account called “By-products
Inventory.”
d. In some instances, the revenue from selling by-products may be treated as “other
income” on the income statement.
ANS: A
Joint costs are not allocated to by-products. When accounting for by-products, the estimated sales
value of the by-product reduces the cost of the main product, and is recorded to an account called “By-
products Inventory.” Alternatively, if the sales value is not easily estimated, the sales may be recorded
as “Other Income.”

39. Thomas Lumber Company produces furniture grade lumber and building grade lumber from a joint
process. Sawdust, a by-product of the manufacturing process is sold to a local toy manufacturer to stuff
leather toys for $10 per ton. In February, the company produced 3,000 tons of sawdust. What is the
entry to reduce the cost of the main products by the estimated sales value of the by-product?
a. By-product inventory $30,000
Work in process $30,000
b. Work in process $30,000
Other income $30,000
c. Cost of goods sold $30,000
By-product inventory $30,000
d. By-product inventory $30,000
Gain or loss on sale of by-product $30,000
ANS: A
If the sales value of the by-product can be estimated, the entry made at the point of separation to set up
the by-product inventory and reduce the joint cost of the main products is:
By-product inventory $30,000
Work in process $30,000
If the value is not readily estimated, an entry is made at the time of the sale, and is usually treated as
other income or a reduction in the cost of the main products.
PROBLEM
1. Information for Tyson Company in May for Department One, the first stage of the production cycle, is as
follows:
Conversion
Materials Costs
Beginning work in process $ 7,500 $ 6,000
Costs added during May 28,500 16,050
Total costs $36,000 $22,050
Goods completed 9,000 units
Ending work in process 1,000 units
Material costs are added at the beginning of the process. The ending work in process is 80 percent
complete as to conversion costs. How would the total costs accounted for be distributed using the
average cost method?
ANS:
Materials Labor
Equivalent units:
Goods completed 9,000 9,000
Ending in process:
Material (1,000 x 100% complete) 1,000
Conversion costs (1,000 x 80% complete) ______ 800
10,000 9,800
Material costs ($36,000 / 10,000 units) $3.60 unit cost
Conversion costs ($22,050 / 9,800 units) 2.25 unit cost
Total $5.85 unit cost
Cost of units completed (9,000 units  $5.85) $52,650

Ending work in process:
Materials (1,000 units  $3.60) $3,600
Conversion costs (1,000 units  80%  $2.25) 1,800 5,400
Total costs accounted for $58,050
2. Highlander Corporation is a manufacturer that uses the average cost method to account for costs of
production. Highlander manufactures a product that is produced in three separate departments:
molding, assembling, and finishing. The following information was obtained for the assembling
department for the month of June:
Work in process, June 1: 4,000 units composed of the following:
Percent of
Amount Completion
Transferred in from the molding department $60,000 100%
Costs added by the assembling department:

Direct materials $ 0 0%
Direct labor 12,300 60%
Factory overhead applied 4,700 50%
$17,000
Work in process, June 1 $77,000
The following activity occurred during the month of June:
(1) 20,000 units were transferred in from the molding department at a cost of
$300,000.
(2) Costs were added by the assembling department as follows:

Direct materials $ 93,600
Direct labor 43,200
$156,220
(3) Materials are added at the end of the process.
(4) 18,000 units were completed and transferred to the finishing department. At June
30, 6,000 units were still in process. The degree of completion of work in process
at June 30 follows:
Direct labor 70%
Factory overhead applied 35%
Prepare in good form a cost of production report for the assembling department for the month of June.
Show supporting computations in good form. The report should include:
a. Equivalent units of production.

b. Total manufacturing costs.
c. Cost per equivalent unit.
d. Dollar amount of ending work in process.
e. Dollar amount of inventory cost transferred out.
ANS:
Highlander Corporation
Cost of Production Summary--Assembling Department
For the Month Ended June 30, 20--

Cost in molding dept. $60,000
Cost in assembling dept.:

Labor $12,300
Cost of goods received from molding

dept. during month 300,000

Materials $93,600
Labor 43,200

Materials:
Finished and transferred to finishing
dept. during month 18,000
of month (6,000 units, 0% completed)

0
Labor:
Finished and transferred to finishing dept.
18,000
during month
of month (6,000 units, 70% completed) 4,200
Factory overhead:
Finished and transferred to finishing dept.
during month 18,000

month (6,000 units, 35% completed) 2,100
20,100

Materials [($0 + $93,600) / 18,000] $ 5.20
Labor [($12,300 + $43,200) / 22,200] 2.50
Factory overhead [($4,700 + 19,420) / 20,100] 1.20
Total $8.90
Inventory costs:
to finishing dept. during month:
Cost in molding dept. (18,000  $15.00*) $270,000
Cost in assembling dept. (18,000  $8.90) 160,200 $430,200

Cost in molding dept. (6,000  $15.00) $90,000
Cost in assembling dept.

Materials (6,000  0%  $4.00) $ -0-
Labor (6,000  70%  $2.50) 10,500
Factory overhead (6,000  35% x
$1.20) 2,520 13,020 103,020
Total production cost accounted for $533,220
* Costs from Molding department ($60,000 + $300,000) /24,000 = $15.00

3. Logan, Inc., had 9,000 units of work in process in Department M on March 1 that were 50 percent
complete as to conversion costs. Materials are introduced at the beginning of the process. During
March, 18,000 units were started, 20,000 units were completed, and there were 1,000 units of normal
losses. Logan had 6,000 units of work in process at March 31 that were 60 percent complete as to
conversion costs. Under Logan's cost accounting system, lost units reduce the number of units over
which total cost can be spread. Using the average cost method, what were the equivalent units for
March for conversion costs?
ANS:
Unit output--Conversion costs:

Transferred out 20,000
Ending work in process (6,000 units  60%) 3,600
Equivalent production for conversion costs 23,600
4. Kyle, Inc., instituted a new process in October. During October, 18,000 units were started in
Department A. Of the units started, 2,000 were lost in the process, 12,000 were transferred to
Department B, and 4,000 remained in work in process at October 31. The work in process at October 31
was 100 percent complete as to material costs and 15% complete as to conversion costs. Material costs
of $78,400 and conversion costs of $52,920 were charged to Department A in October. What were the
total costs transferred to Department B and assigned to ending work in process using the average cost
method?
ANS:

Materials $ 78,400
Conversion costs 52,920

Materials:
Finished and transferred to Department B 12,000
Equivalent units of work in process,

end of month (all materials) 4,000
Conversion costs:
Finished and transferred to Department B 12,000
Equivalent units of work in process,

end of month (4,000 units, 15% completed) 600

Materials ($78,400 / 16,000) $ 4.90
Conversion costs ($52,920 / 12,600) 4.20
Total $ 9.10
Inventory costs:
Cost of goods transferred to Department B (12,000  $9.10) $109,200

Material (4,000 x 4.90) 19,600
Labor (600 x 4.20) 2,520
Total ending work in process inventory 22,120
5. The Roberto Company had computed the flow of units for Department A for the month of May as
follows:
Work in process, May 1: 10,000
Started into production during May 39,000
Units to be accounted for 49,000
Beginning Added during the

current month
work in process
Materials $20,800 $ 97,500
Labor 5,200 34,920
Total $30,800 $165,400
Materials are added at the beginning of the process. There were 8,000 units of work in process at May
31. The work in process at May 1 was 70 percent complete as to conversion costs and the work in
process at May 31 was 60 percent complete as to conversion costs. What was the cost of the goods
transferred out and in ending work in process using the FIFO method?
ANS:
Unit output for the month:
Conversion
Materials Costs
To complete beginning work in process:
Materials needed -0-
30%  10,000 units 3,000
Started and finished during month:

All costs added 31,000 31,000

All materials added 8,000
60%  8,000 4,800
Total 39,000 38,800
Unit costs for month:

Materials $97,500 / 39,000 $2.50
Labor $34,920 / 38,800 .90
Factory overhead $32,980 / 38,800 .85
Total $4.25
Inventory Costs:
Cost of goods finished and transferred out during month:
Beginning units in process:

Prior month’s cost $30,800
Current cost to complete:

Materials (already complete) 0
Labor (10,000 x 30% x $.90) 2,700
Factory overhead (10,000 x 30% x $.85) 2,550 $ 36,050
Units started and completed during month
(31,000 x $4.25) 131,750
Total cost transferred $167,800

Materials (8,000 x $2.50) $20,000
Labor (8,000 x 60% x $.90) 4,320
Factory overhead (8,000 x 60% x $.85) 4,080 28,400
6. The Roberto Company had computed the flow of units for Department A for the month of May as
follows:
Work in process, May 1: 10,000
Started into production during May 39,000
Units to be accounted for 49,000
Beginning Added during the

current month
work in process
Materials $ -0- $235,750
Labor 12,660 166,320
Total $23,970 $552,550
Materials are added at the end of the process. There were 8,000 units of work in process at May 31.
The work in process at May 1 was 30 percent complete as to conversion costs and the work in process at
May 31 was 20 percent complete as to conversion costs. What was the cost of the goods transferred
out and in ending work in process using the FIFO method?
ANS:
Unit output for the month:
Conversion
Materials Costs
Materials needed 10,000
70%  10,000 units 7,000

All costs added 31,000 31,000

No materials added -0-
20%  8,000 1,600
Total 41,000 39,600
Unit costs for month:

Materials $235,750 / 41,000 $ 5.75
Labor $166,320 / 39,600 4.20
Factory overhead $150,480 / 39,600 3.80
Total $13.75
Inventory Costs:
Cost of goods finished and transferred out during month:
Beginning units in process:

Prior month’s cost $23,970
Current cost to complete:

Materials (10,000 x 5.75) 57,500
Labor (10,000 x 70% x $4.20) 29,400
Factory overhead (10,000 x 70% x $3.80) 26,600 $137,470
Units started and completed during month
(31,000 x $13.75) 426,250
Total cost transferred $563,720

Materials (None added) $ -0-
Labor (8,000 x 20% x $4.20) 6,720
Factory overhead (8,000 x 20% x $3.80) 6,080 12,800

7. Howard Poster Incorporated had 12,000 units of work in process in Department A on October 1. These
units were 60 percent complete as to conversion costs. Materials are added in the beginning of the
process. During the month of October, 38,000 units were started and 40,000 units were completed.
Howard had 10,000 units of work in process on October 31. These units were 75 percent complete as to
conversion costs.
1) Compute the equivalent units for materials and conversion costs for the month of October using the
FIFO method.
2) Using the average cost method determine the equivalent units for materials and conversion costs for
the month of October.
ANS:
FIFO equivalent units:
Conversion
Materials Costs
Materials added -0-
40%  12,000 4,800

40,000 units completed - 12,000 units in process,
beginning of month 28,000 28,000

75%  10,000 7,500
Total 38,000 40,300
Average cost equivalent units:

Finished during month 40,000 40,000

75%  10,000 7,500
Total 50,000 47,500
8. Howard Poster Incorporated had 12,000 units of work in process in Department A on October 1. These
units were 60 percent complete as to conversion costs. Materials are added at the end of the process.
During the month of October, 38,000 units were started and 40,000 units were completed. Howard had
10,000 units of work in process on October 31. These units were 75 percent complete as to conversion
costs.
1) Compute the equivalent units for materials and conversion costs for the month of October using the
FIFO method.
2) Using the average cost method determine the equivalent units for materials and conversion costs for
the month of October.
ANS:
FIFO equivalent units:
Conversion
Materials Costs
Materials added 12,000
40%  12,000 4,800

40,000 units completed - 12,000 units in process,
beginning of month 28,000 28,000
All materials added 0
75%  10,000 7,500
Total 40,000 40,300
Average cost equivalent units:

Finished during month 40,000 40,000

Materials added 0
75%  10,000 7,500
Total 40,000 47,500
9. Keith Company manufactures Products A, B, and C from a joint process. Additional information is as
follows:
Product
A B C Total
Units produced 8,000 4,000 2,000 14,000
Joint costs $90,000 ? ? $150,000
Sales value at split off ? ? $30,000 $240,000
Assuming that joint costs are allocated using the relative sales value at split-off approach, what was the
sales value at split off for Product A?
ANS:
Joint cost allocated to Product A of $90,000 / Total joint cost of $150,000 = 60%, so sales value at split
off of Product A must be 60%  total sales value of $240,000, or $144,000.
10. Jim Davis Company processes hogs into three products, chops, bacon and sausage. Production and
selling price data follow:
Chops 100,000 lbs. $5.00/ lb.

Bacon 210,000 lbs. $4.00/ lb.
Sausage 410,000 lbs. $2.00/ lb.
Bacon was smoked, sliced and packaged after the split-off point. The cost incurred for these processes
was $100,000. Sausage was ground and formed into patties after the split-off. This process cost
$60,000.
If joint processing costs were $1,500,000, calculate the total cost of each product using the adjusted
sales value method.
ANS:
Ultimate Costs Sales value Percent Assignment

sales after at sales of joint
Selling
split-off value costs
price value split-off
Product Pounds
Chops 100,000 $5.00 $ 500,000 $ 500,000 25% $ 375,000
Bacon 210,000 $4.00 840,000 $100,000 740,000 37% 555,000
Sausage 410,000 $2.00 820,000 60,000 760,000 38% 570,000
$2,260,000 $160,000 $2,000,000 $1,500,000
Total cost:
Chops $375,000
Bacon $555,000 + 100,000 = $655,000

Sausage $570,000 + 60,000 = $630,000
11. Nate Company manufactures Products A and B from a joint process that also yields a by-product, X.
Nate Company accounts for the revenue from its by-product sales as a deduction from the cost of its
main products. Additional information is as follows:
Product
A B X Total
Units produced 15,000 9,000 6,000 30,000
Joint costs ? ? ? $180,000
Sales value at split off $420,000 $140,000 $20,000 $580,000
(1) Assuming that joint product costs are allocated using the relative sales value at split-off approach,
what was the joint cost allocated to Products A and B?
(2) Prepare the journal entry to transfer the finished products to separate inventory accounts.
(3) Assuming the sales value of X is stable, prepare the journal entries to:
(a) place the by-product in stock
(b) record the sale of 3,000 units for $10,500 on account.
ANS:
(1) In accounting for by-products, the common practice is to make no allocation of the joint costs up to
the split-off point. First, the joint costs must be reduced by the $20,000 sales value of the by-product X
($180,000 - $20,000 = $160,000).
Percent Assignment
sales of joint
Relative sales
value
value
Product Units costs
A 10,000 $420,000 75% (160,000 x 75%) $120,000
B 40,000 140,000 25% (160,000 x 25%) 40,000
$560,000 $160,000
(2)
Finished goods inventory - A 120,000
Finished goods inventory - B 40,000
(3)
By-product inventory 20,000
Accounts receivable 10,500
By-product inventory 10,000 (3,000/6,000 x 20,000)
Gain on sale of by-product 500
CHAPTER 7--MASTER BUDGET and FLEXIBLE BUDGETING
MULTIPLE CHOICE
1. Budgeting provides the framework for:
a. Process costing.
b. Breaking semivariable costs into their fixed and variable components.
c. Planning and control.
d. Delegating authority to managers.
ANS: C
Budgeting provides the framework for planning how the organization meet the goal of maximizing its
income and providing guidelines for controlling costs.
2. The budget should use historical data:
a. Only as a stepping-off point for projections into the future.

b. Because things don’t really change.
c. And add a 5% growth factor for each year.
d. Because management is satisfied with historical results.
ANS: A
Because the budgeting process involves looking to the future, historical data should only be used as a
stepping-off point. The budget must also consider other factors including economic developments and
the general business climate.
3. Which of the following is not a requirement of budgeting?
a. Goals must be realistic and possible to attain.

b. There must be accountability for actual results.
c. Management must clearly define its objectives.
d. The budget must not be changed under any circumstances.
ANS: D
The budget must be flexible enough so it can be modified in light of changing conditions.
4. A budget prepared for a single level of volume based on management’s best estimate of the level of
production and sales for the coming period is a:
a. Flexible budget.
b. Static budget.
c. Continuous budget.
d. Capital budget.
ANS: B
A static budget is prepared for a single level of volume. A flexible budget is prepared for several levels of
volume.
5. A budget that adds a new month at the end of the budget when a month is completed, resulting in a
budget that is always one year in advance is a:
a. Flexible budget.
b. Static budget.
c. Continuous budget.
d. Capital budget.
ANS: C
A continuous or rolling budget “rolls forward” so that as one month is completed, another month is
added at the end of the budget.
6. Which of the following is not an operating budget?

a. Cash budget
b. Sales and administrative budget
c. Sales budget
d. Cost of goods sold budget
ANS: A
Operating budgets include components of the budgeted income statement which include options b, c,
and d. The cash budget is a financial budget.
7. The budget that is used as a basis for preparing all other budgets is the:
a. cash budget.
b. production budget.
c. budget balance sheet.
d. sales budget.
ANS: D
The sales budget is used as the basis for the production budget. The sales or production budgets are
needed to prepare all other budgets.
8. Managers should consider all of the following in developing a sales budget except:
a. Customer demand.
b. Development of new products.
c. Present and future economic conditions.
d. Cost of materials.
ANS: D
The cost of materials should be considered in the direct materials budget. Customer demand, new
products and economic conditions should be factored into the sales budget.
9. Participative budgeting:
a. Results in managers being less apt to meet or beat their budget projections.
b. Motivates managers to meet budget numbers because they set them.
c. Describes the budget meetings in which managers participate.
d. Leaves room to blame top management in the event budget numbers are not met.
ANS: B
Managers are more apt to meet or beat their budget projections when using participative budgeting.
They are more motivated because they set the numbers and there is no one else to blame for imposing
unrealistic standards.
10. Stan is the manager of a division that has been struggling lately. It is budget time and Stan feels he is
under the gun to do well next year. As such, he is building slack into his budget. How will he handle
estimates of revenues and expenses?
Revenues Expenses
a. Overestimate Overestimate
b. Overestimate Underestimate
c. Underestimate Underestimate
d. Underestimate Overestimate
ANS: D
Budget slack occurs when a manager sets unrealistically low goals in an effort to make average
performance look good. If Stan is building slack into his budget, he would budget his sales lower than
realistically expected so he would look good when sales beat the budget. Conversely, his budgeted
expenses would be higher than realistically expected, so he would look good when his expenses were
under budget.
11. Kerry Kola Company sells Kerry Kola in two sizes: 12 ounce and 32 ounce bottles, at a price of $1.00 and
$2.25, respectively. Projected unit sale volumes by region follow:
East Region:
12 ounce bottles 200,000
West Region:
What is Kerry Kola’s budgeted sales?
a. $1,643,750
b. $1,425,000
c. $1,362,500
d. $1,581,250
ANS: B
Kerry Kola’s Sales Budget is calculated as follows:
Unit Sales Unit Selling

Volume Price
Product and Region Total Sales
12 ounce bottles:
East 200,000 $1.00 $ 200,000
West 325,000 $1.00 325,000

$ 525,000
32 ounce bottles:
East 150,000 $2.25 $ 337,500
West 250,000 $2.25 562,500
$ 900,000
Total sales $1,425,000
12. Which of the following represents the correct relationship between budgets and inventories?
a. The direct materials budget includes the budgeted dollar value of the direct materials
inventory at the beginning and end of the budget period.
b. The direct materials budget includes the budgeted number of units in the direct materials
c. The production budget includes the budgeted number of units in the work in process
d. The direct labor budget includes the budgeted number of units in the work in process
ANS: B
The direct materials budget is computed as follows:
Budgeted production in units
x number of components required per unit
= Units of material required for production
+ Desired units in materials inventory at the end of the period
= Total
- Estimated units in materials inventory at the beginning of the period
= Number of units required to be purchased

13. Denny Door Company has budgeted door sales as follows:
Year Number of Units Budgeted Sales Dollars

March 50,000 $1,000,000
April 60,000 $1,200,000
Finished goods inventory at February 28 will be 8,000 units, but the company is making an effort to
reduce inventory and its new policy is that inventory at the end of the month should be 10% of the
budgeted sales for the following month. How many units should Denny Door Company produce in
March?
a. 52,000
b. 62,000
c. 51,000
d. 48,000
ANS: D
Denny’s production budget is calculated as follows:
Budgeted sales in units in March 50,000
+ Desired ending inventory (60,000 x 10%) 6,000
56,000
- Beginning inventory 8,000
48,000

14. Tacy Tires has budgeted production of 150,000 units this fiscal year. There were 15,000 units on hand in
finished goods inventory on January 1 and the company’s desired inventory at the end of the year is
12,000 units. Tacy’s sales budget in units is:
a. 147,000
b. 150,000
c. 153,000
d. 177,000
ANS: C
Budgeted sales, in units Unknown (2)
+ Desired units in inventory, end of period 12,000
Unknown (1)
- Estimated units inventory, beginning of period 15,000
= Budgeted production, in units 150,000
Unknown (1) = 150,000 + 15,000 = 165,000
Unknown (2) = 165,000 - 12,000 = 153,000
15. Producing goods evenly throughout the year despite having a seasonal sales pattern could lead to:
a. Employee morale issues.

b. High costs for recruiting and training new employees.
c. The potential for inventory obsolescence.
d. Relatively stable inventory levels.
ANS: C
Even production coupled with a seasonal sales pattern would lead to fluctuating inventory levels.
Inventory levels would increase during periods when production levels exceeded sales volumes. If
inventory levels were too high, there is the potential that the product could spoil or become outdated
before those inventories could be sold.
16. The format of the direct materials budget is similar to that of the:
a. Factory overhead budget.

b. Sales budget.
c. Production budget.
d. Direct labor budget.
ANS: C
The format of the direct materials budget is similar to that of the production budget as they both
consider inventory levels.
17. Comfy Inc. uses five yards of wool in each blanket it produces. Comfy’s production budget next year is
30,000 blankets. The anticipated wool inventory at January 1 is 40,000 yards, but the company desires
to reduce the inventory to 20,000 yards by the end of the year. Each yard of wool costs $10. How many
yards of wool should Comfy purchase?
a. 190,000 yards
b. 130,000 yards
c. 170,000 yards
d. 1,300,000 yards
ANS: B
Budgeted production of blankets in units 30,000
Yardage required per blanket x 5
Number of yards required for production 150,000

Desired inventory of wool in yards, December 31 20,000
170,000
Estimated inventory of wool in yards, January 1 40,000
Number of yards of wool to be purchased 130,000
18. Arwin Company’s production budget is as follows:
Budgeted sales in units 200,000
Desired units in inventory, December 31 35,000
235,000
Estimated units in inventory, January 1 25,000
Budgeted units of production 210,000
Each unit takes 20 minutes to produce and the standard labor rate is $15 per labor hour. What is
Arwin’s direct labor budget?
a. $1,050,000
b. $1,000,000
c. $1,175,000
d. $9,450,000
ANS: A
Budgeted units of production 210,000 x 1/3 hour each = 70,000 hours
70,000 hours x $15/hr. = $1,050,000

19. Lunchco Inc. produces picnic tables in a two-step process. Pretreated wood is cut in the Cutting
Department and then the lumber is assembled into tables in the Assembly Department. It takes 30
minutes of direct labor time to cut the lumber and the standard hourly labor rate in the Cutting
Department is $12. The tables take one hour to assemble and the standard hourly rate in the Assembly
Department is $10. If Lunchco’s production budget is 20,000, what is the company’s direct labor
budget?
a. $340,000
b. $680,000
c. $330,000
d. $320,000
ANS: D
Lunchco’s direct labor budget is calculated as follows:
Cutting Department 20,000 units x 1/2 hr/unit x $12/hr. $120,000
Assembly Department 20,000 units x 1 hr/unit x $10/hr. 200,000
Total budgeted direct labor $320,000
20. Which of the following is not considered when preparing the cost of goods sold budget?
a. Budgeted factory overhead.

b. Budgeted dollar value of finished goods inventory at the end of the period.
c. Budgeted sales dollars.
d. Budgeted dollar value of work-in-process inventory at the beginning of the year.
ANS: C
Budgeted sales dollars is not considered in preparing the cost of goods sold budget.

21. Budgeted inventories for the Remle Company follow:
January 1 December 31
Direct materials $24,800 $26,700
Finished goods 83,300 87,400
Additional budget information follows:
Cost of goods manufactured 356,900
Calculate the budgeted cost of goods sold.
a. $352,800
b. $350,400
c. $361,000
d. $359,300
ANS: A
Finished goods inventory, January 1 $ 83,300
Total goods available for sale 440,200
Finished goods inventory, December 31 87,400
22. Amounts from all of the following budgets feed into the pro-forma income statement except the:
a. Capital expenditures budget.

b. Factory overhead budget.
c. Direct materials budget.
d. Sales budget.
ANS: A
The capital expenditures budget is the budget for asset acquisitions. The sales budget feeds directly into
the (pro-forma income statement) income statement budget, while the factory overhead and direct
materials budgets feed into the income statement budget indirectly through the cost of goods sold
budget.
23. Information from the operating budgets of Northwest Industries follows:
Selling and administrative expenses $ 50,000
Sales 450,000
Direct labor 80,000
If Northwest’s income tax rate is 40%, what is the budgeted net income?
a. $120,000
b. $30,000
c. $200,000
d. $80,000
ANS: A
The budgeted income statement for Northwest Industries would be as follows:
Net sales $450,000
Gross profit 250,000

Operating income 200,000
Income tax ($200,000 x 40%) 80,000
Net income $120,000
Note that the amounts from the factory overhead and direct labor budgets would have already been
included in the amount shown in the cost of goods sold budget.
24. Consider the following budgets:
(1) Direct materials
(2) Income statement
(3) Production
(4) Cost of goods sold
In what order should these budgets be prepared?
a. 2, 3, 1, 4
b. 3, 4, 1, 2
c. 1, 3, 4, 2
d. 3, 1, 4, 2
ANS: D
The sales budget should be prepared first. The budgeted sales should be used to prepare the
production budget. The budgeted production will be needed to determine the direct materials budget.
The direct materials budget should be used to prepare the cost of goods sold budget. Once the cost of
goods sold budget is determined, that needs to be used to prepare the income statement budget.

25. A plan for timing acquisitions of buildings, equipment or other significant assets is a(n):
a. budget balance sheet.

b. capital expenditures budget.
c. asset budget.
d. financing budget.
ANS: B
A capital expenditures budget is a plan for timing acquisitions of buildings, equipment or other
significant assets.
26. The purpose of a flexible budget is to:
a. Compare actual and budgeted results at virtually any level of production.

b. Eliminate cyclical fluctuations in production reports by ignoring variable costs.
c. Allow management some latitude in meeting goals.
d. Reduce the total time in preparing the annual budget.
ANS: A
The purpose of a flexible budget is to compare actual and budgeted results at virtually any level of
production.
27. Flexible budgeting is a reporting system wherein the:
a. Statements included in the budget report vary from period to period.

b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Planned level of activity is adjusted to the actual level of activity before the budget
comparison report is prepared.
ANS: D
Flexible budgeting is a reporting system wherein the planned level of activity is adjusted to the actual
level of activity before the budget comparison report is prepared.
28. Which of the following budgets is used to provide an “apples to apples” comparison of budgeted and
actual performance at the actual unit volume attained?
a. Continuous budget
b. Flexible budget
c. Master budget
d. Static budget
ANS: B
A flexible budget is used to compare actual and budgeted performance at the actual production volume.
29. Julia Industries produces cookware. The master budget called for production of 75,000 units this year.
The budget at that level of production follows:
Sales $1,200,000
Fixed selling and administrative expense 112,500

Operating income $ 150,000
Due to the popularity of cooking shows on television, Julia Industries now estimates sales will be 80,000
units. What is budgeted operating income at this level?
a. $185,000
b. $160,000
c. $230,000
d. $167,500
ANS: A
75,000 Units Per Unit* 80,000 Units
Sales $1,200,000 $16.00 $1,280,000
Direct materials 300,000 4.00 320,000
Direct labor 150,000 2.00 160,000
Variable factory overhead 225,000 3.00 240,000
Fixed factory overhead 262,500 not applicable 262,500
Fixed selling and administrative 112,500 not applicable 112,500
Operating income $ 150,000 $ 185,000
*For sales and variable costs: Per unit = budgeted amount at 75,000 units / 75,000
30. A summary of Tanner Company’s flexible budget of manufacturing costs follows:
10,000 Units
Direct labor 35,000

Total $96,000
What would the flexible budget of manufacturing costs be at a production volume of 12,000 units?
a. $80,000
b. $115,200
c. $109,000
d. $112,000
ANS: D
10,000 Units Cost per Unit* 12,000 Units
Direct materials $30,000 $3.00 $ 36,000
Direct labor 35,000 3.50 42,000
Variable factory overhead 15,000 1.50 18,000
Fixed factory overhead 16,000 not applicable 16,000
Total $96,000 $112,000
*Cost per unit = budgeted amount at 10,000 units/10,000
31. Quinn Company’s master budget called for 30,000 units of production. Budgeted direct material costs
at this level were $450,000 or $15 per unit. Quinn actually produced 32,000 units and incurred direct
material costs of $496,000. Quinn uses flexible budgeting to evaluate variances and determined that
there was a $16,000 unfavorable direct materials variance. All of the following reasons could have
contributed to the flexible budget variance except:
a. Quinn produced more than the master budget called for.

b. Quinn did a poor job of controlling the purchase cost of the raw materials.
c. Quinn did a poor job of controlling the quantity of the direct materials used in the
production process.
ANS: A
Because flexible budgeting compares actual results against budgeted amounts at the actual level of
production, in this case 32,000, the variance cannot be due to the fact that production levels were
different than what the master budget originally called for.
32. Consider the following about Taylor Corporation:
Direct materials budget based on 50,000 units produced $200,000
Actual direct materials incurred $190,000
Actual units produced 40,000
Assuming Taylor Corporation uses flexible budgeting, what is the variance related to direct materials?
a. $10,000 favorable
b. $50,000 unfavorable
c. $30,000 unfavorable
d. $38,000 unfavorable
ANS: C
Standard material cost per unit ($200,000 / 50,000 units) x $4.00
Budgeted material cost at 40,000 units $160,000
Actual direct material costs incurred 190,000
Unfavorable variance related to direct materials $ 30,000

33. Quinn Company’s master budget called for 30,000 units of production. Budgeted direct material costs
at this level were $450,000 or $15 per unit. Quinn actually produced 32,000 units and incurred direct
material costs of $496,000.
What is Quinn’s direct material variance using flexible budgeting?
a. $16,000 U
b. $46,000 U
c. $74,125 U
d. $16,000 F
ANS: A
Budgeted direct material costs per unit x 15
Budgeted direct material costs @ 32,000 units of 480,000

production
Actual direct material costs 496,000
Unfavorable direct material variance $ 16,000
34. Consider the flexible budget information relating to direct labor costs for Logan Ltd.:
48,000 units 50,000 units 52,000 units

Machining $2.50 per unit $120,000 $125,000 $130,000
Finishing $1.50 per unit 72,000 75,000 78,000
$192,000 $200,000 $208,000
Logan’s actual production was 51,000 units and the related cost was $205,500. What is the variance
related to direct labor?
a. $1,500 unfavorable
c. $2,500 favorable
d. $1,500 favorable
ANS: A
Machining - 51,000 units x $2.50 $127,500
Finishing - 51,000 units x $1.50 76,500
Flexible budget for labor at 51,000 units 204,000
Actual labor costs incurred 205,500
Unfavorable variance $ 1,500
35. The absolute maximum number of units that would be possible under the best conceivable operating
conditions is a description of which type of manufacturing capacity?
a. Practical
b. Theoretical
c. Currently attainable (expected)
d. Normal
ANS: B
Theoretical capacity describes the absolute maximum number of units that would be possible under the
best conceivable operating conditions. Both practical and normal capacity have some allowance for idle
capacity.
36. The level of production that provides complete utilization of all facilities and personnel, but allows for
some idle capacity due to operating interruptions such as machinery breakdowns, idle time and other
inescapable inefficiencies is:
a. practical capacity.
b. theoretical capacity.
c. budgeted capacity.
d. normal capacity.
ANS: A
Practical capacity provides complete utilization of all facilities and personnel, but allows for some idle
capacity.
37. The level of production that is used by most firms for budget development because it represents a
logical balance between maximum production capacity and the capacity demanded by actual sales
volume is:
a. practical capacity.
b. theoretical capacity.
c. budgeted capacity.
d. normal capacity.
ANS: D
Normal capacity is the level of production that will meet normal requirements of ordinary sales demand
over the years. It is used by most manufacturing firms for budget development.
38. When using a flexible budget, what will occur to fixed costs (on a per unit basis) as production
increases?
a. Fixed costs are not considered in flexible budgeting.

b. Fixed costs per unit will decrease.
c. Fixed costs per unit will remain unchanged.
d. Fixed costs per unit will increase.
ANS: B
When using a flexible budget, fixed costs (on a per unit basis) will decrease as production increases.
39. The normal capacity of Noel Company is 4,000 units per month. At this volume, budgeted fixed and
variable factory overhead are $16,000 and $20,000, respectively. In May, actual production was 4,200
units and actual overhead incurred was $37,900.
What was the amount of factory overhead allowed for the actual level of production in May?
a. $36,000
b. $36,800
c. $37,000
d. $37,800
ANS: C
Budgeted variable overhead per unit ($20,000 / 4,000 units) $5.00
Actual units produced x 4,200
Budgeted variable overhead @ 4,200 units $21,000
Budgeted fixed overhead @ 4,200 units 16,000
Overhead allowed for 4,200 units produced $37,000
What is the factory overhead application rate at the actual level of production (rounded to the nearest
penny)?
a. $9.00
b. $8.81
c. $9.02
d. $8.57
ANS: B
Factory overhead application rate = $37,000/4,200 units = $8.81 per unit
41. Bisset Corporation has developed the following flexible budget formula for annual indirect labor cost:
Total costs = $9,600 + $0.75 per machine hour
Operating budgets for the current month are based upon 30,000 hours of planned machine time.
Indirect labor costs included in this planning budget are:
a. $23,300.
b. $22,500.
c. $32,100.
d. $2,425.
ANS: A
Annual fixed costs of $9,600 / 12 = monthly fixed cost $ 800
30,000 machine hours  $.75 per machine hour 22,500
Indirect labor cost budgeted for the month $23,300
42. The standard capacity of a factory is 9,000 units per month. Cost and production data follow:
Standard application rate for fixed factory overhead for 9,000 units $2.00
Standard application rate for variable factory overhead for 9,000 .50
units
Actual number of units produced 8,800
Actual factory overhead incurred $22,700
What is the amount of overhead allowed for the actual volume of production?
a. $22,000
b. $22,400
c. $22,500
d. $22,700
ANS: B
Standard application rate for variable factory overhead x$ .50
Variable factory overhead allowed for 8,800 units $ 4,400
Standard capacity of factory 9,000
Standard application rate for fixed factory overhead x 2.00
Budgeted fixed factory overhead 18,000

Factory overhead allowed for 8,800 units produced $22,400
What is the variance between budgeted factory overhead per the flexible budget and actual overhead
incurred?
a. $1,900 U
b. $1,000 U
c. $900 U
d. $100 U
ANS: C
Actual overhead incurred 37,900
Unfavorable variance $ 900
44. The standard capacity of a factory is 9,000 units per month. Cost and production data follow:
Standard application rate for fixed factory overhead for 9,000 units $2.00
Standard application rate for variable factory overhead for 9,000 .50
units
What is the variance between the overhead per the flexible budget and the actual overhead incurred?
a. $200 U
b. $300 U
c. $100 U
d. $300 F
ANS: B
Standard application rate for variable factory overhead x$ .50
Variable factory overhead allowed for 8,800 units $ 4,400
Standard capacity of factory 9,000
Standard application rate for fixed factory overhead x 2.00
Factory overhead allowed for 8,800 units produced $22,400
Actual overhead incurred 22,700
Unfavorable factory overhead variance $ 300
45. Which of the following is not true regarding service department expenses?
a. Preparing a budget for a service department requires the same procedures as those used
for production departments.
b. Expenses of the service departments are allocated to production departments using a
standard application rate.
c. Production departments will consider allocated service department expenses in
developing their budgets.
d. Variances are not computed for expenses in service departments.
ANS: D
Variances are computed in service departments. The variance will be the difference of the service
department’s actual expenses compared to the amount charged to the production departments.
PROBLEM
1. Keefe Clothing, Inc. manufactures two styles of blue jeans: standard, which sell for $35, and deluxe,
which sell for $50. The jeans are sold in three regions: East, West and South. Deluxe jeans account for
25% of the sales in the East Region, 30% in the West Region and 20% in the South Region. Forecasted
total sales next year are 30,000, 50,000 and 35,000 in the East, West and South Regions, respectively.
Prepare a sales budget for Keefe Clothing, Inc. for next year.
ANS:
Keefe Clothing, Inc.
Sales Budget
For the Year Ended December 31, 20--
Unit Sales Unit Sales

Volume Price
Product and Region Total Sales
Standard:
East * 22,500 $35.00 $ 787,500
West ** 35,000 35.00 1,225,000
South *** 28,000 35.00 980,000
Total 85,500 $2,992,500
Deluxe:
East * 7,500 $50.00 $ 375,000
West ** 15,000 50.00 750,000
South *** 7,000 50.00 350,000
Total 29,500 $1,475,000
Total Revenue $4,467,500
* East 30,000 units x 25% = 7,500 units deluxe; 30,000 - 7,500 = 22,500 units standard
** West 50,000 units x 30% = 15,000 units deluxe; 50,000 - 15,000 = 35,000 units standard
*** South 35,000 units x 20% = 7,000 units deluxe; 35,000 - 7,000 = 28,000 units standard
2. Bradley Company has forecasted sales for the month of March for its single product to be 10,000 in its
Columbus Region, 13,000 units in its Cincinnati Region and 15,000 units in its Cleveland Region. The
estimated inventory on March 1 is 4,500 units and the company desires to have 3,800 units on hand
March 31. The budgeted sales price is $52.00 per unit.
(1) Prepare a sales budget for the month of March.
(2) Prepare a production budget for the month of March.
ANS:
Bradley Company
Sales Budget
For the Month Ended March 31, 20--

Units Unit Selling Price Total Sales
Region:
Columbus 10,000 $52.00 $ 520,000
Cincinnati 13,000 52.00 676,000
Cleveland 15,000 52.00 780,000
38,000 $1,976,000
Bradley Company
Production Budget
For the Month Ended March 31, 20--
Units
Sales 38,000
Plus desired ending inventory, March 31 3,800
Total 41,800
Less estimated beginning inventory, March 1 4,500
Total production 37,300
3. O’Reilly Outfitters Inc. has forecasted sales of 32,000 tents for the upcoming year. The anticipated
finished goods inventory at January 1 is 5,000 units, but management desires this inventory level to be
reduced by 20% on December 31.
Two materials are used in the production of tents: 36 square yards of nylon having a standard cost of
$2.00 per yard, and 20 feet of metal tubing having a standard cost of $.50 per linear foot. Raw material
inventory information is as follows:
Estimated inventory Desired inventory

January 1 December 31
Nylon 110,000 yds. 80,000 yds.
Metal tubing 45,000 ft. 35,000 ft.
(1) Prepare a production budget for the upcoming year.
(2) Prepare a direct materials budget for the upcoming year.
ANS:
O’Reilly Outfitters Inc.
Production Budget
Units
Budgeted sales 32,000
Plus desired ending inventory, December 31 * 4,000
Total 36,000
Less estimated beginning inventory, January 1 5,000
* 5,000 - (5,000 x 20%) = 4,000
O’Reilly Outfitters Inc.
Direct Materials Budget
Nylon Metal Tubing
Square Yards Linear Feet Total

Quantities required for production * 1,116,000 620,000
Plus desired ending inventory, Dec. 31 80,000 35,000
Total 1,196,000 655,000

Less estimated beginning inventory, Jan. 1 110,000 45,000
Total quantity to be purchased 1,086,000 610,000
Unit price $ 2.00 $ .50
Total direct materials purchases $2,172,000 $305,000 $2,477,000
* Nylon 31,000 units x 36 yards per unit = 1,116,000 yards
Metal tubing 31,000 units x 20 feet per unit = 620,000 feet
4. Phelps Company manufactures one product that requires 3 hours of machining direct labor and 2 hours
of assembly direct labor. The standard labor rate is $18.00 per direct labor hour in the Machining
Department and $15.00 per direct labor hour in the Assembly Department. The product has forecasted
sales of 2,000 units in May. The estimated finished goods inventory at May 1 is 250 units and the
desired ending inventory at May 31 is 450 units.
(1) Prepare a production budget for the month of May.
(2) Prepare a direct labor budget for the month of May.
ANS:
Phelps Company
Production Budget
Units
Budgeted sales 2,000
Plus desired ending inventory, May 31 450
Total 2,450
Less estimated beginning inventory, May 1 250

Phelps Company
Direct Labor Budget
Machining Assembly Total

Hours required for production * 6,600 4,400 11,000
Hourly rate $ 18.00 $ 15.00
Direct labor cost $118,800 $66,000 $184,800
* Machining 2,200 units x 3 hours per unit = 6,600 hours
Assembly 2,200 units x 2 hours per unit = 4,400 hours
5. Jasinski Jewelry produces a component for lapel pins. Budgeted production in April is 8,400 units. Each
unit requires 1/3 ounce of gold, and 2 hours of direct labor time. It is estimated that Jasinski will have
100 ounces of gold on hand at April 1, and since management anticipates an increase in the price of gold
in the coming months, the desired ending inventory at the end of April is 150 ounces. The standard cost
of an ounce of gold is $300. The standard rate for direct labor is $25 per hour.
(1) Prepare a direct materials budget.
(2) Prepare a direct labor budget.
ANS:
Jasinski Jewelry
Direct Materials Budget

Gold (ounces)
Quantity of gold required for production * 2,800
Plus desired ending inventory, April 30 150
Total 2,950
Less estimated beginning inventory, April 1 100
Total quantity to be purchased 2,850
Unit price x $300
Total direct material purchases $855,000
* Budgeted production 8,400 units x 1/3 ounce = 2,800 ounces
Jasinski Jewelry
Direct Labor Budget
Direct Labor
Hours required for production ** 16,800
Hourly rate x 25
Total direct labor cost $420,000
** 8,400 units x 2 hours per unit = 16,800 hours
6. Prepare a cost of goods sold budget for the KAS Company for the upcoming year from the following
estimates:
Inventories:
Direct Materials Work in Process Finished Goods

January 1 $22,600 $32,500 $50,200
December 31 31,400 30,400 48,300
Totals from other budgets:
Direct materials purchased $234,500

ANS:
KAS Company
Cost of Goods Sold Budget
Finished goods inventory, Jan. 1 $ 50,200
Work in process inventory, Jan. 1 $ 32,500
Direct materials inventory, Jan. 1 $ 22,600
Direct materials purchases 234,500
Direct materials available for use 257,100
Less direct materials inventory, Dec. 31 31,400
Cost of direct materials used 225,700
Total work in process during the year 636,500
Less work in process inventory, Dec. 31 30,400
Less finished goods inventory, Dec. 31 48,300

7. Wernke Company has the following totals from its operating budgets for November:
Cost of goods sold $1,967,000

Sales 2,530,000
Prepare a budgeted income statement for the month of November assuming a 30% income tax rate.
ANS:
Wernke Company
Budgeted Income Statement
For the Month Ended November 30, 20--
Sales $2,530,000
Cost of goods sold 1,967,000
Gross profit 563,000
Operating income 241,000
Income tax * 72,300
Net income $ 168,700
* 241,000 x 30% = 72,300

8. The following information is from Franklin Industries master budget for the current year:
Number of units 15,000
Sales revenue $585,000
Direct labor 90,000
Variable selling and administrative expenses 60,000
Fixed selling and administrative expenses 20,000
Prepare flexible budgets for the production and sale of 14,000, 15,000 and 16,000 units, respectively.
ANS:
Number of units 15,000 Per unit

amounts
Sales revenue $585,000/15,000 $39.00
Direct materials 165,000/15,000 11.00
Direct labor 90,000/15,000 6.00
Variable factory overhead 120,000/15000 8.00
Variable selling and administrative expenses 60,000/15,000 4.00
Franklin Industries
Flexible Budget

Sales revenue 546,000 585,000 624,000
Direct materials 154,000 165,000 176,000
Direct labor 84,000 90,000 96,000
Variable factory overhead 112,000 120,000 128,000
Variable selling and administrative 56,000 60,000 64,000

expenses
Contribution margin 140,000 150,000 160,000
Fixed factory overhead 75,000 75,000 75,000
Fixed selling and administrative expenses 20,000 20,000 20,000
Operating income $ 45,000 $ 55,000 $ 65,000
9. Delaney Company has the following flexible budget formulas and amounts:
Selling price per unit $54.00

Direct materials per unit 18.00
Direct labor per unit 12.00
Variable factory overhead per unit 7.00
Variable selling and administrative expenses per unit 4.00
Fixed factory overhead $450,000
Actual results for the month of October for the production and sale of 48,000 units were as follows:
Sales revenue $2,605,000

Prepare a performance report for the month of October.
ANS:
Delaney Company
Performance Report
For the Month Ended October 31, 20--
Flexible Actual
Budget*
Results Variance
Sales revenue $2,592,000 $2,605,000 $13,000 F
Direct materials 864,000 868,000 4,000 U
Direct labor 576,000 572,000 4,000 F
Variable factory overhead 336,000 334,000 2,000 F
Variable selling and administrative 192,000 195,000 3,000 U

expenses
Contribution margin 624,000 636,000 12,000 F
Fixed factory overhead 450,000 458,000 8,000 U
Fixed selling and administrative expenses 100,000 105,000 5,000 U
Operating income $ 74,000 $ 73,000 $ 1,000 U
* Variable amounts = Number of units x per unit information.
NAT: IMA 2A - Budget Preparation; 2D - Performance Measurement

TOP: AACSB - Analytic
10. The following information is from Franklin Industries master budget for the current year:
Direct labor 90,000
Franklin actually produced 16,000 units. It’s actual results follow:
Direct labor 95,200
Prepare a performance report for the year.
ANS:
Per unit Amount @

amounts 16,000 units
Number of units
Sales revenue $585,000/15,000 $39.00 $624,000
Direct materials 165,000/15,000 11.00 176,000

Direct labor 90,000/15,000 6.00 96,000
Variable factory overhead 120,000/15000 8.00 126,800
Variable selling and administrative 60,000/15,000 4.00 63,700

expenses
Franklin Industries
Performance Report
Flexible Actual
Budget
Results Variance
Sales revenue $624,000 $620,000 $ 4,000 U
Direct materials 176,000 179,500 3,500 U
Direct labor 96,000 95,200 800 F
Variable factory overhead 128,000 126,800 1,200 F
Variable selling and administrative 64,000 63,700 300 F

expenses
Contribution margin 160,000 154,800 5,200 U
Fixed factory overhead 75,000 78,300 3,300 U
Fixed selling and administrative expenses 20,000 22,400 2,400 U
Operating income $ 65,000 $ 54,100 $10,900 U
11. The standard annual capacity of Jones and Smith Company is 25,000 units per month. Two units can be
machined in one hour. The flexible budget for factory overhead at this volume follows:
Variable:
Power $ 80,000
Supplies 30,000
Maintenance 40,000
Total variable factory overhead 150,000
Fixed:
Supervisory salaries 70,000
Depreciation of buildings and equipment 20,000
Lights and heat 10,000
Property tax and insurance 20,000
Total fixed factory overhead 120,000
Total factory overhead $270,000
In June, actual production was 22,000 units and actual factory overhead incurred was $258,000.
(1) Calculate the standard application rates for fixed and variable overhead at the standard level of
volume in relation to units and machine hours.
(2) Calculate the amount of factory overhead allowed for the actual volume of production in June and
the variance between the actual and budgeted factory overhead.
ANS:
(1) Application rates for factory overhead per unit:
Variable $150,000 / 25,000 = $6.00 per unit
Fixed $120,000 / 25,000 = $4.80 per unit
Application rates for factory overhead per machine hour:
25,000 units x 1/2 hour per unit = 12,500
Variable $150,000 / 12,500 = $12.00 per machine hour
Fixed $120,000 / 12,500 = $ 9.60 per machine hour

(2) Factory overhead allowed for the actual volume of production in June is calculated as follows:
Variable factory overhead per unit $ 6.00
Actual production in June 22,000
Variable factory overhead allowed for 22,000 units $132,000
Factory overhead allowed for 22,000 units produced 252,000
Unfavorable factory overhead variance $ 6,000
12. The November monthly factory overhead cost budget for Brass Ltd. at normal capacity of 10,000 or
5,000 direct labor hours follows:
Variable:
Power $ 6,000
Supplies 12,000
Maintenance 15,000
Total variable factory overhead 33,000
Fixed:
Supervisory salaries 24,000
Depreciation of buildings and equipment 8,000
Lights and heat 6,000
Property tax and insurance 22,000
Total fixed factory overhead 60,000
Total factory overhead $93,000
(1) Prepare a flexible budget for 80%, 100% and 120% of normal capacity.
(2) Determine the rate for application of factory overhead to work in process at each level of volume in
relation to both units and direct labor hours.
ANS:
Standard labor hours per unit 5,000 / 10,000 = .5 hours
Per unit
amounts
Power $6,000/10,000 $.60
Supplies 12,000/10,000 1.20
Maintenance 15,000/10,000 1.50
10,000 units x 80% = 8,000 units
10,000 units x 120% = 12,000 units
Brass Ltd.
Factory Overhead Cost Budget
For the Month Ended November 30, 20--

5,000 labor 6,000 labor
4,000 labor
hrs hrs
hrs
Variable:
Power $ 4,800 $ 6,000 $ 7,200
Supplies 9,600 12,000 14,400
Maintenance 12,000 15,000 18,000
Total variable factory overhead 26,400 33,000 39,600
Fixed:
Supervisory salaries 24,000 24,000 24,000
Depreciation of buildings and equipment 8,000 8,000 6,000

Lights and heat 6,000 6,000 6,000
Property tax and insurance 22,000 22,000 22,000
Total fixed factory overhead 60,000 60,000 60,000
Total factory overhead cost $86,400 $93,000 $99,600
Factory overhead per unit * $10.80 $ 9.30 $ 8.30
Factory overhead per direct labor hour ** $21.60 $18.60 $16.60
* $86,400 / 8,000 = $10.80
$93,000 / 10,000 = $9.30
$99,600 / 12,000 = $8.30
** $86,400 / 4,000 = $21.60
$93,000 / 4,000 = $18.60
$99,600 / 6,000 = $16.60
CHAPTER 8—STANDARD COST ACCOUNTING--MATERIALS, LABOR, and FACTORY OVERHEAD
MULTIPLE CHOICE
1. The purpose of standard costing is to:
a. Determine optimal production level for a given period.

b. Eliminate the need for subjective decisions by management.
c. Control costs.
d. Allocate cost with more accuracy.
ANS: C
The purpose of standard costing is to control cost and promote efficiency.

2. Which of the following terms best identifies the function of standard costs where any deviation from
standards can be quickly detected and responsibility pinpointed so appropriate action may be taken?
a. Management by exception
b. Contribution approach
c. Marginal costing
d. Standardized accounting system
ANS: A
A standard cost system shows the deviations from management's expectation of cost for its
manufactured products. These variances (deviations) are exceptions from the established goals;
therefore, they are better able to manage when the exceptions are reported by the standard cost
system.
3. Characteristics of ideal standards include all of the following except:
a. They generally give rise to unfavorable variances.

b. They may cause personnel to become discouraged.
c. They take into account normal waste and spoilage.
d. They provide a maximum objective for which to strive to improve efficiency.
ANS: C
Ideal standards are set considering ideal circumstances and are generally not attainable, which results in
unfavorable variances. They do not consider normal waste and spoilage.

4. A manufacturer generally wants to set a standard that:
a. Can be achieved only under the most efficient operating conditions.

b. Is high enough to provide motivation and promote efficiency, but is still attainable.
c. Makes no allowance for normal was or spoilage.
ANS: B
Options a and c are characteristics of ideal standards, which generally are not attainable and may cause
employee morale problems. Generally companies want standards that are high enough to provide
motivation, but not too high.
5. Factors to be considered in setting materials standards include all of the following except:
a. Trend of prices of raw materials.

b. Historical costs.
c. Time necessary to perform tasks.
d. New production processes or market developments.
ANS: C
Historical costs are studied to gain familiarity with the materials standard, however, price trends, market
developments and new production processes must be considered as well too. Time necessary to
perform tasks would be considered in setting labor standards.
6. Factors to be considered in setting labor standards include all of the following except:
a. Impact of negotiations with labor unions.

b. The learning effect.
c. Results of engineers’ time studies.
d. The purchasing manager’s estimate of suppliers’ prices.
ANS: D
Wage rates and time to complete tasks are considered in setting labor standards. Union negotiations
would impact wage rates, while the learning effect and engineers’ time studies could impact the
standard amount of time allowed for tasks. The purchasing manager’s estimate of suppliers’ prices
would impact materials standards.
7. RHO Company began its operations on January 1 and produces a single product that sells for $10.25 per
unit. Standard capacity is 80,000 units per year. The 80,000 units were produced and 70,000 units were
sold during the year.
Manufacturing costs and selling and administrative expenses follow:
Fixed Costs Variable Costs

Raw materials -- $2.50 per unit produced
Direct labor -- 1.50 per unit produced
Factory overhead $120,000 1.00 per unit produced
Selling and administrative 80,000 .50 per unit sold
What is the standard cost of manufacturing a unit of product?
a. $6.00
b. $6.50
c. $5.00
d. $5.50
ANS: B
Raw materials $2.50

Direct labor 1.50
Factory overhead - variable 1.00
Factory overhead - fixed 1.50 ($120,000 / 80,000 units)
Standard unit manufacturing cost $6.50
8. When computing variances from standard costs, the difference between actual and standard price
multiplied by actual quantity yields:
a. Combined price--quantity variance.

b. Price variance.
c. Volume variance.
d. Mix variance.
ANS: B
The difference between actual and standard price multiplied by actual quantity yields a price variance.
9. The materials quantity variance, in a standard cost system, is the:
a. Difference between the actual and standard quantities.

b. Difference between the actual and standard quantities multiplied by the actual unit price.
c. Difference between the actual quantity used and the actual quantity purchased
multiplied by the standard unit price.
d. Difference between the actual and standard quantities multiplied by the standard unit
price.
ANS: D
The materials quantity variance = (actual quantity of materials used - standard quantity of materials
allowed) x standard unit price of material.
10. What type of direct material variances for price and quantity will arise if the actual number of pounds of
materials used exceeds standard pounds allowed but actual cost was less than standard cost?
Quantity Price
a. Favorable Favorable
b. Unfavorable Favorable
c. Favorable Unfavorable
d. Unfavorable Unfavorable
ANS: B
The use of material in excess of standard will create an unfavorable usage (quantity) variance. If the
actual cost of the material is less than standard cost, this gives rise to a favorable price variance.
11. Woodside Company manufactures tables with vinyl tops. The standard material cost for the vinyl used
per Style-R table is $7.20 based on 8 square feet of vinyl at a cost of $.90 per square foot. A production
run of 1,000 tables in January resulted in usage of 8,300 square feet of vinyl at a cost of $.85 per square
foot, a total cost of $7,055. The materials quantity variance resulting from the above production run
was:
a. $255 favorable.
b. $255 unfavorable.
c. $270 unfavorable.
d. $270 favorable.
ANS: C
Materials quantity variance = (actual quantity of materials used - standard quantity of materials allowed)
x standard price of material
Materials quantity variance = (8,300 - 8,000*) x $.90
* 1,000 units produced x 8 sq. ft. per unit
Actual quantity 8,300 sq. ft.
Standard quantity 8,000 sq. ft.
Excess of actual quantity over standard 300 sq. ft.
Standard price $ .90 sq. ft.
Materials quantity variance (unfavorable) $ 270
12. Thomas Company uses a standard cost system and recognizes the materials purchase price variance at
the time materials are purchased. Information for raw materials for Product RBI for the month of
October follows:
Standard unit price $1.75
Actual purchase price per unit $1.65
Actual quantity purchased 4,000 units
Actual quantity used 3,900 units
Standard quantity allowed for actual production 3,800 units
What is the materials quantity variance?
a. $175 unfavorable
b. $165 unfavorable
c. $175 favorable
d. $165 favorable
ANS: A
x standard unit price of materials
Materials quantity variance = (3,900 - 3,800) x $1.75 = $175 U (because actual amounts exceeded
standard)
13. Ben's Climbing Gear, Inc. has direct material costs as follows:
Actual units of direct materials used 20,000
Standard price per unit of direct materials $2.50
Materials quantity variance--favorable $5,000
What was Ben's standard quantity of material allowed?
a. $18,000
b. $24,000
c. $20,000
d. $22,000
ANS: D
x standard unit price of material
$5,000 F = ($20,000 - standard quantity of materials allowed) x $2.50
$2,000 F* = $20,000 - standard quantity of materials allowed
$22,000** = standard quantity of materials allowed

* 5,000 F/ 2.50
** 20,000 + 2,000 (note that the favorable variance is added to the actual quantity to arrive at the
standard quantity because by definition, a favorable variance occurs when standard quantities exceed
actual quantities.)
14. The actual hourly rate paid above or below the standard hourly rate, multiplied by the actual number of
hours worked is the:
a. Labor rate variance.

b. Labor efficiency variance.
c. Labor usage variance.
d. Labor direct variance.
ANS: A
Labor rate variance = (Actual labor rate per hour - Standard labor rate per hour) x Actual number of
hours worked.
15. Information relating to direct labor for the Newstead Company follow:
Actual direct labor hours 5,600

Standard direct labor hours 5,400
Total direct labor per payroll $53,200
Standard labor rate per hour $9.00
The labor rate variance is:
ANS: A
Labor rate variance = (Actual labor rate per hour - standard labor rate per hour) x actual number of
hours worked.
Labor rate variance = ($9.50* - $9.00) x 5,600
Labor rate variance = $2,800 U (because actual was in excess of standard)
* Actual labor rate per hour = $53,200 / 5,600 = $9.50
16. Earl Company's direct labor costs for the month of January follow:
Direct labor rate variance--unfavorable $ 1,800
Total payroll $117,000
What was Earl's standard direct labor rate?
a. $6.50
b. $6.60
c. $6.16
d. $6.40
ANS: D
Labor rate variance = (actual labor rate per hour - standard labor rate per hour) x actual number of
hours worked
$1,800 U = (6.50** - standard labor rate per hour) x 18,000
1,800 U / 18,000 = .10
.10 = 6.50 - standard labor rate per hour
6.40 = standard labor rate per hour (since variance is unfavorable, the standard rate is less than the
actual rate)
**Total payroll / actual labor hours worked = actual labor rate per hour
$117,000 / 18,000 = $6.50
17. When performing input-output variance analysis in standard costing, "standard hours allowed" is a
means of measuring:
a. Standard output at standard hours.

b. Actual output at standard hours.
c. Standard output at actual hours.
d. Actual output at actual hours.
ANS: B
Standard hours allowed in standard costing refers to the standard hours allowed for the actual amount
of units produced or how many hours the work should have taken.
18. An unfavorable labor efficiency variance is the:
a. Number of actual hours worked in excess of the standard hours allowed multiplied by the
standard labor rate.
b. Number of actual hours worked in excess of the standard hours allowed multiplied by the
actual labor rate.
c. The number of actual hours worked below the standard hours allowed multiplied by the
standard labor rate.
d. Number of actual hours multiplied by the difference in the actual and standard labor
rates.
ANS: A
Labor efficiency variance = (Actual number of hours worked - standard number of hours allowed) x
standard labor rate per hour.
If actual hours exceed standard hours, the variance will be unfavorable.

The labor efficiency variance is:
ANS: D
Labor efficiency variance = (Actual number of labor hours worked - standard number of labor hours
allowed) x standard labor rate per hour.
Labor efficiency variance = (5,600 - 5,400) x $9
Labor efficiency variance = $1,800 U (because actual was in excess of standard)
20. Alyssa Corporation uses a standard cost system. Direct labor information for Product CER for the month
of October is as follows:
Standard rate $8.00 per hour
Actual rate paid $8.30 per hour
Standard hours allowed for actual production 1,400 hours
Labor efficiency variance $ 800 unfavorable
What are actual hours worked?
a. 1,330
b. 1,400
c. 1,500
d. 1,300
ANS: C
Labor efficiency variance = (actual number of labor hours worked - standard number of labor hours
allowed) x standard labor rate per hour
$ 800 U = (actual number of labor hours worked - 1,400) x $8.00
Standard hours  standard rate:

1,400 hours  $8 $11,200
Efficiency variance (unfavorable) 800
Actual hours (X)  $8 $12,000
$12,000
X= = 1,500 hours
$8
21. Earl Company's direct labor costs for the month of January follow:
Direct labor rate variance--unfavorable $ 1,800
What was Earl's direct labor efficiency variance?
a. $6,500 favorable
c. $1,800 favorable
d. $6,400 favorable
ANS: D
Labor efficiency variance = (18,000 - 19,000) x $6.40*
Labor efficiency variance = 1,000 x 6.40 = $6,400 F (standard exceeded actual)

* The standard labor rate must be calculated prior to calculating the variance above by using the labor
rate variance as follows:
Labor rate variance = (actual labor rate per hour - standard labor rate per hour) x actual number of
hours worked
$1,800 U = (6.50** - standard labor rate per hour) x 18,000
1,800 U / 18,000 = .10
.10 = 6.50 - standard labor rate per hour
6.40 = standard labor rate per hour (since variance is unfavorable, the standard rate is less than the
actual rate)
**Total payroll / actual labor hours worked = actual labor rate per hour
$117,000 / 18,000 = $6.50
22. The direct labor costs for Boundary Company follow:
Direct labor efficiency variance--favorable $ 12,000
Direct labor rate variance--favorable $ 1,650
What was Boundary's standard direct labor rate?
a. $ 11.95
b. $ 11.49
c. $ 11.60
d. $ 12.00
ANS: D
$12,000 F = (33,000 -34,000) x standard labor rate per hour
Actual hours 33,000
Standard hours 34,000
Standard hours allowed in excess of actual hours 1,000 hours
Efficiency variance:
$12,000 / 1,000 hours = $12.00 standard rate
23. The following information pertains to Genie Company:
Standard materials allowed $12,000
Unfavorable materials price variance 2,000
Favorable materials usage variance 1,000
Actual payroll $20,000
Unfavorable labor rate variance 1,500
Unfavorable labor efficiency variance 500
What is the entry to record the direct materials cost and variances, assuming that the price variance is
recorded when the materials are put into production?
a. Materials 12,000
Materials price variance 2,000
Materials quantity variance 1,000
Materials 11,000
Materials 13,000
d. Work in process 12,000
Materials 13,000
ANS: D
Materials that go into work in process are recorded at standard.
Unfavorable variances are debits and favorable variances are credits.
The materials account is credited for the residual amount.
Materials 13,000
The entry to record the direct labor cost is:
Labor rate variance 2,800
Labor efficiency variance 1,800
Payroll 48,600
Payroll 53,200
Payroll 53,200
Payroll 53,200
ANS: C
Labor efficiency variance = (Actual number of labor hours worked - standard number of labor hours
allowed) x standard labor rate per hour.
Labor efficiency variance = (5,600 - 5,400) x $9
Labor efficiency variance = $1,800 U (because actual was in excess of standard)

Labor rate variance = (Actual labor rate per hour - standard labor rate per hour) x actual number of labor
hours worked
Labor rate variance = ($9.50* - $9.00) x 5,600
Labor rate variance = $2,800 U (because actual exceeded standard)
* Actual labor rate per hour = $53,200 / 5,600 = $9.50
Material (recorded at standard 5,400 x $9.00) 48,600
Payroll (actual amounts paid) 53,200
25. The following information pertains to Genie Company:
Standard materials allowed $12,000
Unfavorable materials price variance 2,000
Favorable materials usage variance 1,000
Actual payroll $20,000
Unfavorable labor rate variance 1,500
Unfavorable labor efficiency variance 500
What is the entry to record the direct labor cost and variances?
a. Payroll 20,000
Labor efficiency variance 500
Accrued payroll 21,500

Payroll 20,000
Payroll 20,000
Labor variances 2,000
Payroll 20,000
ANS: B
Labor that goes into work in process is recorded at standard. In this problem, it is the residual amount.
Unfavorable variances are debits. The payroll account is credited when labor is applied to production.
Labor price variance 1,500
Payroll 20,000
26. PHI Company began its operations on January 1 and produces a single product that sells for $35.00 per
unit. 5,000 units were produced and 4,000 units were sold during the year.
Standard costs per unit follow:
Standard cost
Raw materials $12.50
Direct labor 6.50
What is entry to record the finished goods?
d. Cost of goods sold 92,000
ANS: A
Total unit cost = $12.50 + $6.50 + $4.00 = $23.00
Finished goods ($23.00 x 5,000) 115,000
27. If a company follows a practice of isolating variances at the earliest point in time, what would be the
appropriate time to isolate and recognize a direct material price variance?
a. When material is purchased

b. When material is used in production
c. When purchase order is originated
d. When material is issued
ANS: A
The earliest point in time to isolate a direct material price variance is when the material is purchased,
because at that time the difference between actual price and standard price is known.
28. In a standard cost system,when the materials price variance is recorded at the time the material is
purchased, the materials purchase price variance is obtained by multiplying the:
a. Actual price by the difference between actual quantity purchased and standard quantity
used.
b. Actual quantity purchased by the difference between actual price and standard price.
c. Standard price by the difference between standard quantity purchased and standard
quantity used.
d. Standard quantity purchased by the difference between actual price and standard price.
ANS: B
The materials purchase price variance is obtained by multiplying the actual quantity purchased by the
difference between actual price and standard price.
29. Andrews Corporation purchased 3,000 gallons of raw materials for $9,200. The standard price is $3.00
per gallon. If Andrews records the price variance at the earliest possible time, the entry to record the
purchase of the material is:
a. Materials 9,200
Material purchase price variance 200

b. Materials 9,000

c. Materials 9,000
d. Materials 9,200
ANS: C
If the price variance is recorded at the earliest possible time (which would be upon purchase), the entry
is to record the material into inventory at standard:
Materials (3,000 x $3.00) 9,000
October follows:
What is the materials purchase price variance?
a. $390 favorable
b. $390 unfavorable
c. $400 favorable
d. $400 unfavorable
ANS: C
Materials purchase price variance = (actual unit price of materials - standard unit price of materials) x
actual quantity of materials purchased
Materials purchase price variance = ($1.65 - $1.75) x 4,000
Actual unit price $1.65
Standard unit price 1.75
Excess of standard price over actual $ .10
Quantity purchased 4,000 units
Purchase price variance (favorable - standard price exceeds actual) $ 400
October follows:
What is the entry to record the purchase of materials?
a. Materials 6,600
b. Materials 7,000
c. Materials 6,600
d. Materials 6,600
ANS: B
Materials purchase price variance = (actual unit price of materials - standard unit price of materials) x
actual quantity of materials purchased
Materials purchase price variance = ($1.65 - $1.75) x 4,000
Materials purchase price variance = $400 F (because standard price exceeded actual price)
Materials (recorded at standard price 4,000 x 1.75) 7,000

Accounts payable (actual 4,000 x 1.65) 6,600
October follows:
What is the entry to record material usage?
Materials quantity variance 175
Materials 7,000
Materials 6,435
Materials 6,435
Materials 6,825
ANS: D
x standard unit price of materials
Materials quantity variance = (3,900 - 3,800) x $1.75 = $175 U (because actual amounts exceeded
standard)
Work in process (3,800 x 1.75) 6,650
Materials (3,900 x 1.75) 6,875

33. What is the normal year-end treatment of immaterial variances recognized in a cost accounting system
utilizing standards?
a. Reclassified to deferred charges until all related production is sold

b. Closed to cost of goods sold in the period in which they arose
c. Allocated among cost of goods manufactured and ending work in process inventory
d. Capitalized as a cost of ending finished goods inventory
ANS: B
The normal year-end treatment of immaterial variances of standard costs is to close them to cost of
goods sold in the period in which they arose.
34. How should an efficiency variance that is material in amount be treated at the end of an accounting
period?
a. Reported as a deferred charge or credit

b. Allocated among work in process inventory, finished goods inventory, and cost of goods
sold
c. Charged or credited to cost of goods manufactured
d. Allocated among cost of goods manufactured, finished goods inventory, and cost of
goods sold
ANS: B
A variance that is material in amount should be allocated among work in process inventory, finished
goods inventory, and cost of goods sold at the end of an accounting period.

35. Standard costing will produce the same income before extraordinary items as actual costing when
standard cost variances are assigned to:
a. Work in process and finished goods inventories.

b. An income or expense account.
c. Cost of goods sold and inventories.
d. Cost of goods sold.
ANS: C
If standard cost variances are assigned to cost of goods sold and inventories, the result is the same as
actual costing, resulting in the same income before extraordinary items.
36. To effectively use variances to improve operations, management should take the following steps except:
a. Taking appropriate action to follow up on variances.

b. Breaking down the total variance by usage and price.
c. Adding variances together to determine the impact on financial statements.
d. Analyzing cause and effect of both favorable and unfavorable variances.
ANS: C
The use of variances to improve operations normally would not include determination of the impact on
the financial statements. Management should break the variances down, determine the cause of the
variances, and follow up appropriately.
37. If the total materials variance (actual cost of materials used compared with the standard cost of the
standard amount of materials required) for a given operation is favorable, why must this variance be
further evaluated as to price and usage?
a. There is no need to further evaluate the total materials variance if it is favorable.
b. Generally accepted accounting principles require that all variances be analyzed in three
stages.
c. All variances must appear in the annual report to equity owners for proper disclosure.
d. It is done so that management can evaluate the efficiency of the purchasing and
production functions.
ANS: D
All variances, favorable or unfavorable, must be evaluated. The analysis of a favorable materials
variance allows management to evaluate the efficiency of the purchasing and production functions
through study of the price and usage variances.
38. Taking appropriate action on variances includes all of the following except:
a. Ignoring the cause of favorable variances.

b. Revising the standard because it was set incorrectly.
c. Improving the manufacturing process.
d. Looking for new suppliers.
ANS: A
Management should follow up on the causes of both favorable and unfavorable variances.
39. Which of the following is not likely to have caused a materials price variance?
a. The vendor from whom we always bought component XYZ closed and we found a new
one.
b. One of the workers inadvertently cut several pieces of steel to the wrong length.
c. We started using a higher grade of lumber in our process.
d. Higher oil prices have increased the costs of shipping the ingredients to us.
ANS: B
One of the workers cutting steel to the wrong length would impact the materials quantity variance as he
created waste, but not the price variance. The other three situations could impact the price paid for
materials.
40. Bobby’s Burger Place monitors its variances on an hourly basis. It is not uncommon for Bobby to send
workers home early when which of the following variances indicates that he has over-scheduled the
shift?
a. Unfavorable labor efficiency variance.

b. Favorable labor rate variance.
c. Unfavorable materials quantity variance.
d. Favorable labor efficiency variance.
ANS: A
If a shift has been over-scheduled, it would show up as an unfavorable labor efficiency variance since
there would be too many hours for the amount of activity.
41. Which of the following is not likely to cause a labor efficiency variance?
a. We produced more units than were budgeted.

b. There was a flu outbreak and workers had to cover unfamiliar positions.
c. We purchased materials that were poor in quality.
d. One of the supervisors discovered a way to streamline a process.
ANS: A
Because variance analysis is based on flexible budgeting and we are comparing the actual number of
hours incurred for the units produced to the number of hours the production of units should have taken,
the fact that we produced more or less units than were budgeted would not impact the labor efficiency
variance.
42. One possible explanation for a company that experiences a favorable labor efficiency variance, but an
unfavorable labor rate variance could be:
a. The company paid the workers overtime.

b. The company hired more experienced workers.
c. The company purchased materials that were hard to work with.
d. The workers “goofed around” and wasted time.
ANS: B
If a company hires works that are more experienced, the average wage rate could be higher than the
standard rate and they could complete the tasks more quickly resulting in a favorable labor efficiency
variance, but an unfavorable labor rate variance.
The overtime premium paid to workers is usually charged to overtime, so this should not impact the
labor rate variance.
Situations c and d would be more likely to result in unfavorable labor efficiency variances.
43. Under normal circumstances, a purchasing manager who buys poor quality materials because they were
cheaper could potentially be responsible for causing all of the following variances except a(n):
a. Favorable purchase price variance.

b. Unfavorable materials quantity variance.
c. Unfavorable purchase price variance.
d. Unfavorable labor efficiency variance.
ANS: C
If the purchasing manager buys the materials because they are cheap, he normally would not have an
unfavorable purchase price variance. However, if the materials are difficult to work with, this could lead
to unfavorable materials quantity variances and unfavorable labor efficiency variances.
44. All of the following are features of a standard cost system except:
a. Standards change as conditions change.

b. Variances may be determined more often than monthly to allow for more timely action.
c. Standards are based on estimates.
d. The company determines the actual cost of manufacturing a unit.
ANS: D
When using a standard cost system, the company will not determine the actual cost of manufacturing a
unit.
45. All of the following are features of a standard cost system except:
a. Standards should not be adjusted.

b. Standards provide incentives for workers to keep costs in line.
c. Comparisons between actual and standard are more effective than comparisons between
actual costs of the current period and those of the prior period.
d. A standard cost system focuses management attention on materials prices and usages.
ANS: A
Standards should be flexible and should be changed as circumstances warrant. For example, if a new
union contract is negotiated, the standard wage rates should be adjusted to reflect the new wage rates.
46. Overapplied factory overhead would result if:
a. Factory overhead costs incurred were greater than standard costs charged to production.
b. The plant was operated at less than normal capacity.
c. Factory overhead costs incurred were less than standard costs charged to production.
d. Factory overhead costs incurred were unreasonably large in relation to units produced.
ANS: C
Overapplied overhead would result if factory overhead costs incurred were less than standard costs
charged to production.
47. The Johns Company budgeted factory overhead at $125,000 for the period for Department A based on a
budgeted volume of 50,000 direct labor hours. At the end of the period, the factory overhead control
account for Department A had a balance of $126,000. The actual (and allowed) direct labor hours were
52,000.
What was the over- or underapplied factory overhead for the period?
a. $6,500 underapplied
b. $6,500 overapplied
c. $4,000 underapplied
d. $4,000 overapplied
ANS: D
Actual factory overhead incurred - factory overhead applied = over- or underapplied factory overhead
Budgeted overhead / budgeted direct labor hours =
$125,000 / 50,000 = factory overhead application rate per direct labor hour $ 2.50
Actual and allowed direct labor hours x 52,000
Factory overhead applied $130,000
Overapplied factory overhead for the period $ 4,000
48. Donellan Company has a standard and flexible budgeting system and uses a two-variance analysis of
factory overhead. Selected data for the February production activity follows:
Budgeted fixed factory overhead costs $ 70,000
Variable factory overhead rate per direct labor hour $ 7
The controllable variance for February is:
a. $5,000 favorable.
b. $5,000 unfavorable.
c. $7,000 favorable.
d. $7,000 unfavorable.
ANS: B
Actual factory overhead incurred - standard factory overhead budgeted for actual level of production =
controllable variance
Standard direct labor hours $25,000
Variable factory overhead rate per hour x 7
Budgeted variable factory overhead 175,000
Standard factory overhead budgeted at actual level of production $245,000
Controllable variance--unfavorable $ 5,000
49. The data below relate to the month of April for Monroe, Inc., which uses a standard cost system and a
two-variance analysis of factory overhead:
Actual hours used 16,500
Standard hours allowed for good output 16,250
Actual total overhead $53,200
Budgeted fixed costs $12,000
Budgeted activity in hours 16,000
Total overhead application rate per standard direct labor hour $ 3.25
Variable overhead rate per standard direct labor hour $ 2.50
What was Monroe's controllable variance for April?
a. $1,100 favorable
c. $575 favorable
d. $575 unfavorable
ANS: D
Actual factory overhead incurred - Standard overhead budgeted for actual level of production =
controllable variance
Variable overhead application rate per hour $ 2.50
Standard hours allowed x 16,250
Budgeted variable factory overhead $40,625
Total budgeted factory overhead at actual level of production 52,625
Controllable variance -- unfavorable $ 575
50. Elgin Company's budgeted fixed factory overhead costs are $50,000 per month plus a variable factory
overhead rate of $4.00 per direct labor hour. The standard direct labor hours allowed for October
production were 20,000. An analysis of the factory overhead indicates that in October Elgin had an
unfavorable controllable variance of $1,500 and a favorable volume variance of $500. Elgin uses a two-
variance analysis of overhead variances.
The actual factory overhead incurred in October is:
a. $126,500.
b. $128,000.
c. $128,500.
d. $131,500.
ANS: D
Controllable variance = Actual factory overhead - Standard overhead budgeted for actual activity level*
$1,500 U = Actual factory overhead - $130,000
Actual factory overhead = $131,500 (Unfavorable variance indicates that actual factory overhead
exceeds budgeted amounts.)
* Standard direct labor hours 20,000
Variable overhead rate per hour x $4.00
Variable overhead budgeted $ 80,000
Fixed overhead budgeted 50,000
Total overhead budgeted $130,000
51. A company uses a two-variance analysis for overhead variances, controllable and volume. The volume
variance is the difference between the factory overhead applied at standard and:
a. Total factory overhead per the flexible budget.

b. Actual factory overhead incurred.
c. Total factory overhead per the master budget.
d. Fixed overhead incurred.
ANS: A
The volume variance is the difference between the factory overhead per the flexible budget (standard
overhead budgeted for actual level of production) and the factory overhead applied at standard.
52. The fixed overhead application rate is a function of a predetermined "normal" activity level. If standard
hours allowed for good output equal this "normal" activity level for a given period, the volume variance
will be:
a. Zero.
b. Favorable.
c. Unfavorable.
d. Either favorable or unfavorable depending on the budgeted overhead.
ANS: A
If standard hours allowed for good output equal the normal activity level for a given period, the volume
variance will be zero.
Consider the following proof:
Standard hours allowed for good output (4,000 units x 4 hours) 16,000
Budgeted variable factory overhead 16,000 x $2.50 $40,000
Total budgeted factory overhead at actual level of production 52,000
Factory overhead applied 16,000 x $3.25 52,000
Volume variance $ -
53. The data below relate to the month of April for Monroe, Inc., which uses a standard cost system and a
two-variance analysis of factory overhead:
Actual direct labor hours used 16,500
Standard direct labor hours allowed 16,250
Actual total factory overhead $53,200
Budgeted fixed factory overhead $12,000

Total overhead application rate per standard direct labor hour $3.25
Variable overhead application rate per standard direct labor hour $2.50
What was Monroe's volume variance for April?
a. $187.50 favorable
b. $187.50 unfavorable
c. $437.50 favorable
d. $437.50 unfavorable
ANS: A
Standard overhead budgeted for actual level of production - applied overhead at standard = volume
variance
Variable overhead application rate per hour $ 2.50
Standard hours allowed x 16,250
Budgeted variable factory overhead $40,625.00
Budgeted fixed factory overhead 12,000.00
Total budgeted factory overhead 52,625.00
Overhead applied at standard: 16,250 hours  $3.25 52,812.50
Volume variance -- favorable $ 187.50
54. If a company uses a two-variance analysis for overhead variances and uses a predetermined rate for
absorbing manufacturing overhead, the volume variance is the:
a. Underapplied or overapplied variable cost element of overhead.

b. Underapplied or overapplied fixed cost element of overhead.
c. Difference in budgeted costs and actual costs of fixed overhead items.
d. Difference in budgeted costs and actual costs of variable overhead items.
ANS: B
If a company uses a predetermined rate for absorbing manufacturing overhead, the volume variance is
the underapplied or overapplied fixed cost element of overhead.
Consider the following proof:
Standard hours allowed for good output (8125 x 2 hrs.) 16,250
Budgeted variable factory overhead 16,250 x $2.50 $40,625.00
Budgeted fixed factory overhead 12,000.00
Total budgeted factory overhead at actual level of production 52,625.00
Factory overhead applied 16,250 x $3.25 52,812.50
Volume variance -- unfavorable $ 187.50
Budgeted fixed factory overhead per hour $12,000 / 16,000 = $.75 per hour
Difference in allowed vs. budgeted hours 16,250 - 16,000 = 250 hours
Variance attributable to fixed factory overhead 250 x $.75 = $187.50
55. Elgin Company's budgeted fixed factory overhead costs are $50,000 per month plus a variable factory
overhead rate of $4.00 per direct labor hour. The standard direct labor hours allowed for October
production were 20,000. An analysis of the factory overhead indicates that in October, Elgin had an
unfavorable budget (controllable) variance of $1,500 and a favorable volume variance of $500. Elgin
uses a two-variance analysis of overhead variances.
The applied factory overhead in October is:
a. $129,500.
b. $128,000.
c. $130,000.
d. $130,500.
ANS: D
Volume variance = Standard overhead budgeted for actual production level - Applied overhead at
standard
$500 F = $130,000* - Factory overhead applied at standard
$130,500 = Factory overhead applied at standard (Favorable variance indicates that applied overhead
exceeds budgeted amount.)
* Standard direct labor hours 20,000
Variable overhead rate per hour x $4.00
Fixed overhead budgeted 50,000
Total overhead budgeted $130,000
56. In a two-variance system for analyzing factory overhead, a favorable volume variance could be caused
by:
a. The top salesman leaving the company.

b. Receiving more orders than anticipated.
c. A machine breakdown.
d. A work slow-down by workers.
ANS: B
A favorable volume variance occurs when actual production levels exceed the standard production level
set by management. The top salesman leaving the company, a machine breakdown and a work slow-
down would be more likely to lead to actual production levels not meeting expected levels of
production.
57. Information on Shonda Company's factory overhead costs follows:
Actual variable factory overhead $95,000
Actual fixed factory overhead $28,000
Standard hours allowed for actual production 30,000
Standard variable overhead rate per direct labor hour $3.25
Standard fixed overhead rate per direct labor hour $1.00
What is the factory overhead variance?
b. $4,500 favorable
d. $2,500 favorable
ANS: B
Actual factory overhead incurred - standard factory overhead applied
= factory overhead variance
Variable factory overhead rate per direct labor hour $ 3.25
Fixed factory overhead rate per direct labor hour 1.00
Total factory overhead application rate $ 4.25

Standard hours allowed for actual production x 30,000
Factory overhead applied at standard $127,500
Actual variable factory overhead $ 95,000
Actual fixed factory overhead 28,000
Total actual factory overhead incurred 123,000
Favorable overhead variance $ 4,500
58. In a four-variance method analyzing factory overhead, the variable factory overhead efficiency variance
measures:
a. The effect of differences in the actual variable factory overhead rate and the standard
variable factory overhead rate.
b. The difference in the actual hours incurred and standard hours allowed for a given level
of production.
c. The difference between actual and applied variable factory overhead.
d. The difference between actual variable factory overhead and budgeted variable factory
overhead.
ANS: B
The variable overhead efficiency variance is the difference between the actual hours worked and the
standard hours allowed multiplied by the standard variable rate per hour.
59. The following information pertains to the Braun Company for March:
Standard direct labor hours per unit .5 hours
Budgeted production level 20,000 units
Actual units produced 22,000 units

Standard variable rate per direct labor hour $2.00
Standard fixed rate per direct labor hour $3.00
Actual direct labor hours worked 10,500 hours
Actual direct labor costs $150,000
Actual variable factory overhead 22,200
Using the four-variance method of factory overhead variance analysis, what is the spending variance?
b. $200 unfavorable
c. $1,000 favorable
d. $200 favorable
ANS: A
Spending variance = actual variable overhead - (actual hours worked x standard variable rate per hour)
Spending variance = $22,200 - (10,500 x $2)
Spending variance = $22,200 - $21,000
Spending variance = $1,200 Unfavorable (because actual exceeded standard)

Using the four-variance method of factory overhead variance analysis, what is the efficiency variance?
b. $200 unfavorable
c. $1,000 favorable
d. $200 favorable
ANS: C
Efficiency variance = (actual hours worked - standard hours allowed) x standard variable rate per hour
Efficiency variance = (10,500 - 11,000*) x $2
Efficiency variance = $1,000 Favorable (because actual hours worked were less than standard)
* Actual items produced x standard hours allowed (22,000 x .5 = 11,000)

Using the four-variance method of factory overhead variance analysis, what is the budget variance?
a. $1,200 favorable
c. $3,000 favorable
ANS: B
Budget variance = actual fixed cost - budgeted fixed cost
Budget variance = $31,800 - $30,000*
Budget variance = $1,800 Unfavorable (because actual fixed costs exceeded budgeted fixed costs)
* Budgeted production x standard hours allowed per unit x fixed factory overhead rate
(20,000 x .5 x $3 = $30,000)
PTS: 1 DIF: Hard REF: Appendix OBJ: 10

Using the four-variance method of factory overhead variance analysis, what is the volume variance?
a. $1,200 favorable
c. $3,000 favorable
ANS: C
Volume variance = budgeted fixed cost - standard hours allowed x fixed rate
Volume variance = $30,000* - 11,000** x $3
Volume variance = $3,000 favorable (because standard hours allowed exceeded budgeted hours)
* Budgeted production x standard hours allowed per unit x fixed factory overhead rate
(20,000 x .5 x $3 = $30,000)
** Standard hours allowed = actual units x standard hours per unit
11,000 = 22,000 x .5
PTS: 1 DIF: Hard REF: Appendix. OBJ: 10
63. Which of the following correctly demonstrates the comparison of the four-variance method of factory
overhead analysis to the two-variance method of factory overhead analysis?
a. The sum of the spending and budget variances in the four-variance method is equal to
the controllable variance in the two-variance method.
b. The sum of the budget, spending and efficiency variances in the four-variance method is
equal to the controllable variance in the two-variance method.
c. The sum of the spending, efficiency and volume variances in the four-variance method is
equal to the controllable variance in the two-variance method.
d. The budget variance in the four-variance method is equal to the controllable variance in
the two-variance method.
ANS: B
The sum of the variable spending and efficiency variances and the fixed budget variance in the four
variance method is equal to the controllable variance in the two-variance method.
64. Which of the following correctly demonstrates the comparison of the four-variance method of factory
overhead analysis to the two-variance method of factory overhead analysis?
a. The sum of the spending, efficiency and budget variances in the four-variance method is
equal to the volume variance in the two-variance method.
b. The sum of the volume and efficiency variances in the four-variance method is equal to
the volume variance in the two-variance method.
c. The volume variance in the four-variance method is equal to the volume variance in the
two-variance method.
d. The sum of the budget and volume variances in the four-variance method is equal to the
volume variance in the two-variance method.
ANS: C
The volume variance in the four variance method is equal to the volume variance in the two-variance
method.
65. In the three-variance method of factory overhead analysis, what standard cost variance represents the
difference between actual factory overhead incurred and budgeted factory overhead based on actual
hours worked?
a. Volume variance
b. Efficiency variance
c. Budget (spending) variance
d. Quantity variance
ANS: C
The spending (budget) variance represents the difference between actual factory overhead incurred and
budgeted factory overhead based on actual hours worked.
66. The following information is available from the Tomoto Company:
Actual factory overhead $16,500
Actual fixed overhead expenses $ 9,200
Budgeted fixed overhead expenses $ 9,000
Actual hours 3,600
Standard hours 3,800
Variable overhead rate per direct labor hour $ 2.25
Assuming that Tomoto uses a three-variance analysis of overhead variances, what is the budget
(spending) variance?
a. $600 favorable
b. $600 unfavorable
c. $450 favorable
d. $450 unfavorable
ANS: A
Budget variance = Actual factory overhead incurred - Budgeted factory overhead for actual hours
worked
Budget variance = $16,500 - $17,100*
Budget variance = $600 F (Actual is less than budget so variance is unfavorable)
*Actual hours 3,600
Variable overhead rate x $2.25

Budgeted fixed overhead 9,000
Budgeted overhead for actual hours worked $17,100
67. In a three-variance method of factory overhead analysis, the variance that indicates that the volume of
production was more or less than budgeted is the:
a. Budget variance.
b. Capacity variance.
c. Spending variance.
d. Efficiency variance.
ANS: B
The factory overhead capacity variance in a three-variance method of factory overhead analysis
indicates the volume of production was more or less than budgeted because it reflects the difference
between budgeted fixed overhead and the fixed overhead rate multiplied by the actual hours worked.
The factory overhead efficiency variance is the difference between the factory overhead applied and the
actual hours worked multiplied by the standard rate.
The budget or spending factory overhead variance is the difference between the actual overhead
incurred and the budgeted overhead for the actual hours worked.
68. In a three-variance method of factory overhead analysis, the variance that measures the difference
between the factory overhead applied and the actual hours worked multiplied by the standard rate is
the:
a. Budget variance.
b. Capacity variance.
c. Spending variance.
d. Efficiency variance.
ANS: D
The factory overhead efficiency variance in a three-variance method of factory overhead analysis is the
difference between the factory overhead applied and the actual hours worked multiplied by the
standard rate.
The budget or spending factory overhead variance is the difference between the actual overhead
incurred and the budgeted overhead for the actual hours worked.
The capacity factory overhead variance is the difference between the budgeted overhead for the actual
hours worked and the actual hours worked multiplied by the standard rate.
PROBLEM
1. Hernandez Corporation uses a standard cost system and has established the following standards for one
unit of product:
Standard Standard Standard
Quantity Price Cost

Direct materials 10 pounds $2.60 per pound $26.00
Direct labor .25 hour $10.00 per hour 2.50
$28.50
During October, the company purchased 240,000 pounds of material at a total cost of $588,000. The
total factory wages for October were $49,400. During October, 21,000 units of product were
manufactured using 211,000 pounds of material and 5,200 direct labor hours. Material quantity and
price variances are recorded when materials are used.
a. Compute the material quantity and labor efficiency variances.
b. Compute the material price and labor rate variances.
Show whether each of the above variances was either favorable or unfavorable.
ANS:
(a) Standard Actual
Quantity Quantity Standard
or Hours or Hours Difference Cost Variance

Materials
Quantity 210,000* 211,000 1,000 lbs. $2.60 lb. $2,600
Variance lbs. lbs. (unfav.) (unfav.)
Labor
Efficiency 5,250** 5,200 50 hrs. $10.00 hr. $500
Variance hrs. hrs. (fav.) (fav.)
* Actual production x standard allowed (21,000 x 10 lbs = 210,000)
** Actual production x standard allowed (21,000 x .25 hrs = 5,250)
(b) Actual
Standard Actual Quantity
Cost Cost Difference or Hours Variance

Materials
Price $2.60/lb. $2.45/lb.* $.15(fav.) 211,000 $31,650
Variance lbs. (fav.)
Labor
Rate $10.00/hr. $9.50/hr.** $.50(fav.) 5,200 $2,600
Variance hrs. (fav.)
* Actual total cost / actual pounds purchased ($588,000 / 240,000 = $2.45)
** Actual total cost / actual hours ($49,400 / 5,200 = $9.50)
2. Fill in the missing figures below:
Units produced 7,900

Standard hours per unit 5 hours
Standard hours allowed (a)
Standard rate per hour $12.00
Actual hours worked 39,900
Actual labor cost (b)
Labor rate variance $5,985 favorable
Labor efficiency variance (c)
ANS:
(a) Standard hours allowed = units produced x standard hours per unit
Standard hours allowed = 7,900 x 5 = 39,500
(b) Labor rate variance = Actual payroll - (Actual hours worked x standard rate)
$5,985 F = Actual payroll - (39,900 x $12.00)
$5,985 F = Actual payroll - $478,800
Actual payroll = $472,815 (favorable variance is deducted from standard)
(c) Labor efficiency variance = (Actual hours - standard hours allowed) x Standard rate
Labor efficiency variance = (39,900 - 39,500) x $12 = $4,800 U (actual in excess of standard)
3. The normal capacity of the Malloy Company is 20,000 direct labor hours and 10,000 units per month. A
finished unit requires 15 pounds of materials at an estimated cost of $1.00 per pound. The estimated
cost of labor is $12.00 per hour. It is estimated that overhead for a month will be $15,000.
During the month of June, 19,000 direct labor hours were worked at an average rate of $11.50 an hour.
The number of units produced was 9,000, using all 132,000 pounds of material that were purchased at a
cost of $1.05 per pound.
a. Prepare a standard cost summary showing the standard unit cost.

b. Calculate the material and labor variances.
c. Prepare entries in general journal form to charge materials and labor to work in
process. Indicate whether the variances are favorable or unfavorable.
ANS:
Standard Cost Summary
(a) Materials (15 lbs. @ $1.00 per lb.) $15.00
Labor (2 hrs. @ $12.00 per hr.) 24.00
Factory overhead ($15,000 / 10,000 units) 1.50
Standard cost per unit $40.50
(b) Standard Actual

Materials
Quantity 135,000* 132,000 3,000 lbs. $1.00 lb. $3,000
Variance lbs. lbs. (fav.) (fav.)
Labor
Efficiency 18,000** 19,000 1,000 hrs. $12.00 hr. $12,000
Variance hrs. hrs. (unfav.) (unfav.)
* Actual production x standard allowed (9,000 x 15 lbs. = 135,000)
** Actual production x standard allowed (9,000 x 2 hrs*** = 18,000)
*** Normal hours / normal units (20,000 / 10,000 = 2)
Actual

Materials
Price $1.00/lb. $1.05/lb. $.05(unfav.) 132,000 $6,600
Variance lbs. (unfav.)
Labor
Rate $12.00/hr. $11.50/hr. $.50(fav.) 19,000 $9,500
Variance hrs. (fav.)
(c) Work in Process (9,000  $15) 135,000
Materials Price Variance--unfavorable 6,600
Materials Quantity Variance-- favorable 3,000
Materials (132,000  $1.05) 138,600

Labor Efficiency Variance--unfavorable 12,000
Labor Rate Variance--favorable 9,500
Payroll 218,500
Note to instructor - requirement (c) may be optional. If it is not assigned, this problem would be
moderate in difficulty.
NAT: IMA 2D - Performance Measurement; 2B - Cost Management
4. The following information pertains to Skandalis Company's production of one unit of its manufactured
product during the month of June:
Standard quantity of materials 10 lbs.

Standard cost per lb. $.85
Standard direct labor hours .5
Standard wage rate per hour $12.00
Materials purchased 200,000 lbs.
Cost of materials purchased $.82 per lb.
Materials consumed for manufacture of 10,000 units 112,000 lbs.
Actual direct labor hours required for 10,000 units 4,600
Actual direct labor cost per hour $12.25
(a) The materials price variance is recognized when materials are purchased. Compute materials price
and quantity variances and labor rate and efficiency variances.
(b) Prepare the journal entries to record:
(1) the purchase of the materials,
(2) putting materials into production, and
(3) direct labor costs.

ANS:
Standard Actual

Materials
Quantity 100,000* 112,000 12,000 lbs. $.85/lb. $10,200
Variance lbs. lbs. (unfav.) (unfav.)
Labor
Efficiency 5,000** 4,600 400 hrs. $12.00/hr. $4,800
Variance hrs. hrs. (fav.) (fav.)
*Actual production x lbs. allowed per unit (10,000 x 10 = 100,000)
** Actual production x hrs. allowed per unit (10,000 x .5 = 5,000)
Actual

Materials
Purchase $.85/lb. $.82/lb. $.03(fav.) 200,000 $6,000
Price lbs. (fav.)
Variance
Labor
Rate $12.00/hr. $12.25/hr. $.25(unfav.) 4,600 $1,150
Variance hrs. (unfav.)
b.
Materials (200,000 x .85) 170,000
Materials purchase price variance - favorable 6,000
Accounts payable (200,000 x .82) 164,000
Work in process (100,000 x .85) 85,000
Materials quantity variance - unfavorable 10,200
Materials (112,000 x .85) 95,200
Work in process (5,000 x 12.00) 60,000
Labor rate variance - unfavorable 1,150
Labor efficiency variance - favorable 4,800
Payroll (4,600 x 12.25) 56,350
Note to instructor - requirement (b) may be optional. If (b) is not assigned, this problem would be
moderate in difficulty.
5. Perez Company adopted a standard cost system several years ago. The standard costs for the prime
costs of its single product follow:
Material: 10 kilograms @ $4.50 per kilogram $45.00
Labor: 6 hours @ $8.50 per hour $51.00
The following operating data were taken from the records for November:
(1) Units completed: 5,800 units

(2) Budgeted output: 6,000 units
(3) Materials purchased and used: 60,000 kilograms
(4) Total actual labor costs: $306,600
(5) Actual hours of labor: 36,500 hours
(6) Materials quantity variance: $2,250 unfavorable
(7) Net materials variance: $450 unfavorable
Compute the following:
a. Labor rate variance

b. Labor efficiency variance
c. Actual kilograms of material used in the production process
d. Actual cost paid per kilogram of material
ANS:
(a) Actual

Labor
Rate $8.50/hr. $8.40/hr.* $.10 36,500 $3,650
Variance (fav.) hrs. (fav.)
* $306,600 labor cost / 36,500 hours worked = $8.40 per hour
(b) Standard Actual

Labor
Efficiency 34,800 36,500 1,700 hrs. $8.50/hr. $14,450
Variance hrs.** hrs. (unfav.) (unfav.)
** 5,800 units produced x 6 hrs allowed = 34,800
(c) Standard Actual

Materials
Quantity 58,000 unknown 500 kg.# $4.50/kg. $2,250
Variance kg.*** kg. (unfav.) (unfav.)
*** 5,800 units x 10 kg. per unit
# working back: $2,250 / $4.50 = 500 kg.
The actual kg. would be 58,500 (58,000 + 500) The unfavorable variance is added to standard.
(d) Actual

Materials
Price $4.50/ kg. Unknown $.03## 60,000 $1,800
Variance (fav.) kg. (fav.)
## $1,800/ 60,000 = .03
Working back: 4.50 - .03 = 4.47 (Favorable variance is subtracted from standard)

6. Rhodes Corporation manufactures a product with the following standard costs:
Direct materials (20 yards @ $1.85 per yard) $ 37.00
Direct labor (4 hours @ $12.00 per hour) 48.00
Variable factory overhead (4 hours @ $5.40 per hour) 21.60
Fixed factory overhead (4 hours @ $3.60 per hour) 14.40
Total standard cost per unit of output $121.00
Standards are based on normal monthly production involving 2,000 direct labor hours (500 units of
output).
The following information pertains to the month of July:
Direct materials purchased (16,000 yards @ $1.80 per yard) $28,800
Direct materials used (9,400 yards)

Direct labor (1,880 hours @ $12.20 per hour) 22,936
Actual production in July: 460 units
a. Compute the following variances for the month of July, indicating whether each variance
is favorable or unfavorable:
(1) Materials purchase price variance

(2) Materials quantity variance
(3) Labor rate variance
(4) Labor efficiency variance
b. Give potential reasons for each of the variances. Be sure to consider inter-relationships among
variances.
ANS:
(a)
Materials purchase price variance = (Actual unit price - standard unit price) x actual quantity of materials
purchased
Materials purchase price variance = ($1.80 - $1.85) x 16,000 = $800 favorable
(actual price less than standard price)
Materials quantity variance = (Actual quantity of materials used - standard quantity of materials
allowed) x standard unit price
Materials quantity variance = (9,400 - 9,200*) x $1.85 = $370 unfavorable
(actual quantity exceeds standard quantity)
* 460 units x 20 yards per unit = 9,200
Labor rate variance = (Actual rate per hour - standard rate per hour) x Actual hours worked
Labor rate variance = ($12.20 - $12.00) x 1,880 = $376 unfavorable
(actual rate exceeds standard rate)
Labor efficiency variance = (Actual hours worked - standard hours allowed) x standard rate
Labor efficiency variance = (1,880 - 1,840**) x $12.00 = $480 unfavorable
(actual hours exceed standard hours allowed)
** 460 units x 4 hours per unit = 1,840
(b) The favorable purchase price variance may have occurred because the purchasing manager
purchased materials at a lower price that were of lesser quality. The workers encountered production
problems as a result of the lesser quality materials which resulted in using more materials and taking
more time than anticipated. The supervisor also had to assign more experienced workers to this
production, which resulted in a higher average wage rate.
Note to instructor: If requirement (b) is not assigned, this problem would be moderate in difficulty.
PTS: 1 DIF: Hard REF: P. OBJ: 3, 4, 5

NAT: IMA 2D - Performance Measurement
TOP: AACSB - Analytic, Reflective
7. Rhodes Corporation manufactures a product with the following standard costs:
Direct materials (20 yards @ $1.85 per yard) $ 37.00
Direct labor (4 hours @ $12.00 per hour) 48.00
Variable factory overhead (4 hours @ $5.40 per hour) 21.60
Fixed factory overhead (4 hours @ $3.60 per hour) 14.40
Total standard cost per unit of output $121.00
Standards are based on normal monthly production involving 2,000 direct labor hours (500 units of
output).
The following information pertains to the month of July:
Direct materials purchased (16,000 yards @ $1.80 per yard) $28,800
Direct materials used (9,400 yards)

Direct labor (1,880 hours @ $12.20 per hour) 22,936
Actual production in July: 460 units
a. Compute the budgeted fixed overhead.
b. Assuming Rhodes uses the two-variance method of analyzing factory overhead, computer
the following variances for the month of July, indicating whether each variance is
favorable or unfavorable:
(1) Factory overhead controllable variance

(2) Factory overhead volume variance
ANS:
(a) Computation of budgeted fixed factory overhead:
Fixed factory overhead rate per direct

labor hour x $3.60
Total fixed factory overhead $ 7,200
(b)
(1) Factory overhead controllable variance:
Budgeted factory overhead at standard hours for

actual level of production:
Fixed $7,200
Variable (460 units  4 hours  $5.40) 9,936 17,136
Factory overhead budget variance (favorable) $ 286
(Actual factory overhead incurred was less than that budgeted)
(2) Factory overhead volume variance:

Budgeted factory overhead at actual level of
production $17,136
Overhead applied to production

($5.40 + $3.60) x (460 x 4 hours) 16,560
Volume variance (unfavorable) $ 576
(budgeted overhead was in excess of applied overhead)

8. VanDerPloeg, Inc. produces farm equipment at several plants. The business is seasonal and cyclical in
nature. The accountant for the Denver plant uses flexible budgeting to help the plant management
control operations. Data for Denver follows:
Budget data for the year:

Normal monthly capacity of the plant in direct labor hours 12,000 hours
Materials costs (6 lbs. @ $1.50) $9.00/unit
Labor costs (2 hours @ $12.00) $24.00/unit
Overhead estimate at normal monthly capacity:

Variable (controllable)
Indirect materials 600
Repairs 750
Total variable $ 8,100
Fixed (noncontrollable):
Depreciation $ 5,000
Supervision 4,000
Total fixed $ 9,000
Total fixed and variable $ 17,100
Actual data for January:

Units produced 3,900
Costs incurred
Materials (24,000 lbs.) $ 36,000
Direct labor 91,500
Indirect materials 600
Repairs 900
Depreciation 5,000
Supervision 4,000
Total $143,000
a. Compute the fixed and variable factory overhead application rates per unit of
production.
b. Assuming VanDerPloeg uses the two-variance method of analyzing factory
overhead, compute the two overhead variances.
c. Prepare a flexible budget performance report for January comparing actual and
budgeted costs of all cost elements for the actual activity for the month.
d. Prove the factory overhead budget variance from the above report.
ANS:
(a)
Total variable cost
$8,100 / 6,000* units variable factory overhead application
$1.35
rate
Total fixed cost
$9,000 / 6,000 units 1.50 fixed factory overhead application rate
Total factory overhead application rate $2.85
* Normal capacity of 12,000 hours / 2 hours per unit = 6,000 units.
(b)
Actual Factory Overhead for Applied
Factory Overhead Actual Prod. Level Factory Overhead

Fixed: $ 9,000 3,900 units @ $2.85
Var.: 3,900
@ $1.35 = 5,265
$14,265 $11,115
$15,500
Controllable Var. Volume Var.
$1,235 (unfav) $3,150 (unfav)
(c)
Budget Under
(3,900 Actual (Over)
Cost Element units) Costs Budget

Materials:
(3,900 units  $9) $35,100.00 $ 36,000.00 $ (900.00)
Labor:
(3,900 units  $24) 93,600.00 91,500.00 2,100.00
Factory overhead:
Indirect labor (d)
($6,750  65%*) 4,387.50 5,000.00 (612.50) \
Indirect materials \
($600  65%) 390.00 600.00 (210.00) > $1,235

Repairs / control-
($750  65%) 487.50 900.00 (412.50) / lable
Depreciation 5,000.00 5,000.00 -- variance
Supervision 4,000.00 4,000.00 -- (unfav.)
$142,965.00 $143,000.00 $ (35.00)
* $3,900 units / 6,000 units = 65% of normal activity.

Note to instructor: Requirements c and d review chapter 7 concepts. If these requirements are not
assigned, the problem difficulty is moderate.
9. The Jurcevich Corporation manufactures and sells a single product. A standard cost system is used by
the company. The standard factory overhead cost for a unit of product is as follows:
Variable overhead (1.5 hours @ $3 per hour) 4.50
Fixed overhead (1.5 hours @ $1 per hour) 1.50
Total standard cost per unit $6.00
The overhead cost per unit was calculated for the year based on a 60,000 unit volume as follows:
Variable factory overhead cost:

Indirect labor (30,000 hours @ $8) $240,000
Factory supplies (60,000 gallons of oil @ $.80 per gallon) 48,000
Allocated variable service costs from other departments 12,000
Total variable costs $300,000
Fixed overhead costs:

Supervision $ 28,000
Depreciation 50,000
Other fixed costs 12,000
Total fixed overhead costs $ 90,000
Total annual factory overhead budget for 60,000 units $390,000
The charges to the manufacturing department for April are given below for the 5,200 units produced:
Indirect labor (2,400 hrs. @ $8.15 per hr.) $19,560
Factory supplies (6,000 gallons @ $.55) 3,300
Allocated variable service department costs 3,200
Supervision 2,490
Depreciation 3,750
Other fixed costs 1,000
Total $33,300
(a) Assuming Jurcevich uses the two-variance method of analyzing factory overhead, calculate the
following variances from standard cost:
(1) Factory overhead controllable variance

(2) Factory overhead volume variance
(b) Prepare the journal entry to apply factory overhead to work in process and record the variances.
ANS:
(a)
(1) Factory overhead controllable variance:

Budget based on standard hours allowed:

Variable cost:
5,200 units produced  1.5 hours per unit =
7,800 hrs.  $3 per hr. $23,400
Fixed cost: $90,000 / 12 months 7,500
Total budget 30,900
Unfavorable controllable variance $ 2,400
(2) Factory overhead volume variance:

Budget (see above) $30,900
Standard hours allowed  standard rate:

(5,200 units  1.5 hours = 7,800 hours  $4.00) 31,200
Favorable volume variance $ 300
(b)
Work in process (7,800 hours x $4.00) 31,200
Factory overhead controllable variance 2,400
Factory overhead volume variance 300
TOP: Analytic
10. Palek Company has adopted the following standards:
Input Total
Direct materials 3 lbs. @ $3.60 per lb. $10.80
Direct labor 5 hrs. @ $12.00 per hr. 60.00
Factory overhead:
Variable $4.00 per direct labor hour 20.00
Fixed $5.00 per direct labor hour 25.00 45.00
Palek's January budget was based on normal volume of 40,000 standard labor hours. During January,
Palek produced 7,900 units with records indicating the following data:
Direct materials purchased 25,000 lbs. @ $3.65
Direct materials used 23,400 lbs.
Direct labor 39,900 hrs. @ $11.85

Factory overhead $375,000
Assuming Palek uses the four-variance method of analyzing factory overhead, compute the following
variances for the month of January and indicate whether each is favorable or unfavorable:
a. Factory overhead spending variance

b. Factory overhead efficiency variance
c. Factory overhead budget variance
d. Factory overhead volume variance
ANS:
Factory overhead spending variance = Actual variable overhead - (actual hours x standard variable rate
per hour)
Factory overhead spending variance = $165,000* - (39,900 x $4)
Factory overhead spending variance = $165,000 - $159,600 = $5,400 unfavorable
(actual in excess of standard)
*$375,000 - $210,000 = $165,000
Factory overhead efficiency variance = (Actual hours -standard hours allowed) x standard variable rate
per hour)
Factory overhead efficiency variance = (39,900 - 39,500**) x $4 = $1,600 unfavorable
(actual hours in excess of standard hours)
** 7,900 units x 5 hours per unit = 39,500
Factory overhead budget variance = Actual fixed overhead - Budgeted fixed overhead
Factory overhead budget variance = $210,000 - $200,000*** = $10,000 unfavorable
(actual exceeded budget)
*** 40,000 normal hours x $5.00 per hour = $200,000

Factory overhead volume variance = Budgeted fixed overhead - (standard hours allowed x fixed rate per
hour)
Factory overhead volume variance = $200,000 - (39,500 x $5)
Factory overhead volume variance = $200,000 - $197,500 = $2,500 unfavorable
(standard hours allowed were less than normal hours)
11. Palek Company has adopted the following standards:
Input Total
Direct materials 3 lbs. @ $3.60 per lb. $10.80
Direct labor 5 hrs. @ $12.00 per hr. 60.00
Factory overhead:
Variable $4.00 per direct labor hour 20.00
Fixed $5.00 per direct labor hour 25.00 45.00
Palek's January budget was based on normal volume of 40,000 standard labor hours. During January,
Palek produced 7,900 units with records indicating the following data:
Direct materials purchased 25,000 lbs. @ $3.65
Direct materials used 23,400 lbs.
Direct labor 39,900 hrs. @ $11.85
Factory overhead $375,000
Assuming Palek uses the three-variance method of analyzing factory overhead, compute the following
variances for the month of January and indicate whether each is favorable or unfavorable:
a. Factory overhead budget variance
b. Factory overhead capacity variance
c. Factory overhead efficiency variance
ANS:
(a) Factory overhead budget variance:

Budgeted total factory overhead for actual hours worked
(39,900  $4.00) + (40,000  $5.00) 359,600
Factory overhead budget variance $ 15,400 unfavorable
(b) Factory overhead capacity variance:

Budgeted total factory overhead for actual hours worked $359,600
Actual hours worked at standard rate (39,900  $9) 359,100
Factory overhead capacity variance $ 500 unfavorable
(c) Factory overhead efficiency variance:

Actual hours worked at standard rate $359,100
Applied total factory overhead (standard hours allowed

at standard rate (7,900  5 hrs.  $9.00) 355,500
Factory overhead efficiency variance $ 3,600 unfavorable
CHAPTER 9—COST ACCOUNTING FOR SERVICE BUSINESSES
MULTIPLE CHOICE
1. Which of the following is a characteristic of a service organization?
a. Provides a tangible product

b. Carries large inventories
c. Receives payments for physical properties
d. Service is consumed at time it is provided
ANS: D
Answers a, b, and d all involve tangible products; only answer c involves a service.
2. Which of the following is generally not considered a service organization?
a. Hair stylists
b. Lawyers
c. Auto dealerships
d. Plumbers
ANS: C
An auto dealership has as its principle function the selling of automobiles rather than a service.
Although physical items are obtained from hair stylists, lawyers, and plumbers, the principle function
they perform is a service.
3. Service organizations display the following characteristics, except that:
a. They create more jobs than do manufacturers.

b. They employ more people than do manufacturing concerns.
c. They carry larger inventories than do manufacturing concerns.
d. They account for more than half of all goods and services produced.
ANS: C
Service organizations are a major component in the United States economy. A characteristic that they
do not have, however, is the carrying of large inventories. A service is not a tangible, inventoriable item.
4. Examples of service businesses that would use job order costing would include all of the following
except:
a. an accounting firm that has audit clients of various sizes and complexities.
b. a “quick oil change” shop that offers only basic maintenance services.
c. an automotive body repair shop specializing in collision repair.
d. a high end salon offering hair, manicure and spa services.
ANS: B
The accounting firm, collision repair shop and the salon would have customers (jobs) with varying
complexities and sizes. Job order costing would be beneficial in these cases. The oil change shop that
offers only basic maintenance services such as oil changes, would not have as many complexities among
its customers as the others.
5. A service firm, such as a law firm, would choose direct labor dollars over direct labor hours as a cost
driver for overhead because:
a. Overhead is more related to dollars charged than hours worked.

b. Labor hours are harder to track.
c. Labor rates change and thus overhead is automatically updated.
d. Partners and managers incur overhead equally.
ANS: A
Overhead based on labor dollars takes into account that the higher paid individual often incurs more
overhead than someone with a smaller salary. A partner in a law firm uses more administrative time
and has a nice office than does a new attorney, although they both may work the same number of
hours.
6. An example of a direct cost that can be specifically identified with a job and does not have to be
allocated to the job using an overhead rate is:
a. travel expenses.
b. fringe benefits.
c. utilities.
d. office machine lease costs.
ANS: A
Travel expenses can usually be specifically identified with a job.
7. Boyle’s Body Shop repairs automobiles that have been involved in collisions. It’s budget information
follows:
Budgeted direct labor cost $200,000

Budgeted overhead 500,000
Budgeted labor rate per hour $10
Since all of Boyle’s technicians are paid the same rate, Boyle allocates overhead to jobs based on direct
labor hours. Paul Evans brought his car to Boyle for fender repair. It took 5 hours and the new parts for
the job totaled $200. How much overhead was applied to the Evans job?
a. $50
b. $125
c. $200
d. $175
ANS: B
Predetermined overhead rate = Budgeted overhead / Budgeted cost driver
Predetermined overhead rate = $500,000 / 20,000 direct labor hours* = $25 per hour.
Applied overhead = Predetermined overhead rate x actual cost driver for job
Applied overhead = $25 x 5 hours = $125.
* Budgeted direct labor cost / Budgeted labor rate = Budgeted direct labor hours
$200,000 / $10 = 20,000 hours
follows:

the job totaled $200. What was the total cost of the Evans job?
a. $375
b. $200
c. $250
d. $325
ANS: A
$200,000 / $10 = 20,000 hours

Direct labor (5 hours x $10) 50
Applied overhead 125
Total for job $375
follows:

the job totaled $200. If Evans was charged $500, what was the percentage of profit to the selling price?
a. 35%
b. 60%
c. 50%
d. 25%
ANS: D
$200,000 / $10 = 20,000 hours

Direct labor (5 hours x $10) 50
Applied overhead 125
Total for job $375
Profit for job = $500 - $375 = $125
Profit percentage = $125 / $500 = 25%
10. A report that compares the budgeted costs for the job to the actual costs incurred and indicates the
variances is a:
a. Budget analysis.
b. Job cost sheet.
c. Cost analysis.
d. Cost performance report.
ANS: D
A cost performance report compares budgeted cost to actual costs incurred for a job, and indicates the
variances.
11. The first budget to be prepared for a professional services firm should be the:
a. Direct expense budget.

b. Labor budget.
c. Overhead budget.
d. Revenue budget.
ANS: D
The revenue budget should be the first budget prepared because the amount of client business must be
projected before estimating the labor hours and overhead required.
12. Items that should be considered in developing a revenue budget for a professional firm include all of the
following except:
a. Expected new business.

b. Expected mix of professional labor hours.
c. Expected mix of work.
d. All of these should be considered in preparing a revenue budget for a professional firm.
ANS: D
A firm should consider expected new business, the mix of hours (due to different rates charged), and the
mix of work (different departments may bill at different rates).

13. Which of the following should be included in computing a revenue budget for a professional services
firm?
a. Wage rates.
b. Predetermined overhead rate.
c. Billing rate.
d. Direct costs.
ANS: C
A professional firm would use billing rates multiplied by the estimated labor hours in each category to
determine budgeted revenue.
14. Hebert & Co. CPA’s anticipates that partners will bill 2,000 professional hours, managers will bill 7,500
professional hours and staff accountants will bill 25,000 professional hours. Billing rates are $250, $150
and $75 for partners, managers and staff accountants, respectively. What is Hebert & Co.’s budgeted
revenue?
a. $5,462,500
b. $3,500,000
c. $5,175,000
d. $3,750,000
ANS: B
Partners 2,000 hours x $250 $ 500,000
Mangers 7,500 hours x $150 1,125,000
Staff 25,000 hours x $ 75 1,875,000
Total budgeted revenue $3,500,000

15. Hebert & Co. CPA’s anticipates that partners will bill 2,000 professional hours, managers will bill 7,500
professional hours and staff accountants will bill 25,000 professional hours. Salary rates are $100, $60
and $30 for partners, managers and staff accountants, respectively. What is Hebert & Co.’s budgeted
professional labor cost?
a. $2,185,000
b. $2,070,000
c. $2,500,000
d. $1,400,000
ANS: D
Partners 2,000 hours x $100 $ 200,000
Mangers 7,500 hours x $ 60 450,000
Staff 25,000 hours x $ 30 750,000
Total budgeted professional labor cost $1,400,000
16. In a professional services firm, the term “overhead” refers to:
a. Expenses other than professional labor that can be traced to specific jobs.
b. Indirect labor costs.
c. Indirect expenses incurred to support the activities of the firm.
d. Indirect expenses incurred in the factory.
ANS: C
Overhead in a professional services firm includes indirect expenses to support the firm’s activities.
These expenses will include indirect labor and other costs. Expenses that can be traced to specific jobs
are direct costs.

17. All of the operating expenses in a professional firm are:
a. Overhead costs.
b. Period costs.
c. Labor costs.
d. Product costs.
ANS: B
All of the operating expenses in a professional firm are period costs because they are expensed as
incurred as there is no inventory amounts to which they can be attached.
18. A professional firm’s budgeted income statement would include all of the following lines except:
a. Cost of Goods Sold.

b. Overhead.
c. Revenue.
d. Labor.
ANS: A
A professional services firm’s budget would not include cost of goods sold as goods are not sold in a
services firm.
19. The practice of taking overhead costs previously in a single indirect cost pool and separating them into a
number of homogeneous cost pools with separate cost drivers for each pool is:
a. Peanut-butter costing.
b. Process costing.
c. Activities-based costing.
d. Job costing.
ANS: C
Activities-based costing is the process of separating overhead costs into a number of homogeneous cost
pools with separate cost drivers for each pool.
20. There are several advantages to using activity-based costing. Which of the following is one of these
advantages?
a. Services not performed in a department are allocated a portion of the cost of operating
that department.
b. Each department can choose the activity base that relates best to its cost.
c. Simplified costing is time-consuming and expensive to administer.
d. Activity-based rates are much less time-consuming to prepare.
ANS: B
Activity-based costing is applied by activity, allowing a closer matching of the incurrence of overhead
and the application of it.
21. An example of an indirect cost that could be traced directly to individual jobs by examining invoices is:
a. Office rent.
b. Telephone and fax charges.
c. Depreciation expense on office machines.
d. Office supplies.
ANS: B
An analysis of telephone bills could aid in charging telephone and fax charges directly to clients.
22. The practice of assigning costs evenly to jobs using a single overhead rate when different jobs actually
consume resources in different proportions is sometimes called:
a. Smooth costing.
b. Process costing.
c. Activities-based costing.
d. Peanut-butter costing.
ANS: D
Sometimes the practice of assigning costs evenly to jobs using a single overhead rate is referred to as
“peanut-butter” costing.
23. Consider the budget information for Bert and Ernie Design firm:
Professional labor $1,000,000

Administrative labor 200,000
Lease expense 50,000
Design equipment depreciation 25,000
Samples and books 10,000
Utilities 20,000
Professional hours 100,000 hours
Number of rooms redone 2,000 rooms
Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the
number of rooms redone, and facilities costs, which is assigned to jobs based on the number of
professional labor hours. The design support cost pool includes design equipment depreciation and
samples and books. The lease expense and utilities are considered facilities costs.
What is the budgeted rate per cost driver for design support?
a. $17.50
b. $35.00
c. $.35
d. $.70
ANS: A
Design support includes the following costs:
Depreciation of design equipment $25,000
Books and samples 10,000
Total design support costs $35,000
Divided by number of rooms redone 2,000
Rate per number of rooms redone $17.50
24. Consider the budget information for Bert and Ernie Design firm:
Professional labor $1,000,000

Administrative labor 200,000
Design equipment depreciation 25,000
Samples and books 10,000
Utilities 20,000
Professional hours 100,000 hours
Number of rooms redone 2,000 rooms
Bert and Ernie decide there are two cost pools, design support, which is assigned to jobs based on the
number of rooms redone, and facilities costs, which is assigned to jobs based on the number of
professional labor hours. The design support cost pool includes design equipment depreciation and
samples and books. The lease expense and utilities are considered facilities costs.
What is the budgeted rate per cost driver for facilities costs?
a. $17.50
b. $1.05
c. $.70
d. $37.50
ANS: C
Facilities costs include the following costs:
Lease expense $ 50,000
Utilities 20,000
Total design support costs $ 70,000
Divided by number professional labor hours 100,000
Rate per number of professional labor hours $.70
25. Sanborn Architectural Designs Inc. has three partners that each earn $80,000 per year, and three
associates that earn $58,000 per year. Each partner and associate has 2,000 billable hours per year.
Using an activity-based costing approach, if a partner worked 10 hours on a project, the amount of labor
cost that should be billed to the project is:
a. $200.
b. $320.
c. $400.
d. $500.
ANS: C
Activity-based costing looks at the base in question--in this case, partners' salaries--and disregards
associates' salaries. Thus, a job would be billed as total cost divided by total hours.
3 x $80,000 240,000
= = 400 x 10 = $400
3 x 2,000 6,000
26. Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases.
Information about costs follow:
Cost Pool Budgeted Costs Budgeted Cost Driver Budgeted Rate
$2,000,000 professional $.75 / professional

labor cost labor dollar
Legal support $1,500,000
$200 / partner labor

hour
Secretarial support 800,000 4,000 partner labor hours
12,000 professional labor $50 / professional

hours labor hour
Facilities 600,000
The Laurel case required 60 professional hours, 20 of which were partner hours, and labor costs totaled
$10,000. How much overhead was assigned to the Laurel case?
a. $13,500
b. $14,000
c. $6,500
d. $14,500
ANS: D
Legal support $.75 x $10,000 $ 7,500
Secretarial support $200 x 20 hours 4,000
Facilities $50 x 60 hours 3,000
$14,500
27. Hunter and Quinn Collision Repair uses activity-based costing to determine the costs of its cases.
Cost Pool Budgeted Costs Budgeted Cost Driver
Paint shop
operations and clean
$300,000 750 paint jobs
up
Machine costs 120,000 1,500 machine hours
Facilities 80,000 2,000 labor hours
Seth’s car was repaired after he was involved in a rear-end collision. The repair involved 3 hours of
machine time, 5 hours of labor at $30 per hour, and the rear of the car was repainted. How much
overhead was assigned to Seth’s repair job?
a. $2,000
b. $941
c. $990
d. $840
ANS: D
Cost Pool Budgeted Rate Seth’s job Overhead

Paint shop $300,000 / 750 = $400 per paint job 1 job $400
Machine costs $120,000 / 1,500 = $80 per mach. hr. 3 hours 240
Facilities $80,000 / 2,000 = $40 per labor hr. 5 hours 200

$840
28. Lawrence and Louis Law Firm uses activity-based costing to determine the costs of its cases.
Cost Pool Budgeted Costs Budgeted Cost Driver Budgeted Rate
$2,000,000 professional $.75 / professional

labor cost labor dollar
Legal support $1,500,000
$200 / partner labor

hour
Secretarial support 800,000 4,000 partner labor hours
12,000 professional labor $50 / professional

hours labor hour
Facilities 600,000
The Laurel case required 60 professional hours, 20 of which were partner hours, and labor costs totaled
$10,000. If direct costs relating to the case were $1,000, what were the total costs of the Laurel case?
a. $23,000
b. $25,500
c. $21,500
d. $15,500
ANS: B
Legal support $.75 x $10,000 $ 7,500
Secretarial support $200 x 20 hours 4,000
Facilities $50 x 60 hours 3,000
Total overhead applied $14,500
Labor costs $10,000
Overhead costs 14,500

Direct costs 1,000
Total costs of Laurel case $25,500
29. Sanborn Architectural Designs Inc. has three partners that each earn $80,000 per year, and three
associates that earn $58,000 per year. Each partner and associate has 2,000 billable hours per year.
Using a simplified approach, if a partner worked 10 hours on a project, the amount of labor cost that
should be billed to the project is:
a. $350.
b. $200.
c. $320.
d. $345.
ANS: D
A simplified approach generates an average rate (total earnings divided by total hours):
(3 x $80,000) + (3 x $58,000)
6 x 2,000
If a job used 10 hours, then the rate times the hours worked is:
$414,000
= $34.50 x 10 hours = $345
12,000

30. Natasha's Interior Designs has support staff for its professional designers. The two professionals work a
total of 1,800 hours each and make $45,000 each per year. The total support budget is $90,000, of
which $60,000 is professional support, and $30,000 is general office overhead. A job requiring 30
professional hours should be billed how much for overhead if a simplified costing approach is used and
hours are the cost driver?
a. $25
b. $30
c. $600
d. $750
ANS: D
Divide the total overhead incurred of $90,000 by the hours worked by the two professionals, 1,800
hours each, which results in $25 an hour. If a job takes 30 hours, then $25  30 hours = $750.
$90,000
= $25
3,600 hrs.
$25  30 hours = $750
31. Natasha's Interior Designs has support staff for its professional designers. The two professionals work a
total of 1,800 hours each and make $45,000 each per year. The total support budget is $90,000, of
which $60,000 is professional support, and $30,000 is general office overhead. A job requiring 30
professional hours should be billed how much for overhead if a simplified costing approach is used and
labor cost is the cost driver?
a. $25
b. $30
c. $750
d. $900
ANS: C
Labor cost is calculated by determining that each associate works for $25 an hour ($45,000 / 1,800 = $25
per hr.). If two professionals each work 1,800 hours, or a total of 3,600 hours, at $25 an hour, the total
labor cost is $90,000. The overhead of $90,000 divided by the cost driver labor cost of $90,000 gives an
overhead rate of $1 per $1 of labor cost. If the job incurred professional pay of $750 (30 hours x $25),
then overhead applied should be $750.
32. Determining whether the benefit received from more refined information exceeds the cost of obtaining
the information is a(n):
a. Pricing decision.
b. Activity-based cost model.
c. Cost/benefit decision.
d. Cost performance report.
ANS: C
A cost/benefit decision involves weighing the cost of obtaining more refined information against the
benefit that the additional information may have to the decision making process. In some cases, the
difference in the costs determined with the additional information to the costs determined originally is
not significant enough to change the decision, so the benefit of obtaining the additional information did
not justify the cost.
NAT: IMA 3D - Decision Analysis TOP: AACSB - Analytic
33. Which of the following is not one of the categories of a balanced scorecard?
a. Customer
b. Financial
c. Learning and Growth
d. Quality
ANS: D
The four categories of the balanced score card are: Learning and Growth, Internal Business Processes,
Customer and Financial.
34. In creating a balanced scorecard, the number of quality defects would belong to which category of
performance measures?
a. Learning and Growth

b. Internal Business Processes
c. Customer
d. Financial
ANS: B
The number of quality defects would be an indication of how efficient a company’s production process
is.
35. In creating a balanced scorecard, the number of customer complaints would belong to which category of

c. Customer
d. Financial
ANS: C
The number of customer complaints would be an indication of how satisfied a company’s customers are.

36. In creating a balanced scorecard, the rate of employee turnover would belong to which category of

c. Customer
d. Financial
ANS: A
The rate of employee turnover would be an indication of how satisfied a company’s employees are.
37. In creating a balanced scorecard, the return on investment would belong to which category of

c. Customer
d. Financial
ANS: D
The return on investment would be an indication of how profitable the company is.
38. Which of the following is the best example of a non-financial performance measure for the customer
perspective of an airline’s balanced scorecard?
a. Percentage of seats filled.

b. Pilot flight hours.
c. Percentage of on-time arrivals.
d. Revenue per flight.
ANS: A
The percentage of seats filled would be an indication of customer satisfaction. Pilot flight hours would
be included in the learning and growth perspective as it is an indicator of employee experience and
training. Percentage of on-time arrivals is an indicator of efficiency and would be included in the
Internal Business Perspective. Revenue per flight is a financial measure.
Note to faculty: This problem could be amended so that the student could answer the question about
any one of the four perspectives of the balanced scorecard for an airline.
39. Which of the following is the best example of a non-financial performance measure for the learning and
growth perspective of a college’s balanced scorecard?
a. Size of endowment.
b. Number of degrees awarded.
c. Number of conferences attended by faculty members.
d. Percentage of students retained from freshman to sophomore year.
ANS: C
The number of conferences attended by faculty members is an indication of training or growth. The size
of the endowment is a financial measure. The number of degrees awarded would be an internal
business process measure and the percentage of students retained from freshman to sophomore year
would be an indication of customer satisfaction.
any one of the four perspectives of the balanced scorecard for a college.

40. Which of the following is the best example of a non-financial performance measure for the internal
business process perspective of a professional baseball team’s balanced scorecard?
a. Number of repeat season ticket holders

b. Win - loss record.
c. Revenue from team apparel.
d. Number of top minor league prospects.
ANS: B
The win-loss record would be an indication of how well the company is performing its processes, in this
case winning games. The number of repeat season ticket holders would be an indication of customer
satisfaction. The revenue from team apparel would be a financial measure. The number of top minor
league prospects could be a measure of learning and growth (training).
any one of the four perspectives of the balanced scorecard for a baseball team.
41. When creating a balanced scorecard, the following guidelines should be followed in choosing
performance measures except:
a. There should not be too many performance measures.

b. There should be more financial measures than any of the other categories.
c. The measures should be consistent with company strategy.
d. Employees should be able to understand and have control over the performance
measures on which they are evaluated.
ANS: B
A balanced scorecard should not be weighted toward financial measures. Too many measures may
cause employees to lose focus of what is important, and employees should understand and have control
over the performance measures on which they are evaluated. The measures should be consistent with
company strategy.
PROBLEM
1. Joleen Harmon, CPA, has two clients and uses a job order cost system. Client A requires 20 hours of
partner time and 100 hours of staff time. Client B will use 12 hours of partner time and 75 hours of staff
time. Partners are paid $85 an hour and bill support time at 50% of their hourly rate. Staff are paid $25
an hour and bill support time at $20 per billable hour. What is the total charge to each of these clients if
profit is added at 20% over cost?
ANS:
Client A:
20 partner hours at $85 $1,700
Partner support, 50%  $1,700 850
Staff, 100 hours at $25 2,500
Staff support, 100  $20 2,000
Total cost $7,050
Profit (20%  $7,050) 1,410
Client bill $8,460
Client B:
12 partner hours at $85 $1,020
Partner support, 50%  $1,020 510
Staff, 75 hours at $25 1,875
Staff support, 75  $20 1,500
Total cost $4,905
Profit (20%  $4,905) 981
Client bill $5,886

2. Walters and Witt, a law firm that uses job order costing, is analyzing the profitability of its cases. During
the year, the firm represented the Umberg Company in numerous routine legal issues, for which it
charged a monthly retainer fee of $2,500. Budget information for the firm follows:
Direct labor:
Partners $ 500,000
Associates 900,000
Paralegals 600,000
Total $2,000,000
Overhead:
Secretarial support $ 900,000
Depreciation of office equipment 300,000
Fringe benefits 400,000
Utilities 300,000
Communication expenses 250,000
Office supplies 150,000
Total $2,500,000
Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Budgeted and actual time for the Umberg case follows:
Budget Actual
Partners 20 hours 23 hours
Associates 40 hours 42 hours
Paralegals 80 hours 72 hours
In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for
$1,000 of direct costs.
(a) Assuming that Walters and Witt allocates overhead to jobs using direct labor cost as the cost
driver, compute the predetermined overhead rate.
(b) Compute the cost of the Umberg work this year.
(c) Prepare a cost performance report for the Umberg work this year.
(d) Compute the profit that Walters and Witt had on the Umberg work this year.
ANS:
(a) Predetermined overhead rate = budgeted overhead / budgeted cost driver.
Predetermined overhead rate = $2,500,000 / $2,000,000 = 125%
(b) (c) Partner rate* $100 x 125% = $125 + $100 = $225
Associate rate* $60 x 125% = $75 + $60 = $135
Paralegal rate* $20 x 125% = $25 + $20 = $45
* Includes direct labor plus overhead based on direct labor cost.
Actual:
Partner 23 hours x $225 $5,175
Associate 42 hours x $135 5,670
Paralegal 72 hours x $45 3,240
Budgeted:
Partner 20 hours x $225 $4,500
Umberg Company
Cost Performance Report
For year ended December 31, 20--
Item Actual Result Budget Variance

Partners’ salaries and overhead $ 5,175 $ 4,500 $675 U
Associates’ salaries and overhead 5,670 5,400 270 U
Paralegals’ salaries and overhead 3,240 3,600 360 F
Direct costs 875 1,000 125 F
Total $14,960 $14,500 $460 U
U = Unfavorable; F = Favorable
(d) Annual revenue for the Umberg work = $2,500 x 12 = $30,000
Profit = $30,000 - $14,960 = $15,040 (50.1%)
NAT: IMA 2B - Cost Management; 2D - Performance Measurement
3. Domino Consulting has two departments, Information Technology Consulting and General Business
Consulting. The firm has Partners, Senior Consultants and Junior Consultants in each department. The
firm is preparing its budgets for the upcoming year.
The controller received the following information from the marketing department about anticipated
demand for the firm’s products in the upcoming year:
Department: Total Professional Hours:

Information Technology 32,000
General Business 40,000
The controller then worked with the human resources department to determine the following
information about staffing and salary rates for each department:
Information Technology General Business

Ratio of partner hours: senior
consultant hours: junior consultant
hours
1:2:7 1:2.5:6.5
Salary Rates per hour:

Partner $150 $125
Senior Consultant $75 $60
Junior Consultant $40 $30
The controller has also determined that in order to be profitable, billing rates should be three times the
amount paid to employees. The marketing department has determined that billing rates computed on
that basis are comparable to what other consulting firms charge.
(a) Prepare a revenue budget for Domino Consulting Company.
(b) Prepare a labor budget for Domino Consulting Company.
ANS:
(a)
Domino Consulting Company
Revenue Budget
Item Professional Hours* Billing Rate** Total Revenues

Information Technology:
Partner 3,200 $450 $ 1,440,000
Senior Consultant 6,400 225 1,440,000
Junior Consultant 22,400 120 2,688,000

Subtotal 32,000 $ 5,568,000
General Business:
Partner 4,000 $375 $ 1,500,000
Senior Consultant 10,000 180 1,800,000
Junior Consultant 26,000 90 2,340,000
Subtotal 40,000 $ 5,640,000
Total 72,000 $11,208,000
Professional hours were computed as follows:
Information Technology: 1+2+7 = 10
1/10 x 32,000 = 3,200 partner hours
2/10 x 32,000 = 6,400 senior consultant hours
7/10 x 32,000 = 22,400 junior consultant hours
General Business: 1+2.5+6.5 = 10
1/10 x 40,000 = 4,000 partner hours
2.5/10 x 40,000 = 10,000 senior consultant hours
6.5/10 x 40,000 = 26,000 junior consultant hours
** Billing rates were obtained by multiplying the appropriate salary rate by 3.
Domino Consulting Company
Professional Labor Budget
Item Professional Hours* Wage Rate Total Labor Dollars

Information Technology:
Partner 3,200 $150 $ 480,000
Senior Consultant 6,400 75 480,000

Junior Consultant 22,400 40 896,000
Subtotal 32,000 $1,856,000
General Business:
Partner 4,000 $125 $ 500,000
Senior Consultant 10,000 60 600,000
Junior Consultant 26,000 30 780,000
Subtotal 40,000 $1,880,000
Total 72,000 $3,736,000
4. Frederick and Ivey, CPA have the following budgeted items for the month of July:
Depreciation - equipment $2,500

Lease expense 3,000
Professional salaries (from budget) 10,000
Professional dues and subscriptions 1,500
Revenues (from budget) 35,000
Utilities 1,000
Secretarial support 2,800
Travel 1,200
Prepare a budgeted income statement for the month of July.
ANS:
Frederick and Ivey, CPA
Budgeted Income Statement

Revenues (from Revenue budget) $35,000
Operating Costs:
Professional labor (from Professional
Labor Budget) $10,000
Overhead support * 15,800
Direct costs ** 1,200 27,000
Operating Income $ 8,000
*Overhead Budget:
Depreciation - equipment $ 2,500
Lease expense 3,000
Professional dues and subscriptions 1,500
Utilities 1,000
Secretarial support 2,800
Total $15,800
**Travel is usually a direct cost related to specific jobs.
5. Walters and Witt, a law firm, is analyzing the profitability of its cases. During the year, the firm
represented the Umberg Company in numerous routine legal issues, for which it charged a monthly
retainer fee of $2,500. Budget information for the firm follows:
Professional labor:
Partners $ 500,000
Associates 900,000
Paralegals 600,000
Total $2,000,000
Overhead:
Secretarial salaries $ 900,000
Depreciation of office equipment 300,000
Utilities 300,000
Communication expenses 250,000
Office supplies 150,000
Total $2,500,000
Partner, associates and paralegal hourly salary rates are $100, $60 and $20, respectively.
Actual time spent for the Umberg cases follows:
Actual
Partners 23 hours
Associates 42 hours
Paralegals 72 hours
In addition, the firm incurred $875 in travel costs related to Umberg, but the firm had budgeted for
$1,000 of direct costs.
Walters and Witt uses activity-based costing to determine the cost of its cases. With a consultant’s help,
the firm has developed the following information about cost pools:
Cost Pool Expenses Included Cost Allocation Base
Secretarial support Secretarial salaries Partner labor hours
Fringe benefits Fringe benefits Professional labor dollars

Depreciation, lease, utilities,
communications and supplies
Office support Professional labor hours
(a) Compute the budgeted rate per unit of cost driver for each cost pool.
(b) Using activity-based costing, compute the cost of the Umberg work this year.
(c) Compute the profit that Walters and Witt had on the Umberg work this year.
ANS:
(a)
Cost Pool Budgeted Costs Budgeted Cost Drivers Budgeted Rate
Secretarial support $ 900,000 5,000 partner hours* $180/ partner labor hour
20% professional labor

dollars
Fringe benefits 400,000 $2,000,000
$24/ professional labor

hour
Office support 1,200,000** 50,000 hours*
*Budgeted hours:
Partners: $500,000/$100 = 5,000 hours
Associates $900,000/$60 = 15,000 hours
Paralegals $600,000/$20 = 30,000 hours
Total hours 50,000 hours
(b)
Actual professional labor:

Partner 23 hours x $100 $ 2,300

Total labor 137 hours $ 6,260
Overhead:
Secretarial support 23 hours x $180 $ 4,140
Fringe benefits $6,260 x 20% 1,252
Office support 137 hours x $24 3,288
Total overhead $ 8,680
Total $14,940
(c) Annual revenue for the Umberg work = $2,500 x 12 = $30,000
Profit = $30,000 - $14,940 = $15,060 (50.2%)
6. Dye and Dye, Attorneys-at-Law, each bill 1,500 hours per year and receive pay of $100,000 each. Four
paralegals work for the firm and each receives pay of $40,000 and works 2,000 hours per year.
Overhead of $396,000 is anticipated, of which $300,000 is attorney support, and the rest is paralegal
support. Determine overhead under each of the following circumstances:
a. A simplified cost approach is used based on hours.

b. A simplified cost approach is used based on payroll dollars.
c. An activity-based costing approach is used. Attorney support is based on labor
costs, and paralegal support is based on hours worked.
ANS:
(a) 1,500 professional hours  2 = 3,000
2,000 paralegal hours  4 = 8,000
Total hours 11,000
Overhead costs of $396,000 / 11,000 = $36 per hour

(b) $100,000  2 = $200,000
$ 40,000  4 = 160,000
$360,000 total payroll
$396,000 overhead / $360,000 payroll = $1.10 of overhead per dollar of payroll
(c) $100,000  2 = $200,000; $300,000 / $200,000 = $1.50 of overhead per dollar of

attorney payroll
$396,000 - $300,000 (attorney support) = $96,000

$96,000 / (4  2,000) = $12 per hour of paralegal support
NAT: IMA 2B - Cost Measurement TOP: AACSB - Analytic
7. Listed below are balanced scorecard measure for various companies. Label each as either Learning and
Growth, Internal Business Processes, Customer or Financial.
On-time departures Worldwide Airlines
Percentage of customers retained for

next season
Hi-Growth Lawn Care
Drive-through waiting times Burger Boy Fast Foods
Profit margin Porter Company
Number of teachers on staff having

masters degrees
Central High School
Number of customer complaints TV Cable Company
Number of defective products

manufactured
Nyso Manufacturing
Percentage of customer accounts

collected
City Hospital
Rate of table turnover Neighborhood Chili Parlor
Number of employees receiving five,

ten and twenty year service pins
Zimmerman Manufacturing
ANS:
On-time departures Internal business process - would indicate how well

the airline was sticking to its schedule.
Percentage of customers Customer - would indicate how satisfied customers

retained for next season were with their service this season.
Drive-through waiting times Internal business process - would indicate how quickly
the company was preparing fast food orders.
Profit margin Financial
Number of teachers on staff Learning and growth - would be an indication of the

having masters degrees amount of training that the teachers have.
Number of customer Customer - would be an indication of the level of

complaints customer satisfaction.
Number of defective products Internal business processes - would be an indication
manufactured of the efficiency of the manufacturing process.
Percentage of customer Financial - would be an indication of how much cash

accounts collected the hospital is collecting.
Rate of table turnover Internal business processes - would be an indication

of how quickly patrons are being served.
Number of employees Learning and growth - employee longevity is an

receiving five, ten and twenty indication of employee satisfaction.
year service pins
8. Good Locks is a high end salon which offers hair cuts and styling and manicures and pedicures. Debbie
Tresser is the owner of Good Locks and she is working with a consultant to develop a balanced scorecard
to be used to evaluate the performance of Good Locks and to focus her efforts on making improvements
to operations when necessary.
Required:
1. Name the four perspectives of a balanced scorecard.
2. For each of the four perspectives, name two measures Debbie should consider
including in her scorecard.
ANS:
1. The four perspectives are: Learning and Growth, Internal Business Processes, Customer and
Financial
2. Potential perspectives include:

Learning and Growth:
Employee turnover
Number of continuing education hours attended by staff members
Number of licenses held by staff members
Internal Business Processes
Average wait time for appointments
Average time of service
Number of “accidents” where someone’s hair is dyed the wrong color, etc.
Number of hours without a safety incident
Board of health certification as to cleanliness
Customer
Number of customer complaints
Result of customer surveys
Number of repeat customers
Number of new customers resulting from referrals
Financial
Revenues
Operating income
Profit margin for each service
Booth rental income
NAT: IMA 2D - Performance Evaluation TOP: AACSB - Reflective
CHAPTER 10—COST ANALYSIS FOR MANAGEMENT DECISION MAKING

MULTIPLE CHOICE
1. Which of the following is a more descriptive term of the type of cost accounting often called "direct
costing"?
a. Prime costing
b. Out-of-pocket costing
c. Variable costing
d. Relevant costing
ANS: C
Variable costing may be considered a more descriptive term than direct costing because only the
variable costs are used to determine a product's cost.
2. What costs are treated as product costs under direct costing?
a. Only direct costs

b. Only variable manufacturing costs
c. All variable costs
d. All variable and fixed manufacturing costs
ANS: B
Only variable production costs are treated as product costs in direct or variable costing. Although all
variable costs are subtracted from sales in order to determine the contribution margin, only those
variable costs related to the manufacturing process are allocated to the products.
3. The basic assumption made in a variable costing system with respect to fixed costs is that all fixed costs
are:
a. Sunk costs.
b. Product costs.
c. Fixed as to the total cost.
d. Period costs.
ANS: D
The variable costing method assigns all fixed costs to the period in which they originated; therefore,
they are all classified as period costs.
4. Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and
the company sells approximately 500,000 gears each year. Unit cost data for the year follows:
Direct material $9.00
Direct labor 8.00
Other costs: Variable Fixed

Manufacturing $3.00 $7.00
Distribution 5.00 3.00
The unit cost of gears for variable costing inventory purposes is:
a. $14.
b. $17.
c. $20.
d. $24.
ANS: C
Under variable costing, only variable manufacturing costs are assigned to the product. These costs
include:
Direct materials $ 9.00
Direct labor 8.00
Variable manufacturing cost 3.00
Total variable costs $20.00
5. Mobile, Inc., manufactured 700 units of Product A, a new product, during the year. Product A's variable
and fixed manufacturing costs per unit were $5.00 and $2.00, respectively. The inventory of Product A
on December 31 of the year consisted of 100 units. There was no inventory of Product A on January 1 of
the year. What would be the change in the dollar amount of inventory on December 31 if the variable
costing method was used instead of the absorption costing method?
a. $800 decrease
b. $200 decrease
c. $500 decrease
d. $200 increase
ANS: B
Ending inventory under absorption costing (100 units x $7) $700
Ending inventory under variable costing (100 units x $5) 500
$200
6. Which of the following is true about absorption costing?
a. No fixed factory overhead is charged to production.

b. It is also known as direct costing.
c. The term used to designate the difference between sales and cost of goods sold is the
“manufacturing margin.”
d. Over-applied factory overhead is reflected in the income statement as a reduction cost of
goods sold.
ANS: D
Overapplied factory overhead occurs only with absorption costing. Choices a, b and c are characteristics
of variable costing.
7. Which of the following does not appear on an income statement prepared using variable costing?
a. Gross margin/profit.
b. Manufacturing margin
c. Fixed production costs.
d. Variable production costs.
ANS: A
The term commonly used in variable costing to designate the difference between sales and variable cost
of goods sold is manufacturing margin. It is a absorption costing statement that would be expected to
show gross margin/profit.
8. What factor related to manufacturing costs causes the difference in net earnings computed using
absorption costing and net earnings computed using variable costing?
a. Absorption costing considers all costs in the determination of net earnings, whereas
variable costing considers only direct costs.
b. Absorption costing "inventories" all direct costs, but variable costing considers direct
costs to be period costs.
c. Absorption costing "inventories" all fixed manufacturing costs for the period in ending
finished goods inventory, but variable costing expenses all fixed costs.
d. Absorption costing allocates fixed manufacturing costs between cost of goods sold and
inventories, and variable costing considers all fixed costs to be period costs.
ANS: D
Absorption costing considers fixed manufacturing costs to be an essential element of cost in producing a
product; therefore, fixed manufacturing costs are allocated to the inventories and cost of goods sold.
However, when variable costing is used, all fixed costs for a given period are charged only to that period.
9. Net income reported under absorption costing will exceed net income reported under variable costing
for a given period if:
a. Production equals sales for that period.

b. Production exceeds sales for that period.
c. Sales exceed production for that period.
d. The variable overhead exceeds the fixed overhead.
ANS: B
When production exceeds sales under the absorption cost method, the unsold (ending) inventory
contains part of the fixed cost of the period which, along with other inventory costs, are deferred to the
next period. Under the variable costing method, all fixed costs are charged to the current period.
Therefore, when production exceeds sales and results in unsold inventory, net income reported under
absorption costing will exceed the net income reported under variable costing for the period.
10. A manager can increase income under absorption costing by
a. increasing variable costs.

b. increasing production.
c. increasing fixed costs.
d. increasing leased assets.
ANS: B
By increasing production, the fixed costs are absorbed by more units. This lowers the cost per unit and
thus increasing income.
11. The use of either absorption or variable costing will make little difference in companies
a. with large inventories.

b. using JIT.
c. with high fixed costs.
d. with high variable costs.
ANS: B
If JIT or just-in-time is used then inventories levels are minimized. Absorption and variable cost would
have nearly identical results as no costs are deferred in inventories.
12. A basic tenet of variable costing is that fixed overhead costs should be currently expensed. What is the
basic rationale behind this procedure?
a. Fixed overhead costs will occur whether or not production occurs and so it presents a
clearer picture of how changes in production volume affect costs and income.
b. Fixed overhead costs are generally immaterial in amount and the cost of assigning the
amounts to specific products would outweigh the benefits.
c. Allocation of fixed overhead costs is arbitrary at best and could lead to erroneous
decisions by management.
d. Fixed overhead costs are uncontrollable and should not be charged to a specific product.
ANS: A
Variable costing assumes that the category of costs defined as fixed costs will occur with or without
production and should be charged as expenses in the period in which they are incurred as a current cost.
It highlights the relationship between sales and variable production costs thus providing a clearer
picture of how changes in production volume affect costs and income.
13. Absorption cost is required for:
a. income tax purposes.

b. external financial reporting but not income tax purposes.
c. both external financial reporting and income tax purposes.
d. neither external financial reporting nor income tax purposes.
ANS: C
Although variable costing may provide useful information for internal decision making, it is not a
generally accepted accounting method of reporting inventory for external financial statements nor is it
permitted by the Internal Revenue Service to compute taxable income.
14. Segment profitability analysis may be used to evaluate the profitability of:
a. Divisions.
b. Sales territories.
c. Product lines.
d. All of these are correct.
ANS: D
Segment profitability analysis may be used to evaluate the profitability of divisions, sales territories,
product lines, or other identifiable organizational unit.

NAT: IMA 3D - Decision Analysis TOP: AACSB - Reflective
15. When evaluating profitability of a segment, costs that are directly identifiable with a specific segment
are called:
a. Direct costs.
b. Common costs.
c. Indirect costs.
d. Fixed costs.
ANS: A
Direct costs are costs, variable or fixed, that are directly identifiable with a specific segment, so they
would disappear if that segment was eliminated.
16. When evaluating profitability of a segment, costs that would disappear if the company eliminated the
segment are called:
a. Direct costs.
b. Common costs.
c. Indirect costs.
d. Fixed costs.
ANS: A
Direct costs are costs, variable or fixed, that are directly identifiable with a specific segment, so they
would disappear if that segment was eliminated.
17. The excess of revenue over variable costs, including manufacturing, selling and administrative, is called:
a. Gross margin.
b. Manufacturing margin.
c. Contribution margin.
d. Segment margin.
ANS: C
Contribution margin is defined as sales less variable costs.
18. Johns Company operates in three different industries each of which is appropriately regarded as a
reportable segment. Segment No. 1 contributed 60 percent of Johns Company's total sales. Sales for
Segment No. 1 were $600,000 and total variable costs were $400,000. Total common costs for all
segments were $320,000. Johns allocates common costs based on the ratio of each segment's sales to
the total sales. What should be the contribution margin presented for Segment No. 1?
a. $(100,000)
b. $8,000
c. $20,000
d. $200,000
ANS: D
Segment No. 1
Sales $600,000
Less variable costs 400,000
Contribution margin $200,000

19. Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and
variable costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were
60% of sales. Fixed costs directly traceable to the Audio and Video segments were $150,000 and
$120,000, respectively. Common fixed costs of $200,000 were arbitrarily allocated equally to each
segment.
What was the contribution margin of the Audio Segment.
a. $50,000
b. $300,000
c. $200,000
d. $150,000
ANS: B
Sales $500,000
Variable costs (500,000 x 40%) 200,000
20. Nolan Company has two segments: Audio and Video. Sales for the Audio Segment were $500,000, and
variable costs were 40% of sales. The Video Segment also had sales of $500,000, but variable costs were
60% of sales. Fixed costs directly traceable to the Audio and Video segments were $150,000 and
$120,000, respectively. Common fixed costs of $200,000 were arbitrarily allocated equally to each
segment.
What was the segment margin of the Video Segment.
a. $200,000
b. $80,000
c. $(20,000)
d. $150,000
ANS: B
Sales $500,000
Variable costs (500,000 x 60%) 300,000
Contribution margin 200,000
Direct fixed costs 120,000
Segment margin $ 80,000
21. Consider the Marshall Company’s segment analysis:
Division A Division B Total Company

Sales $300,000 $200,000 $500,000
Variable costs 150,000 150,000 300,000
Direct fixed costs 50,000 30,000 80,000
Segment margin 100,000 20,000 120,000
Allocated common fixed costs 90,000 60,000 150,000
Operating income (loss) $ 10,000 $(40,000) $(30,000)
Common costs are allocated arbitrarily based on sales dollars. If Marshall eliminates Segment B, what is
the impact on the operating loss of the company?
a. The loss decreases by $40,000.

b. The loss increases by $20,000.
c. The loss decreases by $60,000.
d. The loss increases by $40,000.
ANS: B
Since the common costs are arbitrarily allocated, a more appropriate segment analysis follows:
Division A Division B Total Company

Sales $300,000 $200,000 $500,000
Variable costs 150,000 150,000 300,000
Direct fixed costs 50,000 30,000 80,000
Segment margin 100,000 20,000 120,000
Common fixed costs - - 150,000
Operating income (loss) $100,000 $ 20,000 $(30,000)
It is apparent from this analysis, that the company would lose $20,000 of profits.
22. A technique that uses the degrees of cost variability to measure the effect of changes in volume on
resulting profits is:
a. Standard costing.
b. Variance analysis.
c. Cost-volume-profit analysis.
d. Segment profitability analysis.
ANS: C
Cost-volume-profit analysis uses the degrees of cost variability to measure the effect of changes in
volume on profitability.
23. Break-even sales volume in units is determined by:
a. Dividing the fixed cost by the difference between the unit selling price and unit variable
costs.
b. Subtracting the fixed cost from the contribution margin.
c. Dividing the fixed cost by the unit selling price.
d. Subtracting the variable cost per unit from the unit selling price.
ANS: A
Break-even sales volume = fixed costs / (unit selling price - unit variable cost)
24. If the selling price and the variable cost per unit both increase 10 percent and fixed costs do not change,
what is the effect on the contribution margin per unit and the contribution margin ratio?
a. Contribution margin per unit and the contribution margin ratio both remain unchanged.
b. Contribution margin per unit and the contribution margin ratio both increase.
c. Contribution margin per unit increases and the contribution margin ratio decreases.
d. Contribution margin per unit increases and the contribution ratio remains unchanged.
ANS: D
If the selling price is originally greater than the variable cost and they both increase by the same
percentage, the absolute increase in selling price will be greater than the variable cost increase.
Therefore, the contribution margin will be increased. If the relative increase in both items is the same,
the ratio measuring them will not be affected. To prove this numerically, assume sales are $10 and
variable costs are $5. A 10% increase will make sales $11 and variable costs $5.50.
Original Example With 10% Increase
Contribution margin $10 - $5 = $5 $11 - $5.50 = $5.50

Contribution margin ratio $5 / $10 = 50% $5.50 / $11 = 50%
25. The Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are
$100,000. What must total sales be to break even?
a. $266,667
b. $250,000
c. $200,000
d. $166,667
ANS: B
Selling price $10.00 100%
Variable costs 6.00 60%
Contribution margin $ 4.00 40%
Break-even Fixed cost

=
sales volume Contribution margin ratio
$100,000
=
.40
= $250,000
26. The Blue Saints Band is holding a concert in Toronto. Fixed costs relating to staging a concert are
$350,000. Variable costs per patron are $5.00. The selling price for a tickets $25.00. The Blue Saints
Band has sold 23,000 tickets so far.
How many tickets does the Blue Saints Band need to sell to break even?
a. 23,000
b. 20,000
c. 14,000
d. 17,500
ANS: D
Break-even sales volume (units) = Fixed cost / Unit contribution margin
Break-even sales volume = $350,000 / ($25 - $5) = 17,500 tickets.
27. Consider the income statement for Pickbury Farm:
Sales $500,000
Variable costs 350,000
Fixed costs 80,000
Net income $ 70,000
What is the break-even point in sales dollars (rounded to the nearest dollar)?
a. $714,286
b. $500,000
c. $266,667
d. $120,000
ANS: C
Break-even point in dollars = Fixed cost / contribution margin ratio
Break-even point = $80,000 / ($150,000/$500,000)
Break-even point = $80,000 / 30% = $266,667

28. Each of the following would affect the break-even point except a change in the:
a. Variable cost per unit.

b. Total fixed costs.
c. Sales price per unit.
d. Number of units sold.
ANS: D
A change in the number of units sold will not have any effect on the determination of the break-even
point.
29. Tennenholtz Company’s break-even graph is depicted below. The line labeled “D” is:
a. The sales line.

b. The contribution margin line.
c. The total cost line.
d. The variable cost line.
ANS: C
The line starting on the J axis where the F line (fixed cost line) intersects J that has the upward slope is
the total cost line. The upward slope from the fixed cost line represents the variable costs.
30. Tennenholtz Company’s break-even graph is depicted below. Which area indicates the profitability of
the company’s product?
a. E.
b. G.
c. B.
d. H.
ANS: C
The area labeled “B” indicates the profitability of the product. It is beyond the break-even point, and
the revenue line, labeled “C” exceeds the total cost line, which is labeled “D.”

31. Franklin Company is a medium-sized manufacturer of bicycles. During the year a new line called
"Radical" was made available to Franklin's customers. The break-even point for sales of Radical is
$250,000 with a contribution margin ratio of 40 percent. Assuming that the profit for the Radical line
during the year amounted to $80,000, total sales during the year would have amounted to:
a. $450,000.
b. $420,000.
c. $400,000.
d. $475,000.
ANS: A
Break-even sales $250,000
Contribution margin ratio x 40%
Calculated fixed cost (must equal contribution margin to break-even 100,000
Net income $ -0-
Sales to make $80,000 profit:
Sales = .60S + $100,000 (fixed) + $80,000 (profit)
.40S = $100,000 + $80,000
$180,000
S =
.40
S = $450,000

32. Kehler Corporation wished to market a new product for $2.00 a unit. Fixed costs to manufacture this
product are $100,000. The contribution margin is 40 percent. How many units must be sold to realize
net income of $100,000 from this product?
a. 200,000
b. 250,000
c. 300,000
d. 350,000
ANS: B
Selling price $ 2.00
Contribution margin x 40%
Contribution margin $ .80
Fixed cost $100,000
Net income 100,000
Total $200,000
Total $200,000 / $.80 = 250,000 units
How many tickets does the Blue Saints Band need to sell to achieve net income of $75,000.
a. 21,250
b. 14,000
c. 17,500
d. 17,000
ANS: A
Target volume (units) = (Fixed cost + target net income) / Unit contribution margin.
Target volume = $350,000 + $75,000 / ($25 - $5)
Target volume = $425,000 / $20 = 21,250 tickets
Sales $500,000
Fixed costs 80,000
Net income $ 70,000
At what sales level does Pickbury achieve net income of $100,000?
a. $700,000
b. $600,000
c. $300,000
d. $530,000
ANS: B
Target sales volume = (Fixed cost + Target profit) / contribution margin ratio
Target sales volume = ($80,000 + $100,000) / ($150,000/$500,000)
Target sales volume = $180,000 / 30% = $600,000

35. If the fixed costs related to a product increase while variable costs and sales price remain constant, what
will happen to (1) contribution margin and (2) break-even point?
Contribution Break-even
Margin Point
a. Unchanged Unchanged
b. Unchanged Increase
c. Increase Decrease
d. Decrease Increase
ANS: B
The contribution margin is determined using only variable costs and is unaffected by fixed costs. The
fixed cost increase, however, will require more sales to break even.
To prove numerically, assume that the sales price is $10 per unit and variable costs are $5 per unit. The
contribution margin of $10 - $5 = $5 does not change. However, if fixed costs increase from $10,000 to
$20,000, the break even point increases from 2,000 units ($10,000/$5) to 4,000 units ($20,000/$5).
36. Which of the following would cause the break-even point to change?
a. Sales volume increased.

b. Fixed costs increased due to addition to physical plant.
c. Total variable costs increased as a function of higher production.
d. Total production decreased.
ANS: B
An increase in fixed cost will also increase the break-even point. Changes in production levels will not
impact the break-even point.
37. A company increased the selling price for its product from $1.00 to $1.20 a unit when total fixed costs
increased from $400,000 to $450,000 and variable cost per unit remained unchanged. How would these
changes affect the break-even point?
a. The break-even point in units would be increased.

b. The break-even point in units would be decreased.
c. The break-even point in units would remain unchanged.
d. The effect cannot be determined from the information given.
ANS: B
The change in fixed cost from $400,000 to $450,000 represents an increase of 12.5 percent; therefore, if
the contribution margin increases:
1. by more than 12.5 percent, the break-even point would decrease.

2. at 12.5 percent, the break-even point would be unchanged.
3. by less than 12.5 percent, the break-even point would increase.
The relative change in contribution margin is 20%; therefore, the effect of the change is a decrease in
the break-even point.
To prove numerically, assume variable costs are $.20 per unit:
Contribution Margin Break-even point in units
Selling price $1.00;
fixed costs $400,000 $1.00 - $.20 = $.80 $400,000/ $.80 = 500,000 units
Selling price $1.20;
fixed costs $450,000 $1.20 - $.20 = $1.00 $450,000/ $1.00 = 450,000

units

38. The relative percentage of unit sales among the various products made by a firm is the:
a. sales volume.
b. sales margin.
c. sales mix.
d. sales ratio.
ANS: C
The sales mix is the relative percentage of unit sales among the various products made by a firm.
39. Consider the following information about the Gumm Company:
Unit Contribution
Margin
Budgeted Sales
Mint gum 6,000 cases $2.00
Bubble gum 4,000 cases $2.50
Budgeted fixed costs are $550,000. The weighted-average unit contribution margin is:
a. $2.25
b. $4.50
c. $2.20
d. $2.30
ANS: C
Number of units Unit CM Total

Mint gum 6,000 $2.00 $12,000
Bubble gum 4,000 $2.50 10,000
Total 10,000 $22,000
$22,000 / 10,000 units = $2.20 per case
Unit Contribution
Margin
Budgeted Sales
Budgeted fixed costs are $550,000. The break-even point in total cases is:
a. 250,000
b. 275,000
c. 220,000
d. 200,000
ANS: A
Weighted-average contribution margin:

Mint gum 6,000 $2.00 $12,000
Bubble gum 4,000 $2.50 10,000
Total 10,000 $22,000
$22,000 / 10,000 units = $2.20 per case

Break-even in units = fixed cost / weighted-average contribution margin
Break-even = $550,000 / $2.20 = 250,000 case
Unit Contribution
Margin
Budgeted Sales
Budgeted fixed costs are $550,000. The break-even number of cases for the mint gum is:
a. 250,000
b. 100,000
c. 132,000
d. 150,000
ANS: D
Weighted-average contribution margin:

Mint gum 6,000 $2.00 $12,000
Bubble gum 4,000 $2.50 10,000
Total 10,000 $22,000
$22,000 / 10,000 units = $2.20 per case
Break-even in units = fixed cost / weighted-average contribution margin
Break-even = $550,000 / $2.20 = 250,000 case

250,000 units x (6,000/10,000) = 150,000 cases of mint gum.
42. The margin of safety is the amount:
a. by which the sales price per unit exceeds the variable cost per unit.
b. that the contribution margin exceeds fixed cost.
c. by which the profit calculated under absorption costing exceeds the profit calculated
under variable costing.
d. that sales can decrease before the company will suffer a loss.
ANS: D
The margin of safety is the amount that sales can decrease before the company will suffer a loss. It can
be expressed in dollars or units and is calculated by subtracting break-even sales revenue from sales
revenue under review.
43. The Company is planning to sell Product Z for $10 a unit. Variable costs are $6 a unit and fixed costs are
$100,000. If the company is currently selling 30,000 units, what is the margin of safety in units?
a. 5,000
b. 10,000
c. 25,000
d. 20,000
ANS: A
Selling price $10.00 100%
Variable costs 6.00 60%

Contribution margin $ 4.00 40%
Break-even in Fixed cost

=
units Contribution margin per unit
$100,000
=
$4.00
= 25,000
With sales volume of 30,000 units, the margin of safety would be 30,000 - 25,000 or 5,000 units.
At the current level of sales, what is the margin of safety in dollars?
a. $137,500
b. $87,500
c. $180,000
d. $115,000
ANS: A
Break-even volume (dollars) = Fixed cost / Contribution margin ratio.
Break-even volume = $350,000 / ($25 - $5 / $20)
Break-even volume = $350,000 / 80% = $437,500

Sales dollars at current level = $25 x 23,000 = $575,000
Margin of safety = Sales revenue - break-even sales revenue
Margin of safety = $575,000 - $437,500 = $137,500
Sales $500,000
Fixed costs 80,000
Net income $ 70,000
What is the margin of safety ratio (to the nearest percentage point)?
a. 47%
b. 70%
c. 30%
d. 88%
ANS: A
Break-even point in dollars = Fixed cost / contribution margin ratio
Break-even point = $80,000 / ($150,000/$500,000)
Break-even point = $80,000 / 30% = $266,667
Margin of safety ratio = (sales - break-even sales) / sales
Margin of safety ratio = ($500,000 - $266,667) / $500,000
Margin of safety ratio = $233,333 / $500,000 = 46.67%

At the current level of sales, what is the margin of safety ratio?
a. 20.0%
b. 23.9%
c. 15.2%
d. 31.3%
ANS: B
Break-even volume (dollars) = Fixed cost / Contribution margin ratio.
Break-even volume = $350,000 / ($25 - $5 / $20)
Break-even volume = $350,000 / 80% = $437,500
Sales dollars at current level = $25 x 23,000 = $575,000
Margin of safety = Sales revenue - break-even sales revenue
Margin of safety = $575,000 - $437,500 = $137,500
Margin of safety ratio = Margin of safety / sales
Margin of safety ratio = $137,500 / $575,000 = 23.9%

How many tickets does the Blue Saints Band need to sell to achieve net income of $50,000 after income
tax, assuming the income tax rate is 50%?
a. 2,500
b. 18,000
c. 22,500
d. 17,500
ANS: C
Target volume (units) = (Fixed cost + (target net income/(1 - tax rate)) / Unit contribution margin.
Target volume = ($350,000 + ($50,000 / (1 - .5) / ($25 - $5)
Target volume = $350,000 + $100,000 / $20 = 22,500 tickets
48. The difference in cost between two alternatives, such as to make a component part of a final product
versus buying the part from an outside supplier is called:
a. Variable cost.
b. Differential cost.
c. Product cost.
d. Indirect cost.
ANS: B
The difference in cost between two alternatives is the differential cost.

49. Donellan Company produces a special gear used in automatic transmissions. Each gear sells for $30, and
the company sells approximately 500,000 gears each year. Unit cost data for the year follows:
Direct material $9.00
Direct labor 8.00
Other costs: Variable Fixed

Manufacturing $3.00 $7.00
Distribution 5.00 3.00
Donellan has received an offer from a foreign manufacturer to purchase 25,000 gears. Domestic sales
would be unaffected by this transaction. If the offer is accepted, variable distribution costs will increase
$1.00 per gear for insurance, shipping, and import duties. The relevant unit cost to a pricing decision on
this offer is:
a. $18.00.
b. $20.00.
c. $24.00.
d. $26.00.
ANS: D
Direct labor 8.00
Variable manufacturing cost 3.00
Variable distribution cost 5.00
Increase in variable distribution costs 1.00
Total $26.00
The fixed manufacturing and distribution costs are irrelevant to the decision because they are not
changed by the 25,000 gear order.

50. Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 80% capacity.
The windows usually sell for $20.00 each. Costs for each window follow:

Direct labor 3.00
Variable factory overhead 2.00
Fixed factory overhead 4.00
Total $14.00
The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
a. Reject the offer because it currently does not have enough capacity to accept the order.
b. Reject the order because the company will lose $20,000 on the order.
c. Accept the offer because the company will realize $20,000 in additional contribution
margin.
d. Accept the offer because the company will realize $40,000 in additional contribution
margin.
ANS: C
Bradley has enough excess capacity to manufacture 20,000 additional units (100,000 x (1 - .80). The
relevant costs are:

Direct labor 3.00
Total $10.00
The $12.00 special selling price exceeds the variable costs of $10.00 for a contribution margin of $2.00
each, or a total contribution margin of $20,000 (10,000 x $2.00).

51. Bradley Inc. has the capacity to make 100,000 windows. Bradley is currently operating at 100% capacity.
The windows usually sell for $20.00 each. Costs for each window follow:

Direct labor 3.00
Total $14.00
The Army has offered to buy 10,000 windows for $12.00 each for barracks. Bradley should:
a. Reject the offer because it currently does not have enough capacity to accept the order.
b. Reject the order because the company will lose $20,000 on the order.
c. Accept the offer because the company will realize $20,000 in additional contribution
margin.
d. Accept the offer because the company will realize $40,000 in additional contribution
margin.
ANS: A
Bradley should reject the offer if it would have to displace orders for the windows that are priced higher
than $12.00.
52. The practice of accepting a selling price when there is excess capacity, as long as it exceeds variable cost
is called:
a. Contribution pricing.
b. Differential pricing.
c. Capacity pricing.
d. Special pricing.
ANS: A
The practice of accepting a selling price when there is excess capacity as long as it exceeds variable cost
is called contribution pricing, thus contributing some positive contribution margin in times of excess
capacity.
53. Chapman Corporation manufactures lamps. Management is currently studying whether the company
should continue to make the cord assembly or purchase them from Graham Company for $5.25.
Chapman needs 20,000 cord assemblies a year. If the part is purchased, the company can not use the
released facilities for another manufacturing activity.
Chapman’s unit cost to manufacture the cord assembly is:

Direct labor 1.75
Factory overhead (70% fixed) 2.50
Total $6.50
The decision Chapman should make and the related differential income is:
Decision Differential Income
a. Buy from Graham $10,000

b. Make the assembly $10,000
c. Make the assembly $25,000
d. Buy from Graham $25,000
ANS: B
The relevant cost of manufacturing the cord assembly:

Direct labor 1.75
Variable factory overhead
(2.50 x 30%) .75

Total $4.75
Number of assemblies 20,000
Cost to make assemblies $ 95,000
Cost to purchase assemblies
(5.25 x 20,000) $105,000
Chapman should made the cord assembly. The differential income in making the assemblies is $10,000
($105,000 - $95,000).
54. Cleese Company currently purchases a finished part from Idle Company, but is considering using it
excess capacity to make the part. Normal capacity is 20,000 hours, but Cleese is currently running at
17,000 hours. Details about budgeted factory overhead follow:
Total Per Hour

Fixed factory overhead $40,000 $2.00
Variable factory overhead 50,000 2.50
$90,000 $4.50
Direct costs to manufacture 1,000 parts in-house would be:
Materials $ 6,000
Direct labor (2,000 @ $8 per hour) 16,000
$22,000
The relevant unit cost Cleese should use to decide whether to make or buy the part is:
a. $31.00
b. $24.50
c. $27.00
d. $26.00
ANS: C
Direct material ($6,000 / 1,000) $ 6.00

Direct labor (2* hours @ 8.00) 16.00
Variable factory overhead (2 hours @ 2.50) 5.00
Total $27.00
* 2,000 hours / 1,000 units = 2 hours per unit.
55. Another term for cost incurred to sell and deliver products is:
a. Differential costs.
b. Administrative costs.
c. General costs.
d. Distribution costs.
ANS: D
Another term for selling and delivery costs is distribution costs.
56. An example of a distribution cost that can be directly assigned to selling activity would be:
a. Advertising costs.
b. Commissions.
c. Sales manager’s salary.
d. Telephone expenses.
ANS: B
Commissions would be directly linked to specific sales. The other costs are indirect costs of selling.
57. In performing an activity-based costing study for distribution costs, appropriate cost drivers for
preparing orders for shipment would include all of the following except the:
a. Number of orders shipped.

b. Time spent packing orders.
c. Time devoted to selling each product.
d. Number of items per order.
ANS: C
The time devoted to selling each product would not impact the cost for preparing the orders for
shipping.
PROBLEM
1. Praeger Company began operations on January 1 and produces a single product that sells for $10.00 per
unit. Standard capacity is 100,000 units per year. During the year, 100,000 units were produced and
80,000 units were sold. There was no inventory at the beginning of the year. Manufacturing costs and
selling and administrative expenses follow:
Fixed Costs Variable Costs

Raw materials -- $2.50 per unit produced
Direct labor -- 1.50 per unit produced
Factory overhead $250,000 .50 per unit produced

Selling and administrative 100,000 .50 per unit sold
There were no variances from the standard variable costs. Any under- or overapplied overhead is
written off directly at year end as an adjustment to cost of goods sold.
a. In presenting inventory on the balance sheet at December 31, what is the unit cost
under absorption costing?
b. In presenting inventory on the balance sheet at December 31, what is the unit cost
under variable costing?
c. What is the net income for the year under absorption costing?
d. What is the net income for the year under direct costing?
e. What is the cost of the ending inventory under absorption costing?
f. What is the cost of the ending inventory under variable costing?
ANS:
(a) Materials $2.50
Labor 1.50
Overhead--Fixed ($250,000 / 100,000) 2.50
Overhead--Variable .50
$7.00
(b) Materials $2.50
Direct labor 1.50
Overhead--Variable .50
$4.50
(c) Sales (80,000  $10) $800,000
Cost of goods sold (80,000  $7.00) $560,000
Under- or overapplied factory overhead* - 560,000

Gross profit $240,000
Selling and administrative [$100,000 + (80,000 x $.50)] 140,000
Net income $100,000
* There is no under- or overapplied fixed factory overhead

since actual the production level was equal to the
expected production level of standard capacity
(d) Sales $800,000
Cost of goods sold ($4.50  80,000) 360,000
Manufacturing margin $440,000
Selling and administrative 140,000 390,000
Net income $ 50,000
(e) Ending inventory is 20,000 units (100,000 - 80,000)

Inventory under absorption costing (20,000 x $7.00) $140,000
Inventory under variable costing (20,000 x $4.50) $ 90,000
2. The Tijama Manufacturing Company has determined the cost of manufacturing a unit of product to be
as follows, based on normal production of 50,000 units per year:
Direct labor 15.00
Variable factory overhead 10.00 $45.00

$57.00
Operating statistics for the month of August and September include:
August September
Units produced 4,200 4,000
Units sold 3,500 4,200
Selling and administrative expenses $25,000 $35,000
The selling price is $70 per unit. There were no inventories on August 1, and there is no work in process
at September 30.
Prepare comparative income statements for each month under the following methods:
a. Absorption costing method

b. Direct costing method
ANS:
The Tijama Manufacturing Co.
Income Statement
(a) (b)
Absorption Direct
Costing Costing
Sales (3,500 units  $70) $245,000 $245,000
Cost of goods sold

(3,500  $57; $199,500
3,500  $45) 157,500

Subtract overapplied fixed
overhead 400* 199,100
Gross margin $ 45,900
Manufacturing margin $ 87,500
Selling & administrative

expenses 25,000 25,000 75,000
Net income (loss) $ 20,900 $ 12,500
* Calculation of underapplied fixed factory overhead:

Fixed overhead per year:
$12 per unit  50,000 units = $600,000
Fixed overhead per month:
$600,000 / 12 months = 50,000
Fixed factory overhead applied to production:

4,200 units  $12 $50,400
Fixed overhead per month 50,000
Fixed factory overhead overapplied $ 400
The Tijama Manufacturing Co.
Income Statement
For the Month Ended September 30, 20--
(a) (b)
Absorption Direct
Costing Costing
Sales (4,200 units  $70) $294,000 $294,000
Cost of goods sold

(4,200  $57) $239,400
(4,200  $45) 189,000
Add underapplied fixed

overhead 2,000** 241,400
Gross margin $ 52,600
Selling & administrative

expenses 35,000 35,000 85,000
Net income (loss) $ 17,600 $ 20,000
** Calculation of underapplied fixed factory overhead:
Fixed factory overhead applied to production (4,000  $12) $48,000
Fixed factory overhead per month 50,000
Fixed factory overhead underapplied $ 2,000
3. Jasper Company makes two versions of one product, Standard and Deluxe. In November, sales of
standard and Deluxe amount to $680,000 and $520,000, respectively. The contribution margin ratio for
Standard is 30% and Standard had direct fixed production and administrative costs of $125,000. The
contribution margin ratio for Deluxe was 40% and direct fixed costs were $160,000. Common costs that
couldn’t be allocated in a meaningful way were $100,000.
Prepare a segmented income statement for the month of November.
ANS:
Jasper Company
Segmented Income Statement

For the Month ended November 30, 20--
Standard Deluxe Total

Sales revenue $680,000 $520,000 $1,200,000
Less variable costs 476,000 312,000 788,000
Less direct fixed costs 125,000 160,000 285,000
Segment margin $ 79,000 $ 48,000 127,000
Less common fixed costs 100,000
Net income $ 27,000
4. The following data relate to a year's budgeted activity for Jorgensen Corporation, a single product
company:
Per Unit
Selling price $8.00
Variable manufacturing costs 3.00
Variable selling costs 2.00
Fixed manufacturing costs (based on 120,000 units) .25
Fixed selling costs (based on 120,000 units) .75
Total fixed costs remain unchanged within the relevant range in which the company is currently
operating.
a. What is the projected annual break-even sales in units?

b. What dollar amount of sales would Jorgenson need to achieve operating income of
$30,000?
c. If fixed costs increased $7,500, how many more units must be sold to break even?
ANS:
(a) Selling price per unit $ 8.00
Less variable cost per unit 5.00
Contribution margin $ 3.00
Fixed cost--manufacturing ($.25  120,000 units) $ 30,000
Fixed cost--selling ($.75  120,000 units) 90,000
Total fixed costs $120,000
Fixed Costs $120,000

BE = = = 40,000 units
Contribution Margin $3
(b) Contribution margin ratio = $3 / $8 = 37.5%
Fixed Costs + Desired Income $120,000 + $30,000

= = $400,000
Contribution Margin Ratio .375
(c) $7,500 / $3.00 (contribution margin per unit) = 2,500 units

Jorgenson would have to sell 2,500 additional units to cover the additional
fixed cost.

5. A traditional break-even chart is illustrated below:
Identify each letter on the above chart, using the proper terminology.
ANS:
Lettered Lettered
Item in Item in
Break-even Break-even
Chart Terminology Chart Terminology

A Break-even point F Fixed cost line
B Net income area G Fixed cost area
C Sales line H Variable cost area
D Total cost line I x-axis (units)
E Net loss area J y-axis (dollars)

6. Tress Enterprises manufactures shampoo and conditioner. Last year, Tress sold 120,000 bottles of
product. Unit sales of conditioner amounted to 60% of the number of units of shampoo. This trend is
expected to continue. The selling price for both products is $12.00, however, the variable cost of a unit
of shampoo is $6.00, while the variable cost of a unit of conditioner is $8.00. Fixed costs are expected to
be $420,000.
(a) Compute the number of each product sold.
(b) Compute the weighted-average contribution margin per unit.
(c) Compute the overall break-even point in units.
(d) Compute the unit sales of shampoo and conditioner at the break-even point.
(e) Compute the dollar sales of shampoo and conditioner at the break-even point.
ANS:
(a) Total sales = shampoo sales + conditioner sales
120,000 = x + .6x
120,000 = 1.6x
x = 75,000 (shampoo sales)
Conditioner sales = .6 x 75,000 = 45,000
(b)
Contribution
margin per
Unit variable Number of
unit
cost units
Product Sales Price Total
Shampoo $12.00 $6.00 $6.00 75,000 $450,000
Conditioner 12.00 8.00 4.00 45,000 180,000
120,000 $630,000
Weighted-average unit contribution margin = $630,000 / 120,000 = $5.25
(c) Break-even point in units $420,000 / $5.25 = 80,000 units.

(d) and (e)
Shampoo sales in units = 80,000 x (75,000 / 120,000) = 50,000 x $12 = $600,000
Conditioner sales = 80,000 x (45,000 / 120,000) = 30,000 x $12 = $360,000
7. The Gaylord Company has sales of $800,000, variable costs of $400,000, and fixed costs of $250,000.
Compute the following:
a. Contribution margin ratio

b. Break-even sales volume
c. Margin of safety ratio
d. Net income as a percentage of sales
ANS:
$800,000 - $400,000
(a) Contribution margin ratio = = 50.0%
$800,000
$250,000
(b) Break-even sales volume = = $500,000
.50
$800,000 - $500,000
(c) Margin of safety ratio = = 37.5%
$800,000
(d) Net income percentage = 50.0%  37.5% = 18.75%

8. Sherpa Manufacturing has the following income statement for 6,000 units:
Sales $600,000
Fixed costs 80,000
Net income $160,000
(a) At what sales volume (in sales dollars) does Sherpa break even?
(b) At what sales volume (in units) does Sherpa break even?
(c) Given the income statement above, compute the margin of safety.
(d) What level of sales volume must be attained to reach net income of $200,000?
(e) What level of sales volume must be attained to reach net income of $180,000, assuming Sherpa
had to pay income taxes at a rate of 40%?
ANS:
(a) Contribution margin ratio = contribution margin / sales
Contribution margin ratio = $240,000 / $600,000 = 40%
Break-even point in sales dollars = fixed costs / contribution margin ratio
Break-even point in sales dollars = $80,000 / 40% = $200,000.
(b) Unit contribution margin = contribution margin / number of units
Unit contribution margin = $240,000 / 6,000 = $40 per unit

Break-even point in units = fixed costs / unit contribution margin
Break-even point in units = $80,000 / $40 = 2,000 units
(c) Margin of safety = sales revenues - break-even sales volume
Margin of safety = $600,000 - $200,000 = $400,000
(d) Target volume of sales = (target profit + fixed costs) / contribution margin ratio
Target volume of sales = ($200,000 + $80,000) / 40% = $700,000
(e) Target volume of sales = (fixed costs + (target after-tax income/(1 - tax rate))/ contribution
margin ratio
Target volume of sales = ($80,000 + ($180,000/(1 - 40%) / 40%
Target volume of sales = (80,000 + 300,000) / 40% = $950,000
PTS: 1 DIF: Hard REF: P. OBJ: 4, 5, 6
9. Westwood Gear, Inc., recently received a special order to manufacture 10,000 units for a Canadian
company. This order specified that the selling price per unit should not exceed $50. Since the order was
received without the effort of the sales department, no commission would be paid. However, an export
handling charge of $5 per unit would be incurred. Management anticipates that acceptance of the
order will have no effect on other sales.
The company is now operating at 80 percent of capacity, or 80,000 units, and expects to continue at this
level for the coming year without the Canadian order. Unit costs based on estimated actual capacity for
the coming year include:
Selling price $65.00
Expenses:
Direct labor 16.00

Sales commissions 5.00
Other marketing expenses (two-thirds variable) 3.00
General expenses (60% fixed) 5.00
Total $60.00
Prepare an analysis showing the effect on profits if the special order is accepted by the company. Based
on your analysis, should the order be filled, and why?
ANS:
Westwood Gear, Inc.
Effect of Special Order on Profits
Differential costs: Per Unit

Direct labor 16.00
Other marketing expenses 2.00
Export-handling charge 5.00
General expenses (40% variable) 2.00
Total $53.00
Differential selling price 50.00
Loss $ 3.00
Loss per unit  units sold = $3  10,000

= $30,000 decrease in profit
The order would be likely turned down if it affected normal customers, or it generated a loss. In this
case a loss was created. On the other hand, if this is a new market, and the company can justify using
this special order as a means to enter a new potentially profitable market they may undertake the
venture even if money is lost on the one order.
10. Busby Company needs 10,000 units of a certain part to use in its production cycle. The following
information is available:
Costs incurred by Busby to make the part:
Direct labor 12
Variable factory overhead 13
Fixed factory overhead 10
Total $50
Costs to buy the part from Thurco: $45
If Busby buys the part from Thurco instead of making it, Busby could not use the released facilities in
another manufacturing activity. However, twenty percent of the fixed overhead would be avoided
because one of the supervisors could be let go.
(a) In deciding whether to make or buy the part, what are the relevant costs that Busby must
consider.
(b) What decision should Busby make?
ANS:
(a) Variable costs to manufacture the product:

Direct labor 12
Variable factory overhead 13
$40
Cost to buy the part from Thurco $45
Savings from releasing the supervisor ( 2)
$43
(b) Based on the above analysis, Busby should continue to make the part.
11. Hoctor Industries wishes to determine the profitability of its products and asks the cost accountant to
make a comparative analysis of sales, cost of sales and distribution costs of each product for the year.
The accountant gathers the following information which will be useful in preparing the analysis:
Standard Deluxe
Number of units sold 500,000 350,000
Number of orders received 15,000 4,000
Selling price per unit $10 $20
Cost per unit $4 $12
Advertising expenses total $100,000, with 60% being expended to advertise the Deluxe model. The
representatives commissions are 5% and 7% for the standard and deluxe models, respectively. The sales
manager’s salary of $50,000 is allocated evenly between products. Other miscellaneous selling costs are
estimated to be $6 per order received.
(a) Compute the selling cost per unit.
(b) Prepare an analysis for Hoctor Industries that will show in comparative form the income derived
from the sale of each unit for the year.
ANS:
(a)
Expense Standard Deluxe Total

Selling expenses:
Advertising
$100,000 x 40% $ 40,000
$ 60,000 $ 100,000
$100,000 x 60%
Commissions
500,000 x $10 x 5% 250,000
490,000 740,000
350,000 x $20 x 7%
Sales manager salary
$50,000 x 1/2 25,000
25,000 50,000
$50,000 x 1/2
Miscellaneous selling costs
15,000 x $6 90,000
24,000 114,000
4,000 x $6
Total selling costs $405,000 $599,000 $1,004,000
Number of units 500,000 350,000
Selling cost per unit $ .81 $1.71
(b)
Hoctor Industries
Comparative Income Analysis
Standard Deluxe Total

Sales
500,000 x $10 $5,000,000

350,000 x $20 $7,000,000 $12,000,000
Manufacturing cost
500,000 x $4 2,000,000
4,200,000 6,200,000
350,000 x $12
Selling cost 405,000 599,000 1,004,000
Operating profit $2,595,000 $2,201,000 $4,796,000

Chapter 1-Introduction To Cost Accounting: Multiple Choice

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Chapter 1-Introduction To Cost Accounting: Multiple Choice

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CHAPTER 1—INTRODUCTION TO COST ACCOUNTING

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic

2. The business entity that purchases finished goods for resale is a:

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Analytic

4. Examples of service businesses include:

a. Airlines, architects, and hair stylists.

Examples of service businesses include airlines, architects, and hair stylists.

PTS: 1 DIF: Moderate REF: P. OBJ: Introduction

NAT: IMA 4 - Business Applications TOP: AACSB - Reflective

5. ISO 9000 is a set of international standards for:

a. determining the selling price of a product.

ISO 9000 is a set of international standards for quality management.

PTS: 1 DIF: Easy REF: P. OBJ: Introduction

NAT: IMA 3A - Strategic Planning TOP: AACSB - Analytic

a. Determining the selling price of a product.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 3B - Strategic Marketing TOP: AACSB - Analytic

NAT: IMA 2A - Budget Preparation TOP: AACSB - Analytic

a. periodically measuring and comparing company results.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

PTS: 1 DIF: Hard REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

a. cost of raw materials.

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Reflective

PTS: 1 DIF: Easy REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

Calculation of monthly variance:

Budgeted wages for August $12,000

Actual wages for August 11,800

Variance for August $ 200 F

Calculation of year-to-date variance:

Budgeted wages for the eight-month period ended August 31 $100,000

Variance for eight-month period ended August 31 $ 3,300 U

PTS: 1 DIF: Moderate REF: P. OBJ: 1

NAT: IMA 2D - Performance Measurement TOP: AACSB - Analytic

PTS: 1 DIF: Moderate REF: P. OBJ: 2

a. The establishment of the Public Company Accounting Oversight Board

PTS: 1 DIF: Moderate REF: P. OBJ: 2

NAT: IMA 4 - Business Applications TOP: AACSB - Ethics

a. Is mostly concerned with external financial reporting.

PTS: 1 DIF: Moderate REF: P. OBJ: 3

NAT: IMA 2E - External Financial Reporting TOP: AACSB - Reflective

a. certified financial planner.

PTS: 1 DIF: Easy REF: P. OBJ: 3

NAT: IMA 4 - Business Applications TOP: AACSB - Reflective

Merchandise inventory, January 1 $ 90,000

Sales salaries 35,000

Merchandise inventory, January 31 65,000

What was the Cost of goods sold in January?

Merchandise Inventory, January 1 $ 90,000

Merchandise Available for Sale $650,000

Less Merchandise Inventory, January 31 65,000