Cost Accounting

Chapter 1 & 2 exercises & problems

Dr. Mohamed Srour

COST CLASSIFICATION
1- Classify the following cost elements according to the type ( Material, Labor , Overhead ) and
level of activity ( Variable , Fixed ):
a- Plant security personnel
b- Executive office personnel
c- Assembly line workers’ wages
d- Salaries of administrative staff
e- Depreciation on factory building
f- Factory heat and air conditioning
g- Sales commissions
h- Sales personnel office rental
i- Production supervisory salaries
j- Varnish used for finishing product

2- Choose the correct answer

1-Factory machine Lubricant is:

a- Variable marketing labor
b- Fixed administrative overhead
c- Variable administrative materials
d- Variable manufacturing overhead

2- Packing and packaging materials are:

a- Fixed manufacturing overhead
b- Variable administrative overhead
c- Variable marketing overhead
d- Direct materials

3- Salaries of factory supervisors are:

a- Indirect manufacturing labor
b- Direct manufacturing labor
c- Marketing labor
c- Administrative labor

4- Headquarters rent is:

a- Variable manufacturing overhead
b- Variable administrative overhead
c- Fixed marketing overhead
d- Fixed administrative overhead

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5- Advertising is:
a- Variable marketing cost element
b- Fixed manufacturing cost element
c- Fixed marketing cost element
d- Fixed administrative cost element

6- Some of the categories used by the Broadway Corporation are presented below:
a- Factory rent
b- Wages of employees who are paid based on number of hours worked.
c- Factory heat
d- Equipment maintenance
e- Cost accountant’s salary
f- Salaries for factory supervisors
g- Electricity to run equipment
h- Equipment depreciation
i- Telephone service.

Required: Indicate whether the above cost elements are fixed, variable or semi-
variable (mixed cost)
Solution:
a Fixed
b Variable
c Variable
d Semi variable
e Fixed
f fixed
g Variable
h fixed
i Semi variable

7- Chewy Chocolate Chip Company uses the following materials to produce chocolate chip
cookies:
a- Bleached flour f- Lubricants for machines
b- Sugar g- Eggs
c- Chocolate chips h- Adhesives for cookie boxes
d- Solvent to clean machines i- Skim milk
e- Partially hydrogenated soybean oil

Required: Indicate whether these items represent direct or indirect materials

Solution:
a Direct
b Direct
c Direct
d Indirect
e Direct
f Indirect

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g Direct
h Indirect
i Direct

HIGH – LOW METHOD:

1- Assume the total maintenance cost at different activity levels are as follows:
X Activity level Y Total cost
1400 18000
2600 30000
1200 16000
1000 14000
2200 26000
2000 24000
1800 22000
1600 20000
3000 34000
2800 32000
Required: Determine the variable cost per unit, the total variable cost and fixed cost using
high-low point method.
X Y
HIGH 3,000 34,000
LOW 1,000 14,000
CHANGE 2,000 20,000
Variable cost/unit (b) = change y / change of x = 20,000/2,000= $10/unit
Y=a+bx
High
34,000= a + 10*3,000
a = 34,000- 30,000= 4,000

Y= 4,000 + 10 X
4,000+10*1,500 = 19,000

2- The manufacturing costs of Fuld Industries for three months of the year are provided below.

Required: Determine the variable cost per unit, the total variable cost and fixed cost using
high-low point method.

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Prime Costs , Conversion Costs & Product costs:

1- The following info. relates to the Snowball Manufacturing Company:

Direct Materials $ 25,000
Indirect Materials $ 5,000
Direct Labor $ 30,000
Indirect Labor $ 4,500
Manufacturing ( Factory) overhead ( excluding indirect materials & indirect labor) $ 15,000
Required: Compute the prime costs, conversion costs & product costs.
prime costs = DM+DL= 25,000+30,000= 55,000
conversion costs= DL + MOH
= 30,000+(5,000+4,500+15,000)= 54,000
product costs= DM + DL + MOH
25,000+ 30,000+ 24,000= 74,000

Solution: Prime Costs:

Formula: Prime Costs = Direct Materials + Direct Labour

Direct Materils 25000

Direct Labour 30000

Prime Cost 55000

Conversion Costs:
Formula: Conversion Costs = Direct Labour + Factory Overhead

Direct Labour 30000

Factory Overhead: Indirect Labour 4500
Indirect Materials 5000
Other Factory OH 15000
24500

Total Conversion Cost 54500

Product Costs:
Formula: Product Cost = Direct Materials + Direct Labour + Factory Overhead

Direct Materials 25000

Direct Labour 30000
Factory Overhaed 24500

Total Product Cost 79500

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2- IOU Manufacturing Company produces wallets. The following cost information is available
for the period ended December 31, 19x3:
Materials put into production: $82,000, of which $78,000 was considered direct materials.
Factory labor cost for the period: $71,500, of which $12,000 was for indirect labor.
Factory depreciation: $50,000.
Selling, general & administrative expenses: $ 62,700.
Units completed during the period: 18,000.
Required: Compute the following:
a- Prime costs b- Conversion costs c- Product costs
d-Period costs
Prime costs = DM+DL
78,000+59,500= 137,500
Conversion costs= DL+MOH
59,500+ (4,000+12,000+50,000)= 125,500
PRODUCT COST = DM + DL + MOH
78,000+59,500 +66,000 = 203,500
Period costs = Non-manufacturing costs = 62,700
solution:

a Prime Costs
formula: Prime Costs = Direct Material + Direct Labor

Direct Material $78,000

Direct Labour $59,500
Prime Costs $137,500

b Conversion Costs
= Direct Labour + Factory Overhead

Direct LAbour $59,500

Factory Overhead $66,000
Conversion Costs $125,500

c Product Costs
= Direct MAterials + Direct Labour + Factory Overhead

Direct Materials $78,000

Direct LAbour $59,500
Factory Overhead $66,000
Product Costs $203,500

d Period Costs
Selling, general, and administrative expenses $62,700

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3- Woody Lumber Manufacturing Company had no units in process on January1. On Dec. 31,
there were 100,000 finished units on hand and no units in process. During the year 250,000
units had been sold. Materials costing $375,000 had been put into process, 80% were direct
materials. Labor costs were $400,000, 65% was direct labor. Additional factory overhead costs
were the following:
Heat, light & power $ 160,000
Depreciation $ 45,000
Property taxes $ 85,000
Repairs & maintenance $ 20,000
- Selling expenses were $ 125,000, general & administrative expenses were $ 80,000.

Required: Compute the following:

a- Prime costs b- Conversion costs c- Product costs
d-Period costs

solution:
a Prime Costs
formula: Prime Costs = Direct Material + Direct Labor

Direct Material $300,000

Direct Labour $260,000
Prime Costs $560,000

b Conversion Costs
= Direct Labour + Factory Overhead

Direct LAbour $260,000

Factory Overhead $525,000
Conversion Costs $785,000

c Product Costs
= Direct MAterials + Direct Labour + Factory Overhead

Direct Materials $300,000

Direct LAbour $260,000
Factory Overhead $525,000
Product Costs $1,085,000

d Period Costs
general, and administrative expenses $80,000
Selling expenses $125,000
Total period costs $205,000

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ABSORPTION & VARIABLE COSTING METHODS:
1- The following data relates to Easley Manufacturing Company:
Variable cost per unit:
Direct materials $4
Direct labor $8
Variable Manufacturing Overhead $2
Variable selling and Administrative expenses $6
Fixed costs per year:
Fixed manufacturing overhead $60,000
Fixed selling and administrative expenses $20,000
Beg. WIP units 1000
End. WIP units 3000
Units in beginning Finished goods inventory 2000
Units produced 12,000
Units Sold 10,000
Units in ending Finished goods inventory 2,000
Selling price per unit $40
Selling and administrative expenses:
Variable per unit $6
Fixed per year $20,000

REQUIRED:
a- Prepare income statement under the:
a- Absorption costing method b- Direct costing method
b- Account for the difference in net income between the two methods (reconcile the difference)

2- Parker Company manufactures and sells a single product, the following information had
been gathered for the summer quarter of 2012:

Beginning inventory ………………………… 0 product cost per unit:

Units produced……………………………… . 10,000 DM 8
Units sold……………………………………… 9,400 DL 9
Ending inventory …………………………… 600 V. MOH 3
Sales price per unit ……………………… … $60 F.MOH 40
Direct materials per unit ……………… …… $8 (400,000 / 10,000)
Direct labor per unit ………………… …… $9 TOTAL COST PER UNIT = 60
Variable manufacturing overhead per unit … $ 3
Total fixed manufacturing overhead …… $ 400,000
Variable selling and administrative ……… $ 20,000
Fixed selling and administrative cost …… $ 48,000
REQUIRED:
a- Prepare income statement under the:
a- Absorption costing method b- Variable costing method
b- Account for the difference in net income between the two methods (reconcile the difference)

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solution:

income statement using Absorption costing

Sales 9,400*60 564,000
(-) Cost of goods sold 9,400*60 (564,000)
GROSS PROFIT 0
(-) Variable selling and administration cost (20,000)
Fixed selling and administrative cost (48,000)
Net loss (68,000)

income statement using Variable costing

Sales 9,400*60 564,000
(-) Cost of goods sold 9,400* 20 188,000
(-) Variable selling and administration cost 20,000
Total variable costs (208,000)
Contribution margin 356,000
(-)fixed cost:
fixed manufacturing overhead 400,000
Fixed selling and administrative cost 48,000
(448,000)
Net loss (92,000)

b- Account for the difference in net income between the two methods (reconcile the difference)

net loss using variable costing (92,000)

+ fixed cost for change in inventory 24,000
(600*40)
net loss using absorption costing (68,000)

6- The following information had been gathered for the year ended December 2015 from Rajan
manufacturing company:

Units produced………………………………… 10,000

Units sold……………………………………… 9,400
Beg. WIP ……………………………………… $10,000
End. WIP……………………………………… $2,000
Beg. Finished Goods ………………………… $92,000
End. Finished Goods ………………………… $200,000
Sales price per unit ……………………………… $60
Direct materials per unit ………………………… $ 8
Direct labor per unit ……………………………… $ 9
Variable manufacturing overhead per unit …… $ 3
Total fixed manufacturing overhead ………… $ 400,000
Variable selling and administrative cost …… $ 20,000
Fixed selling and administrative cost ……… $ 15,000

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REQUIRED:
1- Prepare income statement under the:
a- Absorption costing method b- Direct costing method
2- Account for the difference in net income between the two methods (reconcile the difference)

SOLUTION: 1-a : $29,000 1-b : 29,000

7- XYZ Manufacturing Co. recorded the following information for the year 2016:

Actual Production (units) 30,000

Sales (units ) 25,000
Ending Inventory of Finished goods (units) 5,000
Beginning Inventory of Finished goods (units) 0
Selling price per unit $15

Variable Manufacturing costs per unit:

Direct Materials $1.5
Direct Labor $2.5
Variable Manufacturing Overhead $2

Fixed Factory Overhead $120,000

Selling and Administrative expenses (all fixed) $50,000

Required: Knowing that there is no beginning or ending balances of Work in Process (WIP):
1- Prepare income statement under the:
a- Absorption costing method
b- Direct costing method
2- Account for the difference in net income between the two methods (reconcile the difference)

SOLUTION: 1-a : $75,000 1-b : 55,000

Multiple Choice Questions

1- Each of the following would be classified as variable in terms of cost behavior except:
A. cost of shipping goods to customers via express mail.
B. sales commissions.
C. plant manager's salary.
D. direct materials.

2- Manufacturing overhead:
A. can be either a variable cost or a fixed cost.
B. includes the costs of shipping finished goods to customers.
C. includes all factory labor costs.
D. includes all fixed costs.

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3- Direct materials used in production totaled $330,000. Direct labor was $415,000 and
manufacturing overhead was $220,000. What were the total manufacturing costs incurred for
the month?
A. $530,000
B. $965,000
C. $745,000
D. $635,000

4- Which terms below correctly describe the cost of the black paint used to paint the dots on a
pair of dice? Variable cost; Administrative cost: A) Yes, Yes; B)Yes, No; C) No, Yes; D) No; No
respectively.
A. A
B. B
C. C
D. D

5- The corporate controller's salary would be considered a(n):

A. manufacturing cost.
B. product cost.
C. administrative cost.
D. selling expense.

6- Walton Manufacturing Company gathered the following data for the month: Cost of goods
sold: $35,000; Sales: $89,000; selling expenses: $16,000; Administrative expenses: $21,000.
How much net operating income will be reported for the period?
A. $54,000
B. $17,000
C. $52,000
D. Cannot be determined.

7- Which of the following IS a characteristic of financial accounting?

A. not mandatory
B. must follow GAAP
C. emphasis on relevance of data, rather than precision
D. both A and C above

8- Williams Company's direct labor cost is 25% of its conversion cost. If the manufacturing
overhead for the last period was $45,000 and the direct materials cost was $25,000, the direct
labor cost was:
A. $15,000
B. $60,000
C. $33,333
D. $20,000

9- The costs of direct materials are classified as: (A) conversion cost (yes), manufacturing cost
(yes), prime cost (yes); (B) conversion cost (No), manufacturing cost (No), prime cost (No); (C)
conversion cost (yes), manufacturing cost (yes), prime cost (No); (D) conversion cost (No),
Manufacturing cost (Yes), Prime cost (yes)
A. A
B. B

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C. C
D. D

10- The plans of management are expressed formally in:

A. the annual report to shareholders.
B. Form 10-Q submitted to the Securities and Exchange Commission.
C. performance reports.
D. budgets.

11- The cost of fire insurance for a manufacturing plant is generally considered to be a:
A. product cost.
B. period cost.
C. variable cost.
D. all of the above.

12- During the month of August, direct labor cost totaled $13,000 and direct labor cost was
20% of prime cost. If total manufacturing costs during August were $88,000, the manufacturing
overhead was:
A. $75,000
B. $23,000
C. $65,000
D. $52,000

13- Within the relevant range, the difference between variable costs and fixed costs is:
A. variable costs per unit fluctuate and fixed costs per unit remain constant.
B. variable costs per unit are constant and fixed costs per unit fluctuate.
C. both total variable costs and total fixed costs are constant.
D. both total variable costs and total fixed costs fluctuate.

14- An example of a period cost is:

A. fire insurance on a factory building.
B. salary of a factory supervisor.
C. direct materials.
D. rent on a headquarters building.

15- The three basic elements of manufacturing cost are direct materials, direct labor, and:
A. cost of goods manufactured.
B. cost of goods sold.
C. work in process.
D. manufacturing overhead.

16- Buford Company rents out a small unused portion of its factory to another company for
$1,000 per month. The rental agreement will expire next month, and rather than renew the
agreement Buford Company is thinking about using the space itself to store materials. The
term to describe the $1,000 per month is:
A. sunk cost.
B. period cost.
C. opportunity cost.
D. variable cost.

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17- The following costs were incurred in August: Direct materials: $20,000; Direct labor:
$18,000; Manufacturing overhead $21,000; Selling expenses: $16,000; Administrative
expenses: $21,000.Prime costs during the month totaled:
A. $39,000
B. $59,000
C. $96,000
D. $38,000

18- During August, the cost of goods manufactured was $73,000. The beginning finished
goods inventory was $15,000 and the ending finished goods inventory was $21,000. What was
the cost of goods sold for the month?
A. $79,000
B. $109,000
C. $67,000
D. $73,000

19- Green Company's costs for the month of August were as follows: direct materials, $27,000;
direct labor, $34,000; selling, $14,000; administrative, $12,000; and manufacturing overhead,
$44,000. The beginning work in process inventory was $16,000 and the ending work in
process inventory was $9,000. What was the cost of goods manufactured for the month?
A. $105,000
B. $132,000
C. $138,000
D. $112,000

20- An opportunity cost is:

A. the difference in total costs which results from selecting one alternative instead of another.
B. the benefit forgone by selecting one alternative instead of another.
C. a cost which may be saved by not adopting an alternative.
D. a cost which may be shifted to the future with little or no effect on current operations.

21-Which two terms below describe the wages paid to security guards that monitor a factory
24 hours a day?
A. variable cost and direct cost
B. fixed cost and direct cost
C. variable cost and indirect cost
D. fixed cost and indirect cost

22- Inventory accounts for a manufacturer include all of the following except:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.

23- For a manufacturer, the total cost of manufactured goods completed but still on hand is:
a. Merchandise Inventory.
b. Finished Goods.
c. Work in Process.
d. Materials.

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24- 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.

25- 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.$720,000
d.$930,000

26- 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

27- Financial accounting provides the primary source of information for:

A. decision making in the finishing department
B. improving customer service
C. preparing the income statement for shareholders
D. planning next year's operating budget

28- The most important planning tool is a ________.

A. performance evaluation report
B. balanced scorecard
C. goal
D. budget

29- A report showing the actual financial results for a period compared to the budgeted
financial results for that same period would most likely be called a:
A. strategic plan
B. management forecast
C. performance report
D. revised plan

30- Which of the following differentiates cost accounting and financial accounting?
A) The primary users of cost accounting are the investors, whereas the primary users of
financial accounting are the managers.
B) Cost accounting deals with product design, production, and marketing strategies, whereas
financial accounting deals mainly with pricing of the products.

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 C) Cost accounting measures only the financial information related to the costs of acquiring
fixed assets in an organization, whereas financial accounting measures financial and
nonfinancial information of a company's business transactions.
D) Cost accounting measures information related to the costs of acquiring or using
resources in an organization, whereas financial accounting measures a financial
position of a company to investors, banks, and external parties.

31- Which of the following statements is true of performance reports?

A) The performance report shows actual performance as compared to the budget.
B) The performance report depicts the performance of a firm's competitors.
C) The performance report compares only the budgeted performance over the years.
D) The performance report contains no actual results due to confidentiality.

32- All of the following would be classified as product costs except:

A) property taxes on production equipment.
B) insurance on factory machinery.
C) salaries of the advertising staff.
D) wages of machine operators.

33- Fixed costs expressed on a per unit basis:

A) will increase with increases in activity.
B) will decrease with increases in activity.
C) are not affected by activity.
D) should be ignored in making decisions since they cannot change.

34- John Johnson decided to leave his former job where he earned $12 per hour to go to a
new job where he will earn $13 per hour. In the decision process, the former wage of
$12 per hour would be classified as a(n):
A) sunk cost.
B) direct cost.
C) fixed cost.
D) opportunity cost.
Answer: D

35. The following costs were incurred in February:

Direct materials ......................... $43,000
Direct labor ............................... $16,000
Manufacturing overhead ........... $37,000
Selling expenses ........................ $17,000
Administrative expenses ........... $26,000
Conversion costs during the month totaled:
A) $59,000
B) $80,000
C) $53,000
D) $139,000

Answer: C

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36- During March, the cost of goods manufactured was $62,000. The beginning finished
goods inventory was $11,000 and the ending finished goods inventory was $19,000.
What was the cost of goods sold for the month?
A) $70,000
B) $92,000
C) $54,000
D) $62,000
Answer: C

37- The salary paid to the president of King Company would be classified on the income
statement as a(n):
A) administrative expense.
B) direct labor cost.
C) manufacturing overhead cost.
D) selling expense.
Answer: A

38- Under variable costing, fixed manufacturing overhead is:

A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process Inventory.
E. treated in the same manner as variable manufacturing overhead.

Answer: A

39- All of the following are inventoried under variable costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. items "C" and "D" above.

Answer: D

40- All of the following costs are inventoried under absorption costing except:
A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.

Answer: E

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 41- Which of the following costs would be treated differently under absorption costing
and variable costing?

Direct Labor Variable Manufacturing Overhead Fixed Administrative Expenses

A. Yes No Yes
B. Yes Yes Yes
C. No Yes No
D. No No Yes
E. No No No

Answer: E

42-Lone Star has computed the following unit costs for the year just ended:

Direct material used $12

Direct labor 18
Variable manufacturing overhead 25
Fixed manufacturing overhead 29
Variable selling and administrative cost 10
Fixed selling and administrative cost 17

Under variable costing, each unit of the company's inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
E. some other amount.

Answer: B

43- Santa Fe Corporation has computed the following unit costs for the year just ended:

Direct material used $25

Direct labor 19
Variable manufacturing overhead 35
Fixed manufacturing overhead 40
Variable selling and administrative cost 17
Fixed selling and administrative cost 32

Which of the following choices correctly depicts the per-unit cost of inventory
under variable costing and absorption costing?
Variable
Costing Absorption
Costing
A. $79 $119
B. $79 $151
C. $96 $119
D. $96 $151
E. Some other combination of figures not listed above.

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Answer: A

44- Use the following to answer questions 1& 2:

Indiana Company incurred the following costs during the past year when planned production
and actual production each totaled 20,000 units:

Direct materials used $280,000

Direct labor 120,000
Variable manufacturing overhead 160,000
Fixed manufacturing overhead 100,000
Variable selling and administrative costs 60,000
Fixed selling and administrative costs 90,000

1- If Indiana uses variable costing, the total inventoriable costs for the year would
be:
A. $400,000.
B. $460,000.
C. $560,000.
D. $620,000.
E. $660,000.

Answer: C

2- The per-unit inventoriable cost under absorption costing is:

A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.

Answer: D

45- Consider the following comments about absorption- and variable-costing income
statements:

I. A variable-costing income statement discloses a firm's contribution margin.

II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
III. The amount of variable selling and administrative cost is the same on absorption- and
variable-costing income statements.

Which of the above statements is (are) true?

A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.

Answer: E

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46- Roberts, which began business at the start of the current year, had the following data:

Planned and actual production: 40,000 units

Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Variable: $1 per unit
Fixed: $32,000

The gross margin that the company would disclose on an absorption-costing

income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
E. some other amount.

Answer: C

47- Chicago began business at the start of the current year. The company planned to
produce 25,000 units, and actual production conformed to expectations. Sales totaled 22,000
units at $30 each. Costs incurred were:

Fixed manufacturing overhead $150,000

Fixed selling and administrative cost 100,000
Variable manufacturing cost per unit 8
Variable selling and administrative cost per unit 2

If there were no variances, the company's absorption-costing net income would

be:
A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
E. some other amount.

Answer: C

48- Gomez's inventory increased during the year. On the basis of this information, income
reported under absorption costing:
A. will be the same as that reported under variable costing.
B. will be higher than that reported under variable costing.
C. will be lower than that reported under variable costing.
D. will differ from that reported under variable costing, the direction of which cannot be
determined from the information given.
E. will be less than that reported in the previous period.

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Answer: B

49- The following data relate to Venture Company, a new corporation, during a period
when the firm produced and sold 100,000 units and 90,000 units, respectively:

Direct materials used $400,000

Direct labor 200,000
Fixed manufacturing overhead 250,000
Variable manufacturing overhead 120,000
Fixed selling and administrative expenses 300,000
Variable selling and administrative 45,000
expenses

The company met its original planned production target of 100,000 units. There were
no variances during the period, and the firm's selling price is $15 per unit.

Required:
A. What is the cost of Venture's end-of-period finished-goods inventory under the
variable-costing method?
B. Calculate the company's variable-costing net income.
C. Calculate the company's absorption-costing net income.

Answer:
A. Ending finished-goods inventory (units): 0 + 100,000 - 90,000 =
10,000
Inventoriable costs under variable costing:

Direct materials used $400,000

Direct labor 200,000
Variable manufacturing 120,000
overhead
Total $720,000

Variable cost per unit produced: $720,000 ÷ 100,000 units =

$7.20 per unit
Ending inventory: 10,000 units x $7.20 = $72,000

B. Sales revenue (90,000 units x $15) $1,350,000

Less: Variable costs [(90,000 units x $7.20) + 693,000
$45,000]
Contribution margin $ 657,000
Less: Fixed costs ($250,000 + $300,000) 550,000
Net income $ 107,000

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 C. Predetermined fixed overhead rate: $250,000 ÷ 100,000 units =
$2.50
Absorption cost per unit: $7.20 + $2.50 = $9.70

Sales revenue (90,000 units x $15) $1,350,000

Less: Cost of goods sold (90,000 units x 873,000
$9.70)
Gross margin $ 477,000
Less: Operating costs ($300,000 + 345,000
$45,000)
Net income $ 132,000

Indicate whether the following statements are “TRUE” or FALSE”

1- Under the absorption costing method, a portion of fixed manufacturing overhead cost is
allocated to each unit of product.
2- Contribution margin and gross margin mean the same thing.
3- If production equals sales for the period, absorption costing and variable costing will
produce the same net operating income
4- Manufacturing overhead is an indirect cost with respect to units of product.
5- Depreciation on equipment a company uses in its selling and administrative activities would
be classified as a product cost.
6- Variable costs per unit are affected by changes in activity level (volume of production)
7- Indirect labor is a part of Prime Cost.
8-The cost of lubricants used to grease a production machine in a manufacturing
company is an example of an indirect material cost.
9- Cost accounting is concerned with recording, classifying and summarizing costs for
determination of costs of products or services, planning, controlling and reducing such
costs and furnishing of information to management for decision making.
10- Cost accounting provides the summarized cost data that management needs to control
current operations.
11- Cost accounting is used to help with marketing decisions like bidding on contracts.
12- Planning is the process of monitoring the company’s operations and determining whether
the objectives identified are being accomplished.
13- Financial accounting has no solid principals while cost accounting has.
14- By law financial accounting should be applied but cost accounting is not mandatory.
15- Poorly designed cost accounting system will make employees behave in a desirable
manner and thus manager s will receive reliable information.
16- Financial accounting is considered to be the backbone to top management.
17- Cost accounting identifies, summarizes and interprets cost data to assist managers in
determining the company’s inventory.
18- To calculate product price we have to add liabilities to profit.
19- GAAP are needed in cost accounting rather than financial accounting to make information
users stand on solid ground otherwise fraud, misunderstanding, misinterpreting might occur.
20- Performance reports are used by cost accountants in the planning function.
21- A good cost accounting system should be characterized by being accurate and complex.
22- All overhead cost elements are considered to be direct costs.
23- Salaries of factory managers are considered to be indirect cost elements because the
criteria of physical tracing is not verified.

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24- A variable cost element does not change, in total, as the level of activity changes.
25- Overheads include all indirect materials and indirect labor only.
26- wages and salaries are considered labor while compensation and commission are not.
27- Both cost & financial accounting rely on accounting information system.
28- Financial accounting is not mandatory while cost accounting is mandatory.
29- Production costs take place at the factory while the marketing cost at take place at the
headquarters.
30- Physical tracing means that the cost element (material) can be seen and touched in the
final product.
31- All administration costs are indirect.
32- Fixed cost are variable at the per unit level.
33-Each direct cost element is variable and each indirect cost element is fixed.
34- Some of the marketing cost elements are variable and some are fixed.

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