Needles Finman Irm Ch16

ً ‫ صفحة الباحث العلوي هجانا‬Alaa.aliasrei@gmail.
com ‫@ عالء هحسن شحن‬Aliasrei ‫تلكرام‬
CHAPTER 16
Cost Concepts and Cost Allocation
PLANNING MATRIX
Enhancing Your
Building Your Basic Knowledge and Knowledge, Skills,
Learning Objective Skills and Critical Thinking
1. Explain how managers SE 1 E 1, 2 C1
classify costs and how they C3
use these cost
classifications.
2. Compare how service, SE 2 E 3, 4, 5, 6, P 1, 5 C2
retail, and manufacturing 7, 8 C4
organizations report costs
on their financial
statements and how they
account for inventories.
3. Describe the flow of costs SE 3, 4 E 9, 10
through a manufacturer’s
inventory accounts.
4. Define product unit cost, SE 5, 6 E 11, 12 P 2, 6 C5
and compute the unit cost C6
of a product or service.
5. Define cost allocation, and SE 7, 8, 9 E 13, 14, P 3, 4, 7, 8 C 6
explain how the traditional 15
method of allocating
overhead costs figure into
calculating product or
service unit cost.
MEMORANDA:
SE: Short Exercises
E: Exercises
P: Problems (Each problem has a User Insight question.)
All questions are in the text with related Learning Objectives (Stop, Think, and Apply).
SUGGESTED INSTRUCTIONAL STRATEGY

Output Skills Developed:
Technical, Communication, Interpersonal
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
212 Chapter 16: Cost Concepts and Cost Allocation
Related Learning Objective:

1
Instructional Strategy
Learning activity: Field study
Learning environment: Modified lecture, active, in-class and out-of-class
Learning tool: Textbook assignment Case 1
Steps to Implement
1. Assign Case 1 at least a week before you introduce this learning activity in class. Students are to
work on Case 1 individually.
2. Prepare an in-class assignment that students will work on in groups. The assignment is to include
the following tasks:
a. Discuss and agree upon six costs that the fast-food restaurant incurs.
b. Prepare a table, listing the costs in the first column. Create additional columns to classify the
costs as direct or indirect, fixed or variable, value-adding or nonvalue-adding, and product or
period.
3. Divide the class into groups of four to six students based on the type of fast-food restaurant they
visited (e.g., hamburger, pizza, Mexican food, Chinese food).
4. Distribute the assignment, and allow the groups about ten minutes to complete it.
5. Ask a representative from each group to present to the class one of the costs the group selected
and the classifications it chose for the cost. Have the students use the chalkboard, overhead
projector, or flip charts for their presentations.
6. Discuss the results of the presentations. Reinforce the correct classifications, and discuss any
incorrect ones.
7. If time permits, discuss the ―manufacturing process‖ of a fast-food item or the similarity of cost
classifications in fast-food restaurants.
Assessment
Technical skills: Grade each group’s table. Give a brief quiz at the end of the period to test recall and
comprehension. Ask a related question on the next examination.
Communication skills: Instructor or students can informally grade the presenter based on the content,
format, and style of the presentation. Feedback of this information can help students improve their
presentation skills.
Interpersonal skills: Ask the students one or more of the following questions: How well did your group
interact? How many in the group were prepared for the assignment? How many were fully involved?
What could the group do to improve its performance next time?
Chapter 16: Cost Concepts and Cost Allocation 213
RESOURCE MATERIALS AND OUTLINES

OBJECTIVE 1: Explain how managers classify costs and how they use these cost
classifications.
Summary Statement
Different types of organizations have different types of costs. Manufacturing organizations need
information about the costs of manufacturing products, which include the costs of direct materials,
direct labor, and overhead. Retail organizations need information about the costs of purchasing products
for resale, which include adjustments for freight-in costs, purchase returns and allowances, and
purchase discounts. Service organizations need information about the costs of providing services, which
include the costs of labor and related overhead.
A single cost can be classified and used in several ways, depending on the purpose of the analysis.
Direct costs are those that managers can conveniently and economically trace to a specific cost object;
indirect costs are those that cannot be conveniently and economically traced. Managers use both direct
and indirect costs to support decisions about pricing or about reallocating resources to other cost
objects.
A variable cost is one that changes in direct proportion to a change in productive output; a fixed cost
remains constant within a defined range of activity or time period. By classifying costs according to
these patterns of behavior, managers can estimate how changes in selling prices or operating costs will
affect profitability.
A value-adding cost is the cost of an activity that increases the market value of a product or service; a
nonvalue-adding cost is the cost of an activity that adds cost to a product or service but does not
increase its market value. Classifying costs as value-adding or nonvalue-adding enables managers to
target opportunities for continuous improvement that lead to increased customer satisfaction.
Product costs, or inventoriable costs, are costs assigned to inventory; period costs, or noninventoriable
costs, are costs of resources used during the accounting period but not assigned to products. Managers
use these classifications in preparing financial statements.
New Concepts and Terminology

direct costs; indirect costs; variable cost; fixed cost; value-adding cost; nonvalue-adding cost; product
costs; period costs
Related Text Illustrations

Figure 1: Overview of Cost Classifications
Table 1: Examples of Cost Classifications for a Candy Manufacturer
Lecture Outline
I. Managers’ use of cost information
A. Different organizations have different operating costs
1. Service industries use the estimated costs of services
2. Retail organizations work with the estimated cost of merchandise
3. Manufacturing use estimated product costs
II. All organizations use cost information to determine profits and selling prices and to value
inventory.
III. A single cost can be classified as
A. Direct or indirect, depending on its traceability.
B.
Variable or fixed, depending on its behavior.
C.
Value-adding or nonvalue-adding, depending on whether it adds value to a product or
service.
D. Product or period, depending on whether it is inventoriable.
IV. Managers use cost classifications to
A. Control costs by determining which are traceable to a particular cost object.
B. Calculate the number of units that must be sold to obtain a certain level of profit.
C. Identify the costs of activities that do and do not add value to a product or service.
D. Prepare financial statements.
Teaching Strategy
Identify each of the classifications of a single cost. Refer to Table 1 when explaining that the
classification depends on the purpose of the cost analysis. In explaining product and period costs,
discuss the accrual method and the need to match revenues with expenses in the accounting period. Ask
students to identify the flow of costs between accounts when product costs are expensed. Short Exercise
1 and Exercises 1 and 2 are good illustrations for this learning objective.
OBJECTIVE 2: Compare how service, retail, and manufacturing organizations report costs
on their financial statements and how they account for inventories.
Summary Statement
A manufacturing organization maintains three inventory accounts on its balance sheet: the Materials
Inventory, Work in Process Inventory, and Finished Goods Inventory accounts. In contrast, a service
organization, because it sells services rather than products, maintains no inventory accounts on its
balance sheet. The cost of sales on its income statement reflects the net cost of the services sold. A
retail organization, which purchases products ready for resale, maintains only a Merchandise Inventory
account, which is used to record and account for items in inventory. The cost of goods sold is simply
the difference between the cost of goods available for sale and the ending merchandise inventory.
Although the headings they use in their income statements differ (―costs of goods sold‖ versus ―cost of
sales‖), all three types of organizations use the same income statement format.
At the end of an accounting period, a manufacturer summarizes all manufacturing costs incurred during
the period in a statement of cost of goods manufactured. The total amount of the cost of goods
manufactured is carried over to the income statement, where it is used to compute the cost of goods
sold. Three steps are involved in preparing a statement of cost of goods manufactured:
1. Compute the cost of direct materials used during the period.
2. Compute total manufacturing costs for the period by adding the direct materials costs to the direct
labor costs and total overhead costs.
3. Add the total manufacturing costs to the beginning balance in the Work in Process Inventory
account to arrive at the total cost of work in process during the period; from this amount, subtract
the ending balance in the Work in Process Inventory account to arrive at the cost of goods
manufactured.

statement of cost of goods manufactured
Related Text Illustration

Figure 2: Financial Statements of Service, Retail, and Manufacturing Organizations
Exhibit 1: Statement of Cost of Goods Manufactured and Partial Income Statement for a Manufacturing
Organization
Lecture Outline
I. A manufacturer maintains three inventory accounts on its balance sheet: Materials Inventory,
Work in Process Inventory, and Finished Goods Inventory.
A. Because a service organization sells services rather than products, it maintains no inventory
accounts.
B. A retail organization, which purchases products ready for resale, maintains only a
Merchandise Inventory account.
II. Cost of goods manufactured is a key component of a manufacturing company’s income statement.
A. Determining the cost of goods manufactured involves three steps:
1. Computing the cost of direct materials used during the period
2. Computing total manufacturing costs for the period
3. Computing cost of goods manufactured, adjusting for beginning and ending work in
process inventory
III. The cost of goods manufactured is used on the income statement to compute the cost of goods
sold.
A. Manufacturing, retail, and service organizations use the same income statement format.
Teaching Strategy
Review the calculations in Exhibit 1. Show students the following quick way of memorizing them:
+ Beginning Direct Materials Inventory
+ Direct Materials Purchased
– Ending Direct Materials Inventory
= Cost of Direct Materials Used
+ Direct Labor
+ Overhead
= Total Manufacturing Costs
+ Beginning Work in Process Inventory

– Ending Work in Process Inventory
= Cost of Goods Manufactured
+ Beginning Finished Goods Inventory

– Ending Finished Goods Inventory
= Cost of Goods Sold
Note that all three inventory accounts are handled in the same way (plus beginning, minus ending).
Relate the flow of costs in Exhibit 1 to those in Figure 2.
Use Figure 2 to point out the similarities and differences in the financial statements of service, retail,
and manufacturing organizations.
Use Case 4 to illustrate both a statement of cost of goods manufactured and an income statement for an
international organization by having students work in groups to complete the case. Ask students what
other information they would need to determine the profitability of each product line. Ask them to
distinguish between product and period costs for several of the listed items and to indicate where each
cost would appear on the income statement. To illustrate financial statement analysis, assign and
discuss Case 2, which uses ratio analysis to address reasons for a company’s decline in profitability.
Use Problem 1 to point out some of the differences and similarities in the financial statements of
manufacturing and retail organizations.
OBJECTIVE 3: Describe the flow of costs through a manufacturer’s inventory accounts.

Summary Statement
Transforming materials into finished products ready for sale requires a number of production and
production-related activities, including purchasing, receiving, inspecting, storing, and moving
materials; converting them into finished products using labor, equipment, and other resources; and
moving, storing, and shipping the finished products. A manufacturing organization’s accounting system
tracks these activities as product costs flowing through the various inventory accounts.
The manufacturing cost flow begins when costs are incurred for direct materials, direct labor, and
overhead. Materials costs flow first into the Materials Inventory account, which is used to record the
costs of materials when they are received and again when they are issued for use in a production
process. All manufacturing-related costs—direct materials, direct labor, and overhead—are recorded in
the Work in Process Inventory account as the production process begins. These costs represent total
manufacturing costs. When products are completed, their costs are transferred from the Work in
Process Inventory account to the Finished Goods Inventory account. These costs represent the cost of
goods manufactured. Costs remain in the Finished Goods Inventory account until the products are sold,
at which time they are transferred to the Cost of Goods Sold account.
A number of documents are used to record the flow of manufacturing costs. They include a purchase
request for materials necessary to fill a sales order; a purchase order, which is sent to a vendor; a
receiving report that describes the incoming materials; the vendor’s invoice; a materials request form,
which authorizes the release of materials from a storeroom to production; time cards that track
employees’ work hours; a job order cost card, which records all costs incurred as a product moves
through production; a sales invoice; and a shipping document that accompanies products sent to a
customer.

Materials Inventory account; Work in Process Inventory account; Finished Goods Inventory account;
manufacturing cost flow; total manufacturing costs; cost of goods manufactured

Figure 3: Activities, Documents, and Cost Flows Through the Inventory Accounts of a Manufacturing
Organization
Figure 4: Manufacturing Cost Flow: An Example Using Actual Costing for The Choice Candy
Company
Lecture Outline
I. Transforming materials into finished products ready for sale requires a number of production and
production-related activities, including the following:
A. Purchasing, receiving, inspecting, storing, and moving materials
B. Converting materials into finished products using labor, equipment, and other resources
C. Moving, storing, and shipping the finished products
II. Manufacturing cost flow begins when costs are incurred for direct materials, direct labor, and
overhead.
A.
Materials costs flow first into the Materials Inventory account.
B.
All manufacturing-related costs then flow into the Work in Process Inventory account.
C.
When goods are completed, their costs are transferred to the Finished Goods Inventory
account.
D. When goods are sold, their costs are transferred to the Cost of Goods Sold account.
III. Documents used to track the flow of manufacturing costs include the following:
A. Purchase request
B. Purchase order
C. Receiving report
D. Vendor’s invoice
E. Materials request form
F. Time cards
G. Job order cost card
H. Sales invoice
I. Shipping document
Teaching Strategy
Consider demonstrating the flow of materials on a factory floor by having students use construction
toys to make products. As you issue the materials, explain the cost flow from Direct Materials
Inventory to Work in Process Inventory. As you collect the finished products, explain the cost flow
from Work in Process Inventory to Finished Goods Inventory
Short Exercise 4, and Exercises 9 and 10 relate to manufacturing cost flows and inventory accounts.
OBJECTIVE 4: Define product unit cost, and compute the unit cost of a product or service.
Summary Statement
The three elements of product cost are direct materials costs, direct labor costs, and overhead costs.
Overhead costs are indirect costs.
Direct materials costs are the costs of materials used in making a product that can be conveniently and
economically traced to specific units of the product. For example, the direct materials costs of making a
desk can be traced to the legs, drawers, and top. However, it would be impractical to try to trace the
insignificant costs of the nails, glue, and screws used in the desk. These costs are examples of indirect
materials costs, which are treated as part of overhead.
Direct labor costs are all labor costs that can be conveniently and economically traced to specific units
of a product; the wages of machine operators are an example. However, the wages of a factory’s
maintenance workers cannot be conveniently and economically traced to specific products. They are
considered indirect labor costs and are classified as overhead.
Overhead costs are all manufacturing costs not classified as direct materials or direct labor costs. They
include not only the costs of indirect materials and indirect labor, but also the costs of property taxes,
depreciation on plant and equipment, insurance, rent, and utilities.
Prime costs are the primary costs of production; they are the sum of direct materials costs and direct
labor costs. Conversion costs are the costs of converting direct materials into finished product; they are
the sum of direct labor costs and overhead costs.
A product unit cost can be calculated by dividing the total cost of direct materials, direct labor, and
overhead by the total number of units produced. How products flow physically and how costs are
incurred do not always match, so managers and accountants must use one of three different methods to
calculate product unit cost. The actual costing method uses the actual cost information available at the
end of an accounting period or at the end of a job to calculate the unit cost. The normal costing method
combines actual direct materials and direct labor costs with estimated overhead costs to determine the
product unit cost. The standard costing method uses estimated (standard) costs of direct materials,
direct labor, and overhead to calculate the unit cost.
Because no products are manufactured in the course of providing services, service organizations have
no direct materials costs. They do, however, have direct labor costs and overhead costs. Their most
important cost is the direct cost of professional labor. To determine the cost of performing a service, the
direct labor and service-related overhead costs are included in the analysis.

direct materials costs; direct labor costs; overhead costs; indirect materials costs; indirect labor costs;
prime costs; product unit cost; actual costing, normal costing; standard costing; conversion costs

Focus on Business Practice: Has Technology Shifted the Elements of Product Costs?
Figure 5: Relationships Among Product Cost Classifications
Table 2: Use of Actual and Estimated Costs in Three Cost-Measurement Methods
Lecture Outline
I. The three elements of product cost are direct materials costs, direct labor costs, and overhead
costs.
A. Direct materials costs can be conveniently and economically traced to specific units of a
product.
B. Direct labor costs can be conveniently and economically traced to specific units of a product.
C. Overhead costs are all manufacturing costs not classified as direct materials or direct labor
costs. They include the following:
1. Indirect materials costs
2. Indirect labor costs
3. The costs of property taxes, depreciation on plant and equipment, insurance, rent, and
utilities
II. The three elements of manufacturing costs can be classified as prime costs or conversion costs.
III. A product’s unit cost equals the sum of direct materials, direct labor, and overhead costs divided
by the number of units produced.
A. The actual costing method uses actual cost information available at the end of an accounting
period or at the end of a job to calculate the unit cost of a product.
B. The normal costing method combines the actual direct materials and direct labor costs with
estimated overhead costs to calculate product unit cost.
C. The standard costing method uses estimated costs of direct materials, direct labor, and
overhead to calculate product unit cost.
IV. A service business does not have a physical product that can be assembled, stored, and valued as
inventory.
A. The most important cost in a service business is the professional labor cost.
B. Service-related overhead is the other principal component of the cost of services rendered.
Teaching Strategy
Use Short Exercise 5 to illustrate direct materials, direct labor, and overhead classifications, and Short
Exercise 6 to illustrate a simple calculation of product cost per unit. For more challenging calculations
of product cost per unit, use Exercise 11 or 12 and Problem 2.
Point out that services are consumed as produced and that they therefore cannot be inventoried. Use the
text example to show the cost of processing a home-loan application. Discuss the uses of this cost
information. Emphasize that many methods of measuring cost or performance in manufacturing
organizations can be adapted to service businesses. Note that deregulation of many service industries
has increased the need for effective cost-management techniques. Case 4 is a good illustration of
costing and pricing in considering waste disposal.
OBJECTIVE 5: Define cost allocation and explain how the traditional method of allocating
overhead costs figures into calculating product or service unit cost.
Summary Statement
Overhead costs cannot be easily traced to a product or service; they are indirect costs that must be
collected and allocated in some manner. Cost allocation is the process of assigning a collection of
indirect costs to a specific cost object, such as a product or service, using an allocation base known as a
cost driver. A cost driver might be direct labor hours, direct labor costs, units produced, or another
activity base that is important to a business. As the cost driver increases in volume, it causes the cost
pool—the collection of indirect costs assigned to a cost object—to increase in amount.
Allocating overhead is a four-step process. The first step is to estimate overhead costs and calculate a
predetermined overhead rate at which those costs will be assigned to products or services. Next, as
units of the product or services are produced, the estimated overhead costs are assigned to the product
or service’s costs at the predetermined rate. In the third step, actual overhead costs are recorded as they
are incurred. Finally, at the end of the accounting period, the difference between the actual and applied
overhead costs is calculated and reconciled. If the applied overhead costs are greater than the actual
costs, the difference in the amounts represents overapplied overhead costs; if the applied costs are less
than the actual costs, the difference represents underapplied overhead costs. The Cost of Goods Sold
account is adjusted for any difference between the applied and actual costs that is not material. If the
difference is material, adjustments are made to the Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold accounts.
A predetermined overhead rate has two main uses. It enables managers to make timely decisions about
pricing products or services and controlling costs, and it allows a more equitable assignment of
overhead costs to each unit produced.
The successful allocation of overhead costs depends on two factors: a careful estimate of total overhead
costs, and a good forecast of the activity level of the cost driver.
The traditional approach to assigning overhead costs to a product or service’s costs is to use a single
(plantwide) predetermined overhead rate. The total overhead costs constitute one cost pool, and a
traditional activity base—such as direct labor hours, direct labor costs, machine hours, or units of
production—is the cost driver. This approach is especially useful when companies produce no more
than a few different products or services that require the same production processes and production-
related activities.
The traditional approach assigns overhead costs to a product or service’s cost by estimating a
predetermined overhead rate and multiplying that rate by the actual level of the cost driver. The total
applied overhead cost is added to the actual costs of direct materials and direct labor to determine the
total product or service cost. The unit cost is calculated by dividing total product or service cost by total
units produced. It can also be calculated by determining the cost per unit for each element of the
product or service cost and summing those per-unit costs.
Activity-based costing (ABC) is a method of assigning costs that calculates a more accurate product or
service cost than the traditional approach. It categorizes all indirect costs by activity, traces the indirect
costs to those activities, and assigns activity costs to products using a cost driver related to the cause of
the cost.

cost allocation; cost object; cost driver; cost pool; predetermined overhead rate; overapplied overhead
costs; underapplied overhead costs; activity-based costing (ABC)
Related Text Illustration

Figure 6: Allocating Overhead Costs: A Four-Step Process
Table 3: Allocating Overhead Costs and Calculating Product Unit Cost: Traditional Approach
Lecture Outline
I. Cost allocation is the process of assigning a collection of indirect costs to a specific cost object
using an allocation base known as a cost driver.
A. A cost object (the destination of an assigned indirect cost) is a product, process, department,
or activity that the organization wishes to cost.
B. A cost driver is a volume-related activity base, such as direct labor hours, direct labor costs,
or units produced.
C. As the cost driver increases in volume, it causes the cost pool—the collection of indirect
costs assigned to a cost object—to increase in amount.
II. The allocation of overhead costs requires the following:
A. The pooling of overhead costs that are affected by a common activity
B. The selection of a cost driver whose activity level causes a change in the cost pool
C. Allocating overhead costs is a four-step process:
1. Managers estimate overhead costs and calculate a predetermined overhead rate (a
single, plantwide rate in traditional settings) at which those costs will be assigned to
products.
2. As units of the product or service are produced, the estimated overhead costs are
assigned to the product or service’s costs at the predetermined rate.
3. Actual overhead costs are recorded as they are incurred.
4. At the end of the accounting period, the difference between the actual and applied
overhead costs is calculated and reconciled.
a. If the difference is immaterial, the Cost of Goods Sold account is adjusted.
b. If the difference is material, adjustments are made to the Work in Process
Inventory, Finished Goods Inventory, and Cost of Goods Sold accounts.
III. The traditional approach to allocating overhead
A. The traditional approach to assigning overhead costs to a product or a service’s cost is to use
a single (plantwide) predetermined overhead rate.
1. The total overhead costs constitute one cost pool.
B. The traditional approach is especially useful when a company manufactures only one
product or a few very similar products that require the same production processes and
production-related activities.
C. The traditional approach assigns overhead costs to a product’s cost by estimating a
predetermined overhead rate and multiplying that rate by the actual level of the cost driver.
D. The total applied overhead cost is added to the actual costs of direct materials and direct
labor to determine the total product or service cost.
E. The product or service unit cost is calculated by dividing total product or service cost by
total units produced or by determining the cost per unit for each element of the product or
service’s cost and summing those per-unit costs.
IIIV. Activity-based costing (ABC) is a method of assigning costs that calculates a more accurate
product or service cost than the traditional approach by categorizing all indirect costs by activity,
tracing the indirect costs to those activities, and assigning activity costs to products or services
using a cost driver related to the cause of the cost.
Teaching Strategy
After explaining the need to allocate costs that cannot be directly traced to a product, define cost object
and cost allocation and give some examples. Then discuss each of the steps presented in Figure 7.
Use Short Exercise 8 to illustrate the computation of a predetermined overhead rate, Short Exercise 9 to
illustrate the allocation of overhead to production, and Short Exercise 7 to illustrate the calculation of
underapplied or overapplied overhead costs.
When ABC is used, production costs are grouped into smaller cost pools related to specific activities.
Cost drivers for each cost pool are identified, and their levels are estimated. The activity rate for each
cost pool is calculated by dividing the estimated cost pool amount by the estimated cost driver level.
Overhead, which is represented by the cost pools, is assigned to the product or service’s cost by
multiplying the cost pool rate by the actual cost driver level. The total applied overhead cost is added to
the cost of direct materials and direct labor to determine the total product or service cost. The product or
service unit cost is the total product or service cost divided by the total units produced.
Mention that the ABC method tries to determine what is really driving costs—that it charges a product
only the overhead it actually consumes. Note that because complex products with many special features
require more support (e.g., more setups or inspections), they may consume most of the overhead costs.
Short Exercises 7, 8 and 9 apply to the is learning objective. Use Exercise 14 to illustrate the
computation of a predetermined overhead rate and its application to production.
Use Problem 8 and Case 6 to demonstrate that the traditional volume-based approach tends to
underestimate the costs of low-volume products and to overestimate the cost of high-volume products.
Although these examples do not include selling prices that would allow students to calculate
profitability by product line, point out that when a company uses the traditional volume-based method,
the items that are most difficult to produce may appear to be the most profitable and that the opposite
may be true when a company uses activity-based costing.
REVIEW QUIZ
True-False
1. T F Direct labor costs are initially added to the Work in Process Inventory account.
2. T F The costs of direct materials are first accumulated in an overhead cost pool and are then
allocated to individual products.
3. T F After direct materials have entered production, materials storage, handling, and moving
costs are added to the Work in Process Inventory account.
4. T F A sales invoice is prepared when products are sold.
5. T F The normal costing method uses the actual costs of direct materials, direct labor, and
overhead.
6. T F An actual costing system provides more timely product cost information than a normal
costing system.
7. T F The cost of an activity that does not add to the cost of a product or service but does
increase its market value is a nonvalue-adding cost.
Multiple Choice
8. Which of the following describes the order in which costs flow through a manufacturer’s
inventory accounts?
a. Materials Inventory, Work in Process Inventory, Finished Goods Inventory, Cost of Goods
Sold
b. Work in Process Inventory, Materials Inventory, Finished Goods Inventory, Cost of Goods
Sold
c. Materials Inventory, Work in Process Inventory, Cost of Goods Sold, Finished Goods
Inventory
d. Cost of Goods Sold, Materials Inventory, Work in Process Inventory, Finished Goods
Inventory
e. none of the above
9. Which of the following are overhead costs?

a. Direct materials, indirect materials, and depreciation on manufacturing equipment
b. Direct labor, indirect labor, and depreciation on manufacturing equipment
c. Direct materials, direct labor, and depreciation on manufacturing equipment
d. Indirect materials, indirect labor, and depreciation on manufacturing equipment
e. None of the above
10. Estimated annual overhead cost is $500,000. Estimated annual machine hours are 100,000 hours.
Actual machine hours used in making 100 units of Product A this month are 1,250 hours. The
predetermined overhead rate is
a. $400 per machine hour.
b. $5 per machine hour.
c. $4 per machine hour.
d. $.20 per machine hour.
e. none of the above.
11. Scanlon Division manufactured 3,000 units of Product Z during the year; costs are as follows:
Direct materials $250,000
Direct labor 200,000
Indirect materials and labor 40,000
Depreciation on plant and 20,000
equipment
Total $510,000
The product unit cost for Product Z this year is
a. $150.
b. $152.
c. $163.
d. $170.
e. none of the above.
12. In a manufacturing organization, completed but unsold units would be included in which of the
following accounts?
a. Pending-Sale Inventory
b. Materials Inventory
c. Work in Process Inventory
d. Finished Goods Inventory
13. Direct materials used totaled $64,750; direct labor incurred totaled $198,400; overhead totaled
$394,800; Work in Process Inventory on January 1 (the beginning of the year) was $189,100; and
Work in Process Inventory on December 31 was $197,600. What is the cost of goods
manufactured for the year ended December 31?
a. $1,044,650
b. $657,950
c. $649,450
d. $197,600
14. Inventoriable (product) costs are

a. the manufacturing costs incurred to produce a product.
b. the costs of resources consumed during the current period.
c. the manufacturing, selling, and administrative costs incurred to produce and sell a product.
d. direct materials and direct labor costs only.
e. direct labor and overhead costs only.
15. For a manufacturing organization, which of the following is a period rather than a product cost?
a. Direct materials
b. Direct labor
c. Overhead
d. Wages of machine operators
e. Wages of salespeople
16. Total variable costs

a. vary in total, but not in proportion to a change in productive output or volume.
b. vary in total in an inverse relationship to productive output or volume.
c. vary in total in direct proportion to a change in productive output or volume.
d. do not vary within a defined range of activity or time period.
e. remain constant within a defined range of activity or time period.
17. Zapp Company develops computer programs to meet customers’ special requirements. How
should Zapp classify payments to the programmers who develop the customized software?
a. Indirect and nonvalue-adding cost
b. Indirect and value-adding cost
c. Direct and nonvalue-adding cost
d. Direct and value-adding cost
ANSWERS TO REVIEW QUIZ
True-False Multiple Choice

1. T 8. a
2. F 9. d
3. T 10. b
4. T 11. d
5. F 12. d
6. F 13. c
7. F 14. a
15. e
16. c
17. d

Needles Finman Irm Ch16

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Needles Finman Irm Ch16

Uploaded by

Copyright:

Available Formats

ً ‫ صفحة الباحث العلوي هجانا‬Alaa.aliasrei@gmail.

com ‫@ عالء هحسن شحن‬Aliasrei ‫تلكرام‬

SUGGESTED INSTRUCTIONAL STRATEGY

Related Learning Objective:

RESOURCE MATERIALS AND OUTLINES

New Concepts and Terminology

Related Text Illustrations

New Concepts and Terminology

Related Text Illustration

+ Beginning Work in Process Inventory

+ Beginning Finished Goods Inventory

OBJECTIVE 3: Describe the flow of costs through a manufacturer’s inventory accounts.

New Concepts and Terminology

Related Text Illustrations

New Concepts and Terminology

Related Text Illustrations

New Concepts and Terminology

Related Text Illustration

9. Which of the following are overhead costs?

14. Inventoriable (product) costs are

16. Total variable costs

ANSWERS TO REVIEW QUIZ

True-False Multiple Choice

You might also like