Accounting 202 Chapter 1

Brock Company makes candy. During the most recent accounting period Brock paid $3,000 for raw materials, $4,000 for labor, and $2,000 for overhead costs that were incurred to make candy. Brock started and completed 10,000 units of candy of which 8,000 were sold. Based on this information the balance in the inventory account on Brock's balance sheet would be

$1,800 cost per unit = $0.90 x 2,000 units in inventory = $1,800 in inventory

Calgary Manufacturing company makes chairs and desks. The following costs were incurred in making its products during its first year of operation. Chairs Desks Total Direct Materials $4,000 $6,000 $10,000 Direct Labor 12,000 8,000 20,000 Also the company incurred $14,000 of employee benefits cost. Since these overhead costs are driven by the use of labor they are allocated to the products based on the direct labor dollars. Based on this information alone the total cost of making chairs is.

$24,400 Cost to be allocated / Allocation base = Allocation Rate $14,000 / $20,000 = $0.70 per labor dollar Overhead cost allocated to chairs $ 12,000 x .70 = $ 8,400 Overhead cost allocated to desks $ 8,000 x .70 = 5,600 Total overhead cost allocated $ 14,000 Total cost of making chairs = $4,000 materials + $12,000 labor + $8,400 overhead = $24,400

Use the following information to determine net income in the financial statements under GAAP: Number of boats to be sold 500 Upstream costs $ 5,000,000 Direct materials per boat $ 50,000 Direct labor per boat $ 30,000 Overhead per boat $ 20,000 Downstream costs $ 2,000,000 Assume the company wants to sell each boat for 20% more than the cost to produce the boat.

$3,000,000

Celestin Manufacturing Company incurred $5,000 of depreciation on its manufacturing equipment during its first year of operation. During this year the company made 2,500 units of product and sold 2,000 units of product. Based on this information alone the company would show

$4,000 of cost of goods sold expense on its income statement. The cost of depreciation on manufacturing equipment is an overhead cost which is a product cost. The amount of the depreciation is first placed in the Inventory account and then transferred to the Cost of Goods Sold account when the units are sold. Since the company made 2,500 units of product and sold 2,000 of them, the amount of cost transferred to the Cost of Goods Sold account is $4,000 (5,000 depreciation / 2,500 units = $2 per unit; $2 per unit x 2,000 units sold = $4,000 cost of goods sold. The remaining $1,000 of depreciation would remain in the inventory account until the time the remaining goods are sold.

Brock Company makes candy. During the most recent accounting period Brock paid $3,000 for raw materials, $4,000 for labor, and $2,000 for overhead costs that were incurred to make candy. Brock started and completed 10,000 units of candy of which 8,000 were sold. Based on this information Brock would recognize which of the following amounts of expense on its income statement?

$7,200. Total product cost= 9,000/10,000 (units) = 0.90 cost per unit 0.90 x 8,000 units sold = $7,200 COGS expense

The primary difference between cost classification for a manufacturing firm versus a merchandising firm is

All costs for a manufacturing firm are midstream costs for a merchandising firm.

The Financial Accounting Standards Board (FASB) establishes standards for the preparation of financial accounting reports while the Securities and Exchange Commission (SEC) establishes standards for the preparation of managerial accounting reports. This statement is

False The FASB and the SEC provide standards, rules, and guidance for financial reporting. Managerial accounting is largely unregulated.

Managerial accounting focuses on the needs of external users while financial accounting focuses on the needs of internal users. This statement is

False The relationships described in this statement are reversed. Specifically, managerial accounting focuses on internal users while financial accounting focuses on external users.

Which of the following branches of accounting focuses more on historical data?

Financial accounting. Managerial accounting focuses more on current and future data while financial accounting focuses on reports that explain historical data. For example, financial accounting seeks to determine the amount of income that has been earned in the past while managerial accounting provides information that will facilitate the amount of income to be earned in the future.

The wages of factory maintenance personnel would usually be considered as:

Indirect Labor Manufacturing Overhead a) No Yes b) Yes No c) Yes Yes d) No No Option C Explanation The wages of factory maintenance personnel would not be easily traceable to an individual product and therefore would be classified as indirect labor, which is a component of manufacturing overhead.

Which of the following costs would not be included as part of manufacturing overhead?

Insurance on sales vehicles Explanation Insurance on sales vehicles is a cost incurred to sell a product rather than to make it. All other options are examples of product costs that would be classified as manufacturing overhead.

Product costs are placed in which financial statement account when incurred?

Inventory Explanation When product costs are incurred, they are first placed into an inventory account on the balance sheet. These costs are not recognized as an expense on the income statement until the product is sold.

The primary difference between midstream costs incurred at a manufacturing firm versus a service firm is

Inventory at a service company is consumed immediately as opposed to being stored for future use at a manufacturing firm.

Which of the following are characteristics of managerial accounting information?

Is more willing to sacrifice reliability to gain relevance than is financial accounting. Is future oriented. Provides information to the company's management team. (All of the answers describe characteristics of managerial accounting information)

Which of the following statements is true?

Managerial accounting reports are less regulated than financial accounting reports. Managerial accounting focuses on preparing information for internal users. The types and quality of information are dictated by the management of the reporting entity and are not subject to regulatory requirements.

Use the following information to calculate the sales price of a boat under both GAAP and for internal decision purposes: Number of boats to be sold 500 Upstream costs $ 5,000,000 Direct materials per boat $ 50,000 Direct labor per boat $ 30,000 Overhead per boat $ 20,000 Downstream costs $ 2,000,000 Assume the company wants to sell each boat for 20% more than the cost to produce the boat. Which of the following would be the sales price under GAAP and for internal decision purposes? GAAP Internal Decision a) $ 120,000 $ 136,800 b) $ 136,800 $ 136,800 c) $ 120,000 $ 114,000 d) $ 136,800 $ 114,000

Option A $ 120,000 $ 136,800

Mary's Manufacturing Company used supplies in its accounting department. Which of the following choices reflects how this event would affect the Company's balance sheet and income statement? Assets = Liability + Equity Revenue − Expense = Net Income A + − = n/a + n/a n/a − n/a = n/a B − = n/a + − n/a − + = − C − = n/a + − n/a − n/a = n/a D + − = n/a + n/a n/a − + = −

Option B Explanation Since the accounting department does not make products the cost of supplies used in the department is not a product cost. Instead, the cost of the used supplies is an administrative expense. Recognizing the expense causes assets and equity to decrease. On the income statement expenses increase and net income decreases. Had the supplies been used to produce a product the effects would have been different. Specifically, using manufacturing supplies is an asset exchange transaction that does not affect the income statement immediately. Instead, the income statement would be effected in a subsequent transaction when the goods are sold.

ManCo Manufacturing Company paid cash for commissions paid to sales staff. Which of the following choices reflects how this event would affect the Company's balance sheet and income statement? Assets = Liability + Equity Revenue − Expense = Net Income A + − = n/a + n/a n/a − n/a = n/a B − = n/a + − n/a − + = − C − = n/a + − n/a − n/a = n/a D + − = n/a + n/a n/a − + = −

Option B Explanation When ManCo pays cash to the sales staff the company is paying to sell the product. Selling expenses are downstream costs that are incurred after the product has been made. They are period costs as opposed product cost. Selling costs are expensed in the period they are incurred. As a result, the asset account (Cash) decreases and the expense recognition causes equity (Retained Earnings) to decrease. On the income statement expenses increase and net income decreases.

ManCo Manufacturing Company paid cash for wages of production workers. Which of the following choices reflects how this event would affect the Company's balance sheet and income statement? Assets = Liability + Equity Revenue − Expense = Net Income A + − = n/a + n/a n/a − + = − B − = n/a + − n/a − + = − C + − = n/a + n/a n/a − n/a = n/a D − = n/a + − n/a − n/a = n/a

Option C Explanation When ManCo pays cash for production workers the company is paying money to make inventory. As a result, one asset account (Cash) decreases and another asset account (Inventory) increases, the total amount of assets is not affected. The income statement is not affected until the time goods are sold.

Which of the following describes the flow of product costs in a manufacturing company?

Product costs are first accumulated in an asset account (Inventory) and then transferred to an expense account (Cost of Goods Sold) when the products are sold.

Which of the following is a requirement of the Sarbanes-Oxley Act?

The establishment of a strong set of internal controls. The establishment of a code of ethics. The establishment of a hotline for whistle blowers.

The cost of manufacturing a product includes all of the following except

advertising Advertising is a cost of selling products as opposed to making them.

The cost of a small amount of glue used to manufacture a product may be called

an indirect cost. a product cost. an overhead cost. All of the choices are terms that may be used to describe small quantities of materials consumed in the process of making products.

Within the context of a just-in-time inventory system, the cost of missing a sale because of an insufficient amount of inventory is commonly called waste. This statement is

false

The cost of denim used to manufacture blue jeans would most likely be classified as a

direct material Explanation Denim represents a material that is directly related to the manufacturing of blue jeans and would likely be easily traceable to the individual product. Material costs that are directly related and easily traceable to the product are classified as direct material.

The costs incurred to sell a product would be classified as

downstream costs

According to GAAP, which type of costs are classified as product cost?

midstream costs

Required information The Bake Shop (TBS) buys and sells cakes. To preserve freshness TBS donates cakes that have not been sold within 5 days to charitable organizations. To avoid waste TBS usually orders fewer cakes than it can sell. Sold out signs are frequently seen in the store. Even so, the cakes come in several flavors and occasionally some of the flavors do not sell out before the 5 day shelf life expires. Cakes cost $8 each to purchase and are sold for $14 each. During the most recent month TBS had customer orders for 20 cakes that could not be filled due to a lack of inventory. There were only 4 cakes that had to be donated to charity during the month. Based on this information the

opportunity cost amounted to $120

The three features of the fraud triangle are

opportunity, incentive and rationalization.

Companies that start a just-in-time inventory system are seeking to

reduce the size of the inventory they carry

Which of the following is not a cost associated with holding inventory?

the cost of customizing products

Just-in-time inventory systems are designed to minimize

the cost of storage space opportunity cost the cost of waste

Net income will be overstated if a significant selling and administrative expense is classified as a product cost and

the number of products made is more than the number of products sold.

The primary objective of internal controls is to reduce

the opportunity for fraud

If a manager misclassifies a selling and administrative expense as a product cost and the number of units of the product made is equal to the number of units sold, the amount of net income will not be affected. This statement is

true

In a manufacturing firm, costs incurred to research a more fuel efficient engine would be classified as

upstream costs