CHAPTER 2 COST

The following information pertains to Alleigh's Mannequins: Manufacturing costs $2,170,000 Units manufactured 31,000 Units sold 28,500 units sold for $90 per unit Beginning inventory 0 units What is the amount of gross margin?

$570,000 Answer: D Explanation: 28,500 × ($90 - ($2,170,000 / 31,000)) = $570,000

Pederson Company reported the following: Manufacturing costs $360,000 Units manufactured 9,000 Units sold 7,500 units sold for $90 per unit Beginning inventory 1,000 units What is the manufacturing cost for the ending finished goods inventory?

A) $100,000 Answer: A Explanation: (1,000 + 9,000 - 7,500 ) × 40 = $100,000

In its first year of operation, the Excellent Publishing Company sells 52,000 units and has 1,700 units in stock at year end. The cost of goods sold are $3,100,000. What are the total manufacturing costs for the year if the average unit cost is $8.50?

A) $3,114,450 Answer: A Explanation: $3,100,000 + (1,700 x $8.50) = $3,114,450

When 25,000 units are produced, fixed costs are $21.00 per unit. Therefore, when 20,000 units are produced, fixed costs will ________.

A) increase to $26.25 per unit B) remain at $21.00 per unit C) decrease to $16.80 per unit D) total $420,000 Answer: A Explanation: Fixed costs are $525,000 ($21.00 × 25,000 units). Dividing $525,000 by 20,000 units = $26.25.

Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants. They are: Cost object #1: The physical buildings and equipment Cost object #2: The use of buildings and equipment Cost object #3: The availability and use of manufacturing labor The following manufacturing overhead cost categories are found in the accounting records: a. Depreciation on buildings and equipment b. Lubricants for machines c. Property insurance d. Supervisors salaries e. Fringe benefits f. Property taxes g. Utilities

Answer: Cost object # 1 includes categories a, c, and f. Cost object # 2 includes categories b and g. Cost object # 3 includes categories d and e.

The East Company manufactures several different products. Unit costs associated with Product ORD105 are as follows: Direct materials $54 Direct manufacturing labor 8 Variable manufacturing overhead 11 Fixed manufacturing overhead 25 Sales commissions (2% of sales) 5 Administrative salaries 12 Total $115 What is the percentage of the total fixed costs per unit associated with Product ORD105 with respect to total cost?

B) 32% Answer: B Explanation: $25 + 12 = $37/115 = 32%

Which of the following statements is true?

Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs.

Buildz Manufacturing currently produces 2,000 tables per month. The following per unit data for 2,000 tables apply for sales to regular customers: Direct materials $75 Direct manufacturing labor 20 Variable manufacturing overhead 20 Fixed manufacturing overhead 40 Total manufacturing costs $155 What is the per unit cost when producing 4,000 tables?

C) $135.00 Answer: C Explanation: $540,000 / 4,000 = $135.00

Puritan Apparels is a clothing retailer. Unit costs associated with one of its products, Product AHF 130, are as follows: Direct materials $110 Direct manufacturing labor 90 Variable manufacturing overhead 45 Fixed manufacturing overhead 33 Sales commissions (2% of sales) 10 Administrative salaries 28 Total $316 What are the direct variable manufacturing costs per unit associated with Product AHF 130?

C) $245 Answer: C Explanation: Direct variable manufacturing costs = $110 + $90 + $45 = $245

Rapid Cabinet Makers Inc. provided the following information for last month: Sales $25,000 Variable costs 10,000 Fixed costs 3,000 Operating income $12,000 If sales reduce to half the amount in the next month, what is the projected operating income?

C) $4,500 Answer: C Explanation: Projected operating income = ($25,000 × 0.5) − ($10,000 × 0.5) − $3,000 = $4,500

Wonderful Products Manufacturing Corp. provided the following information for last month: Sales $43,000 Variable costs 14,000 Fixed costs 11,000 Operating income $18,000 If sales reduce to half of the amount in the next month, what is the projected operating income?

D) $3,500 Answer: D Explanation: Projected operating income = ($43,000 / 2) − ($14,000 / 2) − $11,000 = $3,500

Ridez Manufacturing currently produces 4,000 bicycles per month. The following per unit data apply for sales to regular customers: Direct materials $53 Direct manufacturing labor 10 Variable manufacturing overhead 12 Fixed manufacturing overhead 14 Total manufacturing costs $89 The plant has capacity for 6,000 bicycles and is considering expanding production to 5,000 bicycles. What is the per unit cost of producing 5,000 bicycles?

D) $86.20 per unit Answer: D Explanation: Cost of producing 5,000 bicycles = [($53 + $10 + $12 ) × 5,000 units] + ($14 × 4,000 units) = 375,000 ÷ 5,000 units = $86.20

Variable costs per unit vary with the level of production or sales volume.

FALSE

All costs incurred by a company (sacrifice of a resource) are recorded in the accounting system.

FALSE Explanation: A company can incur a cost without it being recorded in the accounting system. Examples include opportunity costs and environmental costs.

Accountants define a cost as the amount of money spent on a resource.

FALSE Explanation: A cost is a resource sacrificed or foregone and the requirement of spending or cash expended is not part of the definition.

Manufacturing companies hold only one type of inventory: direct material.

FALSE Explanation: Manufacturing companies normally hold three types of inventory: Materials, WIP, and Finished Goods.

Which of the following statements about the direct/indirect cost classification is true?

Indirect costs are always allocated.

Which of the following is true of indirect costs?

Indirect costs cannot be traced to a particular cost object in an economically feasible way.

________ are all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way.

Indirect manufacturing costs

A unit cost is also called an average cost.

TRUE

A cost system determines the cost of a cost object by ________.

accumulating and then assigning costs

The determination of a cost as either direct or indirect depends upon the ________.

cost object chosen

Finished goods inventory would normally include ________.

goods fully completed but not yet sold

The only type of inventory that Macy's, a major U.S. department store chain would report on its balance sheet is:

merchandise inventory

Cost tracing is ________.

the assignment of direct costs to the chosen cost object

Cost allocation is ________.

the assignment of indirect costs to the chosen cost object

Direct materials inventory costs would normally include ________.

the cost of materials in stock are part of the cost object (product) and can be traced to that cost object in an economically feasible way

Which of the following factors affect the direct/indirect classification of a cost?

the design where a particular area is dedicated to a specific cost object

Which of the following is a cost driver for a companys human resource costs?

the number of job applications processed

Which of the following statements is true of direct costs?

A direct cost of one cost object can be an indirect cost of another cost object.

Puritan Apparels is a clothing retailer. Unit costs associated with one of its products, Product DCF 130, are as follows: Direct materials $120 Direct manufacturing labor 40 Variable manufacturing overhead 15 Fixed manufacturing overhead 33 Sales commissions (2% of sales) 5 Administrative salaries 24 Total $237 What are the indirect nonmanufacturing variable costs per unit associated with Product DCF130?

A) $5 Answer: A Explanation: Indirect variable costs = Sales commissions = $5

The East Company manufactures several different products. Unit costs associated with Product ORD105 are as follows: Direct materials $92 Direct manufacturing labor 32 Variable manufacturing overhead 12 Fixed manufacturing overhead 32 Sales commissions (2% of sales) 26 Administrative salaries 6 Total $200 What is the percentage of the total variable costs per unit associated with Product ORD105 with respect to total cost?

A) 81% Answer: A Explanation: $92 + $32 + $12 + $26 = $162 ÷ 200 = 81%

Pederson Company reported the following: Manufacturing costs $187,000 Units manufactured 17,000 Units sold 8,500 units sold for $50 per unit Beginning inventory 3,400 units What is the average manufacturing cost per unit?

B) $11.00 Answer: B Explanation: $187,000 / 17,000 = $11.00

Swansea Manufacturing currently produces 3,000 tires per month. The following per unit data for 3,000 tires apply for sales to regular customers: Direct materials $38 Direct manufacturing labor 14 Variable manufacturing overhead 19 Fixed manufacturing overhead 20 Total manufacturing costs $91 The plant has capacity for 5,000 tires and is considering expanding production to 4,000 tires. What is the total cost of producing 4,000 tires?

B) $344,000 Answer: B Explanation: Total cost of producing 4,000 tires = [($38+ $14 + $19) × 4,000 units] + ($20 × 3,000 units) = $344,000

Pederson Company reported the following: Manufacturing costs $480,000 Units manufactured 8,000 Units sold 7,500 units sold for $90 per unit Beginning inventory 2,000 units What is the average manufacturing cost per unit? (Round the answer to the nearest dollar.)

C) $60.00 Answer: C Explanation: $480,000 / 8,000 = $60.00

Pederson Company reported the following: Manufacturing costs $187,000 Units manufactured 17,000 Units sold 8,500 units sold for $20 per unit Beginning inventory 3,400 units What is the manufacturing cost for the ending finished goods inventory?

D) $130,900 Answer: D Explanation: Ending finished inventory = 3,400 + (17,000 - 8,500) × $11 = $130,900

A direct cost of one cost object cannot be an indirect cost of another cost object.

FALSE

Assigning indirect costs is easier than assigning direct costs.

FALSE

Costs are accounted for in two basic stages: assignment followed by accumulation.

FALSE

The smaller the amount of a cost the more likely it is economically feasible to trace it to a particular cost object.

FALSE

Which of the following companies is part of the service sector of our economy?

KPMG

________ sector companies purchase materials and components and convert them into finished goods.

Manufacturing

Which of the following companies is part of the manufacturing sector of our economy?

Nike

Which one of the following items is a direct cost?

Printing costs incurred for payroll check processing; payroll check processing is the cost object.

Which of the following is not an inventoriable cost of a manufacturer?

Sales commissions paid to sales representatives who sell the products made by the manufacturer

A cost driver is a variable, such as the level of activity or volume that causally affects costs over a given time span.

TRUE

A cost is a resource sacrificed or forgone to achieve a specific objective.

TRUE

A cost object is anything for which a cost measurement is desired.

TRUE

A direct cost of one cost object can be an indirect cost of another cost object.

TRUE

A fixed cost is fixed only in relation to a given wide range of total activity or volume and only for a given time span, usually a particular budget period.

TRUE

A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume of output produced.

TRUE

A lease for a store calls for a base monthly rent of $1,500 up to $10,000 of sales with a possible additional monthly cost of 2% of sales over $10,000. The rent is a fixed cost for the month for a relevant range of zero to $10,000 sales.

TRUE

A unit cost is computed by dividing total cost by the number of units.

TRUE

Acquisition costs of direct materials include freight-in charges, sales taxes, and custom duties.

TRUE

Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for making decisions.

TRUE

An actual cost is the cost incurred-a historical or past cost.

TRUE

Banks provide services or what some might call "intangible products" to their customers.

TRUE

Cost drivers casually affect total costs of a cost object over a given time span.

TRUE

Fixed cost per unit falls with an increase in production volume.

TRUE

Improvements in information-gathering technologies are making it possible to trace more costs as direct.

TRUE

Managers use assigned cost information to make decisions and implement them.

TRUE

Merchandising companies purchase products and sell them to customers without changing their basic form.

TRUE

The broader the cost object definition (i.e., plant versus product), the more confident the manager will be about the accuracy of the direct cost amounts.

TRUE

The cost of natural gas used to heat a production facility that makes three products (A,B, and C) would be classified as an indirect cost when the cost object is one of the products (either A, B, or C).

TRUE

Wood used to manufacture chairs is considered a direct variable cost when the cost object is the chair.

TRUE

Which of the following would be considered an actual cost of a current period?

The $25 of materials in a manufactured chair that is ready to be shipped to the customer

Buildz Manufacturing currently produces 2,000 tables per month. The following per unit data for 2,000 tables apply for sales to regular customers: Direct materials $75 Direct manufacturing labor 20 Variable manufacturing overhead 20 Fixed manufacturing overhead 40 Total manufacturing costs $155 The plant has capacity for 4,000 tables and is considering expanding production to 4,000 tables. What is the total cost of producing 4,000 tables?

The plant has capacity for 4,000 tables and is considering expanding production to 4,000 tables. What is the total cost of producing 4,000 tables? A) $540,000 Answer: A Explanation: [($75 + $20 + $20) × 4,000 units] + ($40 × 2,000 units) = $540,000

Which of the following statements is true?

There is a cause-and-effect relationship between the cost driver and the amount of cost.

Atlas Manufacturing produces a unique valve, and has the capacity to produce 50,000 valves annually. Currently Atlas produces 40,000 valves and is thinking about increasing production to 45,000 valves next year. What is the most likely behavior of total manufacturing costs and unit manufacturing costs given this change?

Total manufacturing costs will increase and unit manufacturing costs will decrease.

Which of the following companies is part of the merchandising sector of our economy?

Whole Foods Market

Which of the following is a fixed cost for an automobile manufacturing plant?

administrative salaries

For an automobile manufacturer, period costs include the cost of ________.

advertising

Fixed costs depend on the ________.

amount of unchanged costs for a given time period

At a plant where a union agreement sets annual salaries and conditions, annual labor costs usually ________.

are considered a fixed cost

Inventoriable costs ________.

are expensed in the accounting period in which the products are sold

Period costs ________.

are treated as expenses in the period they are incurred

Inventoriable costs are costs of a product that are considered ________.

assets in a companns balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold

Cost assignment ________.

associates accumulated costs with certain cost objects

For a manufacturing company, indirect manufacturing costs would be included in ________.

both work-in-process inventory and finished goods inventory

If each motorcycle requires a belt that costs $20 and 2,000 motorcycles are produced for the month, the total cost for belts is ________.

considered to be a direct variable cost

The collection of cost data in an organized way, such as in various categories such as materials, labor, and manufacturing overhead, is called:

cost accumulation

All of the following are factors affecting direct versus indirect cost classification except:

cost accuracy

Which of the following is a period cost?

costs incurred to provide customer service such as the operation of a 800 phone line to trouble shoot product problems and to answer questions about product warranties

When costs can be traced to a particular cost object in an economically feasible way, the cost is a:

direct cost

In the cost classification system used by manufacturing firms, assembly workers wages would be included in ________.

direct manufacturing costs

Wages paid to machine operators on an assembly line are classified as a ________.

direct manufacturing labor cost

Total manufacturing costs are comprised of ________.

direct materials costs, direct manufacturing labor costs, and manufacturing overhead costs

For a manufacturing company, direct material costs may be included in ________.

direct materials inventory, work-in-process inventory, and finished goods inventory accounts

The balance sheet of a manufacturing-sector companies would report ________.

direct materials inventory, work-in-process inventory, and finished goods inventory accounts

A unit cost is computed by ________.

dividing total cost by the number of units produced

Service-sector companies ________.

do not produce tangible products but cost accounting is still utilized in service firms.

Which one of the following is a variable cost for an insurance company?

electricity expenses

Which of the following is true if the production volume decreases?

fixed cost per unit increases

Which of the following is a direct manufacturing cost?

fringe benefits paid to machine operators

Work-in-process inventory would normally include ________.

goods partially worked on but not yet fully completed

Cost behavior refers to ________.

how costs react to a change in the level of activity

Period costs ________.

include the cost of selling, delivering, and after-sales support for customers

Variable costs ________.

increase in total when the actual level of activity increases

A plant manufactures several different products. If a particular product is the cost object, then the wages of the plant supervisor can be classified as a(n) ________.

indirect manufacturing cost and therefore is an inventoriable cost

Manufacturing overhead costs are also referred to as ________.

indirect manufacturing costs

Manufacturing overhead costs in an automobile manufacturing plant most likely include ________.

indirect material costs such as lubricants

Costs that are initially recorded as assets and expensed when goods sold are called ________.

inventoriable costs

Which of the following cost is included in cost of goods sold?

manufacturing labor cost

For a manufacturing-sector company, the cost of factory depreciation is classified as a ________.

manufacturing overhead cost

Which of the following is an inventoriable cost?

manufacturing overhead cost

Indirect manufacturing costs ________.

may include both variable and fixed costs

A manufacturing plant produces two product lines: golf equipment and soccer equipment. An example of a direct cost for the golf equipment line is ________.

monthly lease payments for a specialized piece of equipment needed to manufacture the golf driver

Which of the following is a fixed cost with respect to units produced in a factory?

monthly rent payment for the building

The balance sheet of a service-sector companies would show ________.

no inventory accounts

The most likely cost driver of distribution costs is the ________.

number of miles driven

The most likely cost driver of direct labor costs is the ________.

number of production hours

For a manufacturing company, direct labor costs would be included in ________.

only in both work-in-process inventory and finished goods inventory

Costs expensed on the income statement in the accounting period incurred are called ________.

period costs

The income statement of a service-sector firm reports ________.

period costs only

Budgeted costs are ________.

planned or expected costs

For manufacturing firms, inventoriable costs include ________.

plant supervisor salaries

Rally Synthesis Inc. manufactures and sells 100 bottles per day. Fixed costs are $22,000 and the variable costs for manufacturing 100 bottles are $30,000. Each bottle is sold for $1,200. How would the daily profit be affected if the daily volume of sales drop by 10%?

profits are reduced by $9,000 Explanation: Variable cost per unit = $30,000 / 100 = $300 Profit for 100 bottles = ($1,200 × 100) - ($22,000 + $30,000 ) = 68,000 Sales after 10% drop = 100 × (1 - 0.1) = 90 Profit for 90 bottles = ($1,200 × 90) - ($22,000 + (90 × 300))= $59,000 Change in profit = $68,000 - $59,000 = $9,000. Hence, the profit has decreased by $9,000.

A manufacturing plant produces two product lines: golf equipment and soccer equipment. An example of indirect cost for the soccer equipment line is the ________.

property taxes paid on the land and building (plant)

Merchandising-sectors ________.

purchase and then sell tangible products without changing their basic form

A band of normal activity or volume in which specific cost-volume relationships are maintained is referred to as the ________.

relevant range

Marriott International, would be classified as a(n) ________.

service-sector company

For merchandising companies, inventoriable costs include ________.

shipping (incoming) costs to acquire merchandise

R&D costs are treated as period costs because ________.

these costs may increase revenues in the future period

Within the relevant range, if there is a change in the level of the cost driver, then ________.

total fixed costs will remain the same and total variable costs will change

Which of the following is true if the volume of sales increases (within a relevant range)?

total variable cost increases

When 24,000 units are produced, variable costs are $12.00 per unit. Therefore, when 18,000 units are produced ________.

variable costs will remain at $12.00 per unit

Inventoriable costs are expensed on the income statement ________.

when the products are sold

Classifying a cost as either direct or indirect depends upon ________.

whether the cost can be traced to a particular cost object in an economically feasible way

Outside the relevant range, variable costs, such as direct material costs ________.

will not change proportionately with changes in production volumes

Which of the following is not reported on the income statement of a manufacturing firm?

work in progress