Chapter 11 - Learn Smart

Selling inventory for cash will

increase net income.

Unlike manufacturing companies, _______________ companies do not have Work in Process and Finished Goods inventory accounts.

service

True or false: Under variable costing, the income statement is prepared using a contribution margin approach.

sold to customers. Reason: Generally accepted accounting principles require that all product costs, both variable and fixed, be reported as inventory until the products are sold.

Selling inventory for cash is an asset _______________ transaction.

source

Claire Corporation estimated total overhead cost would be $23,000, but actual overhead costs were $26,500. This indicates Claire spent $3,500 more than expected for overhead cost. This type of variance is known as a(n):

spending variance

If less overhead was applied than was actually incurred then overhead was .

under-applied

If less overhead was applied than was actually incurred then overhead was _______________.

under-applied

Generally accepted accounting principles will not permit a company to report their financial statements using _______________ costing.

variable

Absorption costing produces a higher amount of net income

when production exceeds sales. Reason: With absorption costing, fixed manufacturing costs are treated as inventory and remain in inventory accounts until the product is sold. In contrast, all fixed manufacturing costs are expensed using variable costing. Therefore with absorption costing some fixed manufacturing costs will be in inventory, rather than in expense accounts so expenses will be lower and net income will be higher, than with variable costing (when production exceeds sales).

Which inventory account includes the value of partially completed products?

work in process

When a company recognizes estimated overhead, the manufacturing overhead account decreases and the

work in process inventory account increases.

Recognizing estimated manufacturing overhead costs is a(n)

asset exchange transaction

Actual overhead costs are recorded as _______________ in the manufacturing overhead account.

debit

Paying cash for manufacturing overhead is an asset _______________ transaction.

exchange

Paying cash for raw materials is an asset _______________ transaction.

exchange

If the amount of overapplied or underapplied overhead is significant, it must be allocated proportionately between work in process inventory, _______________ goods inventory and cost of goods sold accounts.

finished

Most manufacturing companies accumulate product costs in three distinct inventory accounts including raw materials inventory, work in process inventory and _______________ goods inventory.

finished

Finished inventory includes completed products that are ready for sale.

goods

On the income statement, cost of goods sold is subtracted from sales revenue to determine

gross margin. Reason: Sales - cost of goods sold = gross margin

Ventra Company paid $26,500 cash to purchase raw materials. Recognizing this transaction will have what effect on the financial statements?

Cash decreases and raw materials inventory increases.

Which inventory account would include a product that is complete and waiting to be sold?

Finished goods inventory

What is the effect on net income when a company recognizes $1,000 of estimated manufacturing overhead?

No effect on net income.

What type of inventory includes the materials used to make the company's product?

Raw materials inventory

Which of the following formulas can be used to calculate cost of goods manufactured?

Total Manufacturing Costs Plus: Beginning work in process inventory Less: ending work in process inventory Total work in process inventory Less: ending work in process inventory

Ring Company had beginning finished goods of $10,000. During the period, the company produced goods that cost $200,000. If the ending balance in the Finished Goods Inventory account was $45,000, the amount of cost of goods sold was:

$165,000 Reason: Cost of goods sold = Beginning finished goods + Cost of goods manufactured − Ending finished goods Cost of goods sold = $10,000 + $200,000 − $45,000 = $165,000

During the year, Sam Company made 100 boxes for a cost of $2,000. The company transferred 70 boxes from finished goods inventory to cost of goods sold. What is the value of the inventory transferred from finished goods to cost of goods sold?

$1,400 Reason: $2,000/$100 = $20 per box $20 x 70 = $1400

Ring Company had beginning finished goods of $50,000. During the period, the company produced goods that cost $150,000. If the ending balance in the Finished Goods Inventory account was $25,000, the amount of cost of goods sold was:

$175,000 Reason: Cost of goods sold = Beginning finished goods + Cost of goods manufactured − Ending finished goods Cost of goods sold = $50,000 + $150,000 − $25,000 = $175,000

What is the correct formula for cost of goods manufactured?

Total Manufacturing costs Plus: Beginning work in process inventory Less: Ending work in process inventory

True or false: Under variable costing, the income statement is prepared using a contribution margin approach.

True

True or false: Absorption costing may motivate managers to overproduce in order to increase profits.

True Reason: Absorption costing may motivate managers to overproduce in order to increase profits. To motivate managers to increase profitability without tempting them to overproduce, many companies use variable costing for internal reporting.

When under or over-applied overhead is not significant, most companies normally assign that total amount of overhead correction directly to

cost of goods sold.

Transferring inventory from finished goods to cost of goods sold will _______________ stockholders' equity.

decrease

During the year, Oliver Company paid cash for monthly rent cost on its manufacturing facilities. Oliver Company will record this transaction by decreasing cash and

increasing manufacturing overhead.

Generally accepted accounting principles require that all product costs, both variable and fixed, be reported as _______________ until the products are sold.

inventory

Lumber, metals and chemicals used to make the company's products are examples of raw materials _______________.

inventory

Actual overhead costs are accumulated in

manufacturing overhead Reason: Actual overhead costs are accumulated in the manufacturing overhead account. Estimated overhead is included in the cost of goods sold account.

On the income statement, selling and administrative expenses are subtracted from gross margin to equal

net income.

Raw materials available for use less ending raw materials inventory equals

direct raw materials used.

Cost of goods sold accounts include the cost of materials, labor and a(n) _______________ amount of overhead.

estimated

Recognizing $100 of estimated manufacturing overhead is an asset _______________ transaction.

exchange

Transferring the total cost of dog toys from work in process inventory to finished goods inventory is an asset ______________ transaction.

exchange

Ventra paid $1,000 cash to purchase production supplies. This transaction is an asset

exchange transaction.

Placing $1,100 of raw materials into the production process will cause raw materials inventory to decrease and work in process inventory to _______________.

increase

Paying cash for manufacturing overhead will

not effect net income Reason: It's an asset exchange. There is no effect on net income.

Work in process inventory includes _______________ completed products.

partially

If Ventra estimated total overhead costs would be $40,320 but actual overhead costs were $43,400, then there is a $3,080

spending variance Reason: The combination of the spending and volume variances explains the total overhead variance. The difference between the estimated total overhead costs and the actual total overhead costs is the spending variance. The difference between estimated volume and actual volume is the volume variance.

Sam Company produces race cars. This year costs for the race cars included: Direct materials $2,500 per car Direct labor $3,500 per car Variable overhead $1,500 per car Fixed overhead $10,000,000 Assume that Sam produces 10,000 race cars and sells 65,000 race cars at a sales price of $14,000 per car. What is gross margin using absorption costing?

$27,500,000

At the beginning of the year, Ventra expected to produce 12,000 jewelry boxes and estimated overhead costs of $40,320. Actual overhead costs ended up being $44,000 and Ventra only produced 11,000 jewelry boxes. Based on the information given, what is the predetermined overhead rate?

$3.36 **Predetermined Overhead Rate = Estimated Overhead Costs/Estimated units of production $40,320/12,000 = $3.36

During the year, Sam Company made 250 boxes for a cost of $500. The company transferred 150 boxes from finished goods inventory to cost of goods sold. What is the value of the inventory transferred from finished goods to cost of goods sold?

$300 Reason: $500/$250 = $2 per box $2 x $150 = $300

At the beginning of the year, Ventra expected to produce 10,000 jewelry boxes and estimated overhead costs of $40,000. Actual overhead costs ended up being $45,000 and Ventra only produced 9,000 jewelry boxes. Based on the information given, what is the predetermined overhead rate?

$4.00 **Predetermined Overhead Rate = Estimated Overhead Costs/Estimated units of production $40,000/10,000 = $4.00

Sam Company produces race cars. This year costs for the race cars included: Direct materials $2,000 per car Direct labor $3,000 per car Variable overhead $1,000 per car Fixed overhead $10,000,000 Assume that Sam produces 10,000 race cars and sells 6,000 race cars at a sales price of $14,000 per car. What is gross margin using absorption costing?

$42,000,000

Ventra Company estimates for the current accounting period that its overhead costs will amount to $510,000 and that it will work 85,000 direct labor hours. If actual overhead costs for the year amounted to $530,000 and actual labor hours amounted to 87,000, then overhead would be:

$8,000 under-applied Predetermined overhead rate= Estimated overhead/estimated hours $510,000/85,000 = $6 per direct labor hour Predetermined overhead rate = Actual hours = Applied overhead $6 per direct labor hour x 87,000 = $522,00 actual hours applied overhead Compare $522,000 applied overhead to $530,000 actual overhead and overhead was under-applied by $8,000.

Ventra paid $1,000 cash to purchase production supplies. What effect will the transaction have on the financial statements?

1. Production supplies increases. 2. Cash decreases. 3. Total assets are unchanged.

Which of the following is an inventory account for a manufacturing company?

1. Raw materials 2. Work in process 3. Finished Goods

Ventra Company placed $1,100 of raw materials into the production process of making jewelry boxes. The boxes are not completed. What is the effect on the financial statements?

1. Raw materials inventory decreases 2. Work in process inventory increases

Which of the following statements about the schedule of cost of goods manufactured and sold is correct?

1. The schedule is an internal document which is not presented with the company's financial statements. 2. The schedule of cost of goods manufactured and sold indicates the amount of direct raw materials used during the period.

Unlike manufacturing companies, service companies do not have

1. finished goods. 2. work in process.

Transferring the total cost of dog toys made in January from work in process to finished goods inventory will

1. increase finished goods inventory. 2. decrease work in process inventory.

Beginning raw materials inventory _______________ purchases _______________ ending raw materials inventory equals direct raw materials used.

1. plus 2. less

_______________ costing may motivate managers to overproduce in order to increase profits.

Absorption

In a company where production exceeds sales, which costing method would produce a higher amount of net income?

Absorption With absorption costing, fixed manufacturing costs are treated as inventory and remain in inventory accounts until the product is sold. In contrast, all fixed manufacturing costs are expensed using variable costing. Therefore with absorption costing some fixed manufacturing costs will be in inventory, rather than in expense accounts. So expenses will be lower and net income will be higher than with variable costing (when production exceeds sales).

Cost of goods manufactured is computed as

Beginning work in process + Direct materials used + Direct labor + Overhead - Ending work in process

If production exceeds sales, _______________ costing produces a higher amount of net income.

absorption

Transferring inventory from finished goods to cost of goods sold is a(n) _______________ use transaction.

asset