MANAGERIAL ACCT EXAM 1

Jack Manufacturing Company had beginning work in process inventory of $8,000. During the period, Jack transferred $34,000 of raw materials to work in process. Labor costs amounted to $41,000 and overhead amounted to $36,000. If the ending balance in work in process inventory was $12,000, what was the amount transferred to finished goods inventory?

$107,000. Explanation Materials $34,000 Labor 41,000 Overhead 36,000 Total manufacturing costs 111,000 Beginning work in process inventory 8,000 Total work in process (available for transfer to finished goods) 119,000 Ending work in process (12,000) Cost of goods manufactured (transferred to finished goods) $107,000

During its first year of operations, Connor Company paid $42,040 for direct materials and $19,200 in wages for production workers. Lease payments and utilities on the production facilities amounted to $8,200. General, selling, and administrative expenses were $9,200. The company produced 6,200 units and sold 5,200 units for $16.20 a unit. The average cost to produce one unit is which of the following amounts?

$11.20

The following beginning and ending inventory balances apply to Holder Company: Beginning Ending Raw Materials Inventory $24,000 $22,000 Work in Process Inventory 32,000 33,000 Finished Goods Inventory 20,000 17,000 During the accounting period, the company purchased $234,000 of direct raw materials. It incurred $180,000 of direct labor costs for the year and allocated $260,000 of manufacturing overhead costs to work in process. There was no overapplied or underapplied overhead. Revenue from goods sold during the year was $800,000. What was Holder's gross margin?

$122,000 Explanation Beginning Raw Materials Inventory $24,000 Raw Materials Purchased 234,000 Raw Materials Available for Use 258,000 Ending Raw Materials Inventory (22,000) Raw Materials Used 236,000 Labor 1 80,000 Overhead 260,000 Total Manufacturing Costs 676,000 Beginning Work in Process Inventory 32,000 Total Work in Process Inventory 708,000 Ending Work in Process Inventory (33,000) Cost of Goods Manufactured 675,000 Beginning Finished Goods Inventory 20,000 Cost of Goods Available for Sale 695,000 Ending Finished Goods Inventory (17,000) Cost of Goods Sold $678,000 ------------------- Revenue $800,000 Cost of Goods Sold (678,000) Gross Margin $122,000

The Science Institute has three departments: Biology, Chemistry, and Physics. The institute's controller wants to estimate the cost of operating each department. He has identified several indirect costs that must be allocated to each department including $56,000 of indirect salaries, $11,000 of office supplies, and $43,000 of office rent. There are 500 students in the biology department, 200 in chemistry and 300 in physics (1,000 total students as the allocation base). The amount of cost that should be allocated to the Chemistry Department is

$22,000. Explanation Cost to be allocated = $56,000 + $11,000 + $43,000 = $110,000 Allocation base = 500 + 200 + 300 = 1,000 total students Allocation rate = Cost to be allocated ÷ Allocation base = $110,000 ÷ 1,000 = $110 per student Allocation to Chemistry Department = $110 per student × 200 = $22,000

The following information was drawn from the accounting records of Marlin Manufacturing Co. Product 1 Product 2 Product 3 Direct Material Cost $115,000 $120,000 $125,000 Direct Labor Cost $210,000 $220,000 $230,000 Direct Labor Hours 4,800 hours 5,400 hours 5,600 hours Factory overhead is estimated to be $759,000 and is applied on a basis of direct labor dollars. This overhead cost is not traceable to any particular product. Factory overhead allocated to Product 2 is

$253,000 Explanation Allocation Base = $210,000 + $220,000 + $230,000 = $660,000 Total Direct Labor Cost Allocation Rate = $759,000 Overhead Cost / $660,000 Total Direct Labor Cost = $1.15 Per Direct Labor Dollar Allocation Amount = $1.15 × $220,000 Direct Labor Dollars in Product 2 = $253,000 to be Allocated to Product 2

At the beginning of the current accounting period Blazer Company had a $40,000 balance in its Finished Goods Inventory account. During the period cost of goods manufactured amounted to $280,000. The ending balance in the Finished Goods Inventory account was $42,000. Based on this information the amount of cost of goods sold is

$278,000. Explanation Cost of Goods Manufactured $280,000 Beginning Finished Goods Inventory 40,000 Cost of Goods Available for Sale 320,000 Ending Finished Goods Inventory (42,000) Cost of Goods Sold $278,000

Saylind Molding paid $1,232,000 in rent for the year. The company's three departments are Headrests, Armrests, and Floor Mats. The accountant has identified two possible cost drivers. The number of employees in each department and the square footage of space occupied by each department. The number of employees working in each department includes 88 in the Headrest Department, 58 in the Armrest Department and 138 in Floor Mats Department. The departments occupy 19,000, 20,300, and 16,700 square feet, for Headrests, Armrests, and Floor Mats respectively. How much of the rent cost should be allocated to the products made in the Floor Mats department?

$367,400 Explanation The most appropriate cost driver in this case is the number of square feet occupied by each department. In other words, rental fees are normally based on the size of the space rather than the number of people who work in the department. Therefore, the size of the space (square footage) drives the rental fee.$1,232,000 ÷ 56,000 sq. feet = $22 per sq. foot$22 × 16,700 sq. feet = $367,400

The following beginning and ending inventory balances apply to Holder Company: Beginning Ending Raw Materials Inventory $24,000 $22,000 Work in Process Inventory 32,000 33,000 Finished Goods Inventory 20,000 17,000 During the accounting period, the company purchased $234,000 of direct raw materials. It incurred $180,000 of direct labor costs for the year and allocated $260,000 of manufacturing overhead costs to work in process. There was no overapplied or underapplied overhead. Revenue from goods sold during the year was $800,000. The amount of cost of goods manufactured (amount transferred from WIP to finished goods) was

$675,000 Explanation Beginning Raw Materials Inventory $24,000 Raw Materials Purchased 234,000 Raw Materials Available for Use 258,000 Ending Raw Materials Inventory (22,000) Raw Materials Used 236,000 Labor 180,000 Overhead 260,000 Total Manufacturing Costs 676,000 Beginning Work in Process Inventory 32,000 Total Work in Process Inventory 708,000 Ending Work in Process Inventory (33,000) Cost of Goods Manufactured $675,000

Logan Corporation has 80 employees, 30 in "A-line," and 50 in "B-line." Logan incurred $240,000 in fringe benefits costs last year. How much in fringe benefit costs should be allocated to "A-line"?

$90,000 Explanation Cost to be allocated ÷ Allocation Base = Allocation rate × Weight of base = Amount to Allocate $240,000 fringe benefits cost / 80 employees = $3,000 per employee × 30 employees = $90,000

Fortune Company had beginning raw materials inventory of $16,000. During the period, the company purchased $92,000 of raw materials. If the ending balance in raw materials was $10,000, the amount of raw materials transferred to work in process is:

$98,000

During its first year of operations, Forrest Company paid $47,290 for direct materials and $50,700 in wages for production workers. Lease payments, utility costs, and depreciation on factory equipment totaled $14,300. General, selling, and administrative expenses were $20,700. The average cost to produce one unit was $5.70. How many units were produced during the period?

19,700

Of the following statements, which is NOT true concerning indirect costs?

An indirect cost may be fixed but cannot be variable. Explanation Indirect costs can be fixed or variable

Which of the following is a product cost for a construction company?

Cost of transporting raw materials to the job site

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

Financial accounting Explanation 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.

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.

Which of the following statements is true?

Managerial accounting reports are less regulated than financial accounting reports. Explanation 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.

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.

Women's Medical Center (WMC) divides its business into two departments including pediatrics (PD) and gynecology (GY). WMC has $90,000 of raise money that will be used to increase employee salaries. The Center has identified the following cost drivers that could be used to allocate the raise money to the two departments. PD GY Physicians' salaries $400,000 $500,000 Number of patients 600 400 Nurses' salaries $120,000 $110,000 Based on this information the supervisor of the gynecology department would be expected to advocate the use of which of the following allocation bases?

Physicians' salaries. Explanation It is natural to assume that each supervisor would strive to maximize the amount of the raise money allocated to their respective departments. Since the gynecology department has a disproportionately higher amount of physicians salaries, that based would result in a greater amount of the raise money being allocated to that department. As proof: Amount to be allocated ÷ Allocation base = Allocation rate $90,000 ÷ ($400,000 salary base + 500,000 salary base) = $0.10 per salary dollar Allocation rate x Weight of the base = Amount to allocate $0.10 x $400,000 salary base = $40,000 allocated to pediatrics $0.10 x $500,000 salary base = $50,000 allocated to gynecology

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 are characteristics of managerial accounting information?

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

Which of the following statements regarding the schedule of cost of goods manufactured and sold is true?

The cost of goods sold is determined by subtracting the ending balance in the finished goods inventory account from the amount of the finished goods available for sale. Explanation By the end of the accounting period all of the goods that were available for sale have either been sold or they remain in ending inventory. Therefore, cost of the goods that have been sold can be determined by subtracting the amount in ending inventory from the cost of goods available for sale.

Morehead Manufacturing Company (MMC) makes a screen that is used to manufacture a toy cell phone. All of the screens made by MMC are identical and sold for the same price per unit. Employees of Morehead Manufacturing Company (MMC) made 1,700 screens in January and 1,100 screens in February. Morehead expects to make 18,000 screens during the year. The company incurs $54,000 per year of insurance cost to attain coverage for its manufacturing employees. The company's manufacturing facility contains 24,000 square feet of space. Which of the following is the most appropriate allocation base assuming management is trying to determine the cost of the products made in January?

The number of units. Explanation The cost objective is to determine the cost of the products made in January and February. The cost to be allocated is the insurance cost. Unfortunately, there is no identifiable cause and effect relationship between the cost to be allocated and the cost objects. In other words, the total insurance cost does not change when more or less units of product are made and sold. Under these circumstances accountants frequently choose to allocate an equal amount of cost to each product made and sold. Using the number of units as the allocation base would result in an allocation that applies an equal amount of cost to each unit of product. Since the number of units made and sold differs from month to month, using number of units as the allocation base would assign more of the total insurance costs to the months where more units are produced. As proof:Cost to be allocated ÷ Allocation base = Allocation RateAllocation rate = $54,000 ÷ 18,000 screens = $3 per screenJanuary allocation = 1,700 screens x 3 = $5,100February allocation = 1,100 screens x 3 =$3,300

Saylind Molding paid $280,000 in rent for the year. The company's three departments are Headrests, Armrests, and Floor Mats. The number of employees working in each department includes 60 in the Headrest Department, 30 in the Armrest Department and 110 in Floor Mats Department. The Headrest Department occupies 5,000 square feet of space; the Armrest Department occupies 6,300 square feet and the Floor Mats Department occupies 2,700 square feet. What is the most appropriate cost driver (allocation base) for allocating the $280,000 rental cost to each of the departments?

The square footage of space. Explanation The number of square feet appears to have the strongest cause and effect relationship with the rental cost. Normally properties rent on the basis of square footage. All other things being equal, larger properties demand higher rent. Also, the amount of square footage is information that is available. Finally, managers may be able to control the size of their operation by transferring space to other departments or in some cases renegotiating rental agreements. Accordingly number of square footage seems to be as the most appropriate cost driver.

Which of the following transactions would cause net income for the period to decrease?

Used $2,000 of office supplies

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

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

Just-in-time inventory systems are designed to minimize

all costs identified in the choices provided in this problem. Explanation Customizing products normally suggests that a company is making the inventory to meet the specifications of a buyer who is ready to take delivery of the product(s) immediately upon its completion. Therefore normally there are not finished goods inventory costs associated with product customization.

The process of dividing a total cost into parts, and assigning the parts among relevant cost objects is called

allocation.

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

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

The process of assigning costs to two or more cost objects requires

cost tracing. cost allocation. cost/benefit analysis.

All of the following are features of managerial accounting except:

information is characterized by objectivity, reliability, consistency, and accuracy.

Costs that can be traced to objects in a cost-effective manner are called

direct costs.

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.

Allocation is a mathematical procedure that cannot be manipulated by the parties involved in making the allocation. This statement is

false. Explanation Allocation is based on debatable opinions such as selecting the most appropriate allocation base. Therefore most allocation decisions are impacted by emotional and political influences. The math is not the issue. It is the determination of which data to use in the allocation that makes the process subject to manipulation.

Direct costs and variable costs are synonymous terms. This statement is

false. Explanation Direct costs can be either fixed or variable costs.

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. Explanation Missing an opportunity to earn income from the sell products that is caused by a lack of inventory is called an opportunity cost rather than waste.

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

The estimated amount of manufacturing overhead appears on the schedule of cost of goods manufactured and sold. This statement is

false. Explanation The amount of actual, not estimated, overhead cost appears in the schedule of cost of goods manufactured and sold.

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

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

Upstream costs are included in the determination of cost of goods sold but downstream costs are not included. This statement is

false. Explanation Upstream cost include costs such as research and development that occur before products are made. Normally, these costs are expensed in the period in which they are incurred and are not included in the determination of the cost of inventory which ultimately becomes cost of goods sold. Downstream costs include costs such as advertising that occur after the product has been made. Downstream costs are expensed in the period in which they are incurred. Accordingly, both upstream and downstream costs are period costs that are expensed in the period in which they are incurred. Neither of these costs are included in the determination of costs of goods sold.

Managerial accounting is concerned with

financial, economic, and nonfinancial data

When resolving disputes over allocations, senior management should focus on

mission of the organization. Explanation While subordinates may be unduly influenced by self-interest and may use political influence and emotion to manipulate the allocation to their benefit, senior management must focus on the mission of the organization rather than the self-interest of individual employees.

Which of the following is the most logical cost driver for allocating the telephone bill among four departments?

number of telephones Explanation There is normally a strong cause and effect relationship between the number of phones and the cost shown on the phone bill. The more phones in use the higher the cost of phone service. Further, the number of phones is readily available. Phones are easy to count. Finally, the number of phones is usually a controllable item. In other words a manager could easily decrease or increase the number of phones used in their department by adding or discontinuing service. In summary the number of phones provides strongest match with all three criteria.

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 $12 each to purchase and are sold for $18 each. During the most recent month TBS had customer orders for 24 cakes that could not be filled due to a lack of inventory. There were only 8 cakes that had to be donated to charity during the month. Based on this information the

opportunity cost amounted to $144. Explanation Lost revenue ($18 × 24 units) $432 Cost of goods that would have been incurred ($12 × 24) 288 Loss of potential profit (opportunity cost) $144

Which of the following is normally present in an allocation decision?

political influence human emotion differences of opinion

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

reduce the size of the inventory they carry. Explanation In an ideal just-in-time system, inventory is produced just-in-time to meet customer demand. In other words, because inventory is delivered to customers immediately upon completion, the manufacturer carries a zero inventory balance. In practice, companies rarely accomplish the ideal. For example, it may be necessary to hold inventory for several days before it can be delivered or it may be necessary to hold a minimum amount of inventory for display purposes. Regardless the goal is to reduce the holding of inventory as much as possible.

The Science Institute has three departments: Biology, Chemistry, and Physics. The institute's controller wants to estimate the cost of operating each department. He has identified several indirect costs that must be allocated to each department including $61,000 of indirect salaries, $13,500 of office supplies, and $45,500 of office rent. There are 500 students in the biology department, 200 in chemistry and 300 in physics. The director of the Institute wants to know how much of the indirect cost to allocate to each department. Based on this information

the amount of the cost to be allocated is $120,000. Explanation In this case the "cost to be allocated" is the total of the indirect costs. Specifically, $61,000 + $13,500 + $45,500 = $120,000. The object of concern is the cost of operating each department. Accordingly, the departments (not the students) are the cost objects. The number of students is the best available cost driver. The size of the student body drives the need for administrative staff (indirect salaries), the use of supplies, and the size of the rental space needed. Accordingly, the number of students (not the indirect cost) is the allocation base.

To identify the best cost driver for a particular allocation consideration should be given to

the strength of a cause and effect relationship. the availability of information. the capacity to control the allocation base.

Women's Medical Center (WMC) divides its business into two departments including pediatrics (PD) and gynecology (GY). WMC expects to incur $50,000 of indirect (overhead) cost and has identified the following cost drivers that could be used to allocate the overhead costs to the two departments. PD GY Physicians' salaries $400,000 $500,000 Number of patients 600 400 Nurses' salaries $120,000 $110,000 Assuming the evaluation of job performance is affected by the supervisors' ability to minimize the cost of operating their respective departments,

the supervisor of the gynecology department would advocate using number of patients as the allocation base. Explanation Since the supervisors are judged on their ability to control cost, they are motivated to select the allocation base that minimizes the amount of cost allocated to their departments. Given that the gynecology department has fewer patients than the pediatrics department, using number of patients as the allocation base would result in a smaller amount of the total overhead cost being allocated to gynecology. As proof: Cost to be allocated ÷ Allocation base = Allocation rate $50,000 ÷ (600 patients + 400 patients) = $50 per patient Allocation rate x Weight of the base = amount to allocate $50 x 600 patients = $30,000 allocated to pediatrics $50 x 400 patients = $20,000 allocated to gynecology

Indirect costs are frequently called overhead costs. This statement is

true.

As a result of the cost/benefit concept, a cost that could be traced directly to a cost object may still be treated as an indirect cost. This statement is

true. Explanation Many costs that can be traced directly are treated as indirect cost because directly tracing the cost is not worth the effort necessary to do the tracing. For example, a furniture manufacturer could count the drops of glue used to produce each piece of furniture. However, there is no benefit in knowing that a few drops more or less of glue were used on one piece of furniture versus another piece. As a result glue and other minor supplies are frequently treated as indirect cost rather than expending the effort necessary to directly trace their use to each individual product.

When there is no cause and effect relationship between a cost driver and the cost to be allocated accountants may be forced to make an arbitrary allocation such as assigning an equal amount of cost to each unit of product. This statement is

true. Explanation Suppose a company pays $12,000 per year for a fire insurance premium to cover its manufacturing plant and wants to assign that cost to the products it makes. There is no cause and effect relationship between the number of units of product made and sold and the insurance cost. In other words, regardless of whether the Company increases or decreases the number of units made and sold, the insurance premium remains at $12,000. Even though the number of units of product is not driving the insurance cost, it still may be useful to use number of units as an allocation base. For example, using number of units as the allocation base would result in assigning an equal amount of cost to each product. Having an equal amount of cost assigned to each product may be useful for certain managerial decisions such as cost plus pricing.

The schedule of cost of goods manufactured and sold is not part of the income statement that appears in a company's public financial statements.

true. Explanation The schedule of cost of goods manufactured and sold is prepared for internal use and it does not appear in the financial statements issued to the public.

Which of the following would be classified as an indirect cost when assigning costs to a particular department of a large retail sales store?

utility costs Explanation Determining the cost of the amount of electricity consumed by each department would require power meters to be installed in each department. The cost of doing this would not likely be justified by the benefit attained. Therefore utility costs are usually treated as indirect costs.