Q 1-4 (3)
Mrs. Jones earns $25.00 per hour for straight time worked in the office; and, she earns $40.00 per hour when she works overtime. In week one of the new pay period, she reported that she worked 48 hours, which included 8 hours of overtime. Compute Mrs. Jones's total compensation:
$1,320 Explanation: [Direct labor (48 × 25) + Overtime premium (8 hours × 15)] = $1,320.00
Ms. Taylor works at an assembly plant that produces footballs. She earns $18.00 an hour for straight-time and $36 per hour when she works overtime. She reported that she worked 46 hours during the previous reporting period, which included 6 hours of overtime. Required: Compute the total compensation for the week; the amount of compensation that was reported as direct manufacturing labor; the amount of compensation that is reported as a manufacturing overhead cost.
$936; $828; $108 Total Compensation: Direct Labor [(46 hours × $18) + Overtime premium (6 hrs × $18)] = $936 Direct Manufacturing Labor [(46 hours × $18)] = $828 Manufacturing overhead costs = Overtime premium [(6 hrs × $18)] = $108
Which of the following is not a challenge to managers that allocate costs?
Assign accurate product costs.
Which of the following is correct about indirect costs or a cost object?
Can be traced to a cost object in an economically feasible way.
When are inventoried unit costs expensed?
Not expensed until the units are sold.
Which of the following is not a true statement about variable costs?
Total cost never changes in proportion to any changes in related levels of volume or activity
Unit costs are found in:
all areas of the value chain.
Accounting systems report:
both total-cost amounts and average-cost per unit amounts.
Cost tracing:
describes the assignment of direct costs to a particular cost object
In finished goods inventory:
goods are fully completed but not yet sold.
Mr. Foxhound works at a manufacturing plant that makes balloons for holiday parades. He earns $30 per hour for straight-time and $50 per hour for overtime. One week he worked 46 hours, which included 6 hours of overtime, and 4 hours of idle time caused by a shortage of materials to make the balloons. Required: Compute Mr. Foxhound's total compensation for the week; the amount of compensation reported as direct manufacturing labor; and the amount of compensation that would be reported as manufacturing overhead.
$1,500; $1,260; $240
explain why a manager at a manufacturing company considers the direct costs to be more accurate than indirect costs.
Managers at manufacturing companies consider the direct costs to be more accurate than indirect costs because they can be traced to a specific or particular cost object. Indirect costs, for example, the salaries of administrative personnel at a manufacturing company, can't be traced to a specific cost
explain why managers account for inventoriable and period costs. Explain the differences between inventoriable and period costs.
The inventoriable costs are all costs of a product that a firm regards as an asset in the accounting period when they incurred. They become a cost of the goods sold in the accounting period when the product is sold. Managers expense period costs in the accounting period that they are incurred. All of the costs in an income statement with the exception of cost of goods sold.
When 5,000 units are produced, variable costs are $6 per unit. Therefore, when 20,000 units are produced:
variable costs will total $120,000.
Which of the following is not true about unit costs?
Decision makers think in terms of unit costs rather than total costs
Depending on the purpose, a manager can assign different costs to the same cost object.
TRUE
The cost of steel and tires to an automobile manufacturer is an example of a direct cost.
TRUE
The idle time associated with direct labor and indirect labor is a subclassification of indirect labor.
TRUE
The plant administrative costs at a manufacturing company are indirect costs
TRUE
The two terms that managers use to describe cost classifications in manufacturing costing systems are prime costs and conversion costs
TRUE
The unit cost, or average cost, is the ratio of total costs to the number of units produced
TRUE
Financial accountants realize that a mixed cost
a cost with fixed and variable elements
The difference between total revenues and total variable costs is the ________ ________.
contribution margin
The term that refers to the cost of goods brought to completion, whether they were started before or during the accounting period is
cost of goods manufactured.
Managers compute the unit cost by:
dividing total cost by the number of units.
An example of a mixed cost is:
monthly electric bill.
Managers must know how revenues and costs vary with changes in:
output levels.
List the three key features of cost accounting and cost management.
(1) calculating the cost of products, services, and other cost objects; (2) analyzing relevant information for making decisions, and (3) obtaining information for planning and control and performance evaluation.
As a general rule, managers first calculate total costs, and then compute which of the following costs when they need to make decisions?
A unit costs
discuss why cost allocation is important to a manager. Discuss some of the challenges that managers face when they allocate costs and discuss those factors that affect the direct/indirect cost classification. Be specific.
Cost allocation is important to a manager because they must assign costs accurately to a cost object. Managers are challenged to ensure costs are appropriately allocated to a product. For example, if the product costs are not accurate, the true profitability to products is distorted. As a result, a manager could sell a product that should not be sold because it is not profitable to the company. Some of the factors that affect cost classification include the materiality of the cost in question, the amount of available information-gathering technology, and the product design.
Which of the following is not a commonly used classification or characteristic of manufacturing costs?
Cost of goods sold.
Which of the following is normally included in direct materials inventory?
Direct materials in stock and awaiting use in the manufacturing process.
Which of the following is not a prominent labor component of overhead?
Direct programming labor that cannot be traced to individual products.
Budgeting is not an important tool that managers use in planning and control.
FALSE Explanation: Budgeting is an important tool in planning and control endeavors.
Direct manufacturing labor costs are only a part of prime costs.
FALSE Explanation: Direct manufacturing labor costs are a part of both prime and conversion costs.
One highlight of indirect costs of a cost object is that it can be traced in an economically feasible way.
FALSE Explanation: Indirect costs of a cost object are related to the particular cost object but cannot be traced to it in an economically feasible way.
Indirect costs of a cost object can be traced to a specific cost object and direct costs of a cost object cannot be traced to a specific cost object.
FALSE Explanation: Indirect costs of a cost object are related to the particular cost object but cannot be traced to it in an economically feasible way. Direct costs of a cost object are related to the particular cost object and can be traced to it in an economically feasible way.
Managers should think in terms of unit costs rather than terms of total costs for many decisions.
FALSE Explanation: Managers should think in terms of total costs rather than terms of total costs for many decisions.
Service-sector companies are known as companies that provide products to its customers.
FALSE Explanation: Service-sector companies provide services to its customers.
Cost tracing is used to describe the assignment of indirect costs to a particular cost object.
FALSE Explanation: The term cost tracing is used to describe the assignment of direct costs to a particular cost object.
Fixed costs can be changed quickly to match the amount of resources that are needed or used in the organization.
FALSE Explanation: Unlike variable costs, fixed costs of resources cannot be quickly and easily changed to match the resources needed or used.
A manager at an airline must purchase individual annual licenses and pay registration costs for each airplane in the fleet of airplanes they operate at the airport. What type of cost is/are the registration and license costs for the miles flown each year for each individual airplane?
Fixed cost for the miles flown by each individual plane.
Which of the following methods is not used to reduce the undesirable affects of absorption costing?
Include only financial variables in the measures used to evaluate performance.
Which of the following statements about the direct or indirect cost classification is not true?
Indirect costs are always traced.
explain why it is important for managers to assign costs accurately to cost objects. What are some of the challenges that managers face when they allocate costs to cost objects?
It is important for managers to assign costs accurately to cost objects because the data reported and assigned to the product will not be accurate. Inaccurate product costs results in the inaccurate profitability of different products. As a result, the manager may select to promote the unprofitable product instead of the profitable product. If costs are consistently inaccurate it could affect the long-term profit forecast of the product. One challenge to a manager is the allocation of indirect administrative costs. Managers must decide whether the administrative costs are calculated by the number or products produced or by the number of administrative workers that produce the product.
Which of the following is not a characteristic of absorption costing?
It is not the required inventory method for external reporting in most countries.
and discuss the concepts of how managers assign costs to the same cost objects.
Managers consider the purpose of the cost before they assign costs to the same cost object. Students could provide various examples per any industry sector: In the external reporting purpose in manufacturing companies, the managers review the inventoriable cost of a product that only includes the manufacturing costs. If a manager reviews other costs from the other business functions of the value chain, the costs are assigned to a product for pricing and product-mix decisions
explain why managers are concerned about the flow of inventoriable and period costs in manufacturing and merchandising settings. How do managers determine the flow of these costs?
Managers differentiate between the flow of inventoriable and period costs. The managers in manufacturing settings classify inventoriable costs as those costs that flow through work-in-process and the finished goods accounts. They are expensed as costs of goods sold. Managers that work at merchandising firms only treat the cost of merchandise as an inventoriable cost or expense.
explain how technological advances have improved the accounting or finance manager's ability to track costs. Be specific.
Managers enjoy the advances in information-gathering technology because it enhances their ability to trace direct costs. The development of bar codes now permit managers to classify low-cost products, for example, clips and screws that were previously classified as indirect costs.
explain how the impact of a financial crisis impacts how managers at global companies account for fixed costs. Be specific.
Managers that work at global companies are reluctant to lock in fixed costs. Certain policies could increase the risk of losses during economic downturns. In addition, if there is a decrease in revenues that result from an economic crisis, the fixed costs remain unchanged. If there is a decrease in the revenues, it will prevent problems in the organization.
explain how managers differentiate between fixed costs and variable costs.
Managers understand that total fixed costs do not change in the time-period observed despite the changes in the level of activity or volume. However, the variable costs do change in proportion to changes in the total level of activity or volume.
discuss how manufacturing-sector companies inventory their products.
Manufacturing-sector companies purchase materials and components and convert them into finished goods. Typically, manufacturing-sector companies have three types of inventory. (1) Direct materials inventory is used to account for direct materials that managers keep in stock when they are waiting to use them in the manufacturing process, (2) Work-in process inventory, also known as work-in process inventory, is used to account for goods that are worked on but not completed, and, (3) Finished goods inventory is used to account for goods that are completed but not sold.
discuss whether or not managers should assume that individual cost items are inherently fixed or variable? Why are some costs fixed and other costs variable costs?
No, managers should never assume that individual cost items are inherently fixed or variable. For example, a labor cost can be a variable cost for the units produced when those workers are paid on a piece-rate, or piece-unit, basis. Forecasted labor costs at a plant could be considered a fixed cost in the next fiscal accounting period.
Which of the following is not a characteristic of the type of inventory used in manufacturing-type sector companies?
Products already manufactured and sold.
discuss some of the factors that affect the classification of direct and indirect costs.
Some of the factors that affect the classification of direct and indirect costs include the materiality of the cost in question, the available technology used to gather information, and the design of the operations. In addition, managers must learn to make logical decisions based on the cost object depending on the purpose of the cost because in certain cases, a cost could be classified as a direct cost or an indirect cost.
Although labor cost classifications vary among companies, many companies use multiple labor cost categories
TRUE
Analyzing relevant information is a key aspect of making appropriate decisions.
TRUE
As information gathering technology improves, companies can add more and more direct-cost categories
TRUE
Conversion costs represent all manufacturing costs incurred to convert direct materials into finished goods.
TRUE
Costs are defined as variable or fixed for a specific activity and for a given time period.
TRUE
Costs that have both fixed and variable elements are called mixed costs or semi variable costs.
TRUE
Ford Motor Company is an example of a plant that manufactures automobiles. The cost of the lease where it manufactures automobiles can be categorized as an indirect cost.
TRUE
In general, a manager is more confident about the accuracy of direct costs of cost objects.
TRUE
Management accountants help managers distinguish between relevant and irrelevant information
TRUE
Managers achieve clarity about direct labor costs because it may prevent disputes regarding cost reimbursements contracts, income tax payments, and labor unicorn matters.
TRUE
Manufacturing-sector companies purchase materials and components and convert them into various finished goods.
TRUE
Merchandising-sector companies purchase and then sell tangible products without changing their basic form
TRUE
Outside the relevant range, variable costs, such as direct materials, may not change proportionately with changes in production volume
TRUE
Service-sector companies only provide services or intangible products and so do not hold inventories of tangible products.
TRUE
Under GAAP, only manufacturing costs can be assigned to inventories in the financial statements.
TRUE
Indirect costs such as rent, telephone, and depreciation are always costs of the period in which they are incurred and are not associated with inventories.
TRUE Explanation: Indirect costs such as rent, telephone, and depreciation are always costs of the period in which they are incurred and are not associated with inventories.
Which of the following is not true about payroll fringe costs?
Tax authorities argue that the costs are part of overhead.
discuss how technology has impacted a manager's ability to track direct costs. Be specific.
Technological advances have improved the manager's ability to track direct costs. Managers can add more cost categories that result in more accurate accounting of specific products. For example, some computer software manufacturing companies have enhanced the features of the technology. These companies added more manufacturing cost items so managers can trace specific costs. This results in more accurate accounting of direct costs at a firm.
define relevant range. Discuss what the relevant range is and explain why it is important to managers?
The relevant range is known as the band or range of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Managers are concerned about the relevant range because it is known as the region of activity where a particular relationship holds between a driver and a cost. Managers also observe variable costs because they many not change in proportion to changes in volume.
explain how managers classify manufacturing costs.
There are three ways that managers classify manufacturing costs. They are (1) Direct material cost is the acquisition costs of all materials that become part of the cost object. They include freight-in charges, sales taxes, and customs duties (2) Direct manufacturing labor costs include the compensation of manufacturing labor that managers trace to the cost object. They include wages or fringe benefits paid to machine operators and assembly-line workers who convert direct materials purchased to finished goods, and (3) Indirect manufacturing costs. These include all manufacturing costs that are related to the cost object but cannot be traced to the cost object. These include supplies, indirect materials, indirect manufacturing labor, plant rent and insurance, plant property taxes, plant depreciation, and the compensation of plant managers.
discuss how unit costs are calculated. Discuss how unit costs are related to the value chain.
Unit costs are also known as the average cost. Unit costs can be calculated by dividing total cost by the related number of units. Unit costs are directly related to the value chain because they can be summed in all areas of the value chain. Managers can sum unit costs of different products and services and determine whether or not the product or service is profitable. This information is useful to managers because they use the information to determine which products that they will invest more resources in and the prices that they can charge for the products and services.
The costing systems that managers use to identify the cost of each activity such as testing, design, or set-up are called:
activity-based costing systems.
Pricing and product-mix decisions include
all costs incurred along the value chain.
A key aspect of making decisions is:
analyzing relevant information.
Fixed and variable costs:
are defined as variable or fixed for a specific activity for a given time period.
Managers compare actual results to planned performance:
at the end of the reporting period.
If each motorcycle requires a fan belt that costs $20 and 2,000 motorcycles are produced in the month, the total cost for the fan belts is
considered to be a direct variable cost
The general term used to identify the tracing and allocation of accumulated costs to a cost object is:
cost assignment
Whatever the purpose, the ________ ________ trace direct costs and allocates indirect costs to products.
costing systems
When 40,000 units are produced, fixed costs are $16 per unit. Therefore, when 80,000 units are produced, fixed costs will:
decrease to $8 per unit.
In government contracts, product costs include:
design costs plus manufacturing costs.
The cost of goods sold is the cost of finished goods inventory sold to customers
during the current accounting period
Under the variable costing method
fixed manufacturing costs are not inventoried.
For the purpose of calculating inventory, product costs include only
inventoriable (manufacturing) costs.
All costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold are:
inventoriable costs.
a sunk cost
is a cost that occurred in the past
A production system under which products are manufactured only when needed is:
just-in-time production.
Under Generally Accepted Accounting Principles (GAAP), only ________ costs can be assigned to inventories in the financial statements.
manufacturing
________ ________ is the wage rate paid to workers for both direct labor and indirect labor in excess of their straight-time wage rates.
overtime premium
The wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight time wage rate is:
overtime premium.
The sum of the costs assigned to a product for a specific purpose are:
product costs.
A band of normal activity or volume in which specific cost-volume relationships are maintained is referred to as the:
relevant range
We define cost tracing as:
the assignment of direct costs to a chosen cost object.
We define cost allocation as:
the assignment of indirect costs to the chosen cost object.
The broader definition of a cost object is:
the higher proportion of costs that are direct costs and the managers are more confident in the accuracy of the cost amounts.
