Review for exam
PRN has a plantwide overhead rate of $48 per direct labor hour. It has two products, the standard vacuum and the custom vacuum. The standard vacuum uses 20 direct labor hours and the custom vacuum uses 35 direct labor hours. Direct materials and direct labor are $400 and $350, respectively for the standard vacuum. The direct materials and direct labor for the custom vacuum are $600 and $500, respectively. What is the cost per unit for the standard and custom vacuums? $2,780 for the standard vacuum and $1,710 for the custom vacuum $750 for the standard vacuum and $1,100 for the custom vacuum $900 for the standard vacuum and $1,100 for the custom vacuum $1,620 for the standard vacuum and $2,265 for the custom vacuum $1,710 for the standard vacuum and $2,780 for the custom vacuum
$1,710 for the standard vacuum and $2,780 for the custom vacuum Explanation: Using the plantwide overhead rate of $48, the standard vacuum has 20 hours of direct labor (20 x $48) = $960 for the standard vacuum overhead. The custom vacuum has 35 hours of direct labor (35 x $48) = $1,680 for the custom vacuum overhead. Total costs for the standard vacuum are direct materials of $400 + direct labor of $350 + overhead of $960 = $1,710. Total costs for the standard vacuum are direct materials of $600 + direct labor of $500 + overhead of $1,680 = $2,780.
Morton manufacturing allocates the computer support department's costs to its production departments of assembly and testing. Costs for the computer support department total $40,000. Computer support costs are allocated based on the number of calls to the computer support department. Assembly had 50 calls and testing had 150 calls to the computer support department. What amount will be allocated from the computer support department to the assembly and test departments? $8,000 to assembly and $32,000 to testing $12,000 to assembly and $28,000 to testing $10,000 to assembly and $30,000 to testing $7,775 to assembly and $32,225 to testing $15,000 to assembly $25,000 to testing
$10,000 to assembly and $30,000 to testing Explanation: The rate to allocate the computer support department's costs equal the total costs of $40,000 divided by the total calls for the assembly and test departments of 200 equals an allocation rate of $200. The amount allocated from the computer support department to assembly equals $200 times 50 calls, which equals $10,000. The amount allocated from the computer support department to testing equals $200 times 150 calls, which equals $30,000.
KJP applies a plantwide rate to allocate overhead costs. The rate is based on direct labor hours and KJP estimates a total of 250,000 direct labor hours for the year. The company has also estimated its annual overhead costs to be $4,000,000 and its estimated annual direct materials to be $5,000,000. What is KJP's plantwide overhead rate? $18 per direct labor hour $25 per direct labor hour $16 per direct labor hour $20 per direct labor hour $22 per direct labor hour
$16 per direct labor hour Explanation: The plantwide overhead rate is calculated by taking the total estimated annual overhead costs of $4,000,000 and dividing by the total estimated annual direct labor hours of 250,000 = a plantwide overhead rate of $16 per direct labor hour.
If one unit of product uses direct materials costing $20. What are the total direct materials costs when 10 units are produced and when 20 units are produced? -$200 for 10 units and $600 for 20 units -$200 for 10 units and $400 for 20 units -$1,000 for 10 units and $2,000 for 20 units -$200 for 10 units and $200 for 20 units -$100 for 10 units and $100 for 20 units
$200 for 10 units and $400 for 20 units Explanation: One unit of product costs $20, producing 10 units would cost $200 ($20 x 10 units) and producing 20 units would cost $400 ($20 x 20 units).
The Kelson Company uses the department allocation approach to allocate overhead. Total estimated annual overhead for Kelson is $4,800,000 of which $4,200,000 is for the machining department and $600,000 is for the assembly department. The machining department allocates overhead based on machine hours which are estimated to be 70,000 for the year. The assembly department allocates overhead based on direct labor hours which are estimated to be 30,000 for the year. What are the department overhead allocation rates for the machining and assembly departments? $60 per machine hour for the machining department and $20 per direct labor hour for the assembly department $140 per machine hour for the machining department and $20 per direct labor hour for the assembly department $160 per machine hour for the machining department and $25 per direct labor hour for the assembly department $42 per machine hour for the machining department and $25 per direct labor hour for the assembly department $69 per machine hour for the machining department and $160 per direct labor hour for the assembly department
$60 per machine hour for the machining department and $20 per direct labor hour for the assembly department Explanation: Machining department is allocated based on machine hours. Total estimated overhead for the machining dept is $4,200,000 with total estimated machine hours of 70,000. Machining department overhead rate =$4,200,000 divided by 70,000 = $60 per machine hour. Assembly department is allocated based on direct labor hours. Total estimated overhead for the assembly department is $600,000 with total estimated direct labor hours of 30,000. Assembly department overhead rate = $600,000 divided by 30,000 = $20 per direct labor hour.
The assembly department has estimated overhead costs of $1,200,000. Total direct labor hours for the assembly department are 150,000 and total machine hours are 50,000. What is the predetermined overhead rate for the assembly activity assuming direct labor hours are used as the allocation base? $8 per direct labor hour $24 per machine hour $6 per direct labor hour $20 per machine hour $2 per direct labor hour
$8 per direct labor hour Explanation: Direct labor hours are the cost driver for the assembly activity. The predetermined overhead rate is calculated by taking the estimated overhead costs of $1,200,000 and dividing it by the total direct labor hours for the assembly department of 150,000. 1,200,000 divided by 150,000 = $8 per direct labor hour.
cost pools
A collection of overhead costs, typically organized by department or activity.
mixed cost
A cost that has a combination of fixed and variable costs.
fixed cost
A cost that remains constant in total with changes in activity and varies on a per unit basis with changes in activity.
variable cost
A cost that varies in total with changes in activity and remains constant on a per unit basis with changes in activity.
discretionary fixed cost
A fixed cost that can be changed in the short run without having a significant impact on the organization.
committed fixed cost
A fixed cost that cannot easily be changed in the short run without having a significant impact on the organization.
activity-based management (ABM)
A management tool that uses cost information obtained from an ABC system to improve the efficiency and profitability of operations.
*direct method
A method of allocating costs that allocates service department costs directly to production departments but not to other service departments.
department allocation
A method of allocating costs that uses a separate cost pool, and therefore a separate predetermined overhead rate, for each department.
plantwide allocation
A method of allocating costs that uses one cost pool, and therefore one predetermined overhead rate, to allocate overhead costs.
account analysis
A method of cost analysis that requires a review of accounts by an experienced employee or group of employees to determine whether the costs in each account are fixed or variable.
regression analysis
A method of cost analysis that uses a series of mathematical equations to estimate fixed and variable costs; typically done using computer software.
scattergraph method
A method of cost analysis that uses a set of data points to estimate fixed and variable costs.
high-low method
A method of cost analysis that uses the high and low activity data points to estimate fixed and variable costs.
*cost hierarchy
A method of costing that groups costs based on whether the activity is at the facility level, product or customer level, batch level, or unit level.
Activity-based costing (ABC)
A method of costing that uses several cost pools, and therefore several predetermined overhead rates, organized by activity to allocate overhead costs.
*product-level activities
Activities required to develop, produce, and sell specific types of products.
*batch-level activities
Activities required to produce batches (or groups) of products.
unit-level activities
Activities required to produce individual units of product, such as direct materials and direct labor.
*facility-level activities
Activities required to sustain facility operations and include items such as building rent and management of the factory.
value-added activities
Activities that add to a product's quality and performance.
non-value-added activities
Activities that do not add to a product's quality and performance.
contribution margin income statement
An income statement used for internal reporting that shows fixed and variable cost information.
activity
Any process or procedure that consumes overhead resources.
Which of the following is NOT a step for activity-based management? Continuously improve the value-added activities Minimize or eliminate the non-value added activities Determine if activities are value added or non-value added Identify activities required to complete products Assigns overhead costs to activities
Assigns overhead costs to activities Explanation: The three steps provided by activity-based management are to identify the activities required to complete products; determine if activities are value added or non-value added and continuously improve the value-added activities as well as minimize or eliminate the non-value added activities.
Which of the following is NOT a step in activity-based costing? Assign overhead costs to activities Identify activities to complete products Calculate total costs Allocate overhead costs to products Identify the cost driver for each activity
Calculate total costs Explanation: The five steps in activity-based costing are 1. identify activities and their costs to complete products; 2. assign overhead costs to activities in step 1; 3. identify the cost driver for each activity; 4. calculate a pre-determined overhead rate for each activity and 5. allocate overhead costs to products.
Which statement describes how operating profit is calculated? Contribution margin minus fixed and variable costs Contribution margin minus variable costs Contribution margin minus cost of goods sold Contribution margin minus fixed costs Contribution margin minus cost of goods manufactured
Contribution margin minus fixed costs Explanation: Operating profit is calculated by taking the contribution margin minus fixed costs.
*appraisal costs
Costs for activities that detect defective products before they are delivered to customers.
*prevention costs
Costs for activities that prevent defects in products and services.
*external failure costs
Costs for activities that result from delivering defective products to customers.
*internal failure costs
Costs incurred as a result of detecting defective products before they are delivered to customers.
What is the journal entry to record applied overhead using activity based costing? Debit manufacturing overhead and Credit WIP inventory Debit WIP inventory and Credit manufacturing overhead Debit finished goods inventory and Credit manufacturing overhead Debit manufacturing overhead and Credit finished goods inventory No journal entry is required to apply overhead using activity based costing.
Debit WIP inventory and Credit manufacturing overhead Explanation: The journal entry to record applied overhead using activity based costing is a debit to WIP inventory and a credit to manufacturing overhead.
production departments
Departments directly involved with producing goods or providing services for customers.
service departments
Departments that provide services to other departments within a company.
The following are examples of service departments EXCEPT for which department? Finished product quality inspection department Maintenance department Computer support department Accounting department Human Resources department
Finished product quality inspection department Explanation: The finished product quality inspection department is an example of a production department because it is involved with producing goods or services for customers.
Which of the following is NOT a true statement with respect to activity-based costing and activity-based management? Nonprofit organizations can utilize activity-based costing and activity-based management. Government and governmental organizations would not benefit from activity-based costing and activity-based management. Activity-based costing and activity-based management are not limited to manufacturing companies. Retail organizations can also use activity-based costing and activity-based management. Service organizations often employ activity-based costing and activity-based management techniques.
Government and governmental organizations would not benefit from activity-based costing and activity-based management. Explanation: Activity-based costing and activity-based management are not limited to manufacturing companies. Any organization including service, nonprofit, retail, and even government can reap benefits from implementing activity-based costing and activity-based management .
The following are advantages of activity-based costing EXCEPT which statement? Assists in better decision making It is easier to calculate predetermined overhead rates. Improves processes and reduces costs Increased knowledge of production activities Provides more accurate cost information.
It is easier to calculate predetermined overhead rates. Explanation: The advantages of activity-based costing are that it provides more accurate cost information which leads to better decision making. It also increases the knowledge of the production activities which leads to process improvements and reduced costs.
Which statement best describes regression analysis? -It uses five steps and plots all points on a graph to estimate fixed and variable costs. -It uses a series of mathematical equations to estimate fixed and variable costs. -It uses unusual data points to estimate fixed and variable costs. -It uses four steps to estimate fixed and variable costs. -It uses the cost flow equation to estimate fixed and variable costs.
It uses a series of mathematical equations to estimate fixed and variable costs. Explanation: Regression analysis uses a series of mathematical equations to estimate fixed and variable costs and typically uses computer software to do so.
R-squared
Measures the percent of the variance in the dependent variable explained by the independent variable.
*Which of the following is NOT a measure of the quality of costs? Prevention cost External failure cost Production/Service failure cost Appraisal cost Internal failure cost
Production/Service failure cost Explanation: Organizations measure the cost of quality by categorizing quality costs into the four categories of prevention cost, appraisal cost, internal failure cost and external failure cost
contribution margin
Sales revenue left over after deducting variable costs from sales.
cost driver
The action that causes the costs associated with an activity.
relevant range
The range of activity for which the cost behavior patterns are likely to be accurate.
Which of the following is an important reason for managers to allocate overhead costs to products? Helps managers reach their budget goals Overhead allocation is necessary when using a job costing system To allow all products to absorb costs Overhead allocation assists with meeting production goals To comply with U.S. GAAP
To comply with U.S. GAAP Explanation: The three important reasons for allocating overhead costs to products are to provide information for decision making; promote effective use of resources and to comply with U.S. GAAP.
If a company has total fixed costs per month of $30,000, what happens to their total fixed costs and their fixed costs per unit when 1 unit of product is produced and when 5 units of product are produced? -Total fixed costs will not change but fixed costs per unit will increase as the volume of units produced increases. -Total fixed costs will not change but fixed costs per unit will decrease as the volume of units produced increases. -Total fixed costs and the fixed cost per unit will increase with the volume of units produced. -Total fixed costs will increase but the fixed cost per unit will not change with the volume of units produced. -Total fixed costs and fixed costs per unit will not change with the volume of units produced.
Total fixed costs will not change but fixed costs per unit will decrease as the volume of units produced increases. Explanation: $30,000 divided by 1 unit = $30,000 per unit. $30,000 divided by 5 units = $6,000 per unit. Fixed costs remain unchanged in total. If only one unit of product is produced the company will still need to pay its fixed costs of $30,000. As the volume of production changes and more units are produced the fixed costs are spread over more units causing the fixed cost per unit to decrease.
The following are reasons companies allocate service department costs to production departments with the EXCEPTION of which statement? Companies include service department costs in determining product costs for internal decisions. Allocating service department costs is an incentive to provide services at a reasonable cost. Production managers use the services of these departments. U.S. GAAP requires allocating service department costs for external reporting purposes. The services provided by service departments should be efficiently utilized.
U.S. GAAP requires allocating service department costs for external reporting purposes. Explanation: U.S. GAAP does not allow service department allocation for external reporting purposes. Companies may choose to allocate service department costs for internal purposes only.
The Frye Company's maintenance cost for the past 3 months is as follows; 20 hours with costs of $6,020 for October, 48 hours with costs of $8,100 for November and 12 hours with costs of $3,600 for December. Using the high low method, what would the estimated total fixed cost and variable cost per hour for Frye's maintenance be? -Variable costs are $140 per maintenance hour and fixed costs are $2,500 -Variable costs are $115 per maintenance hour and fixed costs are $1,500 -Variable costs are $125 per maintenance hour and fixed costs are $2,500 -Variable costs are $125 per maintenance hour and fixed costs are $2,100 -Variable costs are $140 per maintenance hour and fixed costs are $2,100
Variable costs are $125 per maintenance hour and fixed costs are $2,100 Explanation: Variable costs = ($8,100 - $3,600) / (48 - 12) = $4,500 / 36 = $125 per maintenance hour. For fixed costs, plug in the high or low data (low is used here) $3,600 = f (fixed costs) + vX ($12 per maintenance hour x 12 maintenance hours); $3,600 = f +$1,500; f= $2,100 ($3,600 - $1,500).
The statement that shows fixed and variable cost information for a company is called: production cost summary statement. income statement. contribution margin income statement. cost of goods sold statement. cost of goods manufactured statement.
contribution margin income statement. Explanation: The contribution margin income statement is an internal statement that shows a company's fixed and variable cost information.
Sales revenue minus variable costs is called: -net sales. -gross profit. -net income. -net profit. -contribution margin.
contribution margin. Explanation: Contribution margin is sales revenue that is left over after deducting variable costs from sales.
All of the following are used to estimate fixed and variable costs EXCEPT: -regression analysis. -high-low method. -scattergraph method. -account analysis. -cost flow equation.
cost flow equation. Explanation: The cost flow equation is used to calculate the cost of raw materials, cost of goods manufactured and cost of goods sold. The four approaches used to estimate fixed and variable costs are account analysis, high-low method, scattergraph method and regression analysis.
The method of allocation that uses several separate cost pools and separate predetermined overhead rates is the: plantwide allocation method. process costing allocation method. indirect materials allocation method. machine hours allocation method. department allocation method.
department allocation method. Explanation: The department allocation method uses several cost pools and therefore uses several predetermined overhead rates.
The following are all examples of a non-value added activity EXCEPT: designing a more efficient computer. moving raw materials within the factory. waiting for phone calls from customers. scrapping defective materials. storing materials to be used in production.
designing a more efficient computer. Explanation: Designing a more efficient computer is a value added activity. The remaining answers are all examples of a non-value added activity as they do not add value to the product and/or service.
The following are examples of fixed costs with the EXCEPTION of: -direct materials used in production. -insurance on production building. -straight line depreciation on production equipment. -factory supervisor's salary. -rent on production building.
direct materials used in production. Explanation: Direct materials used in production is a variable cost because it is dependent on the number of units produced and the costs will increase in total when the number of units increases. Depreciation, rent on the production building, a factor supervisor's salary and insurance on the production building are all fixed costs that do not change in total.
*The method of costing activities required to develop, produce and sell specific types of products is called: cost-level activities. unit-level activities. batch-level activities. facility- level activities. product-level activities.
product-level activities Explanation: Product level activities are utilized to develop, produce and sell specific types of products.
Product costs associated with a computer manufacturer include all of the following EXCEPT: testing computers. selling computers. purchasing materials for computers. assembling computers. inspecting computers.
selling computers. Explanation: Costs associated with selling computers are not a product costs. Selling computers is a responsibility of the sales department and is included in selling expenses.
A disadvantage of using activity-based costing would be: it is difficult to understand. the benefits may not outweigh the costs of this costing method. companies need to install new accounting systems with this costing method. it is time consuming. you cannot run detail cost reports using this costing method.
the benefits may not outweigh the costs of this costing method. Explanation: The main disadvantages of using activity-based costing are it is costly to implement; unitizing fixed costs can be misleading and the benefits of may not outweigh the costs.
1. Costs that change in total due to changes in their activity level are called: -indirect materials cost. -mixed costs. -variable costs. -fixed costs. -indirect labor cost.
variable costs. Explanation: Variable costs change in proportion to changes in the volume of activity. Fixed costs do not change in total when the volume of activity changes. Mixed costs include a fixed and variable cost component and will change when the variable cost component changes due to the volume of activity.
