ac102_rev01-03

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EXAM REVIEW UNIT I - CHAPTERS 1, 2 and 3

Study Suggestions

Review your class notes, homework exercises and problems. Review Summary, Review Problem and Glossary at the end of each chapter. Use your Study Guide, especially Multiple Choice and True & False questions Review the resource materials and practice quizzes and exams available on the

Textbook Website: http://highered.mcgraw-hill.com/sites/0073048836/information_center_view0/

Additional review materials are available online at sites such as: http://www.cliffsnotes.com/WileyCDA/Section/id-305261.html

Key Terms and Concepts to Know

Chapter 1 - Managerial Accounting and Cost Concepts Major differences between financial and managerial accounting. Management activities:

o Planning o Directing and motivating o Controlling o Feedback

Period costs (nonmanufacturing costs): o Selling & Administrative Expenses

Product costs (inventory costs or manufacturing costs): o Direct materials o Direct labor o Manufacturing overhead

Prime cost (direct materials and direct labor) Conversion Cost (direct labor and manufacturing overhead) Cost behavior:

o Variable Cost o Fixed cost o Relevant Range

Cost object: o Direct Cost o Indirect cost

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Cost Classifications used in decisionmaking o Differential cost and differential revenue o Opportunity cost o Sunk cost

Flow of product costs through inventory accounts to cost of goods sold o Raw materials o Work in process including manufacturing overhead o Finished goods o Cost of goods sold

Schedule of Cost of Goods Manufactured Income Statement including calculation of the cost of goods sold Schedule of Cost of Goods Sold

Chapter 2 - Systems Design: Job Order Costing

Differences and similarities between job order and process costing. Flow of overhead costs:

o How to compute predetermined overhead rates o How to apply overhead costs to production o How to compute over and under applied overhead and close it to the

appropriate account. Flow of product costs and overhead costs through the three inventory accounts

and overhead account into cost of goods sold. Journal entries required in a Job Order Cost system.

Chapter 3 - Systems Design: Activity-Based Costing

Differences between activity-based costing and a traditional costing system. Distinguish between unit-level, batch-level, product-level, and facility-level

activities and costs. Understand the ABC methodology:

o How to compute activity rates for cost pools. o How to assign costs to products. o How to compute overhead cost per unit for each product. o How to compute total unit cost for each product. o How to apply overhead to production in work-in-process. o Explain why product costs computed under activity based costing and

conventional costing methods differ. Flow of costs in an activity based costing system.

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SAMPLE PROBLEMS Problem 1 - Fill in the Missing Data Cost of Goods Manufactured Case 1 Case 2 Direct materials 8,000 6,000

Direct labor 3,000 5,000

Manufacturing overhead _______ 7,000

Total manufacturing costs 32,000 _______

Beginning work in process inventory _______ 2,000

Ending work in process inventory 2,000 _______

Cost of goods manufactured _______ _______

Income Statement

Sales 50,000 30,000

Beginning finished goods inventory 9,000 7,000

Cost of goods manufactured 31,500 _______

Goods available for sale _______ 23,000

Ending finished goods inventory 7,000 5,000

Cost of goods sold ______ ______

Gross margin ______ 12,000

Operating expenses 10,000 ______

Net income 6,500 3,000

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Problem 2 - Schedules of Cost of Goods Manufactured and Costs of Goods Sold The following data were taken from the cost records:

Depreciation, factory 70,000Indirect labor 110,000Utilities, factory 50,000Insurance factory 15,000Lubricants for machines 10,000Direct Labor 210,000Purchases of raw materials 160,000Depreciation, sales furniture 7,000

Inventories at the beginning and end of the year were as follows:

January 1 December 31Raw materials 15,000 25,000Work in process 30,000 10,000Finished goods 40,000 60,000

Required:

a) Prepare a Schedule of Cost of Goods Manufactured for the year. b) Prepare a Schedule of Cost of Goods Sold for the year.

Problem 3 - Calculation of overhead rate and application of overhead The J & M Plastics Company uses a predetermined overhead rate based on direct labor hours to apply manufacturing overhead to jobs. Estimated and actual data for direct labor and manufacturing overhead for the last year are as follows:

Estimated Actual Direct labor hours 500,000 480,000 Manufacturing overhead 1,000,000 965,000

Required:

a) Compute the predetermined overhead rate for the year b) Calculate the overhead applied for the year. c) What is the amount of over-applied or under-applied overhead? d) Journalize the entry to close the over or under-applied overhead to COGS

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Problem 4 - Journal Entries, T Accounts and Overhead Applied The Jordan Company uses a job order costing system and applies overhead cost to jobs on the basis of direct labor hours. The following estimates were made for the purpose of computing the predetermined overhead rate: manufacturing overhead cost of $360,000 and direct labor hours of 900. The following transactions took place during the year:

a. Raw materials purchased, $200,000. b. Raw materials used in production (all direct materials), $185,000. c. Salary and wages incurred:

Direct labor (975 hours) 230,000 Indirect labor 90,000 Selling & administrative salaries 110,000

d. Utility costs incurred, $70,000 (90% related to factory operations, remainder to selling & administrative)

e. Maintenance costs were incurred in the factory, $54,000. f. Advertising costs were incurred, $136,000. g. Depreciation was recorded for the year, $95,000 (80% related to factory

equipment, remainder to selling & adm equip.) h. Rental costs incurred on the buildings, $120,000 (85% related to factory

operations, remainder to selling & adm.) i. Manufacturing overhead was applied to jobs j. Cost of goods manufactured for the year, $770,000. k. Sales on account for the year totaled $1,200,000 with a cost to produce of

$800,000. l. The balances in the inventory accounts at the beginning of the year were:

Raw materials 30,000 Work in process 21,000 Finished goods 60,000

Required:

a) Prepare the journal entries to record the information given above. b) Prepare T-accounts for Raw Materials, Work in Process, Finished Goods

and Manufacturing Overhead. Post the relevant journal entries above to each T-account.

c) Determine the ending balance in each account. d) What is the amount of over or under-applied overhead? e) Journalize the entry to transfer the ending in the overhead account to cost

of goods sold. f) Job 412 was one of the many jobs started and completed during the year.

The job required $8,000 in direct materials and 39 hours of direct labor time at a total direct labor cost of $9,200. The job contained only four units. If the company bills at a price 60% above the unit cost on the job cost sheet, what price per unit would have been charged to the customer?

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Problem 5 - Activity-Based Costing Cabalo Company manufactures two products, Product C and Product D. The company estimated it would incur $130,890 in manufacturing overhead costs during the current period. Overhead currently is assigned to the products on the basis of direct labor hours. Data concerning the current period’s operations appear below:

Product C Product D Estimated volume 400 units 1,200 units Direct labor hours per unit 0.70 hour 1.20 hours Direct material cost per unit $10.70 $16.70 Direct labor cost per unit $11.20 $19.20

Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following three activity cost pools:

Activity Cost Pool Activity Measure Estimated

Overhead CostMachine setups Number of setups $ 13,570Purchase Orders Number of purchase orders 91,520General Factory Direct labor hours 25,800 Activity Measure Product C Product D TotalNumber of setups 100 130 230Number of purchase orders 810 1,270 2,080Number of direct labor hours 280 1,440 1,720 Required:

a) Compute the predetermined overhead rate under the current method. Determine the unit product cost of each product.

b) Determine the activity rate (i.e. predetermined overhead rate) for each cost pool.

c) Compute the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product.

d) Compute the unit product cost of each product. e) Compute the overhead applied to work-in-process using both traditional

costing and ABC for a job with the following actual activity: Activity Measure JobNumber of setups 10Number of purchase orders 40Number of direct labor hours 60

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Sample True / False Questions 1. The control function is comparing actual with budgeted results and taking

corrective action when needed. True False

2. Whether a cost is treated as direct or indirect depends on whether tracing the cost is either possible or feasible True False

3. Variable costs are always direct costs. True False

4. Fixed costs stay the same, in total, as activity level changes. True False

5. A manufacturing firm reports only manufacturing costs. True False

6. A job cost sheet will record the direct materials and direct labor used by the job but not the manufacturing overhead applied. True False

7. Manufacturing overhead includes all costs of producing a product except for indirect materials and indirect labor. True False

8. When goods are completed, a debit is made to Finished Goods Inventory and a credit is made to Work in Process Inventory. True False

9. If there is a debit balance in the Manufacturing Overhead account at the end of the period, overhead was underapplied. True False

10. To eliminate underapplied overhead at the end of the year, Manufacturing Overhead would be credited and Cost of Goods Sold would be debited. True False

11. A volume-based allocation measure is directly related to the number of units produced or the number of customers served. True False

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12. When forming activity cost pools, the goal is to create as few cost pools as possible, while still capturing major activities. True False

13. The only difference between a volume-based cost system and an ABC system is how the methods assign indirect costs to products. True False

14. Activity based management is a method of assigning indirect costs to products or services based on the activities they require. True False

15. A value-added activity is one that enhances the perceived value of the product or service to the customer. True False

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Sample Multiple Choice Questions 1. Which of the following is not a characteristic of managerial accounting?

a) Information is used by internal parties b) Information is subjective, relevant, future-oriented c) Reports are prepared as needed d) Reports are prepared according to GAAP

2. Which of the following is the definition of "cost"?

a) Cash paid for something. b) The value of what is given up in exchange for something else. c) The foregone benefit of the path not taken. d) The choice between one alternative and another.

3. A direct cost is one which

a) involves an actual outlay of cash for a specific cost object. b) can be traced to a specific cost object. c) cannot be traced to a specific cost object. d) is not worth the effort of tracing to a specific cost object.

4. Indirect costs are

a) costs that are not worth the effort to trace to a specific cost object. b) costs that change, in total, in direct proportion to changes in activity levels. c) always irrelevant. d) costs that remain constant no matter the activity level.

5. What determines the difference between a variable and a fixed cost?

a) Whether it changes when activity levels change. b) Whether it is relevant to a particular decision. c) Whether it can be traced to a specific cost object. d) Whether it is related to manufacturing or nonmanufacturing activities.

6. Fixed costs are

a) costs that are not worth the effort to trace to a specific cost object. b) costs that change, in total, in direct proportion to changes in activity levels. c) always irrelevant. d) costs that remain constant, in total, no matter the activity level.

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7. A cost that has already been incurred is called a(n) a) Indirect cost. b) Sunk cost. c) Relevant cost. d) Opportunity cost.

8. Martin Company has the following balances for the current month:

Direct materials used 15,000 Direct labor 23,000 Sales salaries 12,000 Indirect labor 3,000 Production manager’s salary 6,000 Marketing costs 9,000 Factory lease 4,000

What are Martin's prime costs? a) $38,000 b) $35,000 c) $47,000 d) $41,000

9. What determines the difference between a product cost and a period cost?

a. Whether it changes when activity levels change. b. Whether it is relevant to a particular decision. c. Whether it can be traced to a specific cost object. d. When the cost will be matched up against revenue on the income statement.

10. Product costs are reported

a. only on the balance sheet. b. only on the income statement. c. on the balance sheet before goods are sold, and on the income statement

after goods are sold. d. on the income statement before goods are sold, and on the balance sheet

after goods are sold. 11. When units are sold, the cost associated with the units is credited to which

account? a. Raw Materials Inventory b. Work in Process Inventory c. Finished Goods Inventory d. Cost of Goods Sold

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12. When units are completed, the cost associated with the job is debited to which account? a. Raw Materials Inventory b. Work in Process Inventory c. Finished Goods Inventory d. Cost of Goods Sold

13. Which of the following would be used to apply manufacturing overhead to

production for the period? a. Raw Materials Inventory would be debited b. Work in Process Inventory would be debited c. Manufacturing Overhead would be debited d. Work in Process Inventory would be credited

14. If a company uses a predetermined overhead rate, which of the following

statements is correct? a. Manufacturing Overhead will be debited for estimated overhead b. Manufacturing Overhead will be credited for estimated overhead c. Manufacturing Overhead will be debited for actual overhead d. Manufacturing Overhead will be credited for actual overhead

15. Mantilla Inc. estimated manufacturing overhead to be $200,000 for the year

along with 20,000 direct labor hours. Actual manufacturing overhead was $215,000, and actual labor hours were 21,000. The journal entry to close the balance in the Manufacturing Overhead account would include which of the following? a. Cost of Goods Sold would be credited for $15,000 b. Cost of Goods Sold would be credited for $5,000 c. Cost of Goods Sold would be debited for $5,000 d. Cost of Goods Sold would be debited for $15,000

16. Cost of goods sold is the amount of cost transferred

a. From of Finished Goods Inventory and into Cost of Goods Sold. b. From of Work in Process Inventory and into Cost of Goods Sold. c. From of Work in Process Inventory and into Manufacturing Overhead. d. From of Work in Process Inventory and into Finished Goods Inventory.

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17. Arthur Company provided the following information for the year:

Direct materials used 110,000 Direct labor used (5,000 hours) 150,000 Manufacturing overhead incurred 166,000

The predetermined overhead rate was $35 per direct labor hour for the year. Assuming the ending balance in Work in Process Inventory is $17,000, what was cost of goods manufactured? a) $260,000 b) $426,000 c) $435,000 d) $418,000

18. Jackson Company had the following information for the year:

Direct materials used 190,000 Direct labor used (5,000 hours) 245,000 Manufacturing overhead incurred 273,000

Jackson Company calculated a predetermined overhead rate using estimated overhead of $320,000 and 8000 estimated direct labor hours. Finished Goods Inventory had a balance of $9,000 at the end of the year. What was adjusted cost of goods sold? a) $715,000 b) $708,000 c) $706,000 d) $699,000

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19. Alcatraz Corp has the following information:

Beginning balance

Ending balance

Raw materials 20,000 30,000 Work in process 15,000 18,000 Finished goods 30,000 20,000

The following additional information is available for the year:

Raw materials purchases 100,000 Direct labor 75,000 Manufacturing overhead applied 80,000 Indirect materials 0

Compute the direct materials used in production. a. $20,000 b. $30,000 c. $110,000 d. $90,000

20. Homer Inc. had the following information for the preceding year:

Beginning

balanceEnding

balanceRaw materials 0 0Work in process ?? 35,000Finished goods ?? 30,000

The following additional information is available for the year:

Direct materials used 200,000 Direct labor 150,000 Manufacturing overhead applied 160,000 Cost of goods manufactured 525,000 Cost of goods sold (unadjusted) 544,000

What was the beginning Finished Goods Inventory balance on 1/1? a. $49,000 b. $65,000 c. $50,000 d. $69,000

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21. Spahn, Inc., which uses a volume-based cost system, produces cat condos that sell for $90 each. Direct materials cost $15 per unit, and direct labor costs $10 per unit. Manufacturing overhead is applied at a rate of 200% of direct labor cost. Nonmanufacturing costs are $27 per unit. What is the gross profit margin for the cat condos?

a. 20.0% b. 50.0% c. 62.5% d. 80.0%

22. Which of the following best defines a unit-level activity?

a. An activity that is performed for a specific customer b. An activity that is performed to support a specific product line c. An activity that is performed for each individual unit d. An activity that is performed for a group of units all at once

Use the following information to answer questions 23 through 26: Bruton, Inc. produces two different products using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $500,000, while the cost of Inspection is $30,000. Usage of the activity drivers are as follows:

Product A Product B TotalMachine hours 1,000 3,000 4,000Number of batches

45 15 60

Product A is assigned $125,000 in Machining cost, and $22,500 in Inspection cost. Product B uses 75% of total machine hours and 25% of total batches.

23. What is the activity rate for Inspection?

a. $125 per batch b. $500 per batch c. $667 per batch d. $2,000 per batch

24. What is the total Inspection cost assigned to Product A?

a. $7,500 b. $22,500 c. $125,000 d. $375,000

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25. What is the total activity cost assigned to Product B? a. $7,500 b. $147,500 c. $375,000 d. $382,500

26. What proportion of Machining activity is used by Product A?

a. 25% b. 33% c. 67% d. 75%

27. Which of the following is most likely to be true of the manufacturing overhead

costs assigned to a product with relatively low volume and high complexity? a. An ABC system will assign more manufacturing overhead costs to the product

than a volume-based system. b. A volume-based system will assign more manufacturing overhead costs to the

product than an ABC system. c. An ABC system will assign the same manufacturing overhead costs to the

product as a volume-based system. d. An ABC system will assign manufacturing overhead costs to the product, while

a volume-based system will not. 28. Buhl manufactures a product that uses $15 in direct materials and $5 in direct

labor per unit. Under the traditional costing system Buhl uses, manufacturing overhead applied to each unit is $12. Buhl is considering switching to an ABC system, under which the total activity cost would be $25. What is the total manufacturing cost per unit for Buhl under the ABC system? a. $20 b. $25 c. $32 d. $45

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29. Logan, Inc. manufactures chainsaws that sell for $60. Each chainsaw uses $10 in direct materials and $3 in direct labor per unit. Logan has two activities: Machining, which is applied at the rate of $2 per machine hour, and Finishing, which is applied at the rate of $20 per batch. This month, Logan made 200 chainsaws, using 1,000 machine hours in 40 batches. What is the gross profit for 200 chainsaw? a. $2,600 b. $5,400 c. $6,600 d. $9,400

30. Mathews Woodworking manufactures baseball bats and wooden tops. Currently,

Mathews makes 5,000 baseball bats each month. Each bat uses $1.00 in direct materials and $0.50 in direct labor. There are two activities in manufacturing the baseball bats: Cutting and Finishing. The cost associated with Cutting is $7,500 a month, allocated on the basis of direct labor hours. The cost associated with Finishing is $12,000 a month, allocated on the basis of batches. Usage of the activity drivers are as follows: Bats Tops Direct labor hours 100 200 Batches 4 6

What is the total manufacturing cost for one baseball bat?

a. $1.46 b. $1.50 c. $2.96 d. $19,501.50

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SOLUTIONS TO SAMPLE PROBLEMS Problem 1 * The missing data is indicated by an asterisk Case 1 Case 2Direct materials 8,000 6,000Direct labor 3,000 5,000Manufacturing overhead 21,000* 7,000Total manufacturing costs 32,000 18,000*Add: Beginning work in process inventory 1,500* 2,000Deduct: Ending work in process inventory 2,000 4,000*Cost of goods manufactured 31,500* 16,000* Sales 50,000 30,000Beginning finished goods inventory 9,000 7,000Add: Cost of goods manufactured 31,500 16,000*Goods available for sale 40,500* 23,000Deduct: Ending finished goods inventory 7,000 5,000Cost of goods sold 33,500* 18,000*Gross margin 16,500* 12,000Operating expenses 10,000 9,000*Net income 6,500 3,000

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Problem 2 Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, January 1 15,000 Add: Purchases of raw materials 160,000 Raw materials available for use 175,000 Deduct: raw materials inventory, Dec. 31 25,000 Raw materials used in production 150,000 Direct Labor 210,000Manufacturing overhead: Depreciation, factory 70,000 Indirect labor 110,000 Utilities, factory 50,000 Insurance, factory 15,000 Lubricants for machines 10,000 Total overhead costs 255,000Total manufacturing costs 615,000Add: Work in process inventory, January 1 30,000 645,000Deduct: Work in process inventory, Dec. 31 10,000Cost of Goods Manufactured 635,000 Schedule of Cost of Goods Sold Finished goods inventory, January 1 40,000Add: Cost of Goods Manufactured 635,000Goods available for sale 675,000Deduct: Finished goods inventory, Dec 1 60,000Cost of Goods Sold 615,000 Problem 3 - Calculation of overhead rate and application of overhead

a) Predetermined overhead rate $1,000,000/500,000 dlh = $2.00 per dlh

b) Overhead applied 480,000 dlh * $2.00 = $960,000

c) Under-applied overhead $965,000 – 960,000 = $5,000

d) Cost of Goods sold 5,000

Manufacturing overhead 5,000

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Problem 4 - Journal Entries a) Predetermined Overhead Rate: $360,000/900 = $400 per direct labor hour Actual direct labor rate: $230,000/975 = $235.90 per direct labor hour

a. Raw materials inventory 200,000 Accounts payable 200,000

b. Work in process 185,000 Raw materials inventory 185,000

c. Work in process 230,000 Manufacturing overhead 90,000 Salary & Wage Expense 110,000 Wages payable 430,000

d. Manufacturing overhead 63,000 Utilities Expense 7,000 Accounts payable 70,000

e. Manufacturing overhead 54,000 Accounts payable 54,000

f. Advertising Expense 136,000 Accounts payable 136,000

g. Manufacturing overhead 76,000 Depreciation Expense 19,000 Accumulated depreciation 95,000

h. Manufacturing overhead 102,000 Rent Expense 18,000 Accounts payable 120,000

i. Work in process 390,000 Manufacturing overhead 390,000 (975 dlh x $400/dlh = 390,000)

j. Finished goods inventory 770,000 Work in process 770,000

k. Accounts receivable 1,200,000 Sales 1,200,000 Cost of goods sold 800,000 Finished goods inventory 800,000

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b) c) d)

Manufacturing OH 90,000 390,000 63,000 54,000 76,000

102,000 5,000 overapplied

Raw Materials Work in Process Finished Goods 30,000 185,000 21,000 60,000

185,000 770,000 770,000 800,000200,000 230,000

390,000

45,000 56,000 30,000

e) Manufacturing overhead 5,000 Cost of goods sold 5,000

f) Cost of manufacturing Job 412: Direct materials $8,000Direct labor 39 dlh x $235.90 = 9,200Manufacturing overhead 39 dlh x $400.00 = 15,600Total Cost $32,800Units produced 4Cost per unit $8,200Markup % 60%Markup 4,920Selling price Cost + markup = $13,120

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Problem 5 - Activity-Based Costing a)

Product C Product D TotalDirect labor hours: 400 units 1,200 units X .7 dlh/unit X 1.2 dlh/unit 280 dlh 1,440 dlh 1,720 dlh Predetermined overhead rate: $130,890 / 1,720 dlh = $76.10/dlh Unit Product Cost: Product C Product D Direct Materials $10.70 $ 16.70 Direct Labor 11.20 19.20 Manufacturing Overhead * 53.27 ** 91.32 Total Unit Cost $ 75.17 $127.22 *.7 dlh/unit * $76.10 = $53.27 ** 1.2 dlh/unit * $76.10 = $91.32

b)

Activity Cost Pool OH Cost Activity Activity Rate Machine set-ups $ 13,570 230 setups $59 per setup Purchase orders 91,520 2,080 orders $44 per order General Factory 25,800 1,720 dlh $15 per dlh

c)

Product C Product D Activities Activitiy

Rates Estimated

ActivityAmount Estimated

ActivityAmount

Machine set-ups $59 per setup 100 $5,900 130 $7,670Purchase orders $44 per order 810 35,640 1,270 55,880General Factory $15 per dlh 280 4,200 1,440 21,600

Total overhead cost $45,740 $85,150Number of Units 400 1,200Overhead cost per unit $114.35 $70.96

d)

Unit Product Cost: Product C Product D Direct Materials $10.70 $ 16.70 Direct Labor 11.20 19.20 Manufacturing Overhead 114.35 70.96 Total Unit Cost $136.25 $106.86

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e)

Overhead rate

Activity

Overhead applied

Traditional $76.10 60 dlh $4,566 ABC Machine set-ups $59.00 10 setups $590 Purchase orders $44.00 40 po’s $1,760 General Factory $15.00 60 dlh $900 Total $3,250

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Solutions to True / False Problems

1. True 2. True 3. False because variable costs are not always direct costs, which can be traced

to a specific cost object. 4. True 5. False because a manufacturing firm reports both manufacturing and

nonmanufacturing costs. 6. False because a job cost sheet summarizes all of the costs incurred on a

specific job. 7. False because manufacturing overhead includes all manufacturing costs except

direct materials and direct labor. 8. True 9. True 10. True 11. True 12. True 13. True 14. False because this describes activity based costing, not activity based

management. 15. True

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Solutions to Multiple Choice Questions

1. D 2. B 3. B 4. A 5. A 6. D 7. B 8. A 9. D 10. C 11. C 12. C 13. B 14. C 15. C 16. A 17. D 18. D 19. D 20. A 21. B 22. C 23. B 24. B 25. D 26. A 27. A 28. D 29. C 30. C

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