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Cost Accounting

Exam Chapters 1-3

1. The branch of accounting that serves as a bridge between financial and managerial accounting is
__________ accounting.

ANS: cost

2. Costs that can be conveniently traced to a cost object are referred to as ____________ costs.

ANS: direct

3. The assumed range of activity that reflects the company’s normal operating range is referred to as the

ANS: relevant range

4. Another name for inventoriable costs is ______________ costs.

ANS: product

5. The three stages of production for a manufacturing firm are ______________, ________________, and

ANS: raw materials, work in process, finished goods

6. In a(n) _________ cost system, factory overhead is assigned to an overhead control account and then
allocated to products and services.

ANS: normal

7. If actual overhead exceeds applied overhead, factory overhead is said to be ______________.

ANS: underapplied

8. If underapplied or overapplied factory overhead is material, it is prorated among ______________________,

_________________________, and _______________________.

ANS: Work in Process Inventory, Finished Goods Inventory, Cost of Goods Sold

9. A performance measure that assumes all production factors are operating perfectly is referred to as
___________________ capacity.

ANS: theoretical
10. Consider the regression equation y = a + bX. The portion of the equation that represents the variable
rate is ________.

ANS: b

11. A __________________________ is a planning document that presents expected variable and fixed
overhead costs at different activity levels.

ANS: flexible budget

12. The costing technique that treats all manufacturing costs as inventoriable is referred to as
_________________ costing.

ANS: absorption or full

13. In comparing financial and management accounting, which of the following more accurately describes
management accounting information?
a. historical, precise, useful
b. required, estimated, internal
c. budgeted, informative, adaptable
d. comparable, verifiable, monetary


14. Management and financial accounting are used for which of the following purposes?

Management accounting Financial accounting

a. internal external
b. external internal
c. internal internal
d. external external


15. Cost accounting is directed toward the needs of

a. regulatory agencies.
b. external users.
c. internal users.
d. stockholders.


16. Cost and management accounting

a. require an entirely separate group of accounts than financial accounting uses.
b. focus solely on determining how much it costs to manufacture a product or provide a
c. provide product/service cost information as well as information for internal decision
d. are required for business recordkeeping as are financial and tax accounting.


17. Which of the following statements is true?

a. Management accounting is a subset of cost accounting.
b. Cost accounting is a subset of both management and financial accounting.
c. Management accounting is a subset of both cost and financial accounting.
d. Financial accounting is a subset of cost accounting.

18. The ethical standards established for management accountants are in the areas of
a. competence, licensing, reporting, and education.
b. budgeting, cost allocation, product costing, and insider trading.
c. competence, confidentiality, integrity, and objectivity.
d. disclosure, communication, decision making, and planning.


19. Which of the following defines variable cost behavior?

Total cost reaction Cost per unit reaction

to increase in activity to increase in activity

a. remains constant remains constant

b. remains constant increases
c. increases increases
d. increases remains constant


20. Which of the following always has a direct cause-effect relationship to a cost?

Predictor Cost driver

a. yes yes
b. yes no
c. no yes
d. no no


21. The indirect costs of converting raw material into finished goods are called
a. period costs.
b. prime costs.
c. overhead costs.
d. conversion costs.


22. The distinction between direct and indirect costs depends on whether a cost
a. is controllable or non-controllable.
b. is variable or fixed.
c. can be conveniently and physically traced to a cost object under consideration.
d. will increase with changes in levels of activity.


23. The formula to compute cost of goods manufactured is

a. beginning Work in Process Inventory plus purchases of raw material minus ending
Work in Process Inventory.
b. beginning Work in Process Inventory plus direct labor plus direct material used plus
overhead incurred minus ending Work in Process Inventory.
c. direct material used plus direct labor plus overhead incurred.
d. direct material used plus direct labor plus overhead incurred plus beginning Work in
Process Inventory.


Wilson Company

The following information has been taken from the cost records of Wilson Company for the past year:

Raw material used in production $326

Total manufacturing costs charged to production during the year (includes direct 686
material, direct labor, and overhead equal to 60% of direct labor cost)
Cost of goods available for sale 826
Selling and Administrative expenses 25

Inventories Beginning Ending

Raw Material $75 $ 85
Work in Process 80 30
Finished Goods 90 110

24. Refer to Wilson Company. The cost of raw material purchased during the year was
a. $316.
b. $336.
c. $360.
d. $411.

Beginning Inventory 75
+Purchases 336
=Goods Available for Sale 411
-Ending Inventory (326)
Materials Used in Production 85
25. Refer to Wilson Company. Direct labor cost charged to production during the year was
a. $135.
b. $216.
c. $225.
d. $360.


Total production costs $686

- Raw materials $326
Conversion Costs $360
Let x = Direct Labor
Let .60x = Factory Overhead
x + .60x $360
x $225

26. Refer to Wilson Company. Cost of Goods Manufactured was

a. $636.
b. $716.
c. $736.
d. $766.

Beginning WIP Inventory $ 80
Costs of Production 686
less: Ending WIP Inventory (30)
Cost of Goods Manufactured $736

27. Refer to Wilson Company. Cost of Goods Sold was

a. $691.
b. $716.
c. $736.
d. $801.

Beginning Finished Goods Inventory $ 90
Cost of Goods Manufactured 736
less: Ending Finished Goods Inventory (110)
Cost of Goods Manufactured $716
28. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was $4,500; raw
material purchases of $29,600 were made during the month. At month end, $7,700 of raw material was on hand.
Raw material used during the month was
a. $26,400.
b. $34,100.
c. $37,300.
d. $29,600.

Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$4,500 + 29,600 - 7,700 = X
X = $26,400

29. An actual cost system differs from a normal cost system in that an actual cost system
a. assigns overhead as it occurs during the manufacturing cycle.
b. assigns overhead at the end of the manufacturing process.
c. does not assign overhead at all.
d. does not use an Overhead Control account.


30. If the level of activity increases,

a. variable cost per unit and total fixed costs increase.
b. fixed cost per unit and total variable cost increase.
c. total cost will increase and fixed cost per unit will decrease.
d. variable cost per unit and total cost increase.


31. All other things being equal, if actual cost per unit is greater than budgeted cost per unit, variable
overhead will be
a. overapplied.
b. the same as fixed overhead.
c. underapplied.
d. applied to Finished Goods.


32. Walton Corporation wishes to develop a single predetermined overhead rate. The company's expected
annual fixed overhead is $340,000 and its variable overhead cost per machine hour is $2. The company's relevant
range is from 200,000 to 600,000 machine hours. Walton expects to operate at 425,000 machine hours for the
coming year. The plant's theoretical capacity is 850,000. The predetermined overhead rate per machine hour
should be
a. $2.40.
b. $2.57.
c. $2.80.
d. $2.85.

Fixed component:

Variable component = $2.00 per unit

Total predetermined overhead = $2.80 per unit

The records of Zenith Corporation revealed the following data for the current year.

Work in Process $ 73,150

Finished Goods 115,000
Cost of Goods Sold 133,650
Direct Labor 111,600
Direct Material 84,200

33. Refer to Zenith Corporation. Assume that Zenith has underapplied overhead of $37,200 and that this amount
is material. What journal entry is needed to close the overhead account? (Round decimals to nearest whole
a. Debit Work in Process $8,456; Finished Goods $13,294; Cost of Goods Sold $15,450 and
credit Overhead $37,200
b. Debit Overhead $37,200 and credit Work in Process $8,456; Finished Goods $13,294; Cost
of Goods Sold $15,450
c. Debit Work in Process $37,200 and credit Overhead $37,200
d. Debit Cost of Goods Sold $37,200 and credit Overhead $37,200

WIP: 73,150/321,800 = $ 8,456
FG: 115,000/321,800 = $13,294
EI: 133,650/321,800 = $15,450

34. Another name for absorption costing is

a. full costing.
b. direct costing.
c. job order costing.
d. fixed costing.

35. Under variable costing, which of the following are costs that can be inventoried?
a. variable selling and administrative expense
b. variable manufacturing overhead
c. fixed manufacturing overhead
d. fixed selling and administrative expense

36. Why is variable costing not in accordance with generally accepted accounting principles?
a. Fixed manufacturing costs are treated as period costs under variable costing.
b. Variable costing procedures are not well known in industry.
c. Net earnings are always overstated when using variable costing procedures.
d. Variable costing ignores the concept of lower of cost or market when valuing inventory.


37. A firm has fixed costs of $200,000 and variable costs per unit of $6. It plans on selling 40,000 units in the
coming year. To realize a profit of $20,000, the firm must have a sales price per unit of at least
a. $11.00.
b. $11.50.
c. $10.00.
d. $10.50.

Sales--40,000 units * $11.50/unit $460,000
Variable Costs:
Manufacturing 240,000
Contribution Margin $220,000
Fixed Costs 200,000
Net Income $ 20,000

38. On what needs do (1) management accounting and (2) financial accounting focus?

ANS: Management accounting focuses on the needs of users inside an organization. Managers need information
related to planning, controlling, decision making, and performance evaluation. Their needs are satisfied through
the providing of information designed for their particular uses. Financial accounting focuses on the needs of users
outside the organization, such as stockholders, creditors, and regulatory agencies. These users require information
that is in conformity with generally accepted accounting principles and, thus, is standardized in the form of
general purpose financial statements.

39. What is the difference between a product cost and a period cost? Give three examples of each. What is the
difference between a direct cost and indirect cost? Give two examples of each.

A product cost is one that is associated with making or acquiring inventory. A period cost is any cost other than
those associated with making or acquiring products and is not considered inventory. Students will have a variety
of examples, but direct material, direct labor, and overhead are product costs. Selling and administrative expenses
are considered period costs. A direct cost is one that is physically and conveniently traceable to a cost object.
Direct material and direct labor are direct costs. An indirect cost is one that cannot be conveniently traced to a cost
object. Any type of overhead cost is considered indirect.

40. Why should predetermined overhead rates be used?

Predetermined overhead rates should be used for three reasons: (1) to assign overhead to Work in Process during
the production cycle instead of at the end of the period; (2) to compensate for fluctuations in actual overhead costs
that have no bearing on activity levels; and (3) to overcome problems of fluctuations in activity levels that have
no impact on actual fixed overhead costs.

41. Discuss underapplied and overapplied overhead and its disposition at the end of the period.

During the course of the production cycle, actual overhead costs are incurred. When overhead is applied to Work
in Process, it is commonly applied using a predetermined rate. Overhead application at a predetermined rate may
cause overhead to be under- or overapplied. If actual overhead is greater than applied overhead, then underapplied
overhead results and a debit balance exists in the overhead account. If applied overhead is greater than actual
overhead, then overapplied overhead results and a credit balance exists in the overhead account. If the amount of
under- or overapplied overhead is immaterial, it is closed directly to Cost of Goods Sold. If the amount is
material, it must be allocated among Work in Process, Finished Goods, and Cost of Goods Sold

42. Given the following information for McCurley Corporation, prepare the necessary journal entries, assuming
that the Raw Material Inventory account contains both direct and indirect material.

a. Purchased raw material on account $28,500.

b. Put material into production: $15,000 of direct material and $3,000 of indirect material.
c. Accrued payroll of $90,000, of which 70 percent was direct and the remainder was indirect.
d. Incurred and paid other overhead items of $36,000.
e. Transferred items costing $86,500 to finished goods.
f. Sold goods costing $71,300 on account for $124,700.


a. RM Inventory 28,500
A/P 28,500
b. WIP Inventory 15,000
Manufacturing OH 3,000
RM Inventory 18,000
c. WIP Inventory 63,000
Manufacturing OH 27,000
Salaries/Wages Payable 90,000
d. Manufacturing OH 36,000
Cash 36,000
e. FG Inventory 86,500
WIP Inventory 86,500
f. A/R 124,700
Sales 124,700
CGS 71,300
FG Inventory 71,300

43. Hume Corporation has the following data for the current year:
Direct Labor $220,000
Direct Material 137,800
Actual Overhead 320,000
Applied Overhead 395,000
Raw Material 51,394
Work in Process 101,926
Finished Goods 111,192
Cost of Goods Sold 250,182

What is the amount of under- or overapplied overhead? Prepare the necessary journal entry to dispose of under- or
overapplied overhead.


Applied Overhead $395,000

Actual Overhead 320,000
$ 75,000overapplied

WIP $101,926/$463,300=.22 x $75,000 = $16,500

FG $111,192/$463,300=.24 x $75,000 = $18,000
CGS $250,182/$463,300=.54 x $75,000 = $40,500

Manufacturing Overhead $75,000

Work in Process $16,500
Finished Goods 18,000
Cost of Goods Sold 40,500

44. The McAlister Co. has the following information available regarding costs and revenues for two recent
months. Selling price is $20.

March April
Sales revenue $60,000 $100,000
Cost of goods sold -36,000 - 60,000
Gross profit $24,000 $ 40,000
Less other expenses:
Advertising $ 600 $ 600
Utilities 4,200 5,600
Salaries and commissions 3,200 4,000
Supplies (bags, cleaning supplies etc.) 320 400
Depreciation 2,300 2,300
Administrative costs 1,900 1,900
Total -12,520 -14,800
Net income $11,480 $25,200


a. Identify each of the company's expenses (including cost of goods sold) as being either
variable, fixed, or mixed.
b. What is the total cost equation?
c. Estimate total cost if sales = $75,000.


a. Cost April May Behavior

COGS 36,000/60,000=60% 60,000/100,000=60% V
Advertising 600 600 F
Utilities 4,200/60,000= 7% 5,600/100,000=5.6% M
Salaries, Etc. 4,000/100,000=4% M
Supplies 320/60,000 .53% 400/100,000=.4% M
Depreciation 2,300 2,300 F
Administration 1,900 1,900 F

b. Total FC = $600 + $2,300 + $1,900 + $2,100 + $2,000 + $200 = $9,100

Total VC = 60% + 3.5% + 2% + .2% = 65.7% sales
TC = $9,100 + 65.7% sales

c. TC = $9100 + (65.7% x $75,000) = $58,375