Exam Chapters 4-5 Answers

1. A company that manufactures custom bridal gowns will use a _______________ costing system to track production costs ANS: job-order 2. Three methods of job-cost valuation are normal, standard, and _________________. ANS: actual 3. In a standard job order costing system, factory overhead is applied using ____________ rates times _______ input. ANS: predetermined;standard 4. When a job is begun, the first document in the job order process is the ____________________. ANS: materials requisition 5. When indirect materials are added to a job, the __________________________ account is debited. ANS: manufacturing overhead 6. The document that contains all information about the costs of a specific job is a ___________________. ANS: job order cost sheet 7. The difference between a standard and an actual quantity, price, or rate is a(n)________________. ANS: variance 8. Underapplied factory overhead that is material in amount is closed to _______________, ______________, and ______________________ at year end. ANS: Work in Process, Finished Goods Inventory,Cost of Goods Sold 9. An activity that a customer is willing to pay for and increases the worth of a product is referred to as a _______________________ activity. ANS: value-added 10. The sum of value-added processing time plus non-value added time equals __________________________. ANS: cycle (lead) time DIF: Moderate OBJ: 5-2 11. Which of the following organizations would be most likely to use a job order costing system? a. the loan department of a bank b. the check clearing department of a bank c. a manufacturer of processed cheese food d. a manufacturer of video cassette tapes ANS: A DIF: Moderate OBJ: 4-1 12. Which of the following could not be used in job order costing? a. standards b. an average cost per unit for all jobs c. normal costing d. overhead allocation based on the job's direct labor hours ANS: B DIF: Easy OBJ: 4-1 13. Total manufacturing costs for the year plus beginning Work in Process Inventory cost equals

a. b. c. d.

cost of goods manufactured in the year. ending Work in Process Inventory. total manufacturing costs to account for. cost of goods available for sale.

ANS: C DIF: Easy OBJ: 4-4 14. Production overhead does not include the costs of a. factory depreciation and supplies. b. factory employees' cafeteria departments. c. production line labor. d. the maintenance department for the factory. ANS: C DIF: Easy OBJ: 4-4 15. Overapplied overhead would result if a. the plant were operated at less than normal capacity. b. overhead costs incurred were less than costs charged to production. c. overhead costs incurred were unreasonably small in relation to units produced. d. overhead costs incurred were greater than costs charged to production. ANS: B DIF: Easy OBJ: 4-4 16. The use of standard material or labor costs in job order costing a. is similar to the use of predetermined overhead rates in a normal costing system. b. will keep actual costs of jobs from fluctuating due to changes in component costs. c. is appropriate for any company making a units to customer specification. d. all answers are correct. ANS: A DIF: Easy OBJ: 4-6 17. A job order costing system is likely to provide better (1) (2) (3)

inventory valuations for financial statements. control over inventory. information about ability to accept additional production work.

(1)

a. b. c. d.

(2)

yes no no yes

(3)

no yes no yes

no yes no yes

ANS: D DIF: Difficult OBJ: 4-1 18. In a production environment that manufactures goods to customer specifications, a job order costing system a. can be used only if standard costs are used for materials and labor.

b. will provide reasonable product cost information only when all jobs utilize approximately the same quantities of material and labor. c. may be maintained using either actual or predetermined overhead rates. d. emphasizes that large customers create the most costs even though they also provide the most revenues. ANS: C DIF: Difficult OBJ: 4-6 19. The cost of abnormal losses (net of disposal costs) should be written off as Product cost

Period cost

yes yes no no

no yes yes no

a. b. c. d.

ANS: C a. b. c. d.

DIF:

Easy

OBJ:

4-8

20. In a job order costing system, the net cost of normal spoilage is equal to estimated disposal value plus the cost of spoiled work. the cost of spoiled work minus estimated spoilage cost. the units of spoiled work times the predetermined overhead rate. the cost of spoiled work minus the estimated disposal value.

ANS: D DIF: Moderate OBJ: 4-8 21. An objective of activity-based management is to a. eliminate the majority of centralized activities in an organization. b. reduce or eliminate non-value-added activities incurred to make a product or provide a service. c. institute responsibility accounting systems in decentralized organizations. d. all of the above ANS: B DIF: Easy OBJ: 5-1 22. Non-value-added activities that are necessary to businesses, but not costs that customers are willing to pay for are known as a. business-value-added activities. b. long-term variable activities. c. short-term variable activities. d. superior business activities. ANS: A DIF: Moderate OBJ: 5-1 23. A process map a. should indicate only value-added activities. b. is also known as a detailed flowchart. c. should indicate only those steps/processes that are obvious in the production of goods/services. d. is also known as a value chart.

ANS: B DIF: Easy OBJ: 5-2 24. When a company is labor-intensive, the cost driver that is probably least significant would be a. direct labor hours. b. direct labor dollars. c. machine hours. d. cost of materials used. ANS: C DIF: Easy OBJ: 5-3 25. The term cost driver refers to a. any activity that can be used to predict cost changes. b. the attempt to control expenditures at a reasonable level. c. the person who gathers and transfers cost data to the management accountant. d. any activity that causes costs to be incurred. ANS: D DIF: Moderate OBJ: 5-3 26. Which of the following have an impact on long-term variable costs? Product variety

a. b. c. d.

Product complexity

no no yes yes

Process complexity

no yes no yes

no yes yes yes

ANS: D DIF: Moderate OBJ: 5-4 27. Which of the following is not a drawback of mass customization? a. The choices are too numerous. b. The potential for errors is great. c. Only a small percentage of available choices is normally selected. d. All of the above are drawbacks. ANS: D

DIF:

Moderate

OBJ:

5-5

28. Activity-based costing and activity-based management are effective in helping managers do all of the following except a. trace technology costs to products. b. promote excellence standards. c. identify only value-added activities. d. analyze performance problems. ANS: C DIF: Moderate OBJ: 5-5 29. A just-in-time manufacturing process should have substantially less of which of the following than a traditional manufacturing process? Idle timeTransfer time

Value-added time

Cycle time

a. b. c. d.

yes yes yes no

yes no yes yes

yes no no yes

yes yes yes no

ANS: C DIF: Difficult OBJ: 5-6 30. A key concept underlying cost driver analysis is that a. all cost drivers identified should be used for cost accumulation. b. the cost of measuring a driver does not exceed the benefits of using it. c. only costs occurring at the unit-level should be assigned to products or services. d. organizational/facility costs are non-value-added and should never be assigned to products or services. ANS: B DIF: Moderate OBJ: 5-3 31. If activity-based costing is implemented in an organization without any other changes being implemented, total overhead costs will a. be reduced because of the elimination of non-value-added activities. b. be reduced because organizational costs will not be assigned to products or services. c. be increased because of the need for additional people to gather information on cost drivers and cost pools. d. remain constant and simply be spread over products differently. ANS: D DIF: Difficult OBJ: 5-5 32. Cajun Company. uses a job order costing system. During April 20X6, the following costs appeared in the Work in Process Inventory account: Beginning balance Direct material used Direct labor incurred Applied overhead Cost of goods manufactured

$ 24,000 70,000 60,000 48,000 185,000

Cajun Company applies overhead on the basis of direct labor cost. There was only one job left in Work in Process at the end of April which contained $5,600 of overhead. What amount of direct material was included in this job? a. $4,400 b. $4,480 c. $6,920 d. $8,000 ANS: A Total Costs Incurred Less: Cost of Goods Manufactured Costs remaining in WIP Overhead Direct Labor (5,600/.80) Direct Materials

202,000 (185,000) 17,000 5,600 7,000

(12,600) 4,400

DIF: Moderate Alpha Company

OBJ:

4-4

Alpha Co. uses a job order costing system. At the beginning of January, the company had two jobs in process with the following costs:

Job #456 Job #461

Direct Material

Direct Labor

Overhead

$3,400 1,100

$510 289

$255 ?

Alpha pays its workers $8.50 per hour and applies overhead on a direct labor hour basis. a. b. c. d.

33. Refer to Alpha Company. What is the overhead application rate per direct labor hour? $ 0.50 $ 2.00 $ 4.25 $30.00

ANS: C Direct Labor Hours: $510/$8.50 Overhead Application Rate: $255 / 60 hrs

60 hrs $

4.25

DIF: Easy OBJ: 4-4 34. Refer to Alpha Company. How much overhead was included in the cost of Job #461 at the beginning of January? a. $ 144.50 b. $ 153.00 c. $2,200.00 d. $2,456.50 ANS: A Direct Labor Hours: $289/$8.50 Overhead Application Rate: $255 / 60 hrs 34 hrs * $4.25/hr

DIF:

Easy

OBJ:

34 hrs $ $

4.25 144.50

4-4

35. Refer to Alpha Company. During January, Alpha’s employees worked on Job #649. At the end of the month, $714 of overhead had been applied to this job. Total Work in Process at the end of the month was $6,800 and all other jobs had a total cost of $3,981. What amount of direct material is included in Job #649? a. $ 677.00

b. $1,391.00 c. $2,142.00 d. $4,658.00 ANS: A Direct Materials--Job 649 Total Work in Process Other Work in Process Costs remaining in WIP Overhead Direct Labor (OH x 2) $714 * 2 Direct Materials

$

714 1,428 $

6,800 (3,981) 2,819 (2,142) 677

DIF: Difficult OBJ: 4-4 36. . Strong Products has no Work in Process or Finished Goods inventories at the close of business on December 31, 20X4. The balances of Strong Products’ accounts as of December 31, 20X4, are as follows: Cost of goods sold--unadjusted Selling & administrative expenses Sales Manufacturing overhead control Manufacturing overhead applied

$2,040,000 900,000 3,600,000 700,000 648,000

Pretax income for 20X4 is: a. $608,000. b. $660,000. c. $712,000. d. undeterminable from the information given. ANS: A Sales Cost of Goods Sold Factory Overhead Underapplied (700,000-648,000) Selling, General and Administrative Expenses Pretax Income

$ 3,600,000 2,040,000 52,000

(2,092,000) (900,000) $ 608,000

DIF: Moderate OBJ: 4-4 Wilson Manufacturing Company Wilson Manufacturing Company produces beach chairs. Chair frames are all the same size, but can be made from plastic, wood, or aluminum. Regardless of frame choice, the same sailcloth is used for the seat on all chairs. Wilson has set a standard for sailcloth of $9.90 per square yard and each chair requires 1 square yard of material. Wilson produced 500 plastic chairs, 100 wooden chairs, and 250 aluminum chairs during June. The total cost for 1,000 square yards of sailcloth during the month was $10,000. At the end of the month, 50 square yards of sailcloth remained in inventory.

37. Refer to Wilson Manufacturing Company. The unfavorable material price variance for sailcloth purchases for the month was a. $ 100. b. $ 495. c. $1,090. d. $1,585. ANS: A $10,000 ÷ 1,000

$10.00 per yard

$(9.90 - 10.00) * 1,000 yards

$100

DIF:

Moderate

OBJ:

4-6

38. Refer to Wilson Manufacturing Company. Assuming that there was no sailcloth in inventory at the beginning of June, the unfavorable material quantity variance for the month was a. $ 495. b. $ 500. c. $ 990. d. $1,000. ANS: C 850 chairs * 1 yard per chair Actual usage (1,000 - 50) Unfavorable usage variance

850 yards 950 yards 100 yards 9.90/yard $

DIF:

Moderate

OBJ:

990

4-6

Smithson Company Smithson Company produces two products (A and B). Direct material and labor costs for Product A total $35 (which reflects 4 direct labor hours); direct material and labor costs for Product B total $22 (which reflects 1.5 direct labor hours). Three overhead functions are needed for each product. Product A uses 2 hours of Function 1 at $10 per hour, 1 hour of Function 2 at $7 per hour, and 6 hours of Function 3 at $18 per hour. Product B uses 1, 8, and 1 hours of Functions 1, 2, and 3, respectively. Smithson produces 800 units of A and 8,000 units of B each period. 39. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced, Product A will have an overhead cost per unit of a. $ 88.64. b. $123.64. c. $135.00. d. None of the responses are correct.

ANS: A Total Overhead Product A

Product B

OH/Unit $ $

Function 1 2 3

Hourly Rate $ $ $

1 2 3

Hourly Rate $ $ $

Function

Units Produced

10 7 18 Totals

Total 2 1 6 9

Hours 10 7 18 Totals

$ $ $ $

20 7 108 135

Total 1 8 1 10

$ $ $ $

10 56 18 84

Total

$ 108,000 $ 672,000 $ 780,000 Total OH Proportion Allocated Units OH per OH Produced Unit $ 780,000 0.090909091 $ 70,909.09 800 $ 88.64 (800/8800)

DIF:

135 84

Hours

Moderate

800 8000

OBJ:

5-3

40. Refer to Smithson Company If total overhead is assigned to A and B on the basis of units produced, Product B will have an overhead cost per unit of a. $84.00. b. $88.64. c. $110.64. d. None of the responses are correct. ANS: B See #70 for Total Overhead Computations Total OH Proportion Allocated Units OH per OH Produced Unit $ 780,000 0.909090909 $ 709,090.91 8000 $ 88.64 (8000/8800)

DIF:

Moderate

OBJ:

5-3

41. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor hours, Product A will have an overhead cost per unit of a. $51.32. b. $205.28. c. $461.88. d. None of the responses are correct. ANS: B

Product

DL Hrs/Unit

A B

Units Produced

4 1.5

Total OH $

DIF:

800 8000

Proportion

Total DL Hours 3200 12000 15200

Allocated Units OH per OH Produced Unit 780,000 0.210526316 $ 164,210.53 800 $ 205.28 (3,200/15,200)

Moderate

OBJ:

5-3

42. Refer to Smithson Company If total overhead is assigned to A and B on the basis of direct labor hours, Product B will have an overhead cost per unit of a. $51.32. b. $76.98. c. $510.32. d. None of the responses are correct. ANS: B See #72 for Direct Labor Computations Total OH $

Proportion

Allocated Units OH per OH Produced Unit 780,000 0.789473684 $ 615,789.47 8000 $ 76.98 (12,000/15,200)

DIF:

Moderate

OBJ:

5-3

43.

Compare and contrast job order and process costing systems.

ANS: Job order costing is characterized by the production of small quantities of heterogeneous distinct or unique items. Items are produced according to customer specifications and, at a minimum, direct material and direct labor costs can be traced to specific jobs. Process costing is characterized by the production of large quantities of homogeneous (alike or similar in nature) items. Specific items cannot be identified with specific costs during the production process. DIF: 44.

Moderate OBJ: 4-1 Discuss the basic forms used in a job order costing system.

ANS: The forms used in a job order costing system include (1) a job order cost sheet which records all the financial and significant production data (actual or standard, and possibly budgeted) relating to a particular job; (2) a material requisition form which records the costs and quantities of material that has been requisitioned for a particular job; and (3) an employee time sheet which records the jobs worked on by an employee and the amount of time spent on each job. DIF: 45.

Moderate OBJ: 4-3 Discuss the accounting treatment of spoilage in a job order costing system.

ANS: If the spoilage is common to all jobs, is normal, and can be estimated, the net cost is applied to production using a predetermined overhead rate that was set by including the spoilage estimate in estimated overhead. If spoilage pertains to a particular job and is normal, the disposal value of the spoiled goods should be removed from that particular job. If the spoilage is abnormal, the net cost should be charged to a loss account and credited to the particular Work in Process job that created the spoilage. DIF: 46.

Moderate OBJ: 4-8 Discuss the characteristics of a company for which ABC would be appropriate.

ANS: Companies having the following characteristics find ABC useful: (1) hard-to-make products that show large profits and easy-to-make products that show losses; (2) profit margins that are difficult to explain; (3) considerable automation that makes it difficult to assign overhead to products that use machine hours or direct labor as bases; (4) substantial overhead costs that are not in proportion to the number of products; and (5) a wide variety of services or products. DIF:

Moderate

OBJ:

5-6