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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 Direct materials Direct labor Manufacturing overhead Total manufacturing costs Beginning work in process inventory Ending work in process inventory Cost of goods manufactured Income Statement Sales Beginning finished goods inventory Cost of goods manufactured Goods available for sale Ending finished goods inventory Cost of goods sold Gross margin Operating expenses Net income 50,000 9,000 31,500 _______ 7,000 ______ ______ 10,000 6,500 30,000 7,000 _______ 23,000 5,000 ______ 12,000 ______ 3,000 Case 1 8,000 3,000 _______ 32,000 _______ 2,000 _______ Case 2 6,000 5,000 7,000 _______ 2,000 _______ _______

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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 70,000 Indirect labor 110,000 Utilities, factory 50,000 Insurance factory 15,000 Lubricants for machines 10,000 Direct Labor 210,000 Purchases of raw materials 160,000 Depreciation, sales furniture 7,000 Inventories at the beginning and end of the year were as follows: December 31 January 1 Raw materials 15,000 25,000 Work in process 30,000 10,000 Finished 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: Actual Estimated Direct labor hours 500,000 480,000 Manufacturing overhead 1,000,000 965,000 Required: a) b) c) d) Compute the predetermined overhead rate for the year Calculate the overhead applied for the year. What is the amount of over-applied or under-applied overhead? 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 periods operations appear below: Product D Product C 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 Machine setups Purchase Orders General Factory Activity Measure Number of setups Number of purchase orders Number of direct labor hours 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: Job Activity Measure Number of setups 10 Number of purchase orders 40 Number of direct labor hours 60 Activity Measure Number of setups Number of purchase orders Direct labor hours Product C 100 810 280 Product D 130 1,270 1,440 Estimated Overhead Cost $ 13,570 91,520 25,800 Total 230 2,080 1,720

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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 Direct labor Sales salaries Indirect labor Production managers salary Marketing costs Factory lease 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 15,000 23,000 12,000 3,000 6,000 9,000 4,000

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

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

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 20,000 15,000 30,000 Ending balance 30,000 18,000 20,000

Raw materials Work in process Finished goods

The following additional information is available for the year: Raw materials purchases Direct labor Manufacturing overhead applied Indirect materials 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 balance 0 ?? ?? Ending balance 0 35,000 30,000 100,000 75,000 80,000 0

Raw materials Work in process Finished goods

The following additional information is available for the year: Direct materials used Direct labor Manufacturing overhead applied Cost of goods manufactured Cost of goods sold (unadjusted) 200,000 150,000 160,000 525,000 544,000

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: Machine hours Number of batches Product A 1,000 45 Product B 3,000 15 Total 4,000 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: Direct labor hours Batches Bats 100 4 Tops 200 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 Direct materials Direct labor Manufacturing overhead Total manufacturing costs Add: Beginning work in process inventory Deduct: Ending work in process inventory Cost of goods manufactured Sales Beginning finished goods inventory Add: Cost of goods manufactured Goods available for sale Deduct: Ending finished goods inventory Cost of goods sold Gross margin Operating expenses Net income Case 1 8,000 3,000 21,000* 32,000 1,500* 2,000 31,500* 50,000 9,000 31,500 40,500* 7,000 33,500* 16,500* 10,000 6,500 Case 2 6,000 5,000 7,000 18,000* 2,000 4,000* 16,000* 30,000 7,000 16,000* 23,000 5,000 18,000* 12,000 9,000* 3,000

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Problem 2 Schedule of Cost of Goods Manufactured Direct materials: Raw materials inventory, January 1 Add: Purchases of raw materials Raw materials available for use Deduct: raw materials inventory, Dec. 31 Raw materials used in production Direct Labor Manufacturing overhead: Depreciation, factory Indirect labor Utilities, factory Insurance, factory Lubricants for machines Total overhead costs Total manufacturing costs Add: Work in process inventory, January 1 Deduct: Work in process inventory, Dec. 31 Cost of Goods Manufactured Schedule of Cost of Goods Sold Finished goods inventory, January 1 Add: Cost of Goods Manufactured Goods available for sale Deduct: Finished goods inventory, Dec 1 Cost of Goods Sold

15,000 160,000 175,000 25,000 150,000 210,000 70,000 110,000 50,000 15,000 10,000 255,000 615,000 30,000 645,000 10,000 635,000 40,000 635,000 675,000 60,000 615,000

Problem 3 - Calculation of overhead rate and application of overhead a) Predetermined overhead rate $1,000,000/500,000 dlh = b) Overhead applied c) Under-applied overhead d) Cost of Goods sold Manufacturing overhead 480,000 dlh * $2.00 = $965,000 960,000 = 5,000 5,000 $2.00 per dlh $960,000 $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 Accounts payable b. Work in process Raw materials inventory c. Work in process Manufacturing overhead Salary & Wage Expense Wages payable 200,000 200,000 185,000 185,000 230,000 90,000 110,000 430,000 63,000 7,000 70,000 54,000 54,000 136,000 136,000 76,000 19,000 95,000 102,000 18,000 120,000 390,000 390,000 770,000 770,000 1,200,000 1,200,000 800,000 800,000

d. Manufacturing overhead Utilities Expense Accounts payable e. Manufacturing overhead Accounts payable f. Advertising Expense Accounts payable

g. Manufacturing overhead Depreciation Expense Accumulated depreciation h. Manufacturing overhead Rent Expense Accounts payable i. Work in process Manufacturing overhead (975 dlh x $400/dlh = 390,000) Finished goods inventory Work in process

j.

k. Accounts receivable Sales Cost of goods sold Finished goods inventory

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b) c) d) Manufacturing OH 90,000 390,000 63,000 54,000 76,000 102,000 5,000 Raw Materials 30,000 185,000 200,000 45,000 e) Manufacturing overhead Cost of goods sold f) Cost of manufacturing Job 412: Direct materials Direct labor Manufacturing overhead Total Cost Units produced Cost per unit Markup % Markup Selling price 39 dlh x $235.90 = 39 dlh x $400.00 = $8,000 9,200 15,600 $32,800 4 $8,200 60% 4,920 $13,120

overapplied Work in Process 21,000 185,000 770,000 230,000 390,000 56,000 5,000 5,000 Finished Goods 60,000 770,000 800,000

30,000

Cost + markup =

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Problem 5 - Activity-Based Costing a) Direct labor hours: Product C 400 units X .7 dlh/unit 280 dlh Product D 1,200 units X 1.2 dlh/unit 1,440 dlh Total 1,720 dlh $76.10/dlh

Predetermined overhead rate: Unit Product Cost: Direct Materials Direct Labor Manufacturing Overhead Total Unit Cost *.7 dlh/unit * $76.10 = $53.27 ** 1.2 dlh/unit * $76.10 = $91.32 b) Activity Cost Pool Machine set-ups Purchase orders General Factory c) Activitiy Rates Machine set-ups $59 per setup Purchase orders $44 per order General Factory $15 per dlh Total overhead cost Number of Units Overhead cost per unit d) Unit Product Cost: Direct Materials Direct Labor Manufacturing Overhead Total Unit Cost Activities OH Cost $ 13,570 91,520 25,800

$130,890 / 1,720 dlh = Product C $10.70 11.20 * 53.27 $ 75.17 Product D $ 16.70 19.20 ** 91.32 $127.22

Activity 230 setups 2,080 orders 1,720 dlh Product Estimated Activity 100 810 280

Activity Rate $59 per setup $44 per order $15 per dlh Product Estimated Activity 130 1,270 1,440 D Amount $7,670 55,880 21,600 $85,150 1,200 $70.96

C Amount $5,900 35,640 4,200 $45,740 400 $114.35

Product C $10.70 11.20 114.35 $136.25

Product D $ 16.70 19.20 70.96 $106.86

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e) Traditional ABC Machine set-ups Purchase orders General Factory Total Overhead rate $76.10 $59.00 $44.00 $15.00 Activity 60 dlh 10 setups 40 pos 60 dlh Overhead applied $4,566 $590 $1,760 $900 $3,250

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Solutions to True / False Problems

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. True True False because variable costs are not always direct costs, which can be traced to a specific cost object. True False because a manufacturing firm reports both manufacturing and nonmanufacturing costs. False because a job cost sheet summarizes all of the costs incurred on a specific job. False because manufacturing overhead includes all manufacturing costs except direct materials and direct labor. True True True True True True False because this describes activity based costing, not activity based management. True

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Solutions to Multiple Choice Questions

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

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