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MULTIPLE CHOICE QUESTIONS A. Exxon Corporation.

B. Macy's Department Store.


1. Which of the following statements is true? C. Wendy's.
A. The word "cost" has the same meaning in all D. Southwest Airlines.
situations in which it is used. E. Columbia University.
B. Cost data, once classified and recorded for a
specific application, are appropriate for use Answer: A LO: 3 Type: N
in any application.
C. Different cost concepts and classifications 11. Selling and administrative expenses would likely
are used for different purposes. appear on the balance sheet of:
D. All organizations incur the same types of A. The Gap.
costs. B. Texas Instruments.
E. Costs incurred in one year are always C. Turner Broadcasting System.
meaningful in the following year. D. all of the above firms.
E. none of the above firms.
Answer: C LO: 1 Type: RC
Answer: E LO: 3 Type: N
2. Product costs are:
A. expensed when incurred. 12. Which of the following inventories would a
B. inventoried. discount retailer such as Wal-Mart report as an
C. treated in the same manner as period costs. asset?
D. treated in the same manner as advertising A. Raw materials.
costs. B. Work in process.
E. subtracted from cost of goods sold. C. Finished goods.
D. Merchandise inventory.
Answer: B LO: 2 Type: RC E. All of the above.

3. Which of the following is a product cost? Answer: D LO: 3 Type: RC


A. Glass in an automobile.
B. Advertising. 13. Which of the following inventories would a
C. The salary of the vice president-finance. company ordinarily hold for sale?
D. Rent on a factory. A. Raw materials.
E. Both "A" and "D." B. Work in process.
C. Finished goods.
Answer: E LO: 2 Type: N D. Raw materials and finished goods.
E. Work in process and finished goods.
4. Which of the following would not be classified as a
product cost? Answer: C LO: 3 Type: RC
A. Direct materials.
B. Direct labor. 14. Zeno Corporation engages in mass customization
C. Indirect materials. and direct sales, the latter by accepting customer
D. Insurance on the manufacturing plant. orders over the Internet. As a result, Zeno:
E. Sales commissions. A. would probably begin the manufacturing
process upon receipt of a customer's order.
Answer: E LO: 2 Type: RC, N B. would typically have fairly low inventory
levels for the amount of sales revenue
5. The accounting records of Tacoma Company generated.
revealed the following costs: direct materials used, C. would typically have fairly high inventory
$170,000; direct labor, $350,000; manufacturing levels for the amount of sales revenue
overhead, $400,000; and selling and generated.
administrative expenses, $220,000. Tacoma's D. would likely find choices "A" and "B" to be
product costs total: applicable.
A. $520,000. E. would likely find choices "A" and "C" to be
B. $750,000. applicable.
C. $920,000.
D. $1,140,000. Answer: D LO: 4 Type: RC
E. some other amount.
15. Companies that engage in mass customization:
Answer: C LO: 2 Type: A A. tend to have a relatively low production
volume.
6. Costs that are expensed when incurred are called: B. tend to have a high production volume that
A. product costs. involves highly standardized end-products.
B. direct costs. C. tend to have a high production volume,
C. inventoriable costs. many standardized components, and
D. period costs. customer-specified combinations of
E. indirect costs. components.
D. tend to have a high production volume,
Answer: D LO: 2 Type: RC many unique components, and customer-
specified combinations of components.
7. Which of the following is a period cost? E. could be typified by the refining operations of
A. Direct material. Shell Oil.
B. Advertising expense.
C. Depreciation on cars driven by a firm's Answer: C LO: 4 Type: RC
president and treasurer.
D. Miscellaneous supplies used in production 16. Midwest Motors manufactures automobiles. Which
activities. of the following would not be classified as direct
E. Both "B" and "C." materials by the company?
A. Sheet metal used in the automobile's body.
Answer: E LO: 2 Type: N B

8. Which of the following is not a period cost? C. Interior leather.


A. Legal costs. D. CD player.
B. Public relations costs. E. Wheel lubricant.
C. Sales commissions.
D. Wages of assembly-line workers. Answer: E LO: 5 Type: N
E. The salary of a company's chief financial
officer (CFO). 17. Which of the following employees of a commercial
printer/publisher would be classified as direct
Answer: D LO: 2 Type: RC, N labor?
A. Book binder.
9. The accounting records of Hill Corporation B. Plant security guard.
revealed the following selected costs: Sales C. Sales representative.
commissions, $40,000; plant supervision, $94,000; D. Plant supervisor.
and administrative expenses, $185,000. Hill's E. Payroll supervisor.
period costs total:
A. $40,000. Answer: A LO: 5 Type: N
B. $94,000.
C. $185,000. 18. Norwood Appliance produces washers and dryers
D. $225,000. in an assembly-line process. Labor costs incurred
E. $319,000. during a recent period were: corporate executives,
$100,000; assembly-line workers, $80,000;
Answer: D LO: 2 Type: A security guards, $18,000; and plant supervisor,
$30,000. The total of Norwood's direct labor cost
10. Which of the following entities would most likely was:
have raw materials, work in process, and finished A. $80,000.
goods? B. $98,000.

Chapter 2 17
C. $110,000. 27. In a manufacturing company, the cost of goods
D. $128,000. completed during the period would include which
E. $228,000. of the following elements?
A. Raw materials used.
Answer: A LO: 5 Type: A B. Beginning finished goods inventory.
C. Marketing costs.
19. Which of the following employees would not be D. Depreciation of delivery trucks.
classified as indirect labor? E. More than one of the above.
A. Custodian.
B. Salesperson. Answer: A LO: 6 Type: RC
C. Assembler of wooden furniture.
D. Plant security guard. 28. Which of the following equations is used to
E. Choices "B" and "C." calculate cost of goods sold during the period?
A. Beginning finished goods + cost of goods
Answer: E LO: 5 Type: RC, N manufactured + ending finished goods.
B. Beginning finished goods - ending finished
20. Depreciation of factory equipment would be goods.
classified as: C. Beginning finished goods + cost of goods
A. operating cost. manufactured.
B. "other" cost. D. Beginning finished goods + cost of goods
C. manufacturing overhead. manufactured - ending finished goods.
D. depreciation expense. E. Beginning finished goods + ending finished
E. administrative cost. goods - cost of goods manufactured.

Answer: C LO: 5 Type: RC Answer: D LO: 6 Type: RC

21. Which of the following costs is not a component of 29. Work-in-process inventory is composed of:
manufacturing overhead? A. direct material and direct labor.
A. Indirect materials. B. direct labor and manufacturing overhead.
B. Factory utilities. C. direct material and manufacturing overhead.
C. Factory equipment. D. direct material only.
D. Indirect labor. E. direct material, direct labor, and
E. Property taxes on the manufacturing plant. manufacturing overhead.

Answer: C LO: 5 Type: RC Answer: E LO: 6 Type: RC

22. The accounting records of Westcott Company 30. Fort Walton Industries began July with a finished-
revealed the following costs: goods inventory of $48,000. The finished-goods
inventory at the end of July was $41,000 and the
Factory utilities $ cost of goods sold during the month was
35,000 $125,000. The cost of goods manufactured during
Wages of assembly-line 170,000 July was:
personnel A. $77,000.
Customer entertainment 45,000 B. $84,000.
Indirect materials used 19,000 C. $118,000.
Depreciation on salespersons' 51,000 D. $132,000.
cars E. some other amount.
Production equipment rental 110,000
costs Answer: C LO: 6 Type: A

Costs that would be considered in the calculation 31. Kansas Plating Company reported a cost of goods
of manufacturing overhead total: manufactured of $260,000, with the firm's year-
A. $164,000. end balance sheet revealing work in process and
B. $215,000. finished goods of $35,000 and $67,000,
C. $385,000. respectively. If supplemental information
D. $430,000. disclosed raw materials used in production of
E. some other amount. $40,000, direct labor of $70,000, and
manufacturing overhead of $120,000, the
Answer: A LO: 5 Type: A company's beginning work in process must have
been:
23. Which of the following statements is (are) correct? A. $5,000.
A. Overtime premiums should be treated as a B. $37,000.
component of manufacturing overhead. C. $65,000.
B. Overtime premiums should be treated as a D. $97,000.
component of direct labor. E. some other amount.
C. Idle time should be treated as a component
of direct labor. Answer: C LO: 6 Type: A
D. Idle time should be accounted for as a
special type of loss. 32. The accounting records of Bronco Company
E. Both "B" and "C" are correct. revealed the following information:

Answer: A LO: 5 Type: RC Raw materials used $


60,000
24. Conversion costs are: Direct labor 125,000
A. direct material, direct labor, and Manufacturing overhead 360,000
manufacturing overhead. Work-in-process inventory, 50,000
B. direct material and direct labor. 1/1
C. direct labor and manufacturing overhead. Finished-goods inventory, 1/1 189,000
D. prime costs. Work-in-process inventory, 76,000
E. period costs. 12/31
Finished-goods inventory, 140,000
Answer: C LO: 5 Type: RC 12/31

25. Prime costs are comprised of: Bronco's cost of goods manufactured is:
A. direct materials and manufacturing A. $519,000.
overhead. B. $522,000.
B. direct labor and manufacturing overhead. C. $568,000.
C. direct materials, direct labor, and D. $571,000.
manufacturing overhead. E. some other amount.
D. direct materials and direct labor.
E. direct materials and indirect materials. Answer: A LO: 6 Type: A

Answer: D LO: 5 Type: RC 33. The accounting records of Dolphin Company


revealed the following information:
26. Which of the following statements is true?
A. Product costs affect only the balance sheet. Total manufacturing costs $530,000
B. Product costs affect only the income Work-in-process inventory, 56,000
statement. Jan. 1
C. Period costs affect only the balance sheet. Work-in-process inventory, 78,000
D. Period costs affect both the balance sheet Dec. 31
and the income statement. Finished-goods inventory, 146,000
E. Product costs eventually affect both the Jan. 1
balance sheet and the income statement. Finished-goods inventory, 123,000
Dec. 31
Answer: E LO: 6 Type: N
Dolphin's cost of goods sold is:

18 Hilton, Managerial Accounting, Seventh Edition


A. $508,000. D. decrease on a per-unit basis as activity
B. $529,000. increases.
C. $531,000. E. increase on a per-unit basis as activity
D. $553,000. increases.
E. some other amount.
Answer: B LO: 8 Type: RC
Answer: C LO: 6 Type: A
41. As activity decreases, unit variable cost:
34. For the year just ended, Cole Corporation's A. increases proportionately with activity.
manufacturing costs (raw materials used, direct B. decreases proportionately with activity.
labor, and manufacturing overhead) totaled C. remains constant.
$1,500,000. Beginning and ending work-in- D. increases by a fixed amount.
process inventories were $60,000 and $90,000, E. decreases by a fixed amount.
respectively. Cole's balance sheet also revealed
respective beginning and ending finished-goods Answer: C LO: 8 Type: RC
inventories of $250,000 and $180,000. On the
basis of this information, how much would the 42. Which of the following is not an example of a
company report as cost of goods manufactured variable cost?
(CGM) and cost of goods sold (CGS)? A. Straight-line depreciation on a machine that
A. CGM, $1,430,000; CGS, $1,460,000. has a five-year service life.
B. CGM, $1,470,000; CGS, $1,540,000. B. Wages of manufacturing workers whose pay
C. CGM, $1,530,000; CGS, $1,460,000. is based on hours worked.
D. CGM, $1,570,000; CGS, $1,540,000. C. Tires used in the production of tractors.
E. Some other amounts. D. Aluminum used to make patio furniture.
E. Commissions paid to sales personnel
Answer: B LO: 6 Type: A Answer: A LO: 8 Type: N

35. Leggio Industries reported the following data for 43. Fixed costs are those costs that:
the year just ended: sales revenue, $950,000; cost A. vary directly with changes in activity.
of goods sold, $420,000; cost of goods B. vary inversely with changes in activity.
manufactured, $330,000; and selling and C. remain constant on a per-unit basis.
administrative expenses, $170,000. Leggio's D. increase on a per-unit basis as activity
gross margin would be: increases.
A. $30,000. E. remain constant as activity changes.
B. $200,000.
C. $360,000. Answer: E LO: 8 Type: RC
D. $530,000.
E. $620,000. 44. The fixed cost per unit:
A. will increase as activity increases.
Answer: D LO: 6 Type: A B. will increase as activity decreases.
C. will decrease as activity increases.
36. Pumpkin Enterprises began operations on January D. will remain constant.
1, 20x1, with all of its activities conducted from a E. will exhibit the behavior described in choices
single facility. The company's accountant "B" and "C."
concluded that the year's building depreciation
should be allocated as follows: selling activities, Answer: E LO: 8 Type: N
20%; administrative activities, 35%; and 45. Which of the following is an example of a fixed
manufacturing activities, 45%. If Pumpkin sold cost?
60% of 20x1 production during that year, what A. Paper used in the manufacture of textbooks.
percentage of the depreciation would appear B. Property taxes paid by a firm to the City of
(either directly or indirectly) on the 20x1 income Los Angeles.
statement? C. The wages of part-time workers who are paid
A. 27%. $8 per hour.
B. 45%. D. Gasoline consumed by salespersons' cars.
C. 55%. E. Surgical supplies used in a hospital's
D. 82%. operating room.
E. 100%.
Answer: B LO: 8 Type: N
Answer: D LO: 6 Type: A
46. The variable costs per unit are $4 when a
37. An employee accidentally overstated the year's company produces 10,000 units of product. What
advertising expense by $50,000. Which of the are the variable costs per unit when 8,000 units
following correctly depicts the effect of this error? are produced?
A. Cost of goods manufactured will be A. $4.00.
overstated by $50,000. B. $4.50.
B. Cost of goods sold will be overstated by C. $5.00.
$50,000. D. $5.50.
C. Both cost of goods manufactured and cost of E. Some other amount.
goods sold will be overstated by $50,000.
D. Cost of goods sold will be overstated by Answer: A LO: 8 Type: A
$50,000, and cost of goods manufactured
will be understated by $50,000. 47. The fixed costs per unit are $10 when a company
E. None of the above. produces 10,000 units of product. What are the
fixed costs per unit when 12,500 units are
Answer: E LO: 6 Type: A produced?
A. $4.
38. Which of the following would likely be a cost driver B. $6.
for the amount of direct materials used? C. $8.
A. The number of units sold. D. $10.
B. The number of direct labor hours worked. E. Some other amount.
C. The number of machine hours worked.
D. The number of employees working in the Answer: C LO: 8 Type: A
factory.
E. The number of units produced. 48. Total costs are $120,000 when 10,000 units are
produced; of this amount, variable costs are
Answer: E LO: 7 Type: N $48,000. What are the total costs when 12,000
units are produced?
39. The choices below depict five costs of Benton A. $57,600.
Corporation and a possible driver for each cost. B. $72,000.
Which of these choices likely contains an C. $120,000.
inappropriate cost driver? D. $129,600.
A. Gasoline consumed; number of miles driven. E. $144,000.
B. Manufacturing overhead incurred in a heavily
automated facility; direct labor hours. Answer: D LO: 8 Type: A
C. Sales commissions; gross sales revenue.
D. Building maintenance cost; building square 49. Baxter Company, which pays a 10% commission to
footage. its salespeople, reported sales revenues of
E. Personnel department cost; number of $210,000 for the period just ended. If fixed and
employees. variable sales expenses totaled $56,000, what
would these expenses total at sales of $168,000?
Answer: B LO: 7 Type: N A. $16,800.
B. $35,000.
40. Variable costs are those costs that: C. $44,800.
A. vary inversely with changes in activity. D. $51,800.
B. vary directly with changes in activity. E. Some other amount.
C. remain constant as activity changes.

Chapter 2 19
Answer: D LO: 8 Type: A C. $300.
D. $3,045.
50. Which of the following would not be characterized E. $3,255.
as a cost object?
A. An automobile manufactured by General Answer: A LO: 10 Type: A
Motors.
B. The New York Fire Department. 59. The average cost per student when 16 students
C. A Burger King restaurant located in enroll in the school is:
Cleveland, Ohio. A. $100.
D. A Delta Airlines flight from Atlanta to Miami. B. $125.
E. All of the above are examples of cost objects. C. $175.
D. $300.
Answer: E LO: 9 Type: N E. $400.

51. Costs that can be easily traced to a specific Answer: C LO: 10 Type: A
department are called:
A. direct costs.
B. indirect costs.
60. The costs that follow all have
C. product costs. applicability for a manufacturing
D. manufacturing costs.
E. processing costs. enterprise. Which of the choices
Answer: A LO: 9 Type: RC listed correctly denotes the costs’
52. Which of the following would not be considered a
applicability for a service provider?
Uncontrollable Opportunity
direct cost with respect to the service department
Cos C
of a new car dealership? t o
A. Wages of repair techniques.
s
B. Property taxes paid by the dealership. t
C. Repair parts consumed.
Applicable Not applicable
D. Salary of the department manager. Not applicable Applicable
E. Depreciation on new equipment used to
Applicable Applicable
analyze engine problems. Not applicable Applicable Applicable
Not applicable Applicable Not applicable
Answer: B LO: 9 Type: N
Answer: C LO: 10 Type: RC
53. Indirect costs:
A. can be traced to a cost object.
B. cannot be traced to a particular cost object. EXERCISES
C. are not important.
D. are always variable costs. Cost Concepts; Different Types of Entities
E. may be indirect with respect to Disney World
but direct with respect to one its major 61. Consider the three firms that follow: (1)
components, Epcot Center.
Continental Airlines, (2) BMW, and (3) Target.
These firms, examples of service providers,
Answer: B LO: 9 Type: RC, N
manufacturers, and merchandisers, tend to have
54. The salary that is sacrificed by a college student different characteristics with respect to costs and
who pursues a degree full time is a(n):
financial-statement disclosures.
A. sunk cost.
B. out-of-pocket cost.
Required:
C. opportunity cost. Determine which of the preceding firms (1, 2,
D. differential cost.
and/or 3) would likely:
E. marginal cost. A. Disclose operating expenses on the income
statement.
Answer: C LO: 10 Type: N B. Have product costs.
C. Have period costs.
55. The tuition that will be paid next semester by a D. Disclose cost of cost good sold on the income
college student who pursues a degree is a(n):
statement.
A. sunk cost. E. Have no meaningful investment in inventory.
B. out-of-pocket cost.
F. Maintain raw-material, work-in-process, and
C. indirect cost. finished-goods inventories.
D. average cost.
G. Have variable and fixed costs.
E. marginal cost.
LO: 2, 3, 8 Type: N
Answer: B LO: 10 Type: N
Answer:
56. Which of the following costs should be ignored A. 1, 2, 3
when choosing among alternatives?
A. Opportunity costs.
B. Sunk costs. E.
C. Out-of-pocket costs.
D. Differential costs.
E. None of the above. 1
B. 2, 3
Answer: B LO: 10 Type: RC
F.
57. If the total cost of alternative A is $50,000 and the
total cost of alternative B is $34,000, then $16,000
is termed the: 2
A. opportunity cost. C. 1, 2, 3
B. average cost.
C. sunk cost.
D. out-of-pocket cost. G.
E. differential cost.

Answer: E LO: 10 Type: N 1, 2, 3


D. 2, 3
Use the following to answer questions 58-59:
Content of Financial Statements and Reports
Wee Care is a nursery school for pre-kindergarten children.
The school has determined that the following biweekly 62. Consider the following cost items:
revenues and costs occur at different levels of enrollment:
1. Sales commissions earned by a
Number of company's sales force.
Students Enrolled Total Revenue Total Costs 2. Raw materials purchased during the
10 $3,000 $2,100 period.
15 4,500 2,700 3. Current year's depreciation on a firm's
16 4,800 2,800 manufacturing facilities.
20 6,000 3,200 4. Year-end completed production of a
21 6,300 3,255 carpet manufacturer.
5. The cost of products sold to customers
58.The marginal cost when the twenty-first student enrolls in of an apparel store.
the school is: 6. Wages earned by machine operators in
A. $55. a manufacturing plant.
B. $155. 7. Income taxes incurred by an airline.
8. Marketing costs of an electronics

20 Hilton, Managerial Accounting, Seventh Edition


manufacturer. Depot on out-going orders
9. Indirect labor costs incurred by a H. Speakers used in Sony home-theater
manufacturer of office equipment. systems
I. Insurance costs related to a Mary Kay
Required: Cosmetics' manufacturing plant
A. Evaluate the costs just cited and determine Required:
whether the associated dollar amounts would Complete the table that follows and classify each
be found on the firm's balance sheet, income of the costs listed as (1) a product or period cost
statement, or schedule of cost of goods and (2) a variable or fixed cost by placing an "X" in
manufactured. the appropriate column.
B. What major asset will normally be
insignificant for service enterprises and Product or Period Cost Variable or Fixed Cost
relatively substantial for retailers, Item Product Period Variable Fixed
wholesalers, and manufacturers? Briefly
A
discuss.
B
C. Briefly explain the similarity and difference
between the merchandise inventory of a C
retailer and the finished-goods inventory of a D
manufacturer. E
F
LO: 3, 6 Type: N G
H
Answer: I
A. 1. Income statement
2. Schedule of cost of goods manufactured LO: 2, 5, 8 Type: N
3. Schedule of cost of goods manufactured
4. Balance sheet Answer:
5. Income statement Product or Period Cost Variable or Fixed Cost
6. Schedule of cost of goods manufactured Item Product Period Variable Fixed
7. Income statement A X X
8. Income statement B X X
9. Schedule of cost of goods manufactured C X X
D X X
B. The asset that differs among these
E X X
businesses is inventory. Service businesses
F X X
typically carry no (or very little) inventory.
Retailers and wholesalers normally stock G X X
considerable inventory. Manufacturers also H X X
carry significant inventories, typically I X X
subdivided in three categories: raw materials,
work in process, and finished goods. Identification of Various Cost Concepts

C. The similarity: Both inventories are 65. The following selected costs were extracted from
carried for sale by the respective businesses. the accounting records of Los Angeles Machining
The difference: Retailers purchase (LAM):
merchandise inventory; in contrast,
manufacturing firms produce their goods. 1. Direct materials used in production
2. Wages of machine operators
Identification of Product Costs and Period Costs, Cost 3. Factory utilities
Behavior 4. Sales commissions
5. Salary of LAM's president
63. Eastside Manufacturing produces small electric 6. Factory depreciation
engines. Identify the following costs as direct 7. Wages of plant security guards
materials (DM), direct labor (DL), manufacturing 8. Uncollectible accounts expense
overhead (MOH), or a period cost (PC). Also 9. Machine lubricant used in production
indicate whether the cost is variable (V) or fixed
(F) with respect to behavior. Required:
By the use of numbers, identify the costs that
A. Commissions paid to salespeople would be used to calculate:
B. Straight-line depreciation on the factory A. cost of goods manufactured.
building B. manufacturing overhead.
C. Salary of the plant supervisor C. total period costs.
D. Wages of the assembly-line workers D. total conversion costs.
E. Machine lubricant used in production E. total direct costs of LAM's credit and
activities collections department.
F. Engine casings used in production F. LAM's inventory valuation.
activities
G. Advertising placed in trade journals LO: 2, 5, 6, 9 Type: N
H. Lease payments for the president's
automobile Answer:
I. Property taxes paid on the factory A. 1, 2, 3, 6, 7, 9
facilities B. 3, 6, 7, 9
C. 4, 5, 8
LO: 2, 5, 8 Type: N D. 2, 3, 6, 7, 9
E. 8
Answer: F. 1, 2, 3, 6, 7, 9
A. PC, V
B. MOH, F Cost of Goods Manufactured and Cost of Goods Sold
C. MOH, F
D. DL, V 66. Panama Manufacturing had the following data for
E. MOH, V the period just ended:
F. DM, V
G. PC, F Work in process, Jan. 1 $ 21,000
H. PC, F Work in process, Dec. 40,000
I. MOH, F 31
J. Finished goods, Jan. 1 70,000
Identification of Product Costs and Period Costs, Cost Finished goods, Dec. 61,000
Behavior 31
Direct materials used 126,000
64. Consider the following items: Direct labor 260,000
Factory depreciation 80,000
A. Tomatoes used in the manufacture of Sales 945,000
Heinz ketchup Advertising expense 52,000
B. Administrative salaries of executives Factory utilities 27,000
employed by Southwest Airlines Indirect materials 19,000
C. Wages of assembly-line workers at a Indirect labor 35,000
Ford plant
D. Marketing expenditures of the Los Required:
Angeles Dodgers baseball club
E. Commissions paid to Coca-Cola's
A. Calculate Panama's cost of goods
manufactured.
salespeople
F. Straight-line depreciation on B. Calculate Panama's cost of goods sold.
manufacturing equipment owned by Dell
Computer LO: 6 Type: A
G. Shipping charges incurred by Office

Chapter 2 21
from the 20x3 accounting records of Miami
Answer: Products:
A. Direct materials used $126,000
Direct labor 260,000 Raw materials used $284,000
Manufacturing overhead: Direct labor 178,000
Factory depreciation 80,000 Indirect labor 35,000
Factory utilities 27,000 Selling and administrative salaries 250,000
Indirect materials 19,000 Building depreciation* 330,000
Indirect labor 35,000 Other selling and administrative 80,000
Total manufacturing costs $547,000 expenses
Add: Work in process, Jan. 1 21,000 Other factory costs 620,000
$568,000
Deduct: Work in process, Dec. 31 40,000 *Seventy percent of the company's
Cost of goods manufactured $528,000 building was devoted to production
activities; the remaining 30% was used
B. Finished goods, Jan. 1 $ 70,000 for selling and administrative functions.
Add: Cost of goods manufactured 528,000
Goods available for sale $598,000 Miami's beginning and ending work-in-process
Deduct: Finished goods, Dec. 31 61,000 inventories amounted to $306,000 and $245,000,
Cost of goods sold $537,000 respectively. The company's beginning and ending
finished-goods inventories were $450,000 and
$440,000, respectively.

Required:
Income-Related Computations
A. Calculate Miami's manufacturing overhead
67. Hampton Company had the following inventory for the year.
balances at the beginning and end of the year:
B. Calculate Miami's cost of goods
January 1 December 31 manufactured.
Raw material $ 50,000 $ 35,000 C. Compute the company's cost of goods sold.
Work in process 130,000 170,000
Finished goods 280,000 255,000 LO: 5, 6 Type: A

During the year, the company purchased $100,000 Answer:


of raw material and spent $340,000 on direct A. Indirect labor $ 35,000
labor. Other data: manufacturing overhead Building depreciation ($330,000 x 231,000
incurred, $450,000; sales, $1,560,000; selling and 70%)
administrative expenses, $90,000; income tax Other factory costs 620,000
rate, 30%. Total $ 886,000

Required: B. Raw material used $ 284,000


A. Calculate cost of goods manufactured. Direct labor 178,000
B. Calculate cost of goods sold. Manufacturing overhead 886,000
C. Determine Hampton's net income. Total manufacturing costs $1,348,000
Add: Work in process, beg. 306,000
LO: 6 Type: A $1,654,000
Deduct: Work in process, end. 245,000
Cost of goods manufactured $1,409,000
Answer:
A. Direct materials used: C. Finished goods, beg. $ 450,000
Raw materials, Jan. 1 $ Add: Cost of goods manufactured 1,409,000
50,000 Cost of goods available for sale $1,859,000
Add: Purchases 100,0 Deduct: Finished goods, end. 440,000
00 Cost of goods sold $1,419,000
Raw materials available for $150,0
use 00 Income and Financial-Schedule Calculations: Working
Deduct: Raw material, 35,0 Backwards
Dec. 31 00
Raw material used $ 69. The selected amounts that follow were taken from
115,000 Kentucky Corporation's accounting records:
Direct labor 340,0
00 Raw material used $ 27,000
Manufacturing overhead 450,0 Direct labor 35,000
00 Total manufacturing costs 104,000
Total manufacturing costs $ Work-in-process inventory, 19,000
905,000 1/1
Add: Work in process, Jan. 1 130,0 Cost of goods manufactured 100,000
00 Cost of goods available for 175,000
$1,035,0 sale
00 Finished-goods inventory, 60,000
Deduct: Work in process, Dec. 170,0 12/31
31 00 Sales revenue 300,000
Cost of goods manufactured $ Selling and administrative 125,000
865,000 expenses
Income tax expense 18,000
B. Finished goods, Jan. 1 $
280,000 Required:
Add: Cost of goods 865,0 Compute the following:
manufactured 00 A. Manufacturing overhead.
Cost of goods available for sale $1,145,0 B. Work-in-process inventory, 12/31.
00 C. Finished-goods inventory, 1/1.
Deduct: Finished goods, Dec. 31 255,0 D. Cost of goods sold.
00 E. Gross margin.
Cost of goods sold $ F. Net income.
890,000
LO: 6 Type: A
C. Sales revenue $1,560,0
00 Answer:
Less: Cost of goods sold 890,0 A. Total manufacturing costs
00 Less: Raw material used
Gross margin $ Direct labor
670,000 Manufacturing overhead
Less: Selling and administrative expenses 90,0
00 B. Total manufacturing costs
Income before taxes $ Add: Work-in-process inventory, 1/1
580,000
Income tax expense ($580,000 x 30%) 174,0 Less: Cost of goods manufactured
00 Work-in-process inventory, 12/31
Net income $
406,000 C. Cost of goods available for sale
Less: Cost of goods manufactured
Finished-goods inventory, 1/1
Elements of Financial Statements
D. Cost of goods available for sale
68. The following selected information was extracted Less: Finished-goods inventory, 12/31

22 Hilton, Managerial Accounting, Seventh Edition


Cost of goods sold
LO: 8 Type: A
E. Sales revenue
Less: Cost of goods sold Answer:
Gross margin Number of Muffler Replacements
500 600 700
Total costs:
F. Gross margin Fixed $ 8,400.00 $ 8,400.00 $ 8,400.00
Less: Selling and administrative expenses costs
Income tax expense Variable 5,000.00 6,000.00 7,000.00
Net income costs
Total costs $13,400.00 $14,400.00 $15,400.00
Flow of Costs, Missing Values
Cost per muffler replacement:
70. The Morton Company recorded the following Fixed cost $ 16.80 $ 14.00 $ 12.00
transactions for February 20x1: Variable 10.00 10.00 10.00
cost
Materials Work in Finished Goods Total cost per $ 26.80 $ 24.00 $ 22.00
Process muffler
Purchases $100,000 replacement
Beginning 18,000 $ 8,000 $ E
inventory Explanatory notes:
Ending A 20,000 30,000 A and C each equal $8,400, since fixed costs do
inventory not vary with activity.
Direct 90,000 J, K, and L each equal $10 ($6,000 ÷ 600), since
materials used variable cost per replacement remains
Direct labor B constant.
Manufacturing B equals $5,000 (500 x $10)
overhead D equals $7,000 (700 x $10)
(includes 115,000 G equals $16.80 ($8,400 ÷ 500)
indirect H equals $14.00 ($8,400 ÷ 600)
materials I equals $12.00 ($8,400 ÷ 700)
used of
$10,000) Fixed and Variable Cost Behavior
Transferred to C
finished goods 72. Global Systems began business on January 1 of the
Cost of goods D current year, producing a single product that is
sold popular with home builders. Demand was very
strong, allowing the company to sell its entire
Sales were $560,000, with sales prices determined manufacturing output of 80,000 units. The
by adding a 40% markup to the firm's following unit costs were incurred:
manufacturing cost. The total cost of direct
materials used, direct labor, and manufacturing Manufacturing costs:
overhead during the month was $285,000. Direct materials $15
Direct labor 8
Required: Variable overhead 11
Calculate the missing values. Fixed overhead 6
Selling and administrative
LO: 6 Type: A costs:
Variable 5
Answer: Fixed 2
Item A:
Beginning materials $ 18,000 Global anticipates an increase in productive output
Add: Purchases 100,000 to 100,000 units and sales of 95,000 units in the
Less: Direct materials used (90,000) next accounting period. The company uses
Less: Indirect materials used (10,000) appropriate drivers to determine cost behavior and
Ending materials $ 18,000 estimates.

Item B: Required:
Total production costs $ 285,000 A. Assuming that present cost behavior patterns
Less: Direct materials used (90,000) continue, compute the total expected costs in
Less: Manufacturing overhead (115,000) the upcoming accounting period.
Direct labor $ 80,000 B. George Levy is about to prepare a graph that
shows the unit cost behavior for variable
Item C: selling and administrative cost. If the graph’s
Beginning work in process $ 8,000 horizontal axis is volume and the vertical axis
Add: Total production costs 285,000 is dollars, briefly describe what George’s
Less: Ending work in process (20,000) graph should look like.
Transferred to finished goods $273,000 C. Determine whether the following costs are
variable or fixed in terms of behavior:
1. Yearly lease payments for a state-of-the-
Item D: art cutting machine.
Sales $560,000 2. A fee paid to a consultant who provided
Divided by rate 140% advice about quality issues. The fee
Cost of goods sold $400,000 was based on the number of consulting
hours provided.
Item E: 3. Cost of an awards dinner for "star"
Ending finished goods $ 30,000 salespeople.
Add: Cost of goods sold 400,000
Less: Transferred to finished goods (273,000) LO: 7, 8 Type: A, N
Beginning finished goods $157,000
Answer:
Fixed and Variable Cost Behavior Direct materials (100,000 x $15) $1,500,000
Direct labor (100,000 x $8) 800,000
71. Mighty Muffler, Inc., operates an automobile Variable overhead (100,000 x 1,100,000
service facility. The table below shows the cost $11)
incurred during a month when 600 mufflers were Fixed overhead (80,000 x $6) 480,000
replaced. Variable selling and 475,000
administrative
(95,000 x $5)
Number of Muffler Replacements
Fixed selling and administrative 160,000
500 600 700 (80,000 x $2)
Total costs: Total costs $4,515,000
Fixed costs A $ 8,400 C
Variable costs B 6,000 D The variable selling and administrative costs are
Total costs E $14,400 F constant at $5 per unit. Thus, the graph is a straight,
horizontal line.
Cost per muffler replacement:
Fixed cost G H I Fixed
Variable cost J K L Variable
Total cost per muffler M N O Variable
replacement Elements of Financial Statements, Cost Behavior

Required: 73. KC Manufacturing, which began operations on


Fill in the missing amounts, labeled A through O, in January 1 of the current year, produces an
the table. industrial scraper that sells for $325 per unit.

Chapter 2 23
Information related to the current year's activities $450,000 variation between these two
follows. amounts?

Number of scrapers 20,000 F. Refer to the preceding question and assume


produced that the firm is currently building the
Number of scrapers sold 17,000 assembly line for $700,000. What economic
Variable costs per unit: term is used to describe the $700,000
Direct materials $25 construction cost?
Direct labor 35
Manufacturing 60 LO: 10 Type: N
overhead
Annual fixed costs: Answer:
Manufacturing $400,000 A. Marginal cost
overhead B. Sunk cost
Selling and 140,000 C. Average cost
administrative D. Opportunity cost
E. Differential cost
KC carries its finished-goods inventory at the F. Out-of-pocket cost
average unit cost of production. There was no
work in process at year-end.
DISCUSSION QUESTIONS
Required:
A. Compute the company's average unit cost of Product Costs and Period Costs
production.
B. Determine the cost of the December 31 75. Madison Corporation has a single facility that it
finished-goods inventory. uses for manufacturing, sales, and administrative
C. Compute the company's cost of goods sold. activities. Should the company's building
D. If next year's production increases to 23,000 depreciation charge be expensed in its entirety or
units and general cost behavior patterns do is a different accounting procedure appropriate?
not change, what is the likely effect on: Explain.
1. The direct-labor cost of $35 per unit?
Why? LO: 2 Type: N
2. The fixed manufacturing overhead cost
of $400,000? Why? Answer:
The company's depreciation charge is, in part, a
LO: 5, 6, 8 Type: A period cost and, in part, a product cost. The
portion that relates to selling and administrative
Answer: activities should be expensed when incurred. In
A. Fixed manufacturing overhead per unit: contrast, the portion that relates to manufacturing
$400,000  20,000 scrapers produced = $20 should be attached to the goods produced, with
the costs now inventoried on the balance sheet.
Average unit manufacturing cost:
Direct materials $ 25 Product Costs and Period Costs, Cost Flows
Direct labor 35
Variable manufacturing 60 76. Manufacturers have established a cost
overhead classification called product costs. Define the term
Fixed manufacturing 20 "product cost" and note where these costs appear
overhead in the financial statements. Be specific.
Average unit cost $140
LO: 2, 5 Type: RC
B. Production (units) 20,000
Sales (units) 17,000 Answer:
Ending finished-goods inventory 3,000 Product costs are costs that relate to the
(units) manufacturing process and consist of direct
materials, direct labor, and manufacturing
3,000 units x $140 = $420,000 overhead. Simply stated, these are costs incurred
to make a product.

C. Finished goods, Jan. 1 Product costs are attached to the units produced
Add: Cost of goods manufactured (20,000 units x $140) (i.e., work in process) and, thus, inventoried on the
Cost of goods available for sale balance sheet. These costs are later charged to
Deduct: Finished goods, Dec. 31 finished goods when the goods are completed.
Cost of goods sold Another transfer occurs when the finished units
are sold, with the costs now transferred to cost of
D. 1. No change. Direct labor is a variable cost, and the cost pergoods soldremain
unit will on theconstant.
income statement.
2. No change. Despite the increase in the number of units produced, this is a fixed cost, which remains the
same in total. Financial Statements of Service, Retailing, and
Manufacturing Firms
Economic Characteristics of Costs
s 77. The income statements and balance sheets of
74. The following terms are used to describe various service, retailing, and manufacturing businesses
economic characteristics of costs: tend to differ.

Opportunity cost Required:


Differential cost A. Which of these businesses will disclose a
Out-of-pocket cost Marginal cost-of-goods-sold figure on the income
cost statement? Why?
Sunk cost Average B. Briefly describe the difference between a
cost retailing firm and manufacturer's disclosure
of inventories on the balance sheet.
Required:
Choose one of the preceding terms to characterize LO: 3 Type: RC
each of the amounts described below. Each term
may be used only once. Answer:
A. Retailers and manufacturers will disclose a
A. The cost of including one extra child in a day- cost-of-goods-sold figure because both of
care center. these entities sell goods. Service businesses,
B. The cost of merchandise inventory purchased in contrast, do not given that such firms
five years ago. The goods are now obsolete. provide services.

C. The cost of feeding 300 children in a public B. A retailer will typically disclose inventories as
school cafeteria is $450 per day, or $1.50 per one-line item entitled merchandise
child per day. What economic term describes inventories. Manufacturers, on the other
this $1.50 cost? hand, carry three different types of
inventories: raw materials, work in process,
D. The management of a high-rise office and finished goods.
building uses 3,000 square feet of space in
the building for its own administrative Definition of Cost Terms
functions. This space could be rented for
$30,000. What economic term describes this 78. Briefly define and discuss the terms in each of the
$30,000 of lost rental revenue? pairs that follow.
E. The cost of building an automated assembly A.
B.
Direct and indirect costs
Direct materials and indirect materials
line in a factory is $700,000; a manually
operated assembly line would cost $250,000. C. Manufacturing overhead and direct labor
What economic term is used to describe the

24 Hilton, Managerial Accounting, Seventh Edition


LO: 5, 9 Type: RC

Answer:
A. Direct costs are logically and practically
related (i.e., easily traceable) to a particular
cost object. An indirect cost, on the other
hand, is not. Whether a cost is direct or
indirect depends on the cost object under
consideration. A cost may be easily traceable
to a company, for example, but not easily
traced to a department of that firm.

B. Direct materials form an integral part of the


finished product and, at the same time, are
easily traced to that product. Indirect
materials, which are part of manufacturing
overhead, generally do not meet these
guidelines. Note, though, that some indirect
material may be easily traced to the product
(e.g., five squirts of wood glue in a piece of
furniture) but it may be too costly to do so.

C. Manufacturing overhead consists of indirect


materials, indirect labor, plant depreciation,
factory utilities, and other factory-related
costs. This cost component reflects all
manufacturing costs other than direct
materials and direct labor. Direct labor, in
contrast, consists of wages of those
employees who work directly on the goods in
production (machine operators, assembly-line
workers, and so forth).

Behavior of Fixed and Variable Costs

79. In discussing the operation of his automobile, a


doctor once observed that gasoline is a fixed cost
because the cost per gallon is relatively stable.
Insurance, on the other hand, is a variable cost
because the cost per mile varies inversely with the
number of miles driven. Comment on the doctor's
observation.

LO: 8 Type: N

Answer:
The doctor's observations are incorrect, as
gasoline is a variable cost and insurance is a fixed
cost. Gasoline cost will increase with the number
of miles driven, whereas insurance outlays will
remain the same. The doctor seems to have
confused the "total" perspective, as defined by
accountants, with the notion of per-unit cost
behavior.

Economic Characteristics of Costs, Relevance for


Decisions

80. Describe the economic characteristics of sunk


costs and opportunity costs, and explain the
impact that these costs may have on decisions.

LO: 10 Type: RC

Answer:
Sunk costs have already been incurred. They are
part of history and cannot be altered. Therefore,
sunk costs are not relevant for any current or
future management decision.

Opportunity costs, in contrast, are relevant for


current and future decisions. Such costs are
defined as the net benefits from a decision
alternative that was not selected—that is, the
benefits were sacrificed to pursue another option.

Chapter 2 25