Cfas Cost Acctg Qa

THEORY OF ACCOUNTS
1. Which of the following statements is false?

(a) Financial reporting should provide information which is relevant to investment, credit and public policy decisions.
(b) Generally speaking, GAAP are those accounting principles with substantial authoritative support.
(c) GAAP are established to ensure the relevancy of the general-purpose financial statements to the widespread uses of
the information by external decision makers.
(d) Once established, GAAP should never be changed.
2. A firm signs a major contract in December to construct custom machinery for a client. No work is begun the current
year yet the footnotes to the firm’s financial statements discuss the nature and peso amount of the contract. This is
an example of
(a) reliability (c) historical cost
(b) full disclosure (d) conservatism
3. A corporation needed a new warehouse; a contractor quoted a P250,000 prices to construct it. The corporation
believed that it could build the warehouse for P215,000 and decided to use company employees to construct the
warehouse. The final construction cost incurred by the corporation was P240,000 but the asset was recorded at
P250,000. This is in violation of the:
(a) time period assumption (c) cost principle
(b) matching principle (d) revenue principle
4. Which of the following accounting concepts best justifies the use of accruals and deferrals?
(a) Cost/benefit constraint (c) Continuity assumption
(b) Unit-measure assumption (d) Materiality constraint
5. Which of the following most clearly states the most important quality which an expenditure must have to be
recognized as an asset on the balance sheet?
(a) It must be both material and relevant
(b) It must have reasonably certain future benefit to the business.
(c) It must be a physical object
(d) It must be used in operation of the business.
6. Which of the following is a current asset?

(a) cash surrender value of a life insurance policy, where the company is the beneficiary
(b) investment in marketable securities for the purpose of controlling the issuing company
(c) cash designated for the purchase of tangible fixed assets
(d) trade installments receivable normally collectible in 24 months
7. The basic components of financial statements include (choose the incorrect one):
(a) statement of changes in equity (c) statement of retained earnings
(b) profit (loss) statement (d) statement of cash flow

8. Which of the following reconciling items would require an adjusting journal entry on the company’s books?
(a) outstanding checks (c) deposits in transit
(b) non-sufficient funds checks (d) cash on hand
9. In recording the bank balance with the book cash balance, which of the following would not cause the bank balance
shown on the bank statement to be lower than the unadjusted book balance?
(a) cash on hand at the company
(b) NSF checks from a customer, as reported on the bank statement
(c) interest credited to the account by the bank
(d) deposits in transit
10. In determining the cost of goods sold:

(a) purchase discounts are deducted net purchases
(b) freight out is added to net purchases
(c) purchase returns and allowances are deducted from net purchases
(d) freight in is added to net purchases

11. Which of these would cause the inventory turnover ratio to increase the most?
(a) increasing the amount of inventory on hand
(b) keeping the amount of inventory on hand constant but increasing sales
(c) keeping the amount of inventory on hand constant but decreasing sales
(d) decreasing the amount of inventory on hand and increasing sales
12. An entity is a large manufacturer of machines. A major customer has placed an order for a special machine for
which it has given a deposit to the entity. The parties have agreed on a price for the machine. As per the terms of
the sale agreement, it is FOB (free on board) contract and the title passes to the buyer when goods are loaded into
the ship at the port. When should the revenue be recognized by the entity?
(a) When the customer orders the machine
(b) When the deposit is received
(c) When the machine is loaded at the port
(d) When the machine has been received by the customer
13. A large manufacturer of cosmetics sells merchandise to a retailer, which in turn sells the goods to the public at large
through its chain of retail outlets. The retailer purchases merchandise from the manufacturer under a consignment
contract. When should revenue from the sale of merchandise to the retailer be recognized by the manufacturer?
(a) When goods are delivered to the retailer
(b) When goods are sold by the retailer
(c) It will depend on the terms of delivery of the merchandise (i.e., CIF cost, insurance, and freight or FOB)
(d) It will depend on the terms of payment (i.e., cash or credit)

14. When the allowance method of recognizing bad debt expense is used, the typical write off of a specific customer’s
account:
(a) has no effect on net income (c) decreases current asset
(b) decrease net income (d) decreases working capital
15. Which of the following is the incorrect statement?

(a) The fair value method of accounting is the most appropriate method of accounting for short-term investments in
marketable debt securities.
(b) Unrealized holding gains and losses on investments in trading securities are recognized in income.
(c) All investments in available for sale securities are reported at fair value.
(d) Only investments in bonds are accounted for by the fair value method.
16. Which of the following is false?

(a) A debit valuation allowance balance for an investment in available for sale securities implies a corresponding owners’
equity account with a credit balance of the same amount.
(b) Unrealized holding gains on investments in available for sale securities may be recognized as a direct increase to
owners’ equity.
(c) Investments in trading securities may be classified as current or long-term.
(d) Investments in available for sale securities may be classified as current or long-term.
17. Which of the following is incorrect?

(a) Investments classified as long-term are reclassified as short-term investments only if it is the intention of the
management to dispose of them in the short term.
(b) If an investor company does not have significant influence in another company, it must use either the fair value
method or the cost method to account for that investment in equity securities.
(c) If an investor company has a controlling interest in another company, it must use either the cost method or the
equity method to account for that investment in equity securities.
(d) The cost method is sometimes applied to investments in equity securities.
18. Select the incorrect statement.

(a) The cost method of accounting for an investment in a subsidiary recognizes the legal fact that the parent and
subsidiary are one economic unit.
(b) Realized gains and losses on investments in equity securities accounted for under the cost method are usually
measured by the difference between the cost and current selling price.
(c) Under the equity method of accounting for long-term investments in equity securities, the investor’ investment
account is decreased by all dividends received from the investee.
(d) The equity method of accounting for long-term investments in equity securities is based on the presumption that the
investor owns a sufficient number of the outstanding voting shares of another company to exercise significant
influence over the operating and financing policies of the other company.

(a) For a long-term equity investment, the investor accounts for a stock split in the same manner as for a stock dividend.
(b) The relative sales value method is usually used to apportion the book or carrying value of a long-term equity
investment between the old shares still owned and newly received stock rights related to those shares.
(c) A stock dividend received on an investment reduces the per share cost to the investor.
(d) For the equity method to be applicable to equity investments, it is presumed that the investor owns enough voting
shares of the investee to exercise managing control.
20. An entity shall classify a noncurrent asset or disposal group as “held for sale” when:
(a) The carrying amount of the asset or disposal group will be recovered through continuing use.
(b) The carrying amount of the asset or disposal group will be recovered through a sale transaction.
(c) The noncurrent asset or disposal group is to be abandoned.
(d) The noncurrent asset or disposal group is idle or retired from active use.
21. Noncurrent asset or disposal group is classified as “held for sale” when the asset is available for immediate sale and
the sale is highly probable. For the sale to be highly probable, (choose the incorrect one)
(a) Management must be committed to a plan to sell the asset.
(b) An active program to locate a buyer and complete the plan must have been initiated.
(c) The asset must be actively marketed for sale at a reasonable price in relation to its carrying value.
(d) The sale is expected to qualify for recognition as a completed sale within one year from the date of classification of
the asset as “held for sale”.
22. Which statement is incorrect concerning presentation of noncurrent asset or disposal group classified as held for
sale?
(a) An entity shall present a noncurrent asset held for sale and the assets of a disposal group classified as held for sale
separately from other assets.
(b) The liabilities of a disposal group classified as held for sale shall be presented separately from other liabilities.
(c) The assets and liabilities a disposal group classified as held for sale shall be offset as a single amount.
(d) An entity shall not depreciate a noncurrent asset classified as held for sale or while it is part of a disposal group
classified as held for sale.
23. What is the treatment of gain on an initial increase in the fair value less cost to sell of a noncurrent asset classified as
held for sale?
(a) The gain shall be recognized in full.
(b) The gain shall not be recognized.
(c) The gain shall be recognized but not in excess of the cumulative impairment loss previously recognized.
(d) The gain shall be recognized but only in retained earnings.
24. Noncurrent asset classified as for rental to others shall be presented in the statement of financial position as:
(a) Current asset
(b) Other noncurrent asset

(c) Noncurrent investment
(d) Property, plant and equipment
25. How should the assets and liabilities of a disposal group classified as held for sale be shown in the statement of
financial position?
(a) The assets and liabilities shall be offset and presented as a single amount.
(b) The assets of the disposal group shall be shown separately from other assets in the statement of financial position,
and the liabilities of the disposal group shall be shown separately from other liabilities in the statement of financial
position.
(c) The assets and liabilities shall be presented as a single amount and as a deduction from equity.
(d) There should be no separate disclosure of assets and liabilities that form part of a disposal
group.
26. An entity acquires a subsidiary exclusively with a view to selling it. The subsidiary meets the criteria to be classified
as held for sale. At the end of the reporting period, the subsidiary has not yet been sold, and six months have
passed since its acquisition. How will the subsidiary be valued in the statement of financial position at the date of
the first financial statements after acquisition?
(a) At fair value
(b) At the lower of its cost and fair value less cost to sell
(c) At carrying amount
(d) In accordance with applicable PFRS
27. An entity classified a noncurrent asset accounted for under the cost model as held for sale on December 31,
2009. Because no offers were received at an acceptable price, the entity decided on July 1, 2010 not to sell the
asset but to continue to use it. In accordance with PFRS 5, the asset shall be measured on July 1, 2010 at:
(a) The lower of its carrying amount and its recoverable amount
(b) The higher of its carrying amount and its recoverable amount
(c) The higher of its carrying amount on the basis that is had never been classified as held for sale and its recoverable
amount
(d) The lower of its carrying amount on the basis that it had never been classified as held for sale and its recoverable
amount
28. The following statements relate to the term “profit”.

Statement 1: Profit is any amount over and above that required to maintain the capital at the
beginning of the period.
Statement 2: Profit is the residual amount that remains after expenses have been deducted
from income.
(a) Both statements are false.
(b) Statement 1 is false.
(c) Statement 2 is false.
(d) Both statements are true.
29. Which of the following is not true of a subsidiary ledger?

(a) The purpose of a subsidiary ledger is to store details of certain general ledger accounts.
(b) The sum of the individual balances in a subsidiary ledger should equal the balance in the general ledger control
accounts.
(c) Journal entries posted to a subsidiary ledger need not be posted to the general ledger.
(d) One benefit of a subsidiary ledger is that the number of general ledger accounts necessary is
reduced.
30. The purpose of trial balance is to:

(a) indicate whether total debits equal total credits.
(b) ensure that all transactions have been recorded.
(c) speed the collection of cash receipts from customers.
(d) increase assets and owner’s equity.
31. The closing entry for sales discounts is:

(a) debit sales discounts and credit income summary.
(b) debit sales discounts and credit sales revenue.
(c) debit income summary and credit sales discounts.
(d) not used because sales discount is a real account which is not closed.
32. Which of the following is not reversed at the start of the new accounting period?
(a) expense paid in advance that is debited to the expense account at the time of payment
(b) doubtful accounts computed using the aging schedule
(c) income earned but not yet recorded because was not yet received
(d) rent collected in advance and credited to a nominal account
33. In the equation, “Assets + Expenses = Liabilities + Revenue + Capital”, the expenses and revenues are:
(a) contra asset and contra liability accounts, respectively, that assist analysis of the financial progress of the firm
(b) incorrectly stated because their signs are reversed, i.e., both are contra items that should have negative signs in the
formula
(c) adjustments to capital that are postponed until the end of a specific accounting period to determine their net effect
on capital for that period
(d) incorrectly included in the formula because “Assets = Liabilities + Capital”
34. Which of the following statements is true?

(a) Service companies do not need to prepare financial statements.
(b) Manufacturing companies maintain the simplest accounting records.
(c) Merchandising companies purchase goods that are ready for sale and then sell them to customers.
(d) A drugstore is an example of a service company.
35. Which of the following is not an accurate statement regarding the rules of debit and credit in recording revenue and
expense transactions?
(a) revenue increases owner’s equity; since increases in owner’s equity are recorded by credits, revenue is recorded by a
credit
(b) expenses decreases owner’s equity; since decreases in owner’s equity are recorded by debits, expenses are recorded
by debits
(c) in recording revenue transactions, we debit the assets received and credit the revenue account
(d) expenses used up assets; since decreases in assets are recorded by credits, expenses are recorded by credits to the
expense account
36. Consider the following:

I. increase an asset VI. decrease owner’s equity
II. decrease an asset VII. increase a revenue
III. increase a liability VIII. decrease a revenue
IV. decrease a liability IX. increase an expense
V. increase owner’s equity X. decrease an expense
Using the above, if an asset account is debited, what are the five possible corresponding credits?
(a) I, IV, VI, VIII, IX (c) I, III, V, VII, IX
(b) II, IV, VI, VIII, X (d) II, III, V, VII, X
37. The historical cost concept measures assets on the basis of:

(a) the replacement cost of assets on the balance sheet
(b) the amount of cash for which the assets could be sold
(c) an appraisal by the auditors
(d) the fair market value of assets on the day they were acquired
38. In financial accounting, gains may be defined as:

(a) total receipts of cash
(b) total receipts of cash in excess of the historical costs of the assets being sold
(c) total revenues
(d) total increases in net assets other than revenues
39. Under the accrual basis of accounting, if cash is received prior to the sale, then:
(a) revenue is recognized when the cash is received
(b) a liability is recognized when cash is received
(c) a liability is removed from the system when the cash is received
(d) revenue is removed from the system when the services have been performed or the goods have been
delivered
40. If there is an objective evidence that AFS is impaired, the cumulative loss that had been recognized in other
comprehensive income:
(a) Shall be amortized over a reasonable period
(b) Shall remain unpaid until the financial asset is disposed of
(c) Shall be recognized in profit or loss
(d) Shall be recognized as an adjustment of the beginning balance of retained earnings
41. A net unrealized loss on an entity’s portfolio of AFS equity securities shall be reflected in the current financial
statements as:
(a) Direct reduction of retained earnings
(b) Current loss resulting from holding equity securities
(c) Footnote or parenthetical disclosure only
(d) Component of other comprehensive income
42. What should happen when the financial statements of an associate are not prepared as of the same date as of the
financial statements of the investor?
(a) The associate shall prepare financial statements for the use of the investor at the same date as that of the investor.
(b) The financial statements of the associate prepared up to a different date shall be used as normal.
(c) Any major transactions between the date of the financial statements of the investor and that of the associate shall be
accounted for.
(d) As long as the gap is not greater than 3 months, there is no problem.
43. When an investor purchases sufficient ordinary shares to gain significant influence over the investee, what is the
proper accounting treatment of any excess of cost over book value acquired?
(a) The excess remains in the investment account until it is sold.
(b) The excess is immediately expensed in the period in which the investment is made.
(c) The excess is amortized over the time period that is reasonable in the light of the underlying cause of the excess.
(d) The excess is charged to retained earnings at the time the investor resells the
investment.
44. Land, building and equipment should be reported on the balance sheet at their cost, less accumulated depreciation,
unless:
(a) some obsolescence is known to have occurred
(b) some of the property still on hand were written down pursuant to a quasi-organization
(c) the amount of insurance carried on the property is well in excess of its book value
(d) not given
45. Dave started his own cheese factory on March 16, 2003. Which of the following transactions would not be
admissible in Dave’s accounting system for the month of March?
(a) On March 18, Dave purchased a cow on account for P3,000.
(b) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
(c) On March 21, Dave contracted with a local radio station to run several one-minute advertising spots during the
month of April.
(d) All of the above transactions would be admissible for Dave’s accounting system in the month of
March.
46. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and issuing a P6,000 note payable
for the balance owed. As a result of this transaction, Jeff’s balance sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity
47. The double-entry system of accounting means that every transaction:

(a) is recorded initially on both the journal and the general ledger
(b) increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by an equal amount of debits and credits
(d) results in changes in accounts on both sides of the balance sheet

48. Which of the following statements is not correct?
(a) debits may increase assets
(b) credits may increase liabilities
(c) debits may increase liabilities
(d) credits may increase owner’s equity
49. Tony owns a store specializing in bags. Tony has just completed a transaction that caused a P12,000 increase in total
assets and a P12,000 increase in liabilities. This transaction could have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note payable for the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note payable for the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by
P12,000
50. Dean has completed the posting process for the month of June and has prepared a trial balance in which the debits
total P11,000 and the credits total P11,100. Which of the following errors would be the most likely candidate in
causing the trial balance not to balance by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger
51. Which of the following is the correct statement?

(a) The best way to ascertain whether a marketable security is short-term or a long-term investment is to check with a
securities dealer.
(b) For balance sheet classification, a security is classified as a short-term investment if it is readily marketable.
(c) For balance sheet classification, a security is classified as a short-term investment based on the intended holding
period.
(d) All investments in trading securities are reported at book values. C

marketable debt securities.
(b) Unrealized holding gains and losses on investments in trading securities are recognized in income.
(c) All investments in available for sale securities are reported at fair value.
(d) Only investments in bonds are accounted for by the fair value method. D
54. Which of the following is true?

marketable equity securities.
(b) All bond investments are accounted for by the amortized cost method.
(c) The carrying value of an investment in trading securities or available for sale securities is limited to market value at
the date of acquisition.
(d) The realized gain or loss on a short-term investment in an equity security is usually equal to the difference between
its cost and its sale price. A
55. Which of the following is false?
(a) A debit valuation allowance balance for an investment in available for sale securities implies a corresponding owners’
equity account with a credit balance of the same amount.
(b) Unrealized holding gains on investments in available for sale securities may be recognized as a direct increase to
owners’ equity.
(c) Investments in trading securities may be classified as current or long-term.
(d) Investments in available for sale securities may be classified as current or long-term. C
56. Which of the following is the correct statement?

(a) Investments in available for sale securities and trading securities are classified separately in a balance sheet.
(b) Investments in available for sale securities include only equity securities.
(c) Investments in trading securities include only debt securities.
(d) Increases in the market value of trading securities and available for sale securities investments always cause the
valuation account to decrease. A
57. Tangible goods used in the productive process and directly related to the products being manufactured are
called:
(a) factory supplies. (c) raw materials.
(b) finished goods. (d) goods in process. C
58. When a portion of inventories has been pledged as security on a loan:

(a) the value of the portion pledged should be subtracted form the debt.
(b) an equal amount of retained earnings should be appropriated.
(c) the fact should be disclosed but the amount of current assets should not be affected.
(d) the cost of the pledged inventories should be transferred from current assets to noncurrent
assets. C
59. Slow-moving and obsolete inventory items should be priced for balance sheet purposes at:
(a) retail inventory price.
(b) cost or market, whichever is lower.
(c) moving average.
(d) at an amount not in excess of possible realizable value. D
60. Subnormal or obsolete goods, either under the cost or the lower of cost or market basis:
(a) should be taken up an unrealized inventory loss.
(b) should be valued at bona-fide selling price less direct cost of disposition.
(c) should be valued by applying an inventory method that uses a constant or nominal value for the normal inventory
level.
(d) should be adjusted in the cost of goods sold. B
61. Merchandise which a trader contracted to purchase but which was not delivered or identified in the year should:
(a) not be included in the inventory.
(b) be included in the inventory at cost.
(c) be included in the inventory at its probable retail value.
(d) be included in the inventory at a normal price. A
62. The appropriate valuation of an operating lease on the statement of financial position of a lessee is:
(a) zero
(b) the absolute sum of the lease payments
(c) the present value of the sum of the lease payments discounted at an appropriate rate
(d) the market value of the asset at the date of the inception of the lease A
63. When equipment held under an operating lease is subleased by the original lessee, the original lessee would
account for the sublease as:
(a) operating lease (c) direct financing lease
(b) sales-type lease (d) capital lease A
64. Equal monthly rental payments for a particular lease should be charged to rental expense by the lessee for which
of the following?
Capital Operating Capital Operating
lease lease lease lease
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes D
65. In a lease that is recorded as an operating lease by the lessee, the equal monthly rental payments should be:
(a) allocated between a reduction in the liability for leased asset and depreciation expense
(b) allocated between a reduction in the liability for leased asset and interest expense
(c) recorded as a reduction in the liability for leased asset
(d) recorded as rental expense D
66. Where the balance sheet indicates that a portion of property, plant and equipment the related accumulated
depreciation pertains to equipment leased to customers, it is evident that the:
(a) operating method of accounting is used for the lease
(b) financing method of accounting is used for the lease
(c) lessor has violated GAAP
(d) lessor is using the income tax method of accounting for the lease A
67. A 20-year property lease, classified as an operating lease, provides for a 10% increase in annual payments every
five years. In the 6th year compared to the 5th year, the lease will cause the following expenses to increase:
Rent Interest Rent Interest
(a) Yes No (c) No No
(b) Yes Yes (d) No Yes C
68. Which is not an essential characteristic of an accounting liability?

(a) The liability is the present obligation of a particular enterprise.
(b) The liability arises from past transaction or event.
(c) The settlement of the liability requires an outflow of resources embodying economic benefits.
(d) The liability is payable to a specifically identified payee. D
69. Current liabilities include:

(a) only obligations which are expected to be settled within the normal operating cycle.
(b) only obligations which are due to be settled within one year from balance sheet date.
(c) obligations which are expected to be settled within the normal operating cycle and obligations which are due to be
settled within one year from balance sheet date.
(d) refinanced long-term debt falling due within one year from balance sheet. C
70. A long-term debt falling due within one year should be reported as noncurrent liability should be reported as
noncurrent liability if the following conditions are met (choose the incorrect one):
(a) The original term is for a period of more than one year.
(b) The enterprise intends to refinance the obligation on a long-term basis.
(c) The intent to refinance is supported by an agreement to refinance which is completed before the issuance of the
financial statements.
(d) The intent to refinance is supported by an agreement to refinance which is completed after the issuance of the
financial statements. D
71. Which will demonstrate an agreement to refinance (choose the incorrect one)?

(a) Long-term obligation has in fact been issued before the issuance of the financial statements for the purpose of
refinancing.
(b) Equity security has in fact been issued before the issuance of the financial statements for the purpose of refinancing.
(c) Before the issuance of the financial statements, the enterprise has in fact entered into a financing agreement that
clearly permits the enterprise to refinance the currently maturing long-term debt on a long-term basis.
(d) Preferred stock has in fact been issued before the issuance of financial statements for the purpose of obtaining
working capital. D
72. Some obligations that are due to be repaid within the next operating cycle and expected to be refinanced or
“rolled over” should be classified as noncurrent:
(a) If the refinancing or “rolling over” is at the discretion of the enterprise and the refinancing agreement has been
reached before the issuance of the statements.
(b) If the refinancing or “rolling over” is at the discretion of the enterprise regardless of whether a refinancing agreement
has been reached or not before the issuance of the statements.
(c) If the refinancing or “rolling over” is not at the discretion of the enterprise.
(d) Subject to no conditions. A
73. Which is not a characteristic of an intangible asset?

(e) the asset lacks physical substance
(f) the asset is used in production or supply of goods and services, for rental to others or for administrative purposes
(g) the asset provides future economic benefits
(h) the asset has indeterminate useful life D
74. Which is not unidentifiable intangible asset?

(a) patent (c) copyright
(b) franchise (d) goodwill D
75. If the pattern in which the economic benefits from the asset are consumed cannot be predicted reliably, the
method of amortization for an intangible asset should be:
(a) straight line (c) declining balance
(b) output method (d) sum of years’ digits A
76. Intangible assets should be carried (benchmark treatment):

(a) gross cost
(b) fair value on balance sheet date
(c) revalued amount minus accumulated amortization and accumulated impairment losses
(d) cost minus accumulated impairment losses and accumulated amortization D
77. Which of the following is not considered in estimating the useful life of intangible assets?
(a) expected usage of the asset by the enterprise
(b) stability of the industry in which the intangible asset operates
(c) salvage value of the asset
(d) level of maintenance expenditure required to obtain the future economic benefit from the
asset C
78. Choose the correct statement.

(a) Financial accounting is a social science and cannot be influenced by changes in legal, political, business and social
environments.
(b) Financial accounting is an information system designed to provide information primarily to the internal users.
(c) General-purpose financial statements must be prepared by a certified public accountant.
(d) The preparation of general-purpose financial statements is usually based on the assumption that the primary users of
the information are external decision makers. D

(e) Financial reporting should provide information which is relevant to investment, credit and public policy decisions.
(f) Generally speaking, GAAP are those accounting principles with substantial authoritative support.
(g) GAAP are established to ensure the relevancy of the general-purpose financial statements to the widespread uses of
the information by external decision makers.
(h) Once established, GAAP should never be changed. D
80. Which of the following statement is true?

(a) Managers of an entity are considered to be internal decision makers.
(b) External decision makers can be obtained whatever financial data they need whenever they need it.
(c) Accounting information is prepared for and useful to only outside decision makers.
(d) The members of the Board of Directors are not “internal users” only. D

81. Choose the incorrect statement.
(a) The objective of the external financial statements is to communicate the economic effects of completed transactions
and other events on the entity.
(b) The practice of accounting requires considerable professional judgment.
(c) Security analysis use information from financial statements and other sources to project future earnings.
(d) The assessment of earnings quality has become an exact science. D
82. Which of the following statement is correct?

(a) Certified Public Accountants are not independent for the benefit of the users of the financial statements, because
they are paid by the client.
(b) Accounting concepts, principles and standards are just as broad and general today as they were sixty years old.
(c) Due the excellent work of the ASC, there are very few choices among alternative accounting policies today.
(d) Disclosure notes are an integral part of the financial statements. D
83. Which of the following equations is not true?

(a) Assets + Liabilities = Owner’s Equity
(b) Assets = Liabilities + Owner’s Equity
(c) Assets – Owner’s Equity = Liabilities
(d) Assets – Liabilities = Owner’s Equity A
84. Dave started his own cheese factory on March 16, 2003. Which of the following transactions would not be
admissible in Dave’s accounting system for the month of March?
(e) On March 18, Dave purchased a cow on account for P3,000.
(f) On March 20, Dave sold his cow to a fast food restaurant for P5,000.
(g) On March 21, Dave contracted with a local radio station to run several one-minute advertising spots during the
month of April.
(h) All of the above transactions would be admissible for Dave’s accounting system in the month of
March. C
85. Jeff purchased a new register system for his grocery store, paying P1,000 in cash and issuing a P6,000 note
payable for the balance owed. As a result of this transaction, Jeff’s balance sheet would reflect:
(a) an increase in assets and an increase in liabilities
(b) a decrease in assets and an increase in liabilities
(c) an increase in assets and a decrease in liabilities
(d) an increase in assets and an increase in owner’s equity A
86. The double-entry system of accounting means that every transaction:

(a) is recorded initially on both the journal and the general ledger
(b) increases one general ledger account while decreasing another
(c) affects at least two general ledger accounts and is recorded by an equal amount of debits and credits
(d) results in changes in accounts on both sides of the balance sheet C

87. Which of the following statements is not correct?
(a) debits may increase assets
(b) credits may increase liabilities
(c) debits may increase liabilities
(d) credits may increase owner’s equity C
88. Tony owns a store specializing in bags. Tony has just completed a transaction that caused a P12,000 increase in
total assets and a P12,000 increase in liabilities. This transaction could have been:
(a) the investment in his business of P12,000 in cash
(b) the purchase of store equipment, paying P9,000 in cash and issuing a P12,000 note payable for the balance owed
(c) the purchase of bags for his inventory, paying P4,000 in cash and issuing an P8,000 note payable for the balance owed
(d) none of the above transactions would cause total assets and total liabilities to increase by
P12,000 B
89. Dean has completed the posting process for the month of June and has prepared a trial balance in which the
debits total P11,000 and the credits total P11,100. Which of the following errors would be the most likely candidate
in causing the trial balance not to balance by P100?
(a) a P100 debit was posted as a P100 credit
(b) a P100 debit was posted as a P100 credit and a P100 credit was posted as a P100 debit
(c) a P50 debit was posted as a P50 credit
(d) the purchase of supplies on account was never posted to the general ledger C
90. Increase in net assets may result from:

(a) revenues
(b) expenses
(c) withdrawals
(d) all of the above are correct A

(a) Increases to owner’s capital are recorded with credits.
(b) Sales are recorded as debits.
(c) Expenses reduce owner’s capital.
(d) Expenses and dividends are both recorded as debits. B
92. Zinc Company recorded office supplies as an asset account when the supplies were purchased. Failure to make
an adjusting entry reflecting the use of these supplies will result in:
(a) an understatement of assets
(b) an overstatement of owner’s equity
(c) an understatement of liabilities
(d) an understatement of owner’s equity B
BPS/EPS
93) Under PAS 33, EPS disclosures are required for
I. Entities whose ordinary shares or potential ordinary shares are publicly traded.
II. Entities that are in the process of issuing ordinary shares in the public market.
a. I only b. II only c. Both I and II d. Neither I nor II
94) Under PAS 33, which of the following statements about an ordinary share is true?
I. An ordinary share is an equity instrument that is superior to all other classes of equity instrument.
II. A potential ordinary share is a financial instrument or other contract that may entitle its holder to ordinary shares.
subordinate
95) Which of the following statements is true?
I. Earnings per share amounts should not be presented if they are negative, i.e. loss per share.
II. Earnings per share amounts calculated for discontinued operations should be presented.
96) When computing diluted EPS for an entity with a complex capital structure, what is the denominator in
the computation?
a. Number of ordinary shares outstanding at year-end
b. Weighted average number of ordinary shares outstanding
c. Weighted number of ordinary shares outstanding plus all other potentially antidilutive securities.
d. Weighted average number of ordinary shares outstanding plus all other potentially dilutive securities
97) For purpose of computing the weighted average number of shares outstanding in EPS calculation, a
mid-year that must be treated as occurring at the beginning oif the year is the
a. Issuance of the share warrants
b. Purchase of treasury shares
c. Issuance of share certificates
d. Issuance of new shares from share split
98) When EPS is computed, dividends on preferred stock are

a. Added because they represent earnings to preferred share holders
b. Reported separately on the income statement
c. Subtracted they represent earnings to preferred shareholders
d. Ignored because so they do not pertain to the common stock
99) It is reduction in earnings per share or an increase in loss per share resulting from the assumption
that convertible instruments are converted, that options or warrants are exercised, or that ordinary shares are
issued upon the satisfaction of specified conditions.
a. Dilution
c. Either dilution or antidilution
b. Antidilution
d. Neither dilution nor antidilution
100) What is the inherent justification underlying the concept of potential diluters in an earnings per share
computation?
a. form over substance
b. substance over form
c. form and substance considered equally
d. substance over form or form over substance depending on the circumstances
101) In determining earnings per share, interest expense, net of applicable income taxes, on convertible
debt which is dilutive should be
a. Added back to net income for diluted earnings per share.
b. Deducted from net income for basic earnings per share and ignored for diluted earnings per share.
c. Deducted from net income for both basic earnings per share and diluted earnings per share.
d. Added back to net income for basic earnings per share, and ignored for diluted earnings per share.
102) Potential ordinary shares do not include

a. Share warrants
b. Employee share options
c. Financial liabilities or equity instruments, including preference shares, that are not convertible into ordinary
shares.
d. Shares which would be issued upon the satsfaction of certain conditions resulting from contractual
arrangements, such as the purchase of a business or other assets.
103) For a company that has only ordinary share outstanding , total shareholder’s equity divided by the
number of shares outstanding represents the:
a. return on equity c. stated
value per share
b. book value per share d. price-earnings ratio
104) A company with a simple capital structure for purposes of computing earnings per share would include
which of the following in the computation of earnings per share?
a. potentially dilutive securities
b. dividends on ordinary share
c. dividends on nonconvertible cumulative preferred stock
d. number of shares of nonconvertible cumulative preferred stock
Sharebased
105) The entity has issued a range of share options to employees. In accordance with PFRS 2, what type of
share-based payment transaction does this represent?
a. Equity-settled share-based payment transaction
b. Asset-settled share-based payment transaction
c. Cash-settled share-based payment transaction
d. Liability-settled share-based payment transaction
106) In accordance with PFRS2, how should an entity recognize the change in the fair value of the liability in
respect of a cash-settled share-based payment transaction?
a. Should not recognize in the financial statements but disclose in the notes thereto
b. Should recognize in the statement of changes in equity
c. Should recognize in profit or loss
d. Should recognize in other comprehensive income
107) A cash-settled share-based payment shall give rise to an increase in which of the following?
a. A current asset c. Equity
b. A noncurrent asset d. A liability
108) An entity has entered into a contract with another entity. The latter will supply the former with a range
of services. The payment for those services will be in cash and based upon the price of former’s ordinary shares on
completion of the contract. In accordance with PFRS 2, what type of share-based payment transaction does this
represent?
a. Asset-settled share-based payment transaction
b. Cash-settles share-based payment transaction
c. Liability-settled share-based payment transaction
d. Equity-settled share-based payment transaction
109) If share-based payment transaction provides that employees have the right to choose the settlement
whether in cash or shares, the entity is deemed to have issued
a. An equity instrument
b. A liability instrument
c. A compound financial instrument
d. Either an equity instrument or liability instrument but not both
110) Under PFRS 2 share – based Payment, the method that must be used to measure employee stock options and
other payments given to employees in the form of equity securities, is:
a. Initial cost c. Fair value
b. Discounted cash flows d. Selling price
111) Many shares and most share options are not traded in an active market. Therefore, it is often difficult
to arrive at a fair value of the equity instruments being issued. Which of the following option valuation techniques
should not be used as a measure of fair value in the first instance?
a. Black – Scholes model c. Monte – Carlo model
b. Binomial model d. Intrinsic value
112) It is the difference between the fair value of the shares to which the counterparty has the right to
subscribe and the price the counterparty is required to pay for those shares.
a. fairvalue c. Market value
b. Intrinsic value d. Book value
113) These are transactions in which the entity receives goods or services as consideration for equity
instruments of the entity including shares and share options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions
114) Compensatory stock options were granted to executives on January 1, 2008, for services to be rendered during
2008, 2009, and 2010. The fair value of the option was measured at the grant-date fair value using the observable
market price of an option with similar terms. The fair value of the options was in excess of the amount the
executives must pay for the stock. The stock options were exercised on December 30, 2010 Compensation expense
should be recognized in the income statement in which of the following
years?
2008 2009 2010 2008 2009 2010
a. No No Yes c. Yes Yes Yes
b. No Yes Yes d. Yes No No
115 For cash settled share-based payment transactions, an entity shall measure the goods or services received and the
liability incurred at the
a. Fair value of the liability
b. Fair value of the goods and services received
c. Either the fair value of the goods or services received or the fair value of the liability
d. Neither the fair value of the goods or services received nor the fair value of the liability
116) Sydney Corporation granted 1,000 stock options to its employees on January 1, 2006, for services performed
during 2006 and 2007. At the date of the grant, the fair value of the stock options is P6,000. The options are
exercisable on January 1, 2008, and expire on June 30, 2008. On July 1, 2008, it was determined that none of the
options were exercised. On December 31, 2008, Sydney Corporation should
a. Restate its financial statements for 2006 and 2007 and reduce compensation expense for each year.
b. Make a prior period adjustment to retained earnings for compensation expense recognized in 2006 and 2007.
c. Not adjust or reverse compensation expense.
d. Record P6,000 of compensation expense in 2008.
SHE
117) Under IFRIC 17, a property dividend declared before the end of the reporting period should be recognized as
liability at the end of the reporting period at
a. Carrying amount of the asset to be distributed
b. Fair value of the asset on the date of declaration
c. Fair value of the asset at the end of reporting period
d. Fair value of the asset at the date of distribution
118) Which of the following should be reported as a stockholder equity account?

a. Discount on convertible bonds
b. Premium on convertible bonds
c. Cumulative foreign exchange translation loss
d. Organization costs
119) Gains and losses on the purchase and resale of treasury stock may be only be reflected in
a. Paid-in capital accounts
b. Paid-in capital and retained earnings accounts
c. Income, paid-in capital and retained earnings
d. Income and paid-in capital accounts
120) Deposits on subscriptions to a proposed increase in capital stock are reported on the balance sheet as
a. Unearned revenue
b. Advances from subscribers
c. A separate item in the capital stock section
d. An addition to retained earnings
121) Which of the following statements best describes the net effect on retained earnings of the purchase and
subsequent sale of treasury stock?
a. retained earnings may never be increased , but sometimes decreased.
b. Retained earnings may never be increased or decreased
c. Retained earnings may be increased but never be decreased.
d. Retained earnings account is always affected unless the selling price is exactly equal to cost
122) When stock rights are exercised, how much should be treated as total proceeds from the issuance of shares?
a. only the consideration received
b. The total of the consideration received and the amount previously recorded for the stock rights
c. the amount previously recorded for the stock rights
d. The total par value of the shares
123) Liabilities and stockholders’ equity are similar in that

a. Both provide certain amount of payments in the form of interest and dividends
respectively based upon written agreements.
b. Both provide specific timing of payments as a result of specific maturity dates.
c. Both creditors and stockholders are equity holders although they have different rights with respect to income, risk,
control and liquidation.
d. Both liabilities and owners equity are ranked equally when the enterprise’s assets are distributed.
124) The declaration of a 10% stock dividend
a. Would decrease both accumulated profits and total shareholders’ equity
b. Would decrease accumulated profits but would have no effect on total shareholders’ total
c. Would have no effect on accumulated profits but would decrease total shareholders’ equity
d. Would have no effect both on accumulated profits and total shareholders’ equity
125) What is the most likely effect of a share split down?

Par value PER SHARE Numbers of shares
a. Decrease No effect
b. Decrease Increase
c. Increase Decrease
d. No effect No effect
126) How would the declaration of a liquidating dividend by a corporation affect each of the following?
Contributed capital Total shareholders’ equity
a. Decrease No effect
b. No effect Decrease
c. No effect No effect
d. Decrease Decrease
127) An entity issued what is called a “12% stock dividend” on its share capital. At what amount per share, if any,
should retained earnings be reduced for this transaction?
a. Zero because no entry is made
b. Par value
c. Market value at the declaration
d. Market value at the date of issuance
128) The peso amount of total shareholders’ equity remains the same when there is
a. Issuance of preference share in exchange for convertible debentures
b. Issuance of nonconvertible bonds with share warrants
c. Declaration of a stock dividend
d. Declaration of a cash dividend
Income taxes
129) Justification for the method of determining periodic deferred tax expense is based on the concept of
a. Matching of periodic expense to periodic revenue
b. Objectivity in the calculation of periodic expense
c. Recognition of asset and liability
d. Consistency of tax expense measurement with the actual tax planning strategies.
130) The deferred tax expense is the

a. Increase in balance of deferred tax asset minus the increase in balance of deferred tax liability
b. Increase in balance of deferred tax liability minus the increase in balance of deferred tax asset
c. Increase in balance of deferred tax asset plus the increase in balance of deferred tax liability
d. Decrease in balance of deferred tax asset minus the increase in balance of deferred tax liability
131) Where a business transaction requires a direct adjustment to an equity account, the tax effect is adjusted against
a. Income c. Equity
b. Tax expense d. Cash
132) Under PAS 12 Income Taxes, deferred tax assets and liabilities are measured at the tax rates that:
a. Applied at the beginning of the reporting period
b. At the end of the reporting period
c. At the rates that prevail at the reporting date
d. Are expected to apply when the asset or liability is settled
133) Which of the following could never be subject to interperiod tax allocation?

a. Interest revenue on government bonds.
a. Depreciation expense on operational assets.
b. Estimated warranty expense.
c. Rent revenue
134) A temporary difference which would result in deferred tax asset is

a. Tax, penalty or surcharge
b. Dividend received on stock investment
c. Excess tax depreciation over accounting depreciation
d. Rent received in advance included in taxable income at the time of receipt but deferred for accounting
purposes
135) Differences between taxable income and pretax accounting income arising from transactions that, under
applicable tax laws and regulations, will not be offset by corresponding differences or turn around in future periods
is a definition of
a. Temporary differences c. Deductible differences
b. Permanent differences d. Taxable differences
136) When a temporary difference will result in taxable amounts in 5 years

a. A deferred tax liability is recognized in the current year.
b. A deferred tax asset is recognized in the current year.
c. A deferred tax liability may be recognized in the current year if certain conditions are met.
d. A deferred tax asset may be recognized in the current year if certain conditions are met.
137) As a result of differences between depreciation for financial reporting purposes and tax purposes, the financial
reporting basis of a company's plant assets falls below the tax basis. Assuming the company had no other temporary
differences, the company should report a
a. Current tax receivable. c. Deferred tax asset.
b. Current tax payable. d. Deferred tax liability.
138) Income tax expense is computed based on

a. Taxable income
b. Total-pretax financial income
c. Accounting income subject to income tax
d. The temporary difference
139) These are differences between carrying amount of an asset or liability in the statement of financial
position and its tax base.
a. Temporary differences c. Permanent differences
b. Timing differences d. Accounting differences
140) Which of the following differences would result in future taxable amounts?

a. Expenses or losses that are deductible after they are recognized in financial income.
b. Revenue or gains that are taxable before they are recognized in financial income.
c. Revenues or gains that are recognized in financial income but are never included in taxable income.
d. Expenses and losses that are deductible before they are recognized in financial income.

Benefits
141) Which of the following is not one of the six components of pension expense (or part of a component)?
a. Initial transition asset
b. Amortization of unrecognized gain or loss
c. Expected return on plan assets
d. Growth (interest cost) in PBO/ABO since the beginning of the period
142) What is measured by the accumulated benefit obligation?

a. The pension expense, computed by the plan formula applied to years of service to date, assuming future salary levels
b. The pension expense, computed by the plan formula applied to years of service to date, using existing salary levels
c. The pension obligation, computed by the plan formula applied to years of service to date, using existing salary levels.
d. The pension obligation, computed by the plan formula applied to year of service to date, assuming future salary
levels.
143) Under which category should lump sum benefit of 1% of the final salary for each year of service and
actuarial gains be accounted for?
a. Lump sum benefits should be accounted for under defined benefit plans.
Actuarial gains should be accounted for under defined benefit plans.
b. Lump sum benefit should be accounted for under short term employee benefits
Actuarial gains should be accounted for under defined benefit plans.
c. Lump sum benefit should be accounted for under defined benefit plans
Actuarial gains should be accounted for under defined contribution plans
d. Lump sum benefit should be accounted for under short term employee benefits
Actuarial gains should be accounted for under defined contribution plans
144) Investments held by retirement benefit plans should be stated in the statement of net assets at
a. Net realizable value c. Original cost less impairment
b. Fair value d. Value in use
145) In a rare circumstance, when a retirement benefit plan has attributes of both defined contribution and
defined benefit plan, it is deemed
a. Defined contribution plan
b. Define benefit plan
c. Neither a defined contribution nor a defined benefit plan
d. Both defined contribution and defined benefit plan
146) Which is incorrect concerning the recognition and measurement of a defined benefit plan?
a. actuarial assumptions are required to measure the obligation and expense and there is a possibility of actuarial gains
and losses.
b. the obligation is measured at a discounted basis.
c. the defined benefit plan must be fully funded
d. the expense recognized for a defined benefit plan is not necessarily the amount of contribution due for the period
147) The vested benefits:

a. are employee benefits that are not conditional of future employment
b. are benefits to be paid to the retired employees in the current period.
c. are benefits to be paid to the retired employees in the subsequent period.
d. are benefits accumulated in the hands of a trustee.
148) Any transition loss on first adopting PAS 19 shall be recognized:

I. as expense immediately
II. as expense over a maximum of 5 years
a. I only c. Either I or II irrevocably
b. II only d. Either I or II revocably
149) An employer’s obligation for postretirement health benefits that are expected to be provided to an
employee must be fully accrued by the date the
a. Employee is fully eligible for benefits
b. Employee retires
c. Benefits are utilized
d. Benefits are paid
150) For a defined benefit pension plan, the discount rate used to calculate the projected benefit obligation is
determined by the
Expected return on plan asset Actual return on plan asset
a. yes yes
b. no no
c. yes no
d. no yes
151) The present value of pension benefits accrued to date using assumptions as to future compensation
levels is the
a. Prior service cost. c. Projected benefit obligation.
b. Accumulated benefit obligation. d. Accrued pension cost.
152) Interest cost included in the net pension cost recognized by an employer sponsoring a defined benefit
plan represents the:
a. amortization of the discount on unrecognized past service cost
b. increase in the fair value of plan assets due to passage of time
c. increase in the projected benefit obligation due to passage of time
d. shortage between the expected and actual return on plan assets
Product Costing and Cost Accumulation
Multiple Choice Questions
1. Product costing in a manufacturing firm is the process of:

A. accumulating the company's period costs.
B. allocating costs among the firm's departments.
C. placing a value on the company's fixed assets.
D. assigning costs to the firm's inventory.
E. assigning costs to the company's managers.
Answer: D LO: 1 Type: RC
2. Which of the following statements is true?

A. Service firms have little need for determining the cost of their services.
B. The concept of product costing is relevant only for manufacturing firms.
C. The cost of year-end inventory appears on the balance sheet as an expense.
D. Service companies use cost information for planning and control purposes.
E. Mining and petroleum companies have no inventoriable costs.
3. Which of the following manufacturers would most likely use job-order costing?
A. Chemical manufacturers.
B. Microchip processors.
C. Custom-furniture manufacturers.
D. Gasoline refiners.
E. Fertilizer manufacturers.
Answer: C LO: 3 Type: RC
4. A custom-home builder would likely utilize:

A. job-order costing.
B. process costing.
C. mass customization.
D. process budgeting.
E. joint costing.
Answer: A LO: 3 Type: RC
5. Which of the following types of companies would most likely use process costing?
A. Aircraft manufacturers.
B. Textile manufacturers.
C. Textbook publishers.
D. Custom-machining firms.
E. Shipbuilders.
Answer: B LO: 3 Type: RC

6. A manufacturing firm produces goods in accordance with customer specifications, commencing production upon
receipt of a purchase order. To accumulate the cost of each order, the company would use a:
A. job-cost record.
B. cost allocation matrix.
C. production log.
D. overhead sheet.
E. manufacturing cost record.
7. A typical job-cost record would provide information about all of the following items related to an order except:
A. the cost of direct materials used.
B. administrative costs.
C. direct labor costs incurred.
D. applied manufacturing overhead.
E. direct labor hours worked.
8. Which of the following statements about material requisitions is false?

A. Material requisitions are often computerized.
B. Material requisitions are a common example of source documents.
C. Material requisitions contain information that is useful to the cost accounting department.
D. Material requisitions authorize the transfer of materials from the production floor to the raw materials warehouse.
E. Material requisitions are routinely linked to a bill of materials that lists all of the materials needed to complete a job.
9. Pruitt Company has developed an integrated system that coordinates the flow of all goods, services, and information
into and out of the organization, working with raw material vendors as well as customers to improve service and
reduce costs. The firm is said to be using:
A. participative management.
B. top-down management.
C. strategic cost management.
D. supply chain management.
E. management by objectives (MBO).
10. The assignment of direct labor cost to individual jobs is based on:

A. an estimate of the total time spent on the job.
B. actual total payroll cost divided equally among all jobs in process.
C. estimated total payroll cost divided equally among all jobs in process.
D. the actual time spent on each job multiplied by the wage rate.
E. the estimated time spent on each job multiplied by the wage rate.
Answer: D LO: 3 Type: N
11. The total production cost of a job is composed of:

A. direct material and direct labor.
B. direct material, direct labor, manufacturing overhead, and outlays for selling costs.
C. direct material, direct labor, manufacturing overhead, and outlays for both selling and administrative costs.
D. direct material, direct labor, and applied manufacturing overhead.
E. direct material, direct labor, and actual manufacturing overhead.
12. Manufacturing overhead:
A. includes direct materials, indirect materials, indirect labor, and factory depreciation.
B. is easily traced to jobs.
C. includes all selling costs.
D. should not be assigned to individual jobs because it bears no obvious relationship to them.
E. is a pool of indirect production costs that must somehow be attached to each unit manufactured.
Answer: E LO: 3 Type: RC
13. As production takes place, all manufacturing costs are added to the:
A. Work-in-Process Inventory account.
B. Manufacturing-Overhead Inventory account.
C. Cost-of-Goods-Sold account.
D. Finished-Goods Inventory account.
E. Production Labor account.
Answer: A LO: 2, 5 Type: RC
14. Which of the following statements regarding work in process is not correct?

A. Work in process is partially completed inventory.
B. Work in process consists of direct labor, direct material, and manufacturing overhead.
C. Work-in-Process Inventory is debited to record direct material used and direct labor incurred.
D. Work-in-Process Inventory appears on the year-end balance sheet.
E. Work-in-Process Inventory is credited when goods are sold.
Answer: E LO: 2, 5 Type: N
15. Which of the following statements about manufacturing cost flows is false?

A. Direct materials, direct labor, and manufacturing overhead are entered in the Work-in-Process Inventory account.
B. The Finished-Goods Inventory account will contain entries that reflect the cost of goods sold during the period.
C. The cost of units sold during the period will typically appear on the income statement.
D. When a company sells goods that cost $54,000 for $60,000, the firm will enter $6,000 in an account entitled Profit on
Sale.
E. Units are normally transferred from Work-in-Process Inventory to Finished-Goods Inventory.
Answer: D LO: 2, 5 Type: N
16. Which of the following statements about materials is false?

A. Acquisitions of materials are normally charged to the Purchases account.
B. The use of direct materials gives rise to a debit to Work-in-Process Inventory.
C. The use of indirect materials gives rise to a debit to Manufacturing Overhead.
D. The use of indirect materials gives rise to a credit to Manufacturing Supplies Inventory.
E. Direct materials are accounted for in a different manner than indirect materials.
Answer: A LO: 5 Type: A
17. Longview Corporation recently used $72,000 of direct materials and $3,000 of indirect materials in production
activities. The journal entries reflecting these transactions would include:
A. a debit to Raw-Material Inventory for $72,000.
B. a debit to Manufacturing Overhead for $3,000.
C. a credit to Manufacturing Overhead for $3,000.
D. a debit to Work-in-Process Inventory for $75,000.
E. a debit to Manufacturing Overhead for $75,000.
Answer: B LO: 5 Type: A

18. A review of a company's Work-in-Process Inventory account found a debit for materials of $67,000. If all procedures
were performed in the correct manner, this means that the firm:
A. also recorded a credit to Raw-Material Inventory.
B. also recorded a credit to Manufacturing Supplies Inventory.
C. was accounting for the usage of direct materials.
D. was accounting for the usage of indirect materials.
E. was accounting for the usage of direct materials by also crediting the Raw-Material Inventory account.
Answer: E LO: 5 Type: N
19. Oregon Manufacturing incurred $106,000 of direct labor and $11,000 of indirect labor. The proper journal entry to
record these events would include a debit to Work in Process for:
A. $0 because Work in Process should be credited.
B. $0 because Work in Process is not affected.
C. $11,000.
D. $106,000.
E. $117,000.
Answer: D LO: 5 Type: A
20. The following information relates to October:

Production supervisor's salary: $2,500
Factory maintenance wages: 250 hours at $8 per hour

The journal entry to record the preceding information is:
A. Manufacturing Overhead 4,500
Wages Payable 4,500
B. Wages Payable 4,500
Manufacturing Overhead 4,500
C. Work-in-Process Inventory 4,500
Wages Payable 4,500
D. Wages Payable 4,500
Work-in-Process Inventory 4,500
E. Work-in-Process Inventory 2,500
Wages Payable 4,500
21. Electricity costs that were incurred by a company's production processes should be debited to:
A. Utilities Expense.
B. Accounts Payable.
C. Cash.
D. Manufacturing Overhead.
E. Work-in-Process Inventory.
22. The journal entry needed to record $5,000 of advertising for Westwood Manufacturing would include:
A. a debit to Advertising Expense.
B. a credit to Advertising Expense.
C. a debit to Manufacturing Overhead.
D. a credit to Manufacturing Overhead.
E. a debit to Projects-in-Process.
23. Regency Company incurred $90,000 of depreciation for the year. Eighty percent relates to the firm's production
facilities, and 20% relates to sales and administrative offices. If all items are handled in the proper manner, a review
of the company's accounting records should reveal a:
A. debit to Depreciation Expense for $90,000.
B. debit to Manufacturing Overhead for $90,000.
C. debit to Manufacturing Overhead for $72,000.
D. debit to Work-in-Process Inventory for $18,000.
E. credit to Cash for $90,000.
Answer: C LO: 5 Type: A
24. The process of assigning overhead costs to the jobs that are worked on is commonly called:
A. service department cost allocation.
B. overhead cost distribution.
C. overhead application.
D. transfer costing.
E. overhead cost apportionment.
Answer: C LO: 4, 5 Type: RC
25. Which of the following is the correct method to calculate a predetermined overhead rate?
A. Budgeted total manufacturing cost ÷ budgeted amount of cost driver.
B. Budgeted overhead cost ÷ budgeted amount of cost driver.
C. Budgeted amount of cost driver ÷ budgeted overhead cost.
D. Actual overhead cost ÷ budgeted amount of cost driver.
E. Actual overhead cost ÷ actual amount of cost driver.
Answer: B LO: 4, 5 Type: RC
26. Metro Corporation uses a predetermined overhead rate of $20 per machine hour. In deriving this figure, the
company's accountant used:
A. a denominator of budgeted machine hours for the current accounting period.
B. a denominator of actual machine hours for the current accounting period.
C. a denominator of actual machine hours for the previous accounting period.
D. a numerator of budgeted machine hours for the current accounting period.
E. a numerator of actual machine hours for the current accounting period.
Answer: A LO: 4, 5 Type: N
27. Horton Company applies overhead based on direct labor hours. At the beginning of 20x1, the company estimated
that manufacturing overhead would be $500,000, and direct labor hours would be 10,000. Actual overhead by the
conclusion of 20x1 amounted to $400,000. On the basis of this information, Horton's 20x1 predetermined overhead
rate is:
A. $0.02 per direct labor hour.
B. $0.025 per direct labor hour.
C. $40 per direct labor hour.
D. $50 per direct labor hour.
E. none of the above.
Answer: D LO: 4, 5 Type: A
28. Dale Company, which applies overhead at the rate of 190% of direct labor cost, began work on job no. 101 during
June. The job was completed in July and sold during August, having accumulated direct material and labor charges
of $27,000 and $15,000, respectively. On the basis of this information, the total overhead applied to job no. 101
amounted to:
A. $0.
B. $28,500.
C. $51,300.
D. $70,500.
E. $79,800.
Answer: B LO: 4, 5 Type: A
29. Huxtable charges manufacturing overhead to products by using a predetermined application rate, computed on the
basis of machine hours. The following data pertain to the current year:

Budgeted manufacturing overhead: $480,000
Actual manufacturing overhead: $440,000
Budgeted machine hours: 20,000
Actual machine hours: 16,000

Overhead applied to production totaled:
A. $352,000.
B. $384,000.
C. $550,000.
D. $600,000.
E. some other amount.
30. Treetops worked on four jobs during its first year of operation: nos. 401, 402, 403, and 404. Nos. 401 and 402 were
completed by year-end, and no. 401 was sold at a profit of 40% of cost. A review of job no. 403's cost record
revealed direct material charges of $20,000 and total manufacturing costs of $25,000. If Treetops applies overhead
at 150% of direct labor cost, the overhead applied to job no. 403 must have been:
A. $0.
B. $2,000.
C. $3,000.
D. $3,333.
E. $5,000.
Answer: C LO: 4, 5 Type: A
31. The left side of the Manufacturing Overhead account is used to accumulate:

A. actual manufacturing overhead costs incurred throughout the accounting period.
B. overhead applied to Work-in-Process Inventory.
C. underapplied overhead.
D. predetermined overhead.
E. overapplied overhead.
32. Throughout the accounting period, the credit side of the Manufacturing Overhead account is used to accumulate:
A. actual manufacturing overhead costs.
B. overhead applied to Work-in-Process Inventory.
C. overapplied overhead.
D. underapplied overhead.
E. predetermined overhead.

33. An accountant recently debited Work-in-Process Inventory and credited Manufacturing Overhead. The accountant
was:
A. applying a predetermined overhead amount to production.
B. recognizing receipt of the factory utilities bill.
C. recording a year-end adjustment for an insignificant amount of underapplied overhead.
D. recognizing actual overhead incurred during the period.
E. recognizing the completion of production.
Answer: A LO: 5 Type: N
34. The final step in recognizing the completion of production requires a company to:
A. debit Finished-Goods Inventory and credit Work-in-Process Inventory.
B. debit Work-in-Process Inventory and credit Finished-Goods Inventory.
C. add direct labor to Work-in-Process Inventory.
D. add direct materials, direct labor, and manufacturing overhead to Work-in-Process Inventory.
E. add direct materials to Finished-Goods Inventory.
Answer: A LO: 2, 5 Type: RC
35. Job no. C12 was completed in November at a cost of $18,500, subdivided as follows: direct material, $3,500; direct
labor, $6,000; and manufacturing overhead, $9,000. The journal entry to record this information is:
A. Finished-Goods Inventory 18,500
B. Work-in-Process Inventory 18,500
Finished-Goods Inventory 18,500
C. Work-in-Process Inventory 18,500
Raw-Material Inventory 3,500
Wages Payable 6,000
D. Cost of Goods Sold 18,500
E. Finished-Goods Inventory 18,500
Cost of Goods Sold 18,500
36. If a company sells goods that cost $70,000 for $82,000, the firm will:
A. reduce Finished-Goods Inventory by $70,000.
B. reduce Finished-Goods Inventory by $82,000.
C. report sales revenue on the balance sheet of $82,000.
D. reduce Cost of Goods Sold by $70,000.
E. follow more than one of the above procedures.
Answer: A LO: 2, 5 Type: A
37. Selto Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries to record this
transaction would include:
A. a credit to Work-in-Process Inventory for $35,000.
B. a debit to Sales Revenue for $45,000.
C. a credit to Profit on Sale for $10,000.
D. a debit to Finished-Goods Inventory for $35,000.
E. a credit to Sales Revenue for $45,000.
Answer: E LO: 2, 5 Type: A

38. A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and billed the customer
$30,000. Which of the following options correctly expresses the accounts that are debited and credited to record
this transaction?
A. Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of Goods Sold.
B. Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, Finished-Goods Inventory.
C. Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, Finished-Goods Inventory.
D. Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of Goods Sold.
E. Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.
39. Barney Company applies manufacturing overhead by using a predetermined rate of 200% of direct labor cost. The
data that follow pertain to job no. 764:

Direct material cost $55,000
Direct labor cost 40,000

If Barney adds a 40% markup on total cost to generate a profit, which of the following choices depicts a portion of the
accounting needed to record the sale of job no. 764?
Account Debited Amount
A. Cost of Goods Sold $175,000
B. Cost of Goods Sold $245,000
C. Finished-Goods Inventory $175,000
D. Finished-Goods Inventory $245,000
E. Sales Revenue $245,000
40. Armada Company applies manufacturing overhead by using a predetermined rate of 150% of direct labor cost. The
data that follow pertain to job no. 831:

Direct material cost $72,000

If Armada adds a 30% markup on total cost to generate a profit, which of the following choices depicts a portion of the
accounting needed to record the sale of job no. 831?
Account Debited Amount
A. Accounts Receivable $167,000
B. Accounts Receivable $217,100
C. Finished-Goods Inventory $167,000
D. Finished-Goods Inventory $217,100
E. Sales Revenue $217,100
41. Media, Inc., an advertising agency, applies overhead to jobs on the basis of direct professional labor hours. Overhead
was estimated to be $150,000, direct professional labor hours were estimated to be 15,000, and direct professional
labor cost was projected to be $225,000. During the year, Media incurred actual overhead costs of $146,000, actual
direct professional labor hours of 14,500, and actual direct labor cost of $222,000. By year-end, the firm's overhead
was:
A. $1,000 underapplied.
B. $1,000 overapplied.
C. $4,000 underapplied.
D. $4,000 overapplied.
E. $5,000 underapplied.

42. Maher, Inc., applies manufacturing overhead at the rate of $60 per machine hour. Budgeted machine hours for the
current period were anticipated to be 80,000; however, a lengthy strike resulted in actual machine hours being
worked of only 65,000. Budgeted and actual manufacturing overhead figures for the year were $4,800,000 and
$4,180,000, respectively. On the basis of this information, the company's year-end overhead was:
A. overapplied by $280,000.
B. underapplied by $280,000.
C. overapplied by $620,000.
D. underapplied by $620,000.
E. underapplied by $900,000.
43. Carlson charges manufacturing overhead to products by using a predetermined application rate, computed on the
basis of labor hours. The following data pertain to the current year:

Budgeted manufacturing overhead: $1,600,000
Actual manufacturing overhead: $1,632,000
Budgeted labor hours: 50,000
Actual labor hours: 48,000

Which of the following choices denotes the correct status of manufacturing overhead at year-end?
A. Overapplied by $32,000.
B. Underapplied by $32,000.
C. Overapplied by $68,000.
D. Overapplied by $96,000.
E. Underapplied by $96,000.
Answer: E LO: 5 Type: A
44. Sanger Corporation debited Cost of Goods Sold and credited Manufacturing Overhead at year-end. On the basis of
this information, one can conclude that:
A. budgeted overhead exceeded actual overhead.
B. budgeted overhead exceeded applied overhead.
C. budgeted overhead was less than applied overhead.
D. actual overhead exceeded applied overhead.
E. actual overhead was less than applied overhead.
45. Howard Manufacturing's overhead at year-end was underapplied by $5,800, a small amount given the firm's size. The
year-end journal entry to record this amount would include:
A. a debit to Cost of Goods Sold.
B. a debit to Manufacturing Overhead.
C. a debit to Work-in-Process Inventory.
D. a credit to Cost of Goods Sold.
E. a credit to Work-in-Process Inventory.
46. Fog Company, which uses labor hours to apply overhead to manufacturing, may have increased amounts of
underapplied overhead at month-end if:
A. suppliers of direct materials have an across-the-board price increase.
B. an accountant failed to record the period's charges for plant maintenance and security.
C. employees are hit hard with a widespread outbreak of the flu.
D. direct laborers are granted a wage increase.
E. outlays for advertising expenditures are increased.
Answer: C LO: 5 Type: N
47. The estimates used to calculate the predetermined overhead rate will virtually always:
A. prove to be correct.
B. result in a year-end balance of zero in the Manufacturing Overhead account.
C. result in overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
D. result in underapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
E. result in either underapplied or overapplied overhead that is closed to Cost of Goods Sold if it is immaterial in amount.
48. Under- or overapplied manufacturing overhead at year-end is most commonly:

A. charged or credited to Work-in-Process Inventory.
B. charged or credited to Cost of Goods Sold.
C. charged or credited to a special loss account.
D. prorated among Work-in-Process Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
E. ignored because there is no effect on the Cash account.
49. When underapplied or overapplied manufacturing overhead is prorated, amounts can be assigned to which of the
following accounts?
A. Raw-Material Inventory, Manufacturing Overhead, and Direct Labor.
B. Cost of Goods Sold, Work-in-Process Inventory, and Finished-Goods Inventory.
C. Work-in-Process Inventory, Raw-Material Inventory, and Cost of Goods Sold.
D. Raw-Material Inventory, Finished-Goods Inventory, and Cost of Goods Sold.
E. Raw-Material Inventory, Work-in-Process Inventory, and Finished-Goods Inventory
50. Fletcher, Inc., disposes of under- or overapplied overhead at year-end as an adjustment to cost of goods sold. Prior
to disposal, the firm reported cost of goods sold of $590,000 in a year when manufacturing overhead was
underapplied by $15,000. If sales revenue totaled $1,400,000, determine (1) Fletcher's adjusted cost of goods sold
and (2) gross margin.
Adjusted Cost
of Goods Sold Gross Margin
A. $575,000 $810,000
B. $575,000 $825,000
C. $590,000 $810,000
D. $605,000 $795,000
E. $605,000 $810,000
51. Which of the following statement(s) is (are) correct regarding overhead application?

I. Actual overhead rates result in more accurate but less timely information.
II. Predetermined overhead rates result in less accurate but more timely information.
III. Predetermined overhead rates tend to smooth product costs over time.
A. III only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
52. The term "normal costing" refers to the use of:

A. job-costing systems.
B. computerized accounting systems.
C. targeted overhead rates.
D. predetermined overhead rates.
E. actual overhead rates.
53. Which of the following statements about the use of direct labor as a cost driver is false?
A. Direct labor is the most commonly used cost driver when calculating a predetermined overhead rate.
B. Direct labor is gaining in importance in many manufacturing applications with respect to being a significant cost driver.
C. Direct labor is an inappropriate cost driver to use if a company is highly automated.
D. If direct labor is a good cost driver, increases in direct labor are matched with increases in manufacturing overhead.
E. Companies can use either direct labor cost or direct labor hours as a cost driver.
54. If the amount of effort and attention to products varies substantially throughout a firm's various manufacturing
operations, the firm might consider the use of:
A. a plant-wide overhead rate.
B. departmental overhead rates.
C. actual overhead rates instead of predetermined overhead rates.
D. direct labor hours to determine the overhead rate.
E. machine hours to determine the overhead rate.
Answer: B LO: 6 Type: N
55. In the two-stage cost allocation process, costs are assigned:

A. from jobs, to service departments, to production departments.
B. from service departments, to jobs, to production departments.
C. from service departments, to production departments, to jobs.
D. from production departments, to jobs, to service departments.
E. from the balance sheet (when goods are produced), to the income statement (when goods are sold).
56. Which of the following entities would not likely be a user of job-costing systems?

A. Custom-furniture manufacturers.
B. Repair shops.
C. Hospitals.
D. Accounting firms.
E. None of the above, as all are likely users.
57. Which of the following would not likely be used by service providers to accumulate job costs?
A. Projects. B. Contracts. C. Clients. D. Processes. E. All of the above, as service providers
cannot use job-costing systems.

58. At the Nassau Advertising Agency, partner and staff compensation cost is a key driver of agency overhead. In light
of this fact, which of the following is the correct expression to determine the amount of overhead applied to a
particular client job?
A. (Budgeted overhead ÷ budgeted compensation) x budgeted compensation cost on the job.
B. (Budgeted overhead ÷ budgeted compensation) x actual compensation cost on the job.
C. (Budgeted compensation ÷ budgeted overhead) x budgeted compensation cost on the job.
D. (Budgeted compensation ÷ budgeted overhead) x actual compensation cost on the job.
E. None of the above, because service providers do not apply overhead to jobs.
59. In comparison with firms that use plantwide overhead rates and departmental overhead rates, companies that
have adopted activity-based costing will typically use:
A. more cost pools and more cost drivers. B. more cost pools and fewer cost drivers C. fewer cost pools and
more cost drivers. D. fewer cost pools and fewer cost drivers. E. only one cost pool and one cost driver.
Manufacturing Cost Flows, Journal Entries
60. The selected data that follow relate to the Berger Furniture Company.

Direct material purchased $160,000
Direct material used 79,000
Direct labor 170,000
Manufacturing overhead incurred 100,000
Manufacturing overhead applied 90,000

During the year, products costing $310,000 were completed, and products costing $316,000 were sold for $455,000.

Required:
Prepare journal entries to record the preceding transactions and events.
LO: 2, 5 Type: A
Answer:
Accounts Payable 160,000
Wages Payable 170,000
Miscellaneous Accounts 100,000
Accounts Receivable 455,000
Sales Revenue 455,000
Basic Journal Entries, Job-Order Costing
61. Quartz Products started and finished job no. C19 during June. The job required $15,000 of direct material and 75
hours of direct labor at $12 per hour. The predetermined overhead rate is $16 per direct labor hour.

During June, direct materials requisitions for all jobs totaled $149,000; the total direct labor hours and cost were 6,200
hours at $12 per hour; and the total cost of jobs completed was $337,500. All of these figures include data that
pertain to job no. C19.

Required:
A. Prepare journal entries that summarize June's total activity.
B. Determine the cost of job no. C19.
LO: 5 Type: A
Answer:
A. Work-in-Process Inventory 149,000
B. Direct material $15,000

Direct labor (75 x $12) 900
Manufacturing overhead applied (75 x $16) 1,200
Total cost of job no. C19 $17,100
Job Costing: Journal-Entry Emphasis
62. Dexter Corporation, which uses a job costing system, had two jobs in process at the start of 20x1: job no. 59 ($95,000)
and job no. 60 ($39,500). The following information is available:
· The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine
activity for the year were anticipated to be $720,000 and 20,000 hours, respectively.
· The company worked on three jobs during the first quarter. Direct materials used, direct labor incurred, and
machine hours consumed were:
Job No. Direct Material Direct Labor Machine Hours

59 $18,000 $45,000 900
60 ---- 25,000 600
61 37,000 35,000 1,200

· Manufacturing overhead during the first quarter included charges for depreciation ($20,000), indirect labor
($50,000), indirect materials used ($4,000), and other factory costs ($108,700).
· Dexter completed job no. 59 and job no. 60. Job no. 59 was sold for cash, producing a profit of $24,600 for the
firm.

Required:
A. Determine the company's predetermined overhead application rate.
B. Prepare journal entries as of March 31 to record the following. (Note: Use summary entries where appropriate by
combining individual job data.)
1. The issuance of direct material to production, and the direct labor incurred.
2. The manufacturing overhead incurred during the quarter.
3. The application of manufacturing overhead to production.
4. The completion of job no. 59 and no. 60.
5. The sale of job no. 59.
LO: 4, 5 Type: A

Answer:
A. Predetermined overhead rate: $720,000 ÷ 20,000 hours = $36 per machine hour
B. 1. Work-in-Process Inventory 55,000*

Work-in-Process Inventory 105,000**
* $18,000 + $37,000 = $55,000
**$45,000 + $25,000 + $35,000 = $105,000
2. Manufacturing Overhead 182,700

Accumulated Depreciation 20,000
Manufacturing Supplies Inventory 4,000
Miscellaneous Accounts 108,700
3. Work-in-Process Inventory 97,200*

*(900 + 600 + 1,200) x $36 = $97,200
4. Finished-Goods Inventory 276,500*

*No. 59: $95,000 + $18,000 + $45,000 +
(900 x $36) = $190,400
No. 60: $39,500 + $25,000 + (600 x $36) = $86,100
5. Cash 215,000*
Sales Revenue 215,000
*$190,400 + $24,600 = $215,000

Fundamentals of Manufacturing Accounting
63. Brickman Corporation, which began operations on January 1 of the current year, reported the following
information:
Estimated manufacturing overhead $ 600,000

Actual manufacturing overhead 639,000
Estimated direct labor cost 480,000
Actual direct labor cost 500,000
Total debits in the Work-in-Process account 1,880,000
Total credits in the Finished-Goods account 920,000
Brickman applies manufacturing overhead to jobs on the basis of direct labor cost and adds a 60% markup to the
cost of completed production when finished goods are sold. On December 31, job no. 18 was the only job that
remained in production. That job had direct-material and direct-labor charges of $16,500 and $36,000, respectively.
Required:
A. Determine the company’s predetermined overhead rate.
B. Determine the amount of under- or overapplied overhead. Be sure to label your answer.
C. Compute the amount of direct materials used in production.
D. Calculate the balance the company would report as ending work-in-process inventory.
E. Prepare the journal entry(ies) needed to record Brickman’s sales, which are all made on account.
LO: 2, 4, 5 Type: A
Answer:
A. Predetermined overhead rate: $600,000 ÷ $480,000 = 125% of direct labor cost

B. Actual manufacturing overhead ($639,000) - applied overhead ($500,000 x 125% = $625,000) = $14,000
underapplied
C. Total debits to Work-in-Process ($1,880,000) - direct labor ($500,000) - applied overhead ($625,000) = direct
materials used ($755,000)
D. The only job in production is job no. 18, which has direct material of $16,500 and direct labor of $36,000. Applied
overhead amounts to $45,000 ($36,000 x 125%), yielding a total job cost of $97,500 ($16,500 + $36,000 + $45,000).
E. The company’s cost of goods sold equals $920,000, resulting in sales revenues of $1,472,000 ($920,000 x
160%). Thus:
Accounts Receivable 1,472,000

Sales Revenue 1,472,000

Job-Costing Computations, Overhead Application
64. Montgomery, Inc., which uses a job-costing system, is a labor-intensive firm, with many skilled craftspeople on the
payroll. Job no. 789 was the only job in process on January 1, having costs of $22,500 as of that date. Direct
materials used and direct labor incurred during January were:

Job No. Direct Materials Direct Labor
789 $ 2,000 $ 6,000
790 9,000 10,000
791 14,000 8,000

Job no. 791 was the only job in production as of January 31.

Required:
A. Should Montgomery use direct labor or machine hours as a cost driver. Why?
B. Assume that the company decided to use direct labor as its cost driver. If the budgeted amounts of direct labor and
manufacturing overhead are anticipated to be $200,000 and $300,000, respectively, what is the firm's
predetermined overhead rate?
C. Compute the cost of work-in-process inventory as of January 31.
D. Compute the cost of jobs completed during January.
E. Suppose that the company sold all of its completed jobs, adding a 40% markup to cost. How much would the firm
report as sales revenue?
LO: 4, 5 Type: A
Answer:
A. The company should use direct labor because it is a labor-intensive firm, with many skilled
craftspeople on the payroll. More than likely, a majority of overhead is "driven" by people
rather than machine operation.
B. $300,000 ¸ $200,000 = 150% of direct labor cost
C. Direct material $14,000

Direct labor 8,000
Manufacturing overhead ($8,000 x 150%) 12,000
Total cost of job no. 791 $34,000
D. Beginning work in process $22,500

Direct material ($2,000 + $9,000) 11,000
Direct labor ($6,000 + $10,000) 16,000
Total cost of job nos. 789 and 790 $73,500
E. Sales revenue: $102,900 ($73,500 x 140%)
Overview of Job-Costing Systems, Overhead Accounting
65. Rockville, Inc., which uses a job-costing system, began business on January 1, 20x3 and applies manufacturing
overhead on the basis of direct-labor cost. The following information relates to 20x3:
· Budgeted direct labor and manufacturing overhead were anticipated to be $200,000 and $250,000, respectively.
· Job nos. 1, 2, and 3 were begun during the year and had the following charges for direct material and direct labor:

Job No. Direct Materials Direct Labor
1 $145,000 $35,000
2 320,000 65,000
3 55,000 80,000
· Job nos. 1 and 2 were completed and sold on account to customers at a profit of 60% of cost. Job no. 3 remained
in production.
· Actual manufacturing overhead by year-end totaled $233,000. Rockville adjusts all under- and overapplied
overhead to cost of goods sold.

Required:
A. Compute the company's predetermined overhead application rate.
B. Compute Rockville's ending work-in-process inventory.
C. Determine Rockville's sales revenue.
D. Was manufacturing overhead under- or overapplied during 20x3? By how much?
E. Present the necessary journal entry to handle under- or overapplied manufacturing overhead at year-end.
F. Does the presence of under- or overapplied overhead at year-end indicate that Rockville's accountants made a
serious error? Briefly explain.
LO: 4, 5 Type: A, N
Answer:
A. $250,000 ÷ $200,000 = 125% of direct labor cost
B. Job no. 3:
Direct material $ 55,000
Direct labor 80,000
Total cost of job no. 3 $235,000
C. Job nos. 1 and 2:

Direct material ($145,000 + $320,000) $465,000
Direct labor ($35,000 + $65,000) 100,000
Total cost of job nos. 1 and 2 $690,000
Sales revenue: $1,104,000 ($690,000 x 160%)

D. Actual overhead $233,000
Applied overhead: [($35,000 + $65,000 +
$80,000) x 125%] 225,000
Underapplied overhead $ 8,000
E. Cost of Goods Sold 8,000

F. No. Companies use a predetermined application rate for several reasons, including the fact
that manufacturing overhead is not easily traced to jobs and products. The predetermined
rate is based on estimates of both overhead and an appropriate cost driver, and situations
where these amounts coincide precisely with actual experiences are rare. As a result,
under- or overapplied overhead typically arises at year-end.
Overhead Calculations
66. Athens Corporation uses a job-cost system and applies manufacturing overhead to products on the basis of machine
hours. The company's accountant estimated that overhead and machine hours would total $800,000 and 50,000,
respectively, for 20x1. Actual costs incurred follow.

Direct material used $250,000
Manufacturing overhead 816,000

The manufacturing overhead figure presented above excludes $27,000 of sales commissions incurred by the firm. An
examination of job-cost records revealed that 18 jobs were sold during the year at a total cost of $2,960,000. These
goods were sold to customers for $3,720,000. Actual machine hours worked totaled 51,500, and Athens adjusts
under- or overapplied overhead at year-end to Cost of Goods Sold.

Required:
A. Determine the company's predetermined overhead application rate.
B. Determine the amount of under- or overapplied overhead at year-end. Be sure to indicate whether overhead was
under- or overapplied.
C. Compute the company's cost of goods sold.
D. What alternative accounting treatment could the company have used at year-end to adjust for under- or
overapplied overhead? Is the alternative that you suggested appropriate in this case? Why?
LO: 4, 5, 6 Type: A, N
Answer:
A. $800,000 ÷ 50,000 = $16 per machine hour
B. Applied overhead (51,500 x $16) $ 824,000

Actual overhead 816,000
Overapplied overhead $ 8,000
C. Cost of goods sold, as reported $2,960,000

Less: Overapplied overhead 8,000
Cost of goods sold, adjusted $2,952,000
D. The company could have allocated the overapplication to work in process, finished goods,
and cost of goods sold. Although this method is acceptable, it is not suggested in this case
because of the immaterial dollar amount in relation to cost of goods sold.
Job Costing: Focus on Overhead

67. Packard Products uses a job-costing system for its units, which pass from the Machining Department, to the Assembly
Department, to finished-goods inventory. The Machining Department is heavily automated; in contrast, the
Assembly Department performs a number of manual-assembly activities. The following information relates to the
Machining Department for the year just ended:

Budgeted manufacturing overhead $8,000,000
Actual manufacturing overhead 7,975,000
Budgeted machine hours 500,000
Actual machine hours 510,000

The Machining Department data that follow pertain to job no. 243, the only job in production at year-end.

Direct materials $64,800
Machine hours 450

Required:
A. Assuming the use of normal costing, calculate the predetermined overhead rate that is used in the Machining
Department.
B. Compute the cost of the Machining Department's year-end work-in-process inventory.
C. Determine whether overhead was under- or overapplied during the year in the Machining Department.
D. If Packard disposes of the Machining Department's under- or overapplied overhead as an adjustment to Cost of
Goods Sold, would the company's Cost-of-Goods-Sold account increase or decrease? Explain.
E. How much overhead would have been charged to the Machining Department's Work-in-Process account during the
year?
F. Comment on the appropriateness of direct labor cost to apply manufacturing overhead in the Assembly
Department.
LO: 4, 5, 6 Type: A
Answer:
A. Machining overhead rate: $8,000,000 ÷ 500,000 hours = $16 per machine hour
B. The ending work in process is carried at a cost of $107,200, computed as follows:
Direct materials $ 64,800

Direct labor 35,200
Manufacturing overhead (450 x $16) 7,200
Total cost $107,200
C. Actual overhead in the Machining Department amounted to $7,975,000, whereas applied overhead totaled
$8,160,000 (510,000 hours x $16). Thus, overhead was overapplied by $185,000 during the year.
D. The department's manufacturing overhead was overapplied by $185,000. As a result of this situation, excessive
overhead flowed from Work in Process, to Finished Goods, to Cost of Goods Sold, meaning that the Cost-of-Goods-
Sold account must be decreased at year-end.
E. The Work-in-Process account is charged with applied overhead, or $8,160,000.
F. The firm's selection of application bases is likely appropriate. The bases should "drive" the costs, meaning there
should be a strong cause-and-effect relationship between the base that is used and the amount of overhead
incurred. In the Assembly Department, a considerable portion of the overhead incurred is related to manual-
assembly (i.e., labor) operations.
Overhead Accounting: Working Backwards

68. Kent Products uses a predetermined overhead application rate of $18 per labor hour. A review of the company's
accounting records revealed budgeted manufacturing overhead for the period of $621,000, applied manufacturing
overhead of $590,400, and overapplied overhead of $11,900.

Required:
A. Determine Kent's actual labor hours, budgeted labor hours, and actual manufacturing overhead.
B. Present the necessary year-end journal entry to handle the overapplied overhead, assuming that the firm allocates
over- or underapplied overhead to Cost of Goods Sold.
LO: 4, 5 Type: A
Answer:
A. Actual labor hours: $590,400 ÷ $18 per hour = 32,800 hours
Budgeted labor hours: $621,000 ÷ $18 per hour = 34,500 hours
Actual manufacturing overhead: $590,400 - $11,900 = $578,500
B. Manufacturing Overhead 11,900
Analysis of Accounts to Derive Overhead Figures; Working Backwards
69. A review of the records of Milgrim, Inc., a new company, disclosed the following year-end information:
· Manufacturing Overhead account: Contained debits of $872,000, which included $20,000 of sales commissions.
· Work-in-Process Inventory account: Contained charges for overhead of $875,000.
· Cost-of-Goods-Sold account: Contained a year-end debit balance of $3,680,000. This amount was computed prior
to any year-end adjustment for under- or overapplied overhead.

Milgrim applies manufacturing overhead to production by using a predetermined rate of $20 per machine
hour. Budgeted overhead for the period was anticipated to be $900,000.

Required:
A. Determine the actual manufacturing overhead for the year.
B. Determine the amount of manufacturing overhead applied to production.
C. Is overhead under- or overapplied? By how much?
D. Compute the adjusted cost-of-goods-sold figure that should be disclosed on the company's income statement.
E. How many machine hours did Milgrim actually work during the year?
F. Compute budgeted machine hours for the year.
LO: 4, 5, 6 Type: A
Answer:
A. $872,000 - $20,000 sales commissions = $852,000
B. $875,000 (given)
C. Manufacturing overhead is overapplied by $23,000 ($875,000 - $852,000).
D. Cost of goods sold $3,680,000

Less: Overapplied overhead 23,000
Cost of goods sold, adjusted $3,657,000
E. Milgrim would have applied overhead to production by using the actual machine hours
worked and the $20 application rate. Thus, the actual hours worked total 43,750 ($875,000
÷ $20).
F. $900,000 ÷ $20 = 45,000 hours

Project Costing in a Service Business
70. Fine & Associates is an interior decorating firm in Tucson. The following costs were incurred in a project to redecorate
the mayor's offices:

Direct material $ 29,000
Direct professional labor 42,000

The firm's budget for the year included the following estimates:

Budgeted overhead $800,000
Budgeted direct professional labor 640,000

Overhead is applied to contracts by using a predetermined overhead rate that is based on direct professional labor
cost. Actual professional labor during the year was $655,000 and actual overhead was $793,000.

Required:
A. Determine the total cost to redecorate the mayor's offices.
B. Calculate the under- or overapplied overhead for the year. Be sure to label your answer.
LO: 8 Type: A
Answer:
A. Direct material $ 29,000
Direct professional labor 42,000
Applied overhead ($42,000 x 125%*) 52,500
Total cost to redecorate $123,500
*$800,000 ¸ $640,000 = 125%
B. Applied overhead ($655,000 x 125%) $818,750

Actual overhead 793,000
Overapplied overhead $ 25,750
Project Costing, Architecture Firm
71. Boswell and Associates designs relatively small sports stadiums and arenas at various sites throughout the
country. The firm’s accountant prepared the following budget for the upcoming year:

Professional staff salaries $3,000,000
Administrative support staff 800,000
Other operating costs 200,000
Eighty percent of professional staff salaries are directly traceable to client projects, a figure that falls to 60% for the
administrative support staff and other operating costs. Traceable costs are charged directly to client projects;
nontraceable costs, on the other hand, are treated as firm overhead and charged to projects by using a
predetermined overhead application rate.
Boswell had one project in process at year-end: an arena that was being designed for Charlotte County. Costs
directly chargeable to this project were:
Professional staff salaries $90,000

Required:
A. Determine Boswell’s overhead for the year and the firm’s predetermined overhead application rate. The rate is
based on costs directly chargeable to firm projects.
B. Compute the cost of the Charlotte County arena project as of year-end.
C. Present three examples of “other operating costs” that might be directly traceable to the Charlotte County project.
LO: 8 Type: A, N
Answer:
A. Professional staff salaries $3,000,000
Subtotal $4,000,000
Less: Direct costs
Professional staff salaries ($3,000,000 x 80%) $2,400,000
Administrative support staff and other costs [($800,000 +
$200,000) x 60%] 600,000 3,000,000
Nontraceable costs (i.e., overhead) $1,000,000
Predetermined application rate: $1,000,000 ÷ $3,000,000 = 33.33%
Professional staff salaries $ 90,000

Subtotal $114,000
Overhead: $114,000 x 33.33% 38,000
Total $152,000
Possible examples include travel, overnight delivery fees, postage, selected costs related to
conducting focus-group studies, photocopying, and supplies related to model construction.
Job Costing in a Consulting Firm
72. KLP provides consulting services and uses a job-order system to accumulate the cost of client projects. Traceable
costs are charged directly to individual clients; in contrast, other costs incurred by KLP, but not identifiable with
specific clients, are charged to jobs by using a predetermined overhead application rate. Clients are billed for
directly chargeable costs, overhead, and a markup.
KLP anticipates the following costs for the upcoming year:

Percentage of Cost
Directly Traceable
Cost to Clients
Professional staff salaries $5,000,000 80%
Administrative support staff 600,000 50
Travel 200,000 80
Other operating costs 200,000 20
Total $6,000,000

KLP's partners desire to make a $480,000 profit for the firm and plan to add a percentage markup on total cost to
achieve that figure.

On May 14, KLP completed work on a project for Lawson Manufacturing. The following costs were incurred:
professional staff salaries, $68,000; administrative support staff, $8,900; travel, $10,500; and other operating costs,
$2,600.

Required:
A. Determine KLP's total traceable costs for the upcoming year and the firm's total anticipated overhead.
B. Calculate the predetermined overhead rate. The rate is based on total costs traceable to client jobs.
C. What percentage of total cost will KLP add to each job to achieve its profit target?
D. Determine the total cost of the Lawson Manufacturing project. How much would Lawson be billed for services
performed?
LO: 8 Type: A, N
Answer:
A. Traceable costs total $4,500,000, computed as follows:

Percent Traceable
Total Cost Traceable Cost
Professional staff salaries $5,000,000 80% $4,000,000
Administrative support staff 600,000 50 300,000
Travel 200,000 80 160,000
Other operating costs 200,000 20 40,000
Total $6,000,000 $4,500,000
KLP's overhead (i.e., the nontraceable costs) totals $1,500,000 ($6,000,000 - $4,500,000).
B. Predetermined overhead rate: $1,500,000 ÷ $4,500,000 = 33.33%

C. Target profit percentage: $480,000 ÷ $6,000,000 = 8%
D. The total cost of the Lawson Manufacturing project is $120,000, and the billing is $129,600, as follows:
$ 68,000
Professional staff salaries

Travel 10,500
Subtotal $ 90,000
Overhead ($90,000 x 33.33%) 30,000
Total cost $120,000
Markup ($120,000 x 8%) 9,600
Billing to Lawson $129,600
Process Costing Versus Job-Order Costing
73. Describe the types of manufacturing environments that would best be suited for (1) job-order costing and (2) process
costing. Include two examples of manufacturers that would likely use job-cost systems.
LO: 3 Type: RC
Answer:
Job-order costing is typically used in manufacturing environments where goods are produced in distinct batches,
called jobs. Typically, there are differences among the various jobs produced. In contrast, process costing is used in
environments where large numbers of identical product units are manufactured. Two examples of job-costing firms
are aircraft and custom-furniture manufacturers.
Underapplied Manufacturing Overhead
74. Manufacturing overhead is applied to production.

A. Describe several situations that may give rise to underapplied overhead.
B. Assume that underapplied manufacturing overhead is treated as an adjustment to Cost of Goods Sold. Explain why
an underapplication of overhead increases Cost of Goods Sold.
LO: 5 Type: N
Answer:
A. Overhead will be underapplied when total actual overhead costs exceed applied overhead. This can occur for a
variety of reasons including underestimation of some overhead costs, incorrect estimation of the application base
and/or production, or changes in the mix of products that affect the level of overhead costs incurred.
B. In most manufacturing environments, many products made during the period are also sold and ending work in
process is modest relative to the amount of goods manufactured. Therefore the vast majority of the overhead
applied to the Work-in-Process Inventory account will flow through Finished-Goods Inventory and on to Cost of
Goods Sold. However, if overhead is underapplied, Cost of Goods Sold has been increased by an insufficient
amount. Consequently, the underapplied overhead should be added to Cost of Goods Sold.
Applied Overhead Versus Actual Overhead
75. Discuss the reasons for using applied overhead rather than actual overhead to determine the cost of production jobs.
LO: 4, 6 Type: RC
Answer:
There are several reasons. First, overhead costs usually bear no direct relationship to individual jobs or products,
but must be incurred for the production process to take place. Therefore, it is crucial that overhead be applied to
products in order to have a complete picture of manufacturing costs. Second, actual overhead is not known until
after the end of the accounting period. The cost of jobs would not be available in a timely fashion if actual overhead
costs were used. Finally, overhead costs often vary due to seasonal factors. This variation is not relevant (once a
decision has been made to operate through the seasonal factors) to decisions that involve products or pricing in the
short term. It is therefore better to use applied overhead to eliminate cost variations from one season to another.
Use of Predetermined Overhead Application Rates
76. The use of predetermined overhead application rates results in a trade-off between accuracy and timeliness. Explain
what this statement means.
LO: 6 Type: RC
Answer:
Predetermined rates are computed by using budgeted (rather than actual) amounts of both manufacturing
overhead and cost drivers. Thus, the rate is really an estimate of overhead per "unit" of driver, a rate that can be
employed to cost products and jobs as the products and jobs are completed. In addition, such rates may be helpful
in decision making. If one desired to focus on actual overhead amounts, the proper rate can be developed only at
the conclusion of the period when such amounts become known.

In view of this situation, a trade-off arises. Namely, the user is forsaking accuracy (estimated amounts vs. actual
amounts) in exchange for the ability to generate more timely accounting information.
Selecting the Proper Cost Driver
77. Harris, Inc., has just completed job nos. 78 and 79, which were similar in terms of complexity, production processes,
and units manufactured. Job no. 78 was manufactured by Joe Barton who earns $14 per hour, whereas job no. 79
was completed by Susan Franklin who earns $20 per hour. If Joe and Susan are equally efficient, would the
company be better off using direct labor cost or direct labor hours as the cost driver in its predetermined overhead
rate? Briefly explain.
LO: 6 Type: N
Answer:
The jobs produced by Barton and Franklin are similar in terms of complexity, production processes, and units
manufactured, and both workers are equally efficient. Thus, the amount of overhead incurred on job no. 78 should
be relatively the same as that incurred on job no. 79. If direct labor hours are used in the predetermined overhead
rate, the overhead applied to the two jobs will be the same, which is good accounting in this case. Conversely, if
direct labor cost were used, Susan's job would absorb more overhead because of the higher labor cost—an
improper accounting since both jobs incurred the same amount.
The Two-Stage Allocation Process for Assigning Overhead Costs
78. Briefly describe the stages used in the two-stage allocation process for assigning overhead costs.
LO: 7 Type: RC
Answer:
In Stage One (Cost Distribution or Allocation), all manufacturing costs are assigned to departmental overhead
centers. For service departments, the related costs are reassigned to the production departments through this
process. In Stage Two (Overhead Application), all of the manufacturing costs accumulated in each production
department are then assigned to the production jobs that passed through the department.
Activity Analysis, Cost Behavior, and Cost Estimation
1. The relationship between cost and activity is termed:

A. cost estimation.
B. cost prediction.
C. cost behavior.
D. cost analysis.
E. cost approximation.
2. Which of the following costs changes in direct proportion to a change in the activity level?
A. Variable cost.
B. Fixed cost.
C. Semivariable cost.
D. Step-variable cost.
E. Step-fixed cost.

3. Montgomery Company has a variable selling cost. If sales volume increases, how will the total variable cost and the
variable cost per unit behave?
Total Variable Cost Variable Cost Per Unit
A. Increase Increase
B. Increase Remain constant
C. Increase Decrease
D. Remain constant Decrease
E. Decrease Increase
4. What type of cost exhibits the behavior that follows?

Manufacturing
Volume (Units) Cost Per Unit
50,000 $1.95
70,000 1.95

A. Variable cost.
B. Fixed cost.
D. Discretionary fixed cost.
E. Step-fixed cost.
5. Plaza Corporation observed that when 25,000 units were sold, a particular cost amounted to $70,000, or $2.80 per
unit. When volume increased by 15%, the cost totaled $80,500 (i.e., $2.80 per unit). The cost that Plaza is studying
can best be described as a:
A. variable cost.
B. fixed cost.
C. semivariable cost.
D. discretionary fixed cost.
E. step-fixed cost.
6. A company observed a decrease in the cost per unit. All other things being equal, which of the following is probably
true?
A. The company is studying a variable cost, and total volume has increased.
B. The company is studying a variable cost, and total volume has decreased.
C. The company is studying a fixed cost, and total volume has increased.
D. The company is studying a fixed cost, and total volume has decreased.
E. The company is studying a fixed cost, and total volume has remained constant.
7. Webster has the following budgeted costs at its anticipated production level (expressed in hours): variable overhead,
$150,000; fixed overhead, $240,000. If Webster now revises its anticipated production slightly downward, it would
expect:
A. total fixed overhead of $240,000 and a lower hourly rate for variable overhead.
B. total fixed overhead of $240,000 and the same hourly rate for variable overhead.
C. total fixed overhead of $240,000 and a higher hourly rate for variable overhead.
D. total variable overhead of less than $150,000 and a lower hourly rate for variable overhead.
E. total variable overhead of less than $150,000 and a higher hourly rate for variable overhead.

8. What type of cost exhibits the behavior that follows?

Manufacturing Total Cost
Volume (Units) Cost Per Unit
50,000 $150,000 $3.00
80,000 150,000 1.88
A. Variable cost.
B. Fixed cost.
E. Mixed cost.
9. When graphed, a typical variable cost appears as:

A. a horizontal line.
B. a vertical line.
C. a u-shaped line.
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.
10. Norman Company pays a sales commission of 5% on each unit sold. If a graph is prepared, with the vertical axis
representing per-unit cost and the horizontal axis representing units sold, how would a line that depicts sales
commissions be drawn?
A. As a straight diagonal line, sloping upward to the right.
B. As a straight diagonal line, sloping downward to the right.
C. As a horizontal line.
D. As a vertical line.
E. As a curvilinear line.
11. When graphed, a typical fixed cost appears as:

A. a horizontal line.
B. a vertical line.
C. a u-shaped line.
D. a diagonal line that slopes downward to the right.
E. a diagonal line that slopes upward to the right.
12. Costs that remain the same over a wide range of activity, but jump to a different amount outside that range, are
termed:
A. step-fixed costs.
B. step-variable costs.
C. semivariable costs.
D. curvilinear costs.
E. mixed costs.
13. Straight-line depreciation is a typical example of a:

A. variable cost.
B. step-variable cost.
C. fixed cost.
D. mixed cost.
E. curvilinear cost.
14. Which of the following choices denotes the typical cost behavior of advertising and sales commissions?
Advertising Sales Commissions
A. Variable Variable
B. Variable Fixed
C. Fixed Variable
D. Fixed Fixed
E. Semivariable Variable
15. Douglas Corporation recently produced and sold 100,000 units. Fixed costs at this level of activity amounted to
$50,000; variable costs were $100,000. How much cost would the company anticipate if during the next period it
produced and sold 102,000 units?
A. $150,000.
B. $151,000.
C. $152,000.
D. $153,000.
E. Some other amount not listed above.
16. Extron, Inc., has only variable costs and fixed costs. A review of the company's records disclosed that when 100,000
units were produced, fixed manufacturing costs amounted to $200,000 and the cost per unit manufactured totaled
$5. On the basis of this information, how much cost would the firm anticipate at an activity level of 97,000 units?
A. $485,000.
B. $491,000.
C. $494,000.
D. $500,000.
17. A review of Parry Corporation's accounting records found that at a volume of 90,000 units, the variable and fixed cost
per unit amounted to $8 and $4, respectively. On the basis of this information, what amount of total cost would
Parry anticipate at a volume of 85,000 units?
A. $1,020,000.
B. $1,040,000.
C. $1,060,000.
D. $1,080,000.
18. Each of Davidson's production managers (annual salary cost, $45,000) can oversee 60,000 machine hours of
manufacturing activity. Thus, if the company has 50,000 hours of manufacturing activity, one manager is needed;
for 75,000 hours, two managers are needed; for 125,000 hours, three managers are needed; and so
forth. Davidson's salary cost can best be described as a:
A. variable cost.
B. semivariable cost.
C. step-variable cost.
D. fixed cost.
E. step-fixed cost.
19. A cost that has both a fixed and variable component is termed a:
A. step-fixed cost.
B. step-variable cost.
C. semivariable cost.
D. curvilinear cost.
E. discretionary cost.
20. A mixed cost is often known as a:

A. semivariable cost.
B. step-fixed cost.
C. variable cost.
D. curvilinear cost.
E. discretionary cost.
21. Richard Hamilton has a fast-food franchise and must pay a franchise fee of $35,000 plus 3% of gross sales. In terms of
cost behavior, the fee is a:
A. variable cost.
B. fixed cost.
C. step-fixed cost.
D. semivariable cost.
E. curvilinear cost.
22. Which of the following are examples of a mixed cost?

I. A building that is used for both manufacturing and sales activities.
II. An employee's compensation, which consists of a flat salary plus a commission.
III. Depreciation that relates to five different machines.
IV. Maintenance cost that must be split between sales and administrative offices.
A. I only.
B. II only.
C. I and III.
D. I, III, and IV.
E. I, II, III, and IV.
23. Which of the following costs exhibits both decreasing and increasing marginal costs over a specific range of activity?
A. Semivariable cost.
B. Curvilinear cost.
C. Step-fixed cost.
E. Fixed cost.

24. The relevant range is that range of activity:
A. where a company achieves its maximum efficiency.
B. where units produced equal units sold.
C. where management expects the firm to operate.
D. where the firm will earn a profit.
E. where expected results are abnormally high.
25. Within the relevant range of activity, costs:

A. can be estimated with reasonable accuracy.
B. can be expected to change radically.
C. exhibit decreasing marginal cost patterns.
D. exhibit increasing marginal cost patterns.
E. cannot be estimated satisfactorily.
26. Within the relevant range, a curvilinear cost function can sometimes be graphed as a:
A. straight line.
B. jagged line.
C. vertical line.
D. curved line.
E. horizontal line.
27. As a firm begins to operate outside the relevant range, the accuracy of cost estimates for fixed and variable costs:
Fixed Variable
A. increases increases
B. increases decreases
C. decreases increases
D. decreases decreases
E. decreases remains unchanged
28. A variable cost that has a definitive physical relationship to the activity measure is called a(n):
A. discretionary cost.
B. engineered cost.
C. managed cost.
D. programmed cost.
E. committed cost.
29. Costs that result from an organization's ownership or use of facilities and its basic organizational structure are termed:
A. discretionary fixed costs.
B. committed fixed costs.
C. discretionary variable costs.
D. committed variable costs.
E. engineered costs.
30. Property taxes are an example of a(n):

A. committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.
31. Which of the following is not an example of a committed fixed cost?

A. Property taxes.
B. Depreciation on buildings.
C. Salaries of management personnel.
D. Outlays for advertising programs.
E. Equipment rental costs.
32. Committed fixed costs would include:

A. advertising.
B. research and development.
C. depreciation on buildings and equipment.
D. contributions to charitable organizations.
E. expenditures for direct labor.
33. Amounts spent for charitable contributions are an example of a(n):

A. committed fixed cost.
B. committed variable cost.
C. discretionary fixed cost.
D. discretionary variable cost.
E. engineered cost.
34. Which of the following would not typically be classified as a discretionary fixed cost?

A. Equipment depreciation.
B. Employee development (education) programs.
C. Advertising.
D. Outlays for research and development.
E. Charitable contributions.
35. Which of the following choices correctly classifies a committed fixed cost and a discretionary fixed cost?
Committed Discretionary
A. Promotion Management salaries
B. Building depreciation Charitable contributions
C. Management training Property taxes
D. Equipment rentals Equipment depreciation
E. Research and development Advertising

36. Which type of fixed cost (1) tends to be more long-term in nature and (2) can be cut back more easily in bad economic
times without doing serious harm to organizational goals and objectives?
Long Term in Can be Cut Back More Easily In
Nature Bad Economic Times
A. Committed Committed
B. Committed Discretionary
C. Discretionary Committed
D. Discretionary Discretionary
E. Committed No difference between
committed and discretionary
37. High-tech automation combined with a downsizing of a company's hourly labor force often results in:
A. increased fixed costs and increased variable costs.
B. increased fixed costs and reduced variable costs.
C. reduced fixed costs and increased variable costs.
D. reduced fixed costs and reduced variable costs.
E. increased discretionary fixed costs and reduced committed fixed costs.
38. Which of the following techniques is not used to analyze cost behavior?

A. Least-squares regression.
B. High-low method.
C. Visual-fit method.
D. Linear programming.
E. Multiple regression.
Answer: D LO: 5, 6 Type: RC
39. The high-low method and least-squares regression are used by accountants to:
A. evaluate divisional managers for purposes of raises and promotions.
B. choose among alternative courses of action.
C. maximize output.
D. estimate costs.
E. control operations.
40. Which of the following statements about the visual-fit method is (are) true?

I. The method results in the creation of a scatter diagram.
II. The method is not totally objective because of the manner in which the cost line is determined.
III. The method is especially helpful in the determination of outliers.
A. I only.
B. II only.
C. I and II.
D. I and III.
E. I, II, and III.
41. The nonstatistical method of cost estimation that calls for the creation of a scatter diagram is the:
A. least-squares regression method.
B. high-low method.
C. visual-fit method.
D. account analysis method.
E. multiple regression method.
42. Which of the following methods of cost estimation relies on only two data points?
B. The high-low method.
C. The visual-fit method.
D. Account analysis.
E. Multiple regression.
Use the following to answer questions 43-44:
Swanson and Associates presently leases a copy machine under an agreement that calls for a fixed fee each month
and a charge for each copy made. Swanson made 7,000 copies and paid a total of $360 in March; in May, the firm
paid $280 for 5,000 copies. The company uses the high-low method to analyze costs.
43. Swanson's variable cost per copy is:

A. $0.040.
B. $0.051.
C. $0.053.
D. $0.056.
E. an amount other than those given above.
44. Swanson's monthly fixed fee is:

A. $80.
B. $102.
C. $106.
D. $112.
Atlanta, Inc., which uses the high-low method to analyze cost behavior, has determined that machine hours best
explain the company's utilities cost. The company's relevant range of activity varies from a low of 600 machine
hours to a high of 1,100 machine hours, with the following data being available for the first six months of the year:
Month Utilities Machine Hours

January $8,700 800
February 8,360 720
March 8,950 810
April 9,360 920
May 9,625 950
June 9,150 900
45. The variable utilities cost per machine hour is:

A. $0.18.
B. $4.50.
C. $5.00.
D. $5.50.
E. an amount other than those listed above.
46. The fixed utilities cost per month is:

A. $3,764.
B. $4,400.
C. $4,760.
D. $5,100.
47. Using the high-low method, the utilities cost associated with 980 machine hours would be:
A. $9,510.
B. $9,660.
C. $9,700.
D. $9,790.
48. Hitchcock, Inc., uses the high-low method to analyze cost behavior. The company observed that at 12,000 machine
hours of activity, total maintenance costs averaged $7.00 per hour. When activity jumped to 15,000 machine hours,
which was still within the relevant range, the average cost per machine hour totaled $6.40. On the basis of this
information, the variable cost per machine hour was:
A. $4.00.
B. $6.40.
C. $6.70.
D. $7.00.
49. Northridge, Inc., uses the high-low method to analyze cost behavior. The company observed that at 20,000 machine
hours of activity, total maintenance costs averaged $10.50 per hour. When activity jumped to 24,000 machine
hours, which was still within the relevant range, the average cost per machine hour totaled $9.75. On the basis of
this information, the company's fixed maintenance costs were:
A. $24,000.
B. $90,000.
C. $210,00.
D. $234,000.
50. The following data relate to the Hodges Company for May and August of the current year:

May August
Maintenance hours 10,000 12,000
Maintenance cost $260,000 $300,000

May and August were the lowest and highest activity levels, and Hodges uses the high-low method to analyze cost
behavior. Which of the following statements is true?
A. The variable maintenance cost is $25 per hour.
B. The variable maintenance cost is $25.50 per hour.
C. The variable maintenance cost is $26 per hour.
D. The fixed maintenance cost is $60,000 per month.
E. More than one of the above statements is true.
Yang Manufacturing, which uses the high-low method, makes a product called Yin. The company incurs three
different cost types (A, B, and C) and has a relevant range of operation between 2,500 units and 10,000 units per
month. Per-unit costs at two different activity levels for each cost type are presented below.
Type A Type B Type C Total

5,000 units $4 $9 $4 $17
7,500 units $4 $6 $3 $13
51. The cost types shown above are identified by behavior as:

Type A Type B Type C
A. Fixed Variable Semivariable
B. Fixed Semivariable Variable
C. Variable Semivariable Fixed
D. Variable Fixed Semivariable
E. Semivariable Variable Fixed
Answer: D LO: 2, 5 Type: A, N
52. If Yang produces 10,000 units, the total cost would be:
A. $90,000.
B. $100,000.
C. $110,000.
D. $125,000.
Answer: C LO: 5 Type: A, N
53. The cost formula that expresses the behavior of Yang's total cost is:
A. Y = $0 + $17X.
B. Y = $20,000 + $13X.
C. Y = $40,000 + $9X.
D. Y = $45,000 + $4X.
E. Y = $60,000 + $5X.
Answer: E LO: 5 Type: A
54. In regression analysis, the variable that is being predicted is known as the:
A. independent variable.
B. dependent variable.
C. explanatory variable.
D. interdependent variable.
E. functional variable.
55. Mohawk Products has determined that the number of machine hours worked (MH) drives the amount of
manufacturing overhead incurred (MOH). On the basis of this relationship, a staff analyst has constructed the
following regression equation:

MOH = 240,000 + 8MH

Which of the choices correctly depicts the nature of Mohawk's variables?
Dependent Independent
A. MOH MOH
B. MOH MH
C. MH MOH
D. MH MH
E. 8 240,000
56. Checkers Corporation, which uses least-squares regression analysis, has derived the following regression equation for
estimates of manufacturing overhead: Y = 495,000 + 5.65X. Which of the following statements is true if the primary
cost driver is machine hours?
A. Total manufacturing overhead is represented by the variable "X."
B. The company anticipates $495,000 of fixed manufacturing overhead.
C. "X" is commonly known as the dependent variable.
D. "X" represents the number of machine hours.
E. Both "B" and "D" are true.
57. Boulder, Inc., recently conducted a least-squares regression analysis to predict selling expenses. The company has
constructed the following regression equation: Y = 329,000 + 7.80X. Which of the following statements is false if the
primary cost driver is number of units sold?
A. The company anticipates $329,000 of fixed selling expenses.
B. "Y" represents total selling expenses.
C. The company expects both variable and fixed selling expenses.
D. For each unit sold, total selling expenses will increase by $7.80.
E. "X" represents the number of hours worked during the period.
58. Tempe, Inc., is studying marketing cost and sales volume, and has generated the following information by use of a
scatter diagram and a least-squares regression analysis:
Scatter Diagram Regression Analysis

Variable cost per unit sold $6.80
Total monthly fixed cost $45,000 $42,500
Tempe is now preparing an estimate for monthly sales of 18,000 units. On the basis of the data presented, compute
the most accurate sales forecast possible.
A. $159,500.
B. $162,000.
C. $164,900.
D. $167,400.
E. An amount other than those listed above.
Answer: C LO: 5 Type: A, N
59. Waller Enterprises has determined that three variables play a key role in determining company revenues. To arrive at
an objective forecast of revenues for the next accounting period, Waller should use:
A. simple regression.
B. multiple regression.
C. a scatter diagram.
D. complex regression.
E. the high-low method.
60. Which of the following tools is not associated with cost estimation?

B. Multiple regression.
C. Inversion equations.
D. Time and motion (engineering) studies.
E. Learning curves.
61. A staff assistant at Washington Corporation recently determined that the first four units completed in a new
manufacturing process took 800 hours to complete, or an average of 200 hours per unit. The assistant also found
that when the cumulative output produced doubles, the average labor time declines by 20%. On the basis of this
information, how many total hours would Washington use if it produces 16 units?
A. 128.
B. 160.
C. 1,280.
D. 2,048.
62. Which of the following is not an issue in the collection of data for cost estimation?
A. Outliers.
B. Missing data.
C. Mismatched time periods.
D. Inflation.
E. All of the above are issues in data collection.
63. A high R2 measure in regression analysis is preferred because:

A. it indicates a good fit of the regression line through the data points.
B. it shows that a great deal of the change in the dependent variable is explained by change in the independent variable.
C. it means that the independent variable is a good predictor of the dependent variable.
D. it means that the cost analyst can be relatively confident in his or her cost predictions.
E. all of the preceding statements are true.
Cost Classification, Cost Behavior
66. Consider the six costs that follow.

1. Advertising and promotion costs of a do-it-yourself retailer
2. Surgical supplies used in a hospital's operating room
3. Aircraft depreciation charges of an airline
4. Utility charges that include a minimum-use fee, for a small business
5. Annual business licensing fee paid by a daycare center
6. Truck fuel consumed by a road construction company

Required:
A. Classify each of these costs as variable, committed fixed, discretionary fixed, or semivariable.
B. Briefly describe the behavior of a per-unit variable cost as activity changes.
C. What elements are present in a semivariable cost that cause it to behave in a semivariable manner?
D. Generally speaking, does management have more flexibility when dealing with committed fixed costs or
discretionary fixed costs?
LO: 2, 4 Type: RC, N
Answer:
A.1. Discretionary fixed
2. Variable
3. Committed fixed
4. Semivariable
5. Committed fixed
6. Variable
B. Per-unit variable costs remain constant as activity levels change.
C. Semivariable, or mixed costs, contain both a variable and fixed component.
D. Discretionary fixed costs
Cost Classification, Cost Equation
67. Sunshine Valley Meat Company produces one of the best sausage products in Pennsylvania. The company's controller
compiled the following information by analyzing the accounting records:
1. Meat costs the company $3.25 per pound of sausage produced.

2. Compensation of production employees is $2.25 per pound of sausage produced.
3. Supervisory salaries total $23,000 per month.
4. The company incurs utility costs of $9,000 per month plus $0.35 per pound of sausage produced.
5. Insurance and property taxes average $6,400 per month.

Required:
A. Classify each cost as variable, fixed, or semivariable.
B. Write a formula to express the behavior of the firm's production costs. (Use the form Y = a + bX, where X denotes
the quantity of sausage produced.)
LO: 2, 5 Type: A, N
Answer:
A. 1. Variable
2. Variable
3. Fixed
4. Semivariable
5. Fixed
B. Supervision $23,000 Meat $3.25

Fixed utilities 9,000 Labor 2.25
Insurance and Variable utilities 0.35
property taxes 6,400 Total variable $5.85
Total fixed $38,400
Production cost per month: Y = $38,400 + $5.85X

Cost Analysis, Behavior, and Classification
68. Viscount Corporation has a machining capacity of 200,000 hours per year. Utilization of capacity is normally 75%; it
has been as low as 40% and as high as 90%. An analysis of the accounting records revealed the following selected
costs:

At a 40% At a 90%
Utilization Rate Utilization Rate
Cost A:
Total $440,000 $ 440,000
Per hour $5.50 ?
Cost B:
Total ? $1,944,000
Per hour $10.80 $10.80
Cost C:
Total $680,000 $1,330,000
Per hour $8.50 $7.39

Viscount uses the high-low method to analyze cost behavior.

Required:
A. Classify each of the costs as being either variable, fixed, or semivariable.
B. Calculate amounts for the two unknowns in the preceding table.
C. Calculate the total amount that Viscount would expect at a 75% utilization rate for Cost A, Cost B, and Cost C.
D. Develop an equation that Viscount can use to predict total cost for any level of hours within its range of operation.
LO: 2, 5 Type: A, N
Answer:
A. Cost A: Fixed (same total amount at each level of activity)
Cost B: Variable (constant per-hour figures)
Cost C: Semivariable (changing total and per-hour figures)
B. Cost A: $440,000 ÷ (200,000 hours x 90%) = $2.44

Cost B: (200,000 hours x 40%) x $10.80 = $864,000
C. Analysis of Cost C (variable portion):

($1,330,000 - $680,000) ÷ [(200,000 x 90%) - (200,000 x 40%)] = $6.50 per hour
Analysis of Cost C (fixed portion):

Total cost at 40% utilization $680,000
Variable cost (200,000 x 40% x $6.50) 520,000
Fixed cost $160,000
75% utilization: 200,000 x 75% = 150,000 hours
Cost A $ 440,000
Cost B (150,000 x $10.80) 1,620,000
Cost C:
Variable portion (150,000 x $6.50) 975,000
Fixed portion 160,000
Total cost $3,195,000
D. Variable cost per hour: $10.80 + $6.50 = $17.30

Fixed cost: $440,000 + $160,000 = $600,000
Equation: Y = $600,000 + $17.30X
where Y = total cost and X = number of hours
Cost Behavior, Cost Analysis
69. Walnut Corporation operates a small medical lab in Kansas, one that conducts minor medical procedures (including
blood tests and x-rays) for a number of doctors. The lab consumes various medical supplies and is staffed by two
technicians, both of whom are paid a monthly salary. In addition, there is an on-site office manager who is also paid
by the month.

Required:
A. If the lab's patient count increases by, say, 15%, will the lab's total operating costs increase by 15%? Explain.
B. Walnut is considering opening an additional lab in a new suburban medical building. What will likely happen to the
lab's level of fixed cost incurrence? Why?
C. What analysis methods would be available to the office manager and/or Walnut management if a close look at the
lab's cost behavior is desired?
Answer:
A. No. The lab has a mixture of both variable and fixed costs. Variable costs (such as supplies) will increase, directly
paralleling the increase in clients. The salaries of the technicians and office manager are step-fixed in nature,
meaning that a 15% hike in client load will do nothing to these expenditures. A possibility exists, though, that an
increase in patient load could create the need for an added technician.
B. Fixed costs typically do not change when activity changes. However, the opening of a new branch will create the
need for added technicians and presumably another office manager, thus causing costs to rise. In addition, facility
rental charges will increase and there will be an added cost if the firm leases and/or depreciates equipment. Note:
This answer assumes that the original facility will continue with existing personnel and not implement a job-sharing
arrangement through a cutback in operating hours.
C. Possible methods include account classification, visual fit, high-low, and least-squares regression.
Cost Behavior and Analysis; High-Low Method
70. The following selected data were taken from the accounting records of Shook Industrial Manufacturing:

Machine Manufacturing Overhead
Month Hours
May 46,000 $ 889,000
June 60,000 1,130,000
July 68,000 1,274,000
August 52,000 980,000

July's costs consisted of machine supplies ($170,000), property taxes ($24,000), and plant maintenance
($1,080,000). These costs exhibit the following respective behavior: variable, fixed, and semivariable.

Required:
A. Determine the machine supplies and property taxes for May.
B. By using the high-low method, analyze Shook's plant maintenance cost and calculate the monthly fixed portion and
the variable cost per machine hour.
C. Assume that present cost behavior patterns continue into future months. Estimate the total amount of
manufacturing overhead the company can expect in September if 56,000 machine hours are worked.
LO: 2, 5 Type: A
Answer:
A. Machine supplies: $170,000 ÷ 68,000 hours = $2.50 per hour; 46,000 hours x $2.50
= $115,000
Property taxes: Fixed at $24,000
B. Plant maintenance in May: $889,000 - $115,000 - $24,000 = $750,000

Variable plant maintenance: ($1,080,000 - $750,000) ÷ (68,000 - 46,000) = $15 per hour
Fixed plant maintenance:
Total plant maintenance for 68,000 hours $1,080,000
Less: Variable plant maintenance (68,000 x $15) 1,020,000
Fixed cost $ 60,000
C. Manufacturing overhead at 56,000 hours:

Machine supplies at $2.50 per hour $ 140,000
Property taxes 24,000
Plant maintenance:
Variable at $15 per hour 840,000
Fixed 60,000
Total $1,064,000
High-Low Method vs. Visual-Fit Method
71. Moore Company needs to determine the variable utilities rate per direct machine hour in order to estimate cost for
August. Relevant information is as follows.

Utilities
Month Machine Hours Worked Cost
April 4,800 $4,144
May 5,200 4,300
June 5,600 4,482
July 6,000 4,804

Moore anticipates producing 3,800 units in August, with each unit requiring 1.5 hours of machine time. The company
uses the high-low method to analyze costs.

Required:
A. Calculate the variable and fixed components of the utilities cost.
B. Using the data calculated above, estimate the utilities cost for August.
C. Compare the high-low method versus the visual-fit method with respect to (1) number of data observations used in
the analysis and (2) objectivity of the results.
LO: 5 Type: A, N
Answer:
A. Variable cost:
($4,804 - $4,144) ÷ (6,000 - 4,800) = $0.55 per hour
Total cost for 6,000 hours $4,804

Less: Variable cost (6,000 x $0.55) 3,300
Fixed cost $1,504
B. Variable cost (3,800 x 1.5 x $0.55) $3,135

Fixed cost 1,504
Total cost $4,639
C. The high-low method uses only two data observations, the highest and the lowest, whereas the
visual-fit method utilizes all data points that have been gathered (except outliers). Many
analysts would say the visual-fit method is advantageous in this regard.
However, the visual-fit method lacks total objectivity because of the manner in which the cost
line is fit through the data points (drawn by "visual approximation"). The high-low method is
therefore said to be more objective.
Cost Estimation, High-Low Method, Relevant Range
72. The Southlake Medical Clinic offers a number of specialized medical services. A review of data for the year just ended
revealed variable costs of $32 per patient day, annual fixed costs of $480,000, and semivariable costs, which
displayed the following behavior at the "peak" and "valley" of activity:

January (2,400 patient days): $258,400
August (2,900 patient days): $278,900

Required:
A. Calculate the total cost for an upcoming month (2,800 patient days) if current cost behavior patterns
continue. Southlake uses the high-low method to analyze cost behavior.
B. There is a high probability that Southlake's volume will increase in forthcoming months as patients take advantage
of new scientific advances. Can the data and methodology used in part (a) for predicting the costs of 2,800 patient
days be employed to estimate the costs for, say, 3,800 patient days? Why or why not?
LO: 2, 3, 5 Type: A, N
Answer:
A. Analysis of semivariable cost (variable portion):
($278,900 - $258,400) ÷ (2,900 - 2,400) = $41 per patient day
Analysis of semivariable cost (fixed portion):
Total cost for 2,900 patient days $278,900
Less: Variable cost (2,900 x $41) 118,900
Fixed cost $160,000
Variable cost (2,800 x $32) $ 89,600
Fixed cost ($480,000 ÷ 12 months) 40,000
Semivariable cost:
Variable portion (2,800 x $41) 114,800
Total cost $404,400
B. No. The "peak" and "valley" of operation were 2,900 patient days and 2,400 patient days,
respectively. The 3,800-patient-day data point is well outside this range of observed cost
relationships and recent activity (i.e., the relevant range). Costs can change outside of this
range (e.g., fixed costs may be higher), and the lack of past experience will likely create
unknowns for the analyst.
Cost Estimation, High-Low Method, Analysis of Step-Fixed Cost
73. A-1 Corporation extracts ore for eight different companies in Colorado. The firm anticipates variable costs of $65 per
ton along with annual fixed overhead of $840,000, which is incurred evenly throughout the year. These costs
exclude the following semivariable costs, which are expected to total the amounts shown for the high and low
points of ore extraction activity:

March (850 tons): $39,900
August (1,300 tons): $46,200

A-1 uses the high-low method to analyze cost behavior.

Required:
A. Calculate the semivariable cost for an upcoming month when 875 tons will be extracted.
B. Calculate the total cost for that same month.
C. A-1 uses Cortez Trucking to haul extracted ore. Cortez's monthly charges are as follows:

800 - 1,099 tons $ 70,000
1,100 tons - 1,399 tons 90,000
1,400+ tons 110,000

1. From a cost behavior perspective, what type of cost is this?
2. If A-1 plans to extract 875 tons, is the company being very "cost effective" with respect to Cortez's billing
rates? Briefly discuss.
LO: 2, 5 Type: A, N
Answer:
A. Analysis of semivariable cost (variable portion):
($46,200 - $39,900) ÷ (1,300 - 850) = $14 per ton
Total cost for 1,300 tons $ 46,200
Less: Variable cost (1,300 x $14) 18,200
Fixed cost $ 28,000
Variable portion (875 x $14) $ 12,250
Total $ 40,250
B. Semivariable cost $ 40,250

Variable cost (875 x $65) 56,875
Fixed cost ($840,000 ÷ 12) 70,000
Total $167,125
C. 1 Step-fixed.
.
2 No. Notice that the bill will be $70,000 for A-1's tonnage, and the firm could have
. Cortez haul up to 1,099 tons for the same cost. Ideally, A-1 should try to move to the
right-hand side of the step to get a better return on its investment.
Cost Behavior/Estimation, High-Low Method, Working Backward
74. Charger Corporation has three costs: A, which is variable; B, which is fixed; and C, which is semivariable. The
company, which uses the high-low method, extracted the following data from its accounting records:
· At 180,000 hours of activity, Cost A totaled $2,610,000.
· At 140,000 hours, the low point during the period, Cost C totaled $1,498,000; at 200,000 hours, the high point,
Cost C’s fixed portion amounted to $1.75 per hour.
· At 160,000 hours of activity, the sum of Costs A, B, and C amounted to $8,162,000.
Required:
A. Compute the variable portion (total) of Cost C at 140,000 hours of activity.
B. Compute Cost C (total) at 160,000 hours of activity.
C. Compute Cost B (total) at 160,000 hours of activity.
LO: 2, 5 Type: A, N
Answer:
A. Cost C’s fixed portion will total the same amount, $350,000 (200,000 hours x $1.75), at both 200,000 hours and
140,000 hours. Thus, the variable portion of C at 140,000 hours will be $1,148,000 ($1,498,000 - $350,000).
B. The variable portion of Cost C is $8.20 per hour ($1,148,000 ÷ 140,000 hours). Cost C will therefore total
$1,662,000 [(160,000 hours x $8.20) + $350,000].
C. Cost A equals $2,320,000 [($2,610,000 ÷ 180,000 hours) x 160,000 hours. Thus:
Total cost (A + B + C) $8,162,000

Less: Cost A $2,320,000
Cost C 1,662,000 3,982,000
Cost B $4,180,000
High-Low and Regression Analysis, Interpretation
75. Managers in the Stamping Department have been studying overhead cost and the relationship with machine
hours. Data from the most recent 12 months follow.

Month Overhead Machine Hours
January $5,030 2,730
February 1,600 600
March 7,210 3,403
April 4,560 2,200
May 6,880 3,411
June 6,520 2,586
July 6,230 3,364
August 5,570 2,411
September 7,728 3,960
October 5,810 2,897
November 4,580 2,207
December 6,010 2,864

The manager of the department has requested a regression analysis of these two variables (labeled no. 1
below). However, the staff person performing the analysis decided to run another regression that excluded
February (labeled no. 2). She observed that the volume of activity was very low for that month because of two
factors: a severe flu outbreak and an electrical fire that disrupted operations for about 10 working days.

Regression No. 1 Regression No. 2
Constant 428.00 Constant 550.00
R² 0.79 R² 0.74
b coefficient 1.86 b coefficient 1.90

Required:
A. Prepare an overhead cost breakdown by using the high-low method. The analysis should be useful in helping to
predict variable and fixed costs under normal operating conditions.
B. Prepare an estimate of overhead cost for a volume of 3,000 machine hours by using regression no. 1.
C. You now have the ability to analyze three cost estimates from the high-low data in part (a) and the two regression
equations. Which one do you feel would provide the best estimate? Explain the factors that support your
choice. Note: Do not calculate an overhead cost estimate with regression no. 2.
LO: 5, 8 Type: A, N
Answer:
A. September and April are the high and low months of volume, respectively. February is an outlier and has
been eliminated from the analysis since the instructions call for "normal operating conditions."
Analysis of semivariable cost (variable portion):
($7,728 - $4,560) ÷ (3,960 - 2,200) = $1.80 per hour
Total cost for 3,960 hours $7,728
Less: Variable cost (3,960 x $1.80) 7,128
Fixed cost $ 600
B. Variable cost (3,000 x $1.86) $5,580

Fixed cost 428
Total cost $6,008
C. Regression no. 2 would provide the best of the three estimates. The regression equations have substantial
advantages over the high-low method since all data are used (not just the highest and lowest points), and
quantitative measures of the strength of the relationship are available. Regression no. 2 also eliminates
February's data, which are deemed an outlier.
The equation in regression no. 2 is plausible: overhead costs increase as machine hours increase. Although
no. 2's R² is lower than the R² for regression no. 1, it is still very respectable, with 74% (versus 79%) of the
change in overhead being explained by the change in machine hours.
Cost Estimation Methods; Cost Analysis
76. Shortly after being hired as an analyst with Harrison Rentals, which is located in upstate New York, Luis Gomez was
asked to prepare a report that focused on the company's order processing costs—a cost driven largely by the
number of rental invoices written. Luis knew that he could use several different tools to analyze cost behavior,
including scatter diagrams, least-squares regression, and the high-low method. In addition, he knew that he could
present the results of his analysis in the form of algebraic equations. Those equations follow.

Scatter diagram: OP = $56,000 + $6.80RI
Least-squares regression: OP = $59,000 + $6.75RI
High-low method: OP = $53,500 + $7.25RI
where OP = total order processing costs and RI = number of rental invoices written

Luis had analyzed data over the past 12 months and built equations based on these data, purposely including the
slowest month of the year and the busiest month so that things would "…tend to even out." He observed that
February was especially slow because of a paralyzing blizzard, one that forced the company to close for four days.

Required:
A. Will scatter diagrams, least-squares regression, and the high-low method normally result in the same
equation? Why?
B. Assuming the use of least-squares regression, explain what the $59,000 and $6.75 figures represent.
C. Assuming the use of a scatter diagram, predict the order processing cost of an upcoming month when Harrison
expects to write 2,500 rental invoices.
D. Did Luis err in constructing the equations on data of the past 12 months? Briefly discuss. If "yes," determine which
of the three tools is likely to be affected the most and explain why.
LO: 5, 7 Type: A, N
Answer:
A. No. The three methods produce equations by different means. Scatter diagrams and least-squares regression rely
on an examination of all data points. The scatter diagram, however, requires an analyst to fit a line through the
points by visual approximation, or "eyeballing." In contrast, least-squares regression involves the use of statistical
formulas to derive the best possible fit of the line through the points. Finally, the high-low method is based on an
analysis of only two data points: the highest and the lowest.
B. These amounts represent the fixed and variable elements of the company's order processing cost. Fixed cost totals
$59,000, and Harrison incurs $6.75 of variable cost for each invoice written.
C. OP = $56,000 + $6.80RI

OP = $56,000 + ($6.80 x 2,500)
OP = $73,000
D. Yes, he did err by including February data. February is not representative because of the effects of the blizzard. The
month is an outlier and should be eliminated from the data set.
The equation constructed by using the high-low method is likely to be affected the most since the equation is based
on only two data points. One of those two points should have been excluded from the analysis.
Using and Analyzing a Regression Equation
77. North Company is making plans for the introduction of a new product, which has a target selling price of $7 per
unit. The following estimates of manufacturing costs have been derived for 6 million units, to be produced during
the first year:

Direct material: $6,000,000
Direct labor: $2,100,000 (at $14 per hour)

Overhead costs have not yet been estimated, but monthly data on total production and overhead for the past 12
months have been analyzed by using least-squares regression. The major overhead cost driver is direct labor hours,
with the following results:

Computed values:
Fixed overhead cost: $3,200,000
Coefficient of independent variable: $2.25

Required:
A. Prepare the company's regression equation (Y = a + bX) to estimate overhead.
B. Calculate the predicted overhead cost at an activity level of 6,300,000 units.
C. What is North’s dependent variable in this case?
D. How can the company evaluate the "quality" of its regression equation?
LO: 5, 8 Type: A, N
Answer:
A. Y = $3,200,000 + $2.25X
B. Direct labor:
For 6 million units, direct labor totals 150,000 hours ($2,100,000 ¸ $14);
For 1 unit, direct labor totals 0.025 hours (150,000 ¸ 6,000,000);
For 6,300,000 units, direct labor totals 157,500 hours (6,300,000 x 0.025).
Y = $3,200,000 + (157,500 x $2.25) = $3,554,375
C. The dependent variable is Y, or total overhead cost.
D. There are two ways to evaluate the regression equation:

1. Determine whether the relationship makes economic sense. Is it plausible that
overhead cost is related to direct labor hours? Does the estimated regression equation
look reasonable? Answering these questions requires a good understanding of the
production process
2. Use the coefficient of determination, R², to assess the regression equation's goodness
of fit.
Cost Behavior Characteristics
78. Compare and contrast the following types of costs: (1) variable and step-variable and (2) fixed and step-fixed.
LO: 2 Type: RC
Answer:
(1) A variable cost changes in direct proportion to a change in an activity level or cost driver, with a typical example
being direct material. A step-variable cost is nearly variable, but it increases in small steps rather than continuously
(e.g., additional direct labor).
(2) A fixed cost remains unchanged as the activity level varies (e.g., rent). In contrast, a step-fixed cost remains fixed
over a sizable range of activity, but jumps to a different amount for activities outside that range (e.g., the salaries of
new employees who are needed because of volume changes).
The Relevant Range
79. Define the term "relevant range" and explain its importance in understanding cost behavior.
LO: 3 Type: RC
Answer:
The relevant range is the range of activity within which management expects a company to operate. This can be
based on past experience and/or sales projections.
This concept is important because management need not concern itself with extremely high or low levels of activity
that are unlikely to occur. Also, observed cost relationships are typically valid within the relevant range and can
therefore be used for purposes of estimation at other levels within that range.
Committed Costs and Discretionary Costs
80. Differentiate between committed costs and discretionary costs. Be sure to present two examples of each and explain
which of the two cost types would likely be cut should a company encounter financial difficulties.
LO: 4 Type: RC
Answer:
A committed cost is a fixed amount that stems from an organization's ownership or use of facilities, and its basic
organizational structure. Property taxes, rent, and salaries of top management are examples of committed costs.
A discretionary cost, also a fixed amount, occurs as a result of a management decision to spend a particular amount
of money for some purpose. Examples are advertising, training, promotion, and contributions to charitable
organizations.
The distinction between committed and discretionary costs is that committed costs can be changed only by major
decisions with long-term implications. Discretionary costs can be changed in the short run and, thus, are cost-
cutting targets should an organization encounter financial difficulties.
Deficiencies of the Visual-Fit and High-Low Methods
81. Both the visual-fit and high-low methods of cost estimation have inherent limitations. Briefly identify the major
deficiency associated with each method.
LO: 5 Type: RC

Answer:
The visual-fit method suffers from a lack of objectivity. Given that the cost line is created by visual approximation or
"eyeballing," different cost analysts will likely produce different lines. The high-low method, on the other hand, is
objective. However, it uses only two data points and ignores the rest, thus generalizing about cost behavior by
relying on only a very small percentage of possible data observations.
Least-Squares Regression and Multiple Regression
82. Distinguish between least-squares regression and multiple regression as cost estimation methods.
LO: 5, 6 Type: RC
Answer:
In the least-squares regression (LSR) method, the cost line is positioned to minimize the sum of the squared
deviations between the cost line and the data points. The cost line fit to the data using LSR is called a regression
line. The statistical equation for this line is represented by the formula: Y = a + bX, with X denoting activity level
(independent variable) and Y denoting the total cost (dependent variable).
The multiple-regression line has all the same properties of the simple LSR line, but more than one independent
variable is taken into consideration. The use of more independent variables can better explain accompanying
changes in cost.
ABSORPTION & VARIABLE COSTING
1. Under variable costing, fixed manufacturing overhead is:

A. expensed immediately when incurred.
B. never expensed.
C. applied directly to Finished-Goods Inventory.
D. applied directly to Work-in-Process Inventory.
E. treated in the same manner as variable manufacturing overhead.
2. All of the following are inventoried under variable costing except:

A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. items "C" and "D" above.
3. All of the following are expensed under variable costing except:

A. variable manufacturing overhead.
B. fixed manufacturing overhead.
C. variable selling and administrative costs.
D. fixed selling and administrative costs.
E. items "C" and "D" above.
4. All of the following costs are inventoried under absorption costing except:

A. direct materials.
B. direct labor.
C. variable manufacturing overhead.
D. fixed manufacturing overhead.
E. fixed administrative salaries.
5. All of the following are inventoried under absorption costing except:

A. direct labor.
B. raw materials used in production.
C. utilities cost consumed in manufacturing.
D. sales commissions.
E. machine lubricant used in production.
6. The underlying difference between absorption costing and variable costing lies in the treatment of:
A. direct labor.
B. variable manufacturing overhead.
C. fixed manufacturing overhead.
D. variable selling and administrative expenses.
E. fixed selling and administrative expenses.
7. Which of the following costs would be treated differently under absorption costing and variable costing?
Variable Fixed
Direct Manufacturing Administrative
Labor Overhead Expenses
A. Yes No Yes
B. Yes Yes Yes
C. No Yes No
D. No No Yes
E. No No No
8. Lone Star has computed the following unit costs for the year just ended:

Direct material used $12
Direct labor 18
Variable manufacturing overhead 25
Fixed manufacturing overhead 29
Variable selling and administrative cost 10
Fixed selling and administrative cost 17

Under variable costing, each unit of the company's inventory would be carried at:
A. $35.
B. $55.
C. $65.
D. $84.
9. Prescott Corporation has computed the following unit costs for the year just ended:

Direct labor 27

Under absorption costing, each unit of the company's inventory would be carried at:
A. $75.
B. $107.
C. $116.
D. $133.
10. Santa Fe Corporation has computed the following unit costs for the year just ended:

Direct labor 19

Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption
costing?
Variable Absorption
Costing Costing
A. $79 $119
B. $79 $151
C. $96 $119
D. $96 $151
E. Some other combination of figures not listed above.
11. Delaware has computed the following unit costs for the year just ended:
Variable manufacturing cost $85

Fixed manufacturing cost 20
Which of the following choices correctly depicts the per-unit cost of inventory under variable costing and absorption
costing?
A. Variable, $85; absorption, $105.
B. Variable, $85; absorption, $116.
C. Variable, $103; absorption, $105.
D. Variable, $103; absorption, $116.

Indiana Company incurred the following costs during the past year when planned production and actual production
each totaled 20,000 units:
Direct materials used $280,000

Variable manufacturing overhead 160,000
Fixed manufacturing overhead 100,000
Variable selling and administrative costs 60,000
Fixed selling and administrative costs 90,000
12. If Indiana uses variable costing, the total inventoriable costs for the year would be:
A. $400,000.
B. $460,000.
C. $560,000.
D. $620,000.
E. $660,000.
13. The per-unit inventoriable cost under absorption costing is:

A. $9.50.
B. $25.00.
C. $28.00.
D. $33.00.
E. $40.50.
14. Consider the following comments about absorption- and variable-costing income statements:

I. A variable-costing income statement discloses a firm's contribution margin.
II. Cost of goods sold on an absorption-costing income statement includes fixed costs.
III. The amount of variable selling and administrative cost is the same on absorption- and variable-costing income
statements.

Which of the above statements is (are) true?
A. I only.
B. II only.
C. I and II.
D. II and III.
E. I, II, and III.
15. Roberts, which began business at the start of the current year, had the following data:

Planned and actual production: 40,000 units
Sales: 37,000 units at $15 per unit
Production costs:
Variable: $4 per unit
Fixed: $260,000
Selling and administrative costs:
Fixed: $32,000

The gross margin that the company would disclose on an absorption-costing income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
16. McAfee, which began business at the start of the current year, had the following data:

Production costs:
Fixed: $260,000
Fixed: $32,000

The contribution margin that the company would disclose on an absorption-costing income statement is:
A. $0.
B. $147,000.
C. $166,500.
D. $370,000.
17. Chicago began business at the start of the current year. The company planned to produce 25,000 units, and actual
production conformed to expectations. Sales totaled 22,000 units at $30 each. Costs incurred were:

Fixed manufacturing overhead $150,000
Fixed selling and administrative cost 100,000
Variable manufacturing cost per unit 8
Variable selling and administrative cost per unit 2

If there were no variances, the company's absorption-costing net income would be:
A. $190,000.
B. $202,000.
C. $208,000.
D. $220,000.
18. Norton, which began business at the start of the current year, had the following data:

Production costs:
Fixed: $260,000
Fixed: $32,000

The contribution margin that the company would disclose on a variable-costing income statement is:
A. $97,500.
B. $147,000.
C. $166,500.
D. $370,000.
19. Madison began business at the start of the current year. The company planned to produce 30,000 units, and actual
production conformed to expectations. Sales totaled 28,000 units at $32 each. Costs incurred were:

Fixed manufacturing overhead $150,000
Variable manufacturing cost per unit 11
Variable selling and administrative cost per unit 2

If there were no variances, the company's variable-costing net income would be:
A. $270,000.
B. $292,000.
C. $308,000.
D. $532,000.
20. The following data relate to Lobo Corporation for the year just ended:
Sales revenue $750,000

Cost of goods sold:
Variable portion 370,000
Variable selling and administrative cost 50,000
Which of the following statements is correct?

A. Lobo’s variable-costing income statement would reveal a gross margin of $270,000.
B. Lobo’s variable costing income statement would reveal a contribution margin of $330,000.
C. Lobo’s absorption-costing income statement would reveal a contribution margin of $330,000.
D. Lobo’s absorption costing income statement would reveal a gross margin of $330,000.
E. Lobo’s absorption-costing income statement would reveal a gross margin of $145,000.
Franz began business at the start of this year and had the following costs: variable manufacturing cost per unit, $9;
fixed manufacturing costs, $60,000; variable selling and administrative costs per unit, $2; and fixed selling and
administrative costs, $220,000. The company sells its units for $45 each. Additional data follow.
Planned production in units 10,000

Actual production in units 10,000
Number of units sold 8,500
There were no variances.
21. The net income (loss) under absorption costing is:

A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
22. The net income (loss) under variable costing is:

A. $(7,500).
B. $9,000.
C. $15,000.
D. $18,000.
23. Income reported under absorption costing and variable costing is:

A. always the same.
B. typically different.
C. always higher under absorption costing.
D. always higher under variable costing.
E. always the same or higher under absorption costing.
24. Gomez's inventory increased during the year. On the basis of this information, income reported under absorption
costing:
A. will be the same as that reported under variable costing.
B. will be higher than that reported under variable costing.
C. will be lower than that reported under variable costing.
D. will differ from that reported under variable costing, the direction of which cannot be determined from the information
given.
E. will be less than that reported in the previous period.
25. Which of the following conditions would cause absorption-costing net income to be lower than variable-costing net
income?
A. Units sold exceeded units produced.
B. Units sold equaled units produced.
C. Units sold were less than units produced.
D. Sales prices decreased.
E. Selling expenses increased.
26. Which of the following situations would cause variable-costing net income to be lower than absorption-costing net
income?
A. Units sold equaled 39,000 and units produced equaled 42,000.
B. Units sold and units produced were both 42,000.
C. Units sold equaled 55,000 and units produced equaled 49,000.
D. Sales prices decreased by $7 per unit during the accounting period.
E. Selling expenses increased by 10% during the accounting period.

27. Consider the following statements about absorption- and variable-costing net income:

I. Yearly income reported under absorption costing will differ from income reported under variable costing if
production and sales volumes differ.
II. Long-run, total income reported under absorption costing will often be close to that reported under variable
costing.
III. Differences in income under absorption and variable costing can often be reconciled by multiplying the change in
inventory (in units) by the variable manufacturing overhead cost per unit.

A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
28. Which of the following formulas can often reconcile the difference between absorption- and variable-costing net
income?
A. Change in inventory units x predetermined variable-overhead rate per unit.
B. Change in inventory units ÷ predetermined variable-overhead rate per unit.
C. Change in inventory units x predetermined fixed-overhead rate per unit.
D. Change in inventory units ÷ predetermined fixed-overhead rate per unit.
E. (Absorption-costing net income - variable-costing net income) x fixed-overhead rate per unit.
29. Monex reported $65,000 of net income for the year by using absorption costing. The company had no beginning
inventory, planned and actual production of 20,000 units, and sales of 18,000 units. Standard variable
manufacturing costs were $20 per unit, and total budgeted fixed manufacturing overhead was $100,000. If there
were no variances, net income under variable costing would be:
A. $15,000.
B. $55,000.
C. $65,000.
D. $75,000.
E. $115,000.
30. Canyon reported $106,000 of net income for the year by using variable costing. The company had no beginning
inventory, planned and actual production of 50,000 units, and sales of 47,000 units. Standard variable
manufacturing costs were $15 per unit, and total budgeted fixed manufacturing overhead was $150,000. If there
were no variances, net income under absorption costing would be:
A. $52,000.
B. $97,000.
C. $106,000.
D. $115,000.
E. $160,000.
31. Consider the following statements about absorption costing and variable costing:

I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
II. Absorption costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.

A. I only.
B. II only.
C. III only.
D. I and II.
E. I, II, and III.
Answer: E LO: 5, 6 Type: RC
32. Consider the following statements about absorption costing and variable costing:

I. Variable costing is consistent with contribution reporting and cost-volume-profit analysis.
II. Variable costing must be used for external financial reporting.
III. A number of companies use both absorption costing and variable costing.

A. I only.
B. II only.
C. III only.
D. I and II.
E. I and III.
Answer: E LO: 5, 6 Type: RC
33. For external-reporting purposes, generally accepted accounting principles require that net income be based on:
A. absorption costing.
B. variable costing.
C. direct costing.
D. semivariable costing.
E. activity-based costing.
34. Under throughput costing, the cost of a unit typically includes:

A. selling costs.
B. fixed manufacturing overhead.
C. the direct costs incurred whenever a unit is manufactured.
D. administrative costs.
E. all of the above.
35. Which of the following methods defines product cost as the unit-level cost incurred each time a unit is manufactured?
A. Throughput costing.
B. Indirect costing.
C. Process costing.
D. Absorption costing.
E. Back-flush costing.
36. Orion's management recently committed to incurring direct labor and all manufacturing overhead charges regardless
of the number of units produced. Under throughput costing, the company's cost of goods sold would include
charges for:
A. selling and administrative costs.
B. direct materials.
C. direct labor and manufacturing overhead.
D. direct materials, direct labor, and manufacturing overhead.
E. direct materials, direct labor, manufacturing overhead, and selling and administrative costs.
37. Highline Company reported the following costs for the year just ended:

Throughput manufacturing costs $180,000
Non-throughput manufacturing costs 600,000
Selling and administrative costs 125,000

If Highline uses throughput costing and had sales revenues for the period of $950,000, which of the following choices
correctly depicts the company's cost of goods sold and net income?
Cost of Net
Goods Sold Income
A. $180,000 $45,000
B. $180,000 $645,000
C. $305,000 $45,000
D. $305,000 $645,000
38. The fixed-overhead volume variance under variable costing:

A. coincides with the fixed manufacturing overhead that was applied to production.
B. is deducted on the income statement.
C. does not exist.
D. will equal the fixed-overhead budget variance.
E. must be unfavorable.
39. Which of the following differs between absorption costing and variable costing?
A. The number of units produced.
B. The fixed-overhead volume variance.
C. Sales revenues.
D. The treatment of variable manufacturing overhead.
E. Income tax rates.
Characteristics of Absorption Costing and Variable Costing
40. Consider the statements that follow.
1. Variable selling costs are expensed when incurred.

2. The income statement discloses a company’s contribution margin.
3. Fixed manufacturing overhead is attached to each unit produced.
4. Direct labor becomes part of a unit’s cost.
5. Sales revenue minus cost of goods sold equals contribution margin.
6. This method must be used for external financial reporting.
7. Fixed selling and administrative expenses are treated in the same manner as fixed manufacturing overhead.
8. This method is sometimes called full costing.
9. This method requires the calculation of a fixed manufacturing cost per unit.
Required:
Determine which of the nine statements:
A. Relate only to absorption costing.
B. Relate only to variable costing.
C. Relate to both absorption costing and variable costing.
D. Relate to neither absorption costing nor variable costing.
LO: 1, 2, 3, 6 Type: RC, N
Answer:
A. 3, 6, 8, 9
B. 2, 7
C. 1, 4
D. 5
Miscellaneous Calculations: Variable and Absorption Costing
41. Information taken from Grille Corporation's May accounting records follows.

Direct labor 80,000
Variable selling and administrative costs 51,000
Sales revenues 625,000

Required:
A. Assuming the use of variable costing, compute the inventoriable costs for the month.
B. Compute the month's inventoriable costs by using absorption costing.
C. Assume that anticipated and actual production totaled 20,000 units, and that 18,000 units were sold during
May. Determine the amount of fixed manufacturing overhead and fixed selling and administrative costs that would
be expensed for the month under (1) variable costing and (2) absorption costing.
D. Assume the same data as in requirement "C." Compute the contribution margin that would be reported on a
variable-costing income statement.
LO: 1, 2, 3 Type: A
Answer:
A. Direct materials used $150,000
Direct labor 80,000
Total $260,000
B. Direct materials used $150,000

Direct labor 80,000
Total $360,000
C. 1. Fixed manufacturing overhead: $100,000

Fixed selling and administrative costs: $60,000
2. Fixed manufacturing overhead: ($100,000 ÷ 20,000 units) x 18,000 units = $90,000

Fixed selling and administrative costs: $60,000
D. Variable manufacturing costs: $150,000 + $80,000 + $30,000 = $260,000
Variable manufacturing costs per unit: $260,000 ÷ 20,000 units = $13
Contribution margin: $625,000 - [(18,000 x $13) + $51,000] = $340,000
Miscellaneous Calculations: Variable and Absorption Costing
42. Sosa, Inc., began operations at the start of the current year, having a production target of 60,000 units. Actual
production totaled 60,000 units, and the company sold 90% of its manufacturing output at $55 per unit. The
following costs were incurred:

Manufacturing:
Selling and administrative:
Variable 120,000
Fixed 630,000

Required:
A. Assuming the use of variable costing, compute the cost of Sosa's ending finished-goods inventory.
B. Compute the company's contribution margin. Would Sosa disclose the contribution margin on a variable-costing
income statement or an absorption-costing income statement?
C. Assuming the use of absorption costing, how much fixed selling and administrative cost would Sosa include in the
ending finished-goods inventory?
D. Compute the company's gross margin.
LO: 1, 2, 3 Type: RC, A
Answer:
A. Variable production costs total $1,080,000 ($300,000 + $420,000 + $360,000), or $18 per unit
($1,080,000 ÷ 60,000 units). Since 6,000 units remain in inventory [0 + 60,000 - (60,000 x 90%)],
the ending finished goods totals $108,000 (6,000 x $18).
B. Sales revenue (60,000 units x 90% x $55) $2,970,000

Less: Variable cost of goods sold
(60,000 units x 90% x $18) $972,000
Variable selling and administrative 120,000 1,092,000
Contribution margin $1,878,000
The contribution margin is disclosed on a variable-costing income statement.
C. None. All fixed selling and administrative cost is treated as a period cost and expensed against
revenue.
D. The cost of a unit would increase by $10 ($600,000 ÷ 60,000 units) because of the addition of
fixed manufacturing overhead. Thus:
Sales revenue $2,970,000

Cost of goods sold (60,000 units x 90% x $28) 1,512,000
Gross margin $1,458,000
Absorption- and Variable-Costing Income Calculations

43. The following data relate to Venture Company, a new corporation, during a period when the firm produced and sold
100,000 units and 90,000 units, respectively:

Fixed selling and administrative expenses 300,000
Variable selling and administrative expenses 45,000

The company met its original planned production target of 100,000 units. There were no variances during the period,
and the firm's selling price is $15 per unit.

Required:
A. What is the cost of Venture's end-of-period finished-goods inventory under the variable-costing method?
B. Calculate the company's variable-costing net income.
C. Calculate the company's absorption-costing net income.
LO: 1, 2, 3 Type: A
Answer:
A. Ending finished-goods inventory (units): 0 + 100,000 - 90,000 = 10,000
Inventoriable costs under variable costing:

Total $720,000
Variable cost per unit produced: $720,000 ÷ 100,000 units = $7.20 per unit
Ending inventory: 10,000 units x $7.20 = $72,000
B. Sales revenue (90,000 units x $15) $1,350,000

Less: Variable costs [(90,000 units x $7.20) + $45,000] 693,000
Contribution margin $ 657,000
Less: Fixed costs ($250,000 + $300,000) 550,000
Net income $ 107,000
C. Predetermined fixed overhead rate: $250,000 ÷ 100,000 units = $2.50

Absorption cost per unit: $7.20 + $2.50 = $9.70
Sales revenue (90,000 units x $15) $1,350,000

Less: Cost of goods sold (90,000 units x $9.70) 873,000
Gross margin $ 477,000
Less: Operating costs ($300,000 + $45,000) 345,000
Absorption- and Variable-Costing Inventory/Income Calculations
44. The following data relate to Hunter, Inc., a new company:

Planned and actual production 200,000 units
Sales at $48 per unit 170,000 units
Manufacturing costs:
Variable $18 per unit
Fixed $840,000
Variable $7 per unit
Fixed $925,000

There were no variances during the period.

Required:
A. Determine the number of units in the ending finished-goods inventory.
B. Calculate the cost of the ending finished-goods inventory under (1) variable costing and (2) absorption costing.
C. Determine the company's variable-costing net income.
D. Determine the company's absorption-costing net income.
LO: 1, 2, 3 Type: A
Answer:
A. Ending finished-goods inventory: 0 + 200,000 - 170,000 = 30,000 units
B. Variable costing: 30,000 units x $18 = $540,000

Absorption costing:
Predetermined fixed overhead rate: $840,000 ÷ 200,000 units = $4.20;
30,000 units x ($18.00 + $4.20) = $666,000
C. Sales revenue (170,000 units x $48) $8,160,000

Less: Variable costs [170,000 units x ($18 + $7)] 4,250,000
Contribution margin $3,910,000
Less: Fixed costs ($840,000 + $925,000) 1,765,000
Net income $2,145,000
D. Sales revenue (170,000 units x $48) $8,160,000

Less: Cost of goods sold [170,000 units x ($18.00 + $4.20)] 3,774,000
Less: Operating costs [(170,000 units x $7) + $925,000] 2,115,000
Net income $2,271,000
Conversion of Absorption-Cost Data to Variable-Cost Data; Working Backwards
45. Kim, Inc., began business at the start of the current year and maintains its accounting records on an absorption-cost
basis. The following selected information appeared on the company's income statement and end-of-year balance
sheet:

Income-statement data:
Sales revenues (35,000 units x $22) $770,000
Gross margin 210,000
Total sales and administrative expenses 160,000
Balance-sheet data:
Ending finished-goods inventory (12,000 units) 192,000

Kim achieved its planned production level for the year. The company's fixed manufacturing overhead totaled
$141,000, and the firm paid a 10% commission based on gross sales dollars to its sales force.

Required:
A. How many units did Kim plan to produce during the year.
B. How much fixed manufacturing overhead did the company apply to each unit produced?
C. Compute Kim's cost of goods sold.
D. How much variable cost did the company attach to each unit manufactured?
LO: 1, 2, 3 Type: A, N

Answer:
A. Sales (35,000 units) + ending finished-goods inventory (12,000 units) = production (47,000
units). Note: There is no beginning finished-goods inventory.
B. Since planned and actual production figures are the same, Kim applied $3 to each unit ($141,000
÷ 47,000 units).
C. Sales revenue $770,000

Gross margin 210,000
Cost of goods sold $560,000
D. Kim attached $13 to each unit. This figure can be derived by analyzing cost of goods sold:
Cost of goods sold $560,000

Fixed cost in cost of goods sold (35,000 units x $3) 105,000
Variable cost of goods sold $455,000
$455,000 ÷ 35,000 units = $13
The same $13 figure can be obtained by studying the ending finished-good inventory:
Ending finished-goods inventory $192,000

Fixed cost (12,000 units x $3) 36,000
Variable cost $156,000
$156,000 ÷ 12,000 units = $13
Reconciliation of Absorption- and Variable-Costing Income
46. Houston Company has per-unit fixed and variable manufacturing costs of $40 and $15, respectively. Variable selling
and administrative costs are $9 per unit. Consider the two cases that follow for the firm.

Case A: Variable-costing net income, $110,000; sales, 6,000 units; production, 6,000 units
Case B: Variable-costing net income, $178,000; sales, 7,500 units; production, 7,100 units

Required:
A. From a product-costing perspective, what is the basic difference between absorption costing and variable costing?
B. Compute Houston's absorption-costing net income in Case A.
C. Compute Houston's absorption-costing net income in Case B.
LO: 1, 4 Type: RC, A
Answer:
A. The difference between absorption costing and variable costing lies in the treatment of fixed manufacturing
overhead. Under absorption costing, fixed manufacturing overhead is a product cost and attached to each unit
produced. In contrast, under variable costing, it is written off (expensed) as a period cost.
B. Since the number of units sold equals the number of units produced, variable- and absorption-income figures are
the same: $110,000.
C. With sales of 7,500 units and production of 7,100 units, income computed under absorption costing includes
$16,000 (400 units x $40) of prior-period fixed manufacturing overhead. Absorption income is therefore $162,000
($178,000 - $16,000).
47. Beachcraft Corporation has fixed manufacturing cost of $12 per unit. Consider the three independent cases that
follow.
Case A: Absorption- and variable costing net income each totaled $240,000 in a period when the firm produced 18,000 units.
Case B: Absorption-costing net income totaled $320,000 in a period when finished-goods inventory levels rose by 7,000 units.
Case C: Absorption-costing net income and variable-costing net income respectively totaled $220,000 and $250,000 in a
period when the beginning finished-goods inventory was 14,000 units.
Required:
A. In Case A, how many units were sold during the period?
B. In Case B, how much income would Beachcraft report under variable costing?
C. In Case C, how many units were in the ending finished-goods inventory?
LO: 4 Type: A
Answer:
A. Absorption- and variable costing income will be the same amount when inventory levels are unchanged. Thus, sales
totaled 18,000 units.
B. The difference between absorption-costing income and variable-costing income is $84,000 (7,000 units x
$12). Given that inventories are rising, variable-costing net income will amount to $236,000 ($320,000 - $84,000).
C. The $30,000 difference in income ($250,000 - $220,000) is explained by the change in inventory units, multiplied by
the fixed overhead per unit. Thus, the inventory changed by 2,500 units ($30,000 ÷ $12). Given that absorption
income is less than income computed by the variable-costing method, inventory levels must have decreased,
resulting in an ending inventory level of 11,500 units (14,000 - 2,500).
Throughput Costing, Absorption Costing, Variable Costing
48. Coastal Corporation, which uses throughput costing, began operations at the start of the current year. Planned and
actual production equaled 20,000 units, and sales totaled 17,500 units at $95 per unit. Cost data for the year were
as follows:

$ 18
Direct materials (per unit)

Conversion cost:
Selling and administrative costs (total) 430,000

The company classifies direct materials as a throughput cost.

Required:
A. Compute the company's total cost for the year.
B. How much of this cost would be held in year-end inventory under (1) absorption costing, (2) variable costing, and
(3) throughput costing?
C. How much of the company's total cost for the year would appear on the period's income statement under (1)
absorption costing, (2) variable costing, and (3) throughput costing?
D. Compute the year's throughput-costing net income.
LO: 1, 2, 3, 7 Type: A, N
Answer:
A. Direct materials (20,000 units x $18) $ 360,000
Selling and administrative costs 430,000
Total $1,570,000
B. The year-end inventory of 2,500 units (20,000 - 17,500) is costed as follows:
Absorption Variable Throughput

Costing Costing Costing
Direct materials $ 360,000 $360,000 $360,000
Direct labor 160,000 160,000
Variable manufacturing overhead 280,000 280,000
Total product cost $1,140,000 $800,000 $360,000
Cost per unit (Total ÷ 20,000 units) $57 $40 $18
Year-end inventory (2,500 units x cost per unit)
$142,500 $100,000 $45,000
C. The total costs would be allocated between the current period's income statement and the
year-end inventory on the balance sheet. Thus:
Absorption costing: $1,570,000 - $142,500 = $1,427,500

Variable costing: $1,570,000 - $100,000 = $1,470,000
Throughput costing: $1,570,000 - $45,000 = $1,525,000
D. Throughput income: Sales revenue (17,500 units x $95) - $1,525,000 = $137,500
Throughput Costing
49. Krell Corporation, which uses throughput costing, began operations at the start of the current year (20x1). Planned
and actual production equaled 40,000 units, and sales totaled 35,000 units at $80 per unit. Cost data for 20x1 were
as follows:

$ 20
Direct materials (per unit)

Conversion cost:
Variable (per unit) 8
Fixed 220,000

The company classifies direct materials as a throughput cost.
Required:
A. What is meant by the term "throughput costing"?
B. Compute the cost of the company's year-end inventory.
C. Prepare Krell's income statement for the year.
LO: 1, 7 Type: RC, A
Answer:
A. Throughput costing is a technique that assigns only the unit-level spending amounts for
direct costs as the cost of products or services. In this case, direct materials is the only item
that qualifies as a throughput cost.
B. Ending inventory: 0 + 40,000 units - 35,000 units = 5,000 units; 5,000 units x $20 = $100,000
C. Krell Corporation
Throughput-Costing Income Statement
For the Year Ended December 31, 20x1
Sales revenue (35,000 units x $80) $2,800,000

Less: Cost of goods sold (35,000 units x $20) 700,000
Less: Operating costs
Direct labor $ 215,000
Variable selling and administrative costs (35,000 units x $8) 280,000
Total operating costs $1,583,000
Variable- and Absorption-Costing Income Statements, Volume Variance
50. Outdoors Company manufactures sleeping bags that sell for $30 each. The variable standard costs of production are
$19.50. Budgeted fixed manufacturing overhead is $100,000, and budgeted production is 10,000 sleeping bags. The
company actually manufactured 12,500 bags, of which 11,000 were sold. There were no variances during the year
except for the fixed-overhead volume variance. Variable selling and administrative costs are $0.50 per sleeping bag
sold; fixed selling and administrative costs are $5,000.

Required:
A. Calculate the standard product cost per sleeping bag under absorption costing and variable costing.
B. Compute the fixed-overhead volume variance.
C. Prepare income statements for the year by using absorption costing and variable costing.
LO: 2, 3, 9 Type: A
Answer:
A. The absorption cost is $29.50 [$19.50 + ($100,000 ¸ 10,000 units)], and the variable cost is $19.50.
B. Volume variance = budgeted fixed overhead - fixed overhead applied

= $100,000 - (12,500 units x $10)
= $(25,000) or $25,000F
C. Outdoors Company
Absorption-Costing Income Statement
For the Year Ended December 31, 20xx
Sales revenue (11,000 units x $30) $330,000

Less: Cost of goods sold (11,000 units x $29.50) 324,500
Gross margin (at standard) $ 5,500
Add: Fixed-overhead volume variance 25,000
Gross margin (at actual) $ 30,500
Less: Operating expenses [(11,000 units x $0.50) + $5,000] 10,500
Net income $ 20,000
Outdoors Company
Variable-Costing Income Statement
For the Year Ended December 31, 20xx
Sales revenue (11,000 units x $30) $330,000

Less: Var. cost of goods sold (11,000 units x $19.50) $214,500
Var. operating expenses (11,000 units x $0.50) 5,500 220,000
Contribution margin $110,000
Less: Fixed costs ($100,000 + $5,000) 105,000
Net income $ 5,000
Absorption Costing, Variable Costing, and Terminology
51. Absorption and variable costing are two different methods of measuring income and costing inventory.

Required:
A. Product costs are defined as costs associated with the manufacturing process. How does the operational definition
of product cost differ between absorption costing and variable costing?
B. An absorption-costing income statement will report gross profit or gross margin whereas a variable-costing income
statement will report contribution margin. What is the difference between these terms?
C. BoSan, Inc., has greatly modified its manufacturing process to reduce non-value-added activities and has also
adopted the just-in-time philosophy. As a result, the average finished-goods inventory has dropped from six weeks'
supply to eight business days' supply. In view of these changes, will the difference in operating income between
variable costing and absorption costing be greater or less than in the past? Explain.
LO: 1, 2, 3, 6 Type: RC, N
Answer:
A. The sole difference between the two methods is that fixed manufacturing overhead costs are defined as a product
cost under absorption costing and as a period cost under variable costing.
B. Gross profit (gross margin) is the difference between sales and cost of goods sold. Cost of goods sold includes
variable and fixed manufacturing costs. Contribution margin, on the other hand, is the difference between sales and
variable expenses, namely, variable cost of goods sold and variable operating expenses. Fixed costs are ignored
when calculating the contribution margin.
C. These changes should reduce the differences in operating income between absorption costing and variable
costing. Inventories of work-in-process and finished goods are much smaller than previously; thus, changes in
inventories will be much less significant, which reduces differences in income.
52. The difference in net income between absorption and variable costing can be explained by the change in finished-
goods inventory (in units) multiplied by the standard fixed manufacturing overhead rate.

Required:
Explain why this calculation accounts for the difference noted.
LO: 4 Type: RC
Answer:
The only difference between the two methods is the treatment of fixed manufacturing overhead. Such amounts are
expensed under variable costing whereas with absorption costing, a predetermined amount is attached to each unit
manufactured. This applied overhead moves back and forth between the balance sheet and the income statement
depending on what happens to inventory during the period (i.e., increase or decrease). Because of this situation,
the change in inventory multiplied by the fixed manufacturing overhead per unit corresponds with the difference in
reported income between absorption costing and variable costing.
Activity-Based Costing
1. Consider the following statements regarding traditional costing systems:

I. Overhead costs are applied to products on the basis of volume-related measures.
II. All manufacturing costs are easily traceable to the goods produced.
III. Traditional costing systems tend to distort unit manufacturing costs when numerous goods are made that have
widely varying production requirements.

A. I only.
B. II only.
C. III only.
D. I and III.
E. II and III.
2. Many traditional costing systems:

A. trace manufacturing overhead to individual activities and require the development of numerous activity-costing rates.
B. write off manufacturing overhead as an expense of the current period.
C. combine widely varying elements of overhead into a single cost pool.
D. use a host of different cost drivers (e.g., number of production setups, inspection hours, orders processed) to improve
the accuracy of product costing.
E. produce results far superior to those achieved with activity-based costing.
3. The following tasks are associated with an activity-based costing system:
1—Calculation of cost application rates

2—Identification of cost drivers
3—Assignment of cost to products
4—Identification of cost pools
Which of the following choices correctly expresses the proper order of the preceding tasks?
A. 1, 2, 3, 4.
B. 2, 4, 1, 3.
C. 3, 4, 2, 1.
D. 4, 2, 1, 3.
E. 4, 2, 3, 1.
Answer: D LO: 2, 4 Type: RC
4. Which of the following is the proper sequence of events in an activity-based costing system?
A. Identification of cost drivers, identification of cost pools, calculation of cost application rates, assignment of cost to
products.
B. Identification of cost pools, identification of cost drivers, calculation of cost application rates, assignment of cost to
products.
C. Assignment of cost to products, identification of cost pools, identification of cost drivers, calculation of cost application
rates.
D. Calculation of cost application rates, identification of cost drivers, identification of cost pools, assignment of cost to
products.
E. Some other sequence of the four activities listed above.
Answer: B LO: 2, 4 Type: RC
5. Which of the following tasks is not normally associated with an activity-based costing system?
A. Calculation of cost application rates.
B. Identification of cost pools.
C. Preparation of allocation matrices.
D. Identification of cost drivers.
E. Assignment of cost to products.
6. Which of the following is not a broad, cost classification category typically used in activity-based costing?
A. Unit-level.
B. Batch-level.
C. Product-sustaining level.
D. Facility-level.
E. Management-level.
7. In an activity-based costing system, direct materials used would typically be classified as a:
A. unit-level cost.
B. batch-level cost.
C. product-sustaining cost.
D. facility-level cost.
E. matrix-level cost.
8. Which of the following is least likely to be classified as a batch-level activity in an activity-based costing system?
A. Shipping.
B. Receiving and inspection.
C. Production setup.
D. Property taxes.
E. Quality assurance.
9. In an activity-based costing system, materials receiving would typically be classified as a:

A. unit-level activity.
B. batch-level activity.
C. product-sustaining activity.
D. facility-level activity.
E. period-level activity.
10. Foster, Inc., an appliance manufacturer, is developing a new line of ovens that uses controlled-laser technology. The
research and testing costs associated with the new ovens is said to arise from a:
A. unit-level activity.
B. batch-level activity.
C. product-sustaining activity.
D. facility-level activity.
E. competitive-level activity.
11. Consider the following statements regarding product-sustaining activities:

I. They must be done for each batch of product that is made.
II. They must be done for each unit of product that is made.
III. They are needed to support an entire product line.

A. I only.
B. II only.
C. III only.
D. I and II.
E. II and III.
12. Which of the following is least likely to be classified as a facility-level activity in an activity-based costing system?
A. Plant maintenance.
B. Property taxes.
C. Machine processing cost.
D. Plant depreciation.
E. Plant management salaries.
13. The salaries of a manufacturing plant's management are said to arise from:

A. unit-level activities.
B. batch-level activities.
C. product-sustaining activities.
D. facility-level activities.
E. direct-cost activities.
14. Which of the following choices correctly depicts a cost that arises from a batch-level activity and one that arises from
a facility-level activity?
Batch-Level Facility-Level
Activity Activity
A. Direct materials Plant depreciation
B. Inspection Property taxes
C. Quality assurance Shipping
D. Plant maintenance Insurance
E. Management salaries Material handling
15. The division of activities into unit-level, batch-level, product-sustaining level, and facility-level categories is
commonly known as a cost:
A. object.
B. application method.
C. hierarchy.
D. estimation method.
E. classification scheme that is useful in traditional, volume-based systems.
16. Alamo's customer service department follows up on customer complaints by telephone inquiry. During a recent
period, the department initiated 7,000 calls and incurred costs of $203,000. If 2,940 of these calls were for the
company's wholesale operation (the remainder were for the retail division), costs allocated to the retail division
should amount to:
A. $0.
B. $29.
C. $85,260.
D. $117,740.
E. $203,000.
Riverside Florists uses an activity-based costing system to compute the cost of making floral bouquets and delivering
the bouquets to its commercial customers. Company personnel who earn $180,000 typically perform both tasks;
other firm-wide overhead is expected to total $70,000. These costs are allocated as follows:
Bouquet Production Delivery Other

Wages and salaries 60% 30% 10%
Other overhead 50% 35% 15%
Riverside anticipates making 20,000 bouquets and 4,000 deliveries in the upcoming year.
17. The cost of wages and salaries and other overhead that would be charged to each bouquet made is:
A. $7.15.
B. $8.75.
C. $12.50.
D. $13.75.
18. The cost of wages and salaries and other overhead that would be charged to each delivery is:
A. $19.63.
B. $20.31.
C. $26.75.
D. $40.63.
HiTech Products manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The
company, which uses activity-based costing, has identified five activities (and related cost drivers). Each activity, its
budgeted cost, and related cost driver is identified below.
Activity Cost Cost Driver

Material handling $ 225,000 Number of parts
Material insertion 2,475,000 Number of parts
Automated machinery 840,000 Machine hours
Finishing 170,000 Direct labor hours
Packaging 170,000 Orders shipped
Total $3,880,000
The following information pertains to the three product lines for next year:
Economy Standard Deluxe

Units to be produced 10,000 5,000 2,000
Orders to be shipped 1,000 500 200
Number of parts per unit 10 15 25
Machine hours per unit 1 3 5
Labor hours per unit 2 2 2
19. What is HiTech's cost application rate for the material-handling activity?

A. $1.00 per part.
B. $2.25 per part.
C. $6.62 per labor hour.
D. $13.23 per part.
E. A rate other than those listed above.
20. What is HiTech's cost application rate for the automated machinery activity?
A. $24.00 per machine hour.
B. $24.50 per labor hour.
C. $49.42 per unit.
D. $50.00 per machine hour.
21. What is HiTech's cost application rate for the finishing activity?

A. $5.00 per labor hour.
B. $5.00 per machine hour.
C. $5.00 per unit.
D. $7.50 per unit.
22. What is HiTech's cost application rate for the packaging activity?

A. $4.86 per machine hour.
B. $5.00 per labor hour.
C. $10.00 per unit.
D. $100.00 per order shipped.
23. Under an activity-based costing system, what is the per-unit cost of Economy?

A. $141.
B. $164.
C. $225.
D. $228.
24. Under an activity-based costing system, what is the per-unit cost of Standard?

A. $164.
B. $228.
C. $272.
D. $282.
25. Under an activity-based costing system, what is the per-unit cost of Deluxe?

A. $272.
B. $282.
C. $320.
D. $440.
26. Assume that HiTech is using a volume-based costing system, and the preceding manufacturing costs are applied to all
products based on direct labor hours. How much of the preceding cost would be assigned to Deluxe?
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
27. Assume that HiTech is using a volume-based costing system, and the preceding manufacturing costs are applied to all
products based on direct labor hours. How much of the preceding cost would be assigned to Standard?
A. $456,471.
B. $646,471.
C. $961,176.
D. $1,141,176.
Century, Inc., currently uses traditional costing procedures, applying $400,000 of overhead to products X and Y on
the basis of direct labor hours. The firm is considering a shift to activity-based costing and the creation of individual
cost pools that will use direct labor hours (DLH), production setups (SU), and number of parts components (PC) as
cost drivers. Data on the cost pools and respective driver volumes follow.
Pool No. 1 Pool No. 2 Pool No. 3

Product (Driver: DLH) (Driver: SU) (Driver: PC)
X 600 30 1,500
Y 1,400 50 1,000
Pool Cost $80,000 $140,000 $180,000
28. The overhead cost allocated to product X by using traditional costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
29. The overhead cost allocated to product Y by using traditional costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
30. The overhead cost allocated to product X by using activity-based costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
31. The overhead cost allocated to product Y by using activity-based costing procedures would be:
A. $120,000.
B. $184,500.
C. $215,500.
D. $280,000.
Kelly and Logan, an accounting firm, provides consulting and tax planning services. A recent analysis found that 65%
of the firm's billable hours to clients resulted from tax planning and for many years, the firm's total administrative
cost (currently $250,000) has been allocated to services on this basis.
The firm, contemplating a change to activity-based costing, has identified three components of administrative cost,
as follows:
Staff support $180,000

In-house computing charges 50,000
Miscellaneous office costs 20,000
Total $250,000
A recent analysis of staff support found a strong correlation with the number of clients served (consulting, 20; tax
planning, 60). In contrast, in-house computing and miscellaneous office cost varied directly with the number of
computer hours logged and number of client transactions, respectively. Consulting consumed 30% of the firm's
computer hours and had 20% of the total client transactions.
32. Assuming the use of activity-based costing, the proper percentage to use in allocating staff support costs to tax
planning services is:
A. 20%.
B. 60%.
C. 65%.
D. 75%.
E. 80%.
33. If Kelly and Logan switched from its current accounting method to an activity-based costing system, the amount of
administrative cost chargeable to consulting services would:
A. decrease by $23,500.
B. increase by $23,500.
C. decrease by $32,500.
D. change by an amount other than those listed above.
E. change, but the amount cannot be determined based on the information presented.
Answer: A LO: 1, 4 Type: A
34. Activity-based costing systems:

A. use a single, volume-based cost driver.
B. assign overhead to products based on the products' relative usage of direct labor.
C. often reveal products that were under- or overcosted by traditional costing systems.
D. typically use fewer cost drivers than more traditional costing systems.
E. have a tendency to distort product costs.
35. Dreyfus Manufacturing sells a number of goods whose selling price is heavily influenced by cost. A recent study of
product no. 519 revealed a traditionally-derived total cost of $1,019, a selling price of $1,850 based on that figure,
and a newly computed activity-based total cost of $1,215. Which of the following statements is true?
A. All other things being equal, the company should consider a drop in its sales price.
B. The company may have been extremely competitive in the marketplace from a price perspective.
C. Product no. 519 could be labeled as being overcosted by the firm's traditional costing procedures.
D. If product no. 519 is undercosted by traditional accounting procedures, then all of the company's other products must
be undercosted as well.
E. Generally speaking, the activity-based cost figure is “less accurate” than the traditionally-derived cost figure.
36. Vanguard combines all manufacturing overhead into a single cost pool and allocates this overhead to products by
using machine hours. Activity-based costing would likely show that with Vanguard's current procedures,
A. all of the company's products are undercosted.
B. the company's high-volume products are undercosted.
C. all of the company's products are overcosted.
D. the company's high-volume products are overcosted.
E. the company's low-volume products are overcosted.
37. Jackson manufactures products X and Y, applying overhead on the basis of labor hours. X, a low-volume product,
requires a variety of complex manufacturing procedures. Y, on the other hand, is both a high-volume product and
relatively simplistic in nature. What would an activity-based costing system likely disclose about products X and Y as
a result of Jackson's current accounting procedures?
X Y
A. Undercosted Undercosted
B. Undercosted Overcosted
C. Overcosted Undercosted
D. Overcosted Overcosted
E. Costed correctly Costed correctly
38. Koski manufactures products J and K, applying overhead on the basis of labor hours. J, a low-volume product,
requires a variety of complex manufacturing procedures. K, on the other hand, is both a high-volume product and
relatively simplistic in nature. What would an activity-based costing system likely disclose about products J and K as
a result of Koski's current accounting procedures?
Undercosted Overcosted
A. J, K
B. J, K
C. J K
D. K J
E. None of the above, as both products are costed correctly.
39. Consider the following statements:

I. Product diversity creates costing problems because diverse products tend to utilize manufacturing activities in
different ways.
II. Overhead costs that are not incurred at the unit level create costing problems because such costs do not vary with
traditional application bases such as direct labor hours or machine hours.
III. Product diversity typically exists when a single product (e.g., a ballpoint pen) is made in different colors.

A. I only.
B. II only.
C. I and II.
D. I and III.
E. II and III.
40. Consumption ratios are useful in determining:

A. the existence of product-line diversity.
B. overhead that is incurred at the unit level.
C. if overhead-producing activities are being utilized effectively.
D. if overhead costs are being applied to products.
E. if overhead-producing activities are being utilized efficiently.
41. Widely varying consumption ratios:

A. are reflective of product-line diversity.
B. indicate an out-of-control production environment.
C. dictate a need for traditional costing systems.
D. work against the implementation of activity-based costing.
E. create an unsolvable product-costing problem.
42. Moon Bay Manufacturing uses machine hours to apply manufacturing overhead to products. This method of costing
would likely be acceptable if the company has:
A. a large proportion of unit-level activities.
B. a large proportion of unit-level activities and fairly identical consumption ratios among product lines.
C. a large proportion of unit-level activities and widely varying consumption ratios among product lines.
D. a large proportion of nonunit-level activities.
E. a large proportion of nonunit-level activities and fairly identical consumption ratios among product lines.
43. In comparison with a system that uses a single, volume-based cost driver, an activity-based costing system is preferred
when a company has:
A. a large proportion of nonunit-level activities.
B. product-line diversity or a large proportion of nonunit-level activities.
C. minimal product-line diversity and a small proportion of nonunit-level activities.
D. existing variances from budgeted amounts.
E. a situation other than those noted above.
44. Consider the following factors:

I. The degree of correlation between consumption of an activity and consumption of a particular cost driver.
II. The likelihood that a particular cost driver will induce a desired behavioral effect.
III. The likelihood that a particular cost driver will cause an increase in the cost of measurement.

Which of these factors should be considered in the selection of a cost driver?
A. I only.
B. I and II.
C. I and III.
D. II and III.
E. I, II, and III.
45. Which of the following activity cost pools and activity measures likely has the lowest degree of correlation?
Activity Cost Pool Activity Measure
A. Order department Number of orders processed
B. Sales management Time spent by managers in each sales territory
C. Accounts receivable processing Number of customers
D. Catering Numbers of meals served
E. Employee travel to job sites (sites are Number of employees
within 100-mile radius of company
headquarters)

46. Grossman Enterprises is converting to an activity-based costing system and needs to depict the various activities in its
manufacturing process along with the activities' relationships. Which of the following is a possible tool that the
company can use to accomplish this task?
A. Storyboards.
B. Activity relationship charts (ARCs).
C. Decision trees.
D. Simulation games.
E. Process organizers.
47. Successful adoptions of activity-based costing typically occur when companies rely heavily on:
A. finance personnel.
B. accounting personnel.
C. manufacturing personnel.
D. office personnel.
E. multidisciplinary project teams.
48. Under a traditional costing system, which of the following costs would likely be classified as indirect with respect to
the various products manufactured?
A. Plant maintenance.
B. Factory supplies.
C. Utilities.
D. Machinery depreciation.
E. All of the above would be considered indirect costs.
49. Williams Corporation is changing from a traditional costing system to an activity-based system. As a result of this
action, which of the following costs would likely change from indirect to direct?
A. Direct materials.
B. Factory supplies.
C. Production setup.
D. Production setup and finished-goods inspection.
E. Production setup, finished-goods inspection, and product shipping.
50. Which of the following generally fails to signal the need for a new product-costing system?
A. Line managers do not believe reported product costs.
B. Complex products have high reported profitability despite the lack of premium prices.
C. Overhead rates are high and increasing over time.
D. Line managers suggest that seemingly profitable products be dropped.
E. Product-line profit margins are easy to explain.
51. Of the following organizations, activity-based costing cannot be used by:

A. manufacturers.
B. financial-services firms.
C. book publishers.
D. hotels.
E. none of the above, as all are able to use this costing system.
52. Which of the following statements about activity-based costing (ABC) is false?

A. ABC cannot be used by service businesses.
B. In comparison with traditional costing systems, ABC tends to use more cost pools and more cost drivers.
C. In comparison with traditional-costing systems, ABC results in less cost “averaging” of various diversified activities.
D. In comparison with traditional-costing systems, ABC results in more costs being classified as direct costs.
E. ABC tends to reduce cost distortion among product lines.
53. A hospital administrator is in the process of implementing an activity-based-costing system. Which of the following
tasks would not be part of this process?
A. Identification of cost pools.
B. Calculation of cost application rates.
C. Assignment of cost to services provided.
D. Identification of cost drivers.
E. None of the above, as all these tasks would be part of the process.
Classification of Activities
54. St. Helena Cellars produces wine in northern California. Consider the following selected costs that arose during the
current year:

1. Safety costs at winery
2. Truckload shipping costs
3. Building maintenance costs
4. Bottle and cork cost
5. Development cost of new, after-dinner wine
6. Tasting and testing costs

Required:
A. Briefly distinguish between unit-level and product-sustaining activities.
B. Classify the six costs listed as arising from a unit-level, batch-level, product-sustaining, or facility-level activity.
LO: 3 Type: RC, N
Answer:
A. A unit-level activity is performed for each unit of production. In contrast, a product-sustaining
activity is needed to support an entire product line. The latter is not necessarily performed
each time a new unit or batch of products is manufactured.
B. 1. Facility-level
2. Batch-level
3. Facility-level
4. Unit-level
5. Product-sustaining
6. Batch-level
Classification of Activities
55. Consider the following costs that relate to a bank and a manufacturer of software:

Bank
1. Review cost of commercial loan applications
2. Operating cost of human resources department
3. Immediate processing cost of a specific customer's cash deposit
4. Bank membership cost of joining local Chamber of Commerce
Software manufacturer
5. Label and packaging charges from a commercial printer for a new software release
6. Air conditioning/heating costs of the firm's production plant
7. Transport cost of moving the CD-output from production run no. 1 to the company's warehouse
8. Design, development, and coding cost of new spreadsheet software

Required:
A. Classify the eight costs listed as arising from either a unit-level, batch-level, product-sustaining, or facility-level
activity.
B. Would number of loan applications or number of customers be a more appropriate cost-driver base for the review
of loan applications? Briefly explain.
Answer:
A. 1. Unit-level 5. Product-sustaining
2. Facility-level 6. Facility-level
3. Unit-level 7. Batch-level
4. Facility-level 8. Product-sustaining
B. The number of loan applications would be more appropriate because it has a higher correlation with the
amount of review cost incurred. Applications create review cost; customers, on the other hand, may not.
56. Alexander Corporation produces flat-screen computer monitors. Consider the following selected costs that arose
during the current year:

1. Direct materials used: $3,640,000
2. Plant rent, utilities, and taxes: $1,229,000
3. New technology design engineering: $2,040,000
4. Materials receiving: $318,000
5. Manufacturing-run/set-up charges: $115,000
6. Equipment depreciation: $92,000
7. General management salaries: $1,564,000
Required:
A. Briefly distinguish between batch-level and facility-level activities.
B. Determine the cost of the firm's unit-level, batch-level, product-sustaining, and facility-level activities.
LO: 3 Type: RC, N, A
Answer:
A. A batch-level activity is performed for each batch of products rather than for each unit. In contrast, a facility-level
activity is required for an entire process to occur. Examples of the latter, which support the organization as a whole,
include plant maintenance and property taxes.
B. Unit-level: $3,640,000 (1)

Batch-level: $318,000 (4) + $115,000 (5) = $433,000
Product-sustaining: $2,040,000 (3)
Facility-level: $1,229,000 (2) + $92,000 (6) + $1,564,000 (7) = $2,885,000
Activity-Based Costing, Traditional Costing
57. The controller for Wolfe Machining has established the following overhead cost pools and cost drivers:

Budgeted
Overhead Cost Pool Overhead Cost Cost Driver
Machine setups $240,000 Number of setups
Material handling 90,000 Units of raw material
Quality control inspection 48,000 Number of inspections
Other overhead costs 160,000 Machine hours
Total $538,000
Budgeted Level
Overhead Cost Pool for Cost Driver Overhead Rate
Machine setups 200 setups $1,200 per setup
Material handling 60,000 units $1.50 per unit
Quality control 1,200 inspections $40 per inspection
Other overhead 20,000 machine hours $8 per machine hour
Order no. 715 has the following production requirements:
Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850

Required:
A. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
B. Suppose that Wolfe were to use a single, predetermined overhead rate based on machine hours. Compute the rate
per hour and the total overhead assigned to order no. 715.
C. Discuss the merits of an activity-based costing system in comparison with a traditional costing system.
LO: 1, 4, 5 Type: A, N
Answer:
A. Predetermined Level of
Overhead Cost Pool Overhead Rate Cost Driver Cost
Machine setups $1,200 per setup 7 setups $ 8,400
Material handling $1.50 per unit 11,200 units 16,800
Quality control $40 per inspection 16 inspections 640
Other overhead costs $8 per machine hour 850 machine hours 6,800
Total $32,640
B $538,000 ¸ 20,000 machine hours = $26.90 per hour;

$26.90 per hour x 850 hours = $22,865
C. Activity-based costing (ABC) uses multiple cost drivers, more closely aligning individual costs
with the factors that are creating them. Traditional systems, in contrast, use fewer drivers and
therefore result in “lumping” of unlike activities together. The end result is that ABC tends to
eliminate the cost distortion that sometimes arises with traditional systems, more specifically,
the under- or overcosting of products.

Activity-Based Costing: Analysis Emphasis
61. Lennox Industries manufactures two products: A and B. A review of the company's accounting records revealed the
following per-unit costs and production volumes:

A B
Production volume (units) 2,500 5,000
Direct material $ 40 $ 60
Direct labor:
2 hours at $12 24
3 hours at $12 36
Manufacturing overhead:
2 hours at $93 186
3 hours at $93 279

Manufacturing overhead is currently computed by spreading overhead of $1,860,000 over 20,000 direct labor
hours. Management is considering a shift to activity-based costing in an effort to improve the firm's accounting
procedures, and the following data are available:

Cost Driver Volume
Cost Pool Cost Cost Driver A B Total
Setups $ 240,000 Number of setups 100 20 120
General factory 1,500,000 Direct labor hours 5,000 15,000 20,000
Machine processing 120,000 Machine hours 2,200 800 3,000
$1,860,000

Lennox determines selling prices by adding 40% to a product's total cost.

Required:
A. Compute the per-unit cost and selling price of product B by using Lennox's current costing procedures.
B. Compute B's per-unit overhead cost of product B if the company switches to activity-based costing.
C. Compute the total per-unit cost and selling price under activity-based costing.
D. Lennox has recently encountered significant international competition for product B, with considerable business
being lost to very aggressive suppliers. Will activity-based costing allow the company to be more competitive with
product B from a price perspective? Briefly explain.
E. Will the cost and selling price of product A likely increase or decrease if Lennox changes to activity-based
costing? Why? Hint: No calculations are necessary.
LO: 1, 4, 5 Type: A, N
Answer:
A. Direct material $ 60
Direct labor 36
Manufacturing overhead 279
Per-unit cost $375
Markup ($375 x 40%) 150
Selling price $525
B. Setups: $240,000 ÷ 120 setups = $2,000 per setup

General factory: $1,500,000 ÷ 20,000 direct labor hours = $75 per direct labor hour
Machine processing: $120,000 ÷ 3,000 machine hours = $40 per machine hour
Overhead cost for product B:

Setups: 20 setups x $2,000 $ 40,000
General factory: 15,000 labor hours x $75 1,125,000
Machine processing: 800 machine hours x $40 32,000
Total $1,197,000
Overhead per unit: $1,197,000 ÷ 5,000 units = $239.40
C. Direct material $ 60.00

Direct labor 36.00
Manufacturing overhead 239.40
Per-unit cost $335.40
Markup ($335.40 x 40%) 134.16
Selling price $469.56
D. Yes. The switch to activity-based costing results in a lower cost being assigned to product B ($335.40
vs. $375) and thus a lower selling price.
E. Because less overhead cost is assigned to product B under activity-based costing, more will be
assigned to product A. A higher cost translates into a higher selling price.
Activity-Based and Traditional Costing; Cost Distortion
62. Scott, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor
hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000
hours, respectively. Information about the company's products follows.

Regular—
Estimated production volume: 3,000 units
Direct materials cost: $28 per unit
Direct labor per unit: 3 hours at $15 per hour
Deluxe—
Estimated production volume: 4,000 units
Direct materials cost: $42 per unit
Direct labor per unit: 4 hours at $15 per hour
Scott's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine
processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders
processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.

Orders Machine Inspection
Processed Hours Worked Hours
Regular 320 16,000 4,000
Deluxe 180 24,000 6,000
Total 500 40,000 10,000

Required:
A. Compute the application rates that would be used for order processing, machine processing, and product inspection
in an activity-based costing system.
B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the
expected manufacturing volume is attained.
C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and
applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this
procedure? Overcosted?
LO: 1, 4, 5 Type: A, N
Answer:
A. Order processing: $250,000 ÷ 500 orders processed (OP) = $500 per OP
Machine processing: $1,200,000 ÷ 40,000 machine hours (MH) = $30 per MH
Product inspection: $150,000 ÷ 10,000 inspection hours (IH) = $15 per IH
B. Activity Regular Deluxe

Order processing:
320 OP x $500 $160,000
180 OP x $500 $ 90,000
Machine processing:
16,000 MH x $30 480,000
24,000 MH x $30 720,000
Product inspection:
4,000 IH x $15 60,000
6,000 IH x $15 90,000
Total $700,000 $900,000
Production volume (units) 3,000 4,000
Cost per unit $233.33* $225.00**
* $700,000 ÷ 3,000 units = $233.33

**$900,000 ÷ 4,000 units = $225.00
The cost of a Regular unit is $306.33, and the cost of a Deluxe unit is $327.00:
Regular Deluxe
Direct materials $ 28.00 $ 42.00

Direct labor:
3 hours x $15 45.00
4 hours x $15 60.00
Order processing, machine processing, and inspection 233.33 225.00
Total cost $306.33 $327.00
C. Overhead rate: $1,600,000 ÷ 25,000 direct labor hours (DLH) = $64 per DLH
Regular: 3 hours x $64 = $192
Deluxe: 4 hours x $64 = $256
Regular is undercosted by this procedure, as the more accurate ABC figure is $233.33. In contrast, Deluxe
is overcosted because the ABC figure for overhead amounts to only $225.
Activity-Based Costing: Service Application
64. Heartland Bank & Trust operates in a very competitive marketplace, using a traditional labor-hour-based system to
determine the cost of processing its mortgage loans. Recently, the firm explored a switch to activity-based costing
to determine the accuracy of its previous ways. The following information is available:
Activity Cost Driver Driver Units

Application processing $ 900,000 Applications 4,000
Loan underwriting 800,000 Underwriting hours 16,000
Loan closure 880,000 Legal hours 8,000
Total $2,580,000
Two loan applications were originated and closed during the year. No. 7439 consumed 3.5 hours in loan
underwriting and 1.5 hours in loan closure, for a total of 5.0 hours. No. 7809 also required 5.0 hours of time,
subdivided as follows: 2.0 hours in loan underwriting and 3.0 hours in loan closure.
Required:
A. Use an activity-based-costing system and determine the cost of processing, underwriting, and closing the two loan
applications.
B. Determine the cost of processing the two loans if Heartland uses the traditional labor-hour-based
system. Conversations with management found that, on average, each application took nine labor hours of
processing time, excluding underwriting and closure.
C. Is Heartland making a mistake by continuing to use a traditional system that is based on an average labor cost per
hour? Why?
LO: 5, 8 Type: A, N
Answer:
A. Cost pool rates:
Application processing: $900,000 ÷ 4,000 = $225 per application
Loan underwriting: $800,000 ÷ 16,000 = $50 per underwriting hour
Loan closure: $880,000 ÷ 8,000 = $110 per legal hour
Application no. 7439: Application ($225) + underwriting (3.5 x $50 = $175) + closure (1.5 x $110 = $165) = $565
Application no. 7809: Application ($225) + underwriting (2.0 x $50 = $100) + closure (3.0 x $110 = $330) = $655
B. Total labor hours: Application processing (4,000 x 9 = 36,000) + underwriting (16,000) + closure (8,000) = 60,000
Average rate per hour: $2,580,000 ÷ 60,000 = $43 per hour
Application no. 7439: (9 + 5) x $43 = $602
Application no. 7809: (9 + 5) x $43 = $602
C. Yes. The traditional system results in an average cost per hour of $43; yet, Heartland’s hourly charges vary greatly
based on the function being performed. Rates range from $25 per hour ($225 ÷ 9) for application processing, to $50
per hour for underwriting, to $110 for legal services. ABC produces a more accurate determination of cost because
three separate drivers are used rather than just one.
Effect of Environment on Product-Costing System
66. At a recent professional meeting, two controllers discussed product-costing problems in their respective
companies. Both controllers are familiar with ABC systems, but neither of their firms utilizes such a system.

Controller D reported that part of the problem in his firm results from major differences among product lines with
respect to unit volume, utilization of activities, quality assurance requirements established by customers, and
product size. Controller M noted that in her firm, which manufactures consumer goods, all items undergo the same
basic production processes in the same sequence. However, lately there has been a significant increase in the
number of item colors.

Cost Drivers
67. Define the term "cost driver" and discuss the factors that are important in the selection of appropriate cost drivers.
LO: 6 Type: RC
Answer:
A cost driver is an event or activity that results in the incurrence of costs. For example, many of the costs in an
automated environment are created by the operation of machines, and machine hours may be a suitable cost driver
for overhead application.
The first factor important in the selection of cost drivers is the degree of correlation (i.e., relationship) among the
driver, the activity, and the cost. This relationship is crucial to achieve credibility and accuracy. Another factor is the
cost of measurement. Cost/benefit tradeoffs must be taken into account. The system should contain drivers that
identify key costs but if too many drivers are used, the system will be burdensome and expensive. Behavioral
effects must also be considered in identifying cost drivers. Such effects may influence the behavior of decision
makers, which could be good or bad depending on the outcome.
END

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THEORY OF ACCOUNTS

1. Which of the following statements is false?

6. Which of the following is a current asset?

10. In determining the cost of goods sold:

15. Which of the following is the incorrect statement?

16. Which of the following is false?

17. Which of the following is incorrect?

18. Select the incorrect statement.

19. Which of the following is the incorrect statement?

(c) The noncurrent asset or disposal group is to be abandoned.

(b) The gain shall not be recognized.

(d) The gain shall be recognized but only in retained earnings.

(b) Other noncurrent asset

(d) Property, plant and equipment

(c) At carrying amount

(d) In accordance with applicable PFRS

(b) The higher of its carrying amount and its recoverable amount

28. The following statements relate to the term “profit”.

29. Which of the following is not true of a subsidiary ledger?

30. The purpose of trial balance is to:

31. The closing entry for sales discounts is:

34. Which of the following statements is true?

36. Consider the following:

37. The historical cost concept measures assets on the basis of:

38. In financial accounting, gains may be defined as:

47. The double-entry system of accounting means that every transaction:

51. Which of the following is the correct statement?

53. Which of the following is the incorrect statement?

54. Which of the following is true?

56. Which of the following is the correct statement?

58. When a portion of inventories has been pledged as security on a loan:

68. Which is not an essential characteristic of an accounting liability?

69. Current liabilities include:

71. Which will demonstrate an agreement to refinance (choose the incorrect one)?

73. Which is not a characteristic of an intangible asset?

74. Which is not unidentifiable intangible asset?

76. Intangible assets should be carried (benchmark treatment):

78. Choose the correct statement.

79. Which of the following statements is false?

80. Which of the following statement is true?

82. Which of the following statement is correct?

83. Which of the following equations is not true?

86. The double-entry system of accounting means that every transaction:

90. Increase in net assets may result from:

91. Which of the following statements is false?

98) When EPS is computed, dividends on preferred stock are

102) Potential ordinary shares do not include

118) Which of the following should be reported as a stockholder equity account?

123) Liabilities and stockholders’ equity are similar in that

125) What is the most likely effect of a share split down?

130) The deferred tax expense is the

133) Which of the following could never be subject to interperiod tax allocation?

134) A temporary difference which would result in deferred tax asset is

136) When a temporary difference will result in taxable amounts in 5 years

138) Income tax expense is computed based on

140) Which of the following differences would result in future taxable amounts?

142) What is measured by the accumulated benefit obligation?

147) The vested benefits:

148) Any transition loss on first adopting PAS 19 shall be recognized:

Multiple Choice Questions

1. Product costing in a manufacturing firm is the process of:

Answer: D LO: 1 Type: RC

2. Which of the following statements is true?