MANAGEMENT ACCOUNTING

Midterm Test (time: 60’)

Name: Student ID: Class:

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Part 1: Multiple choice questions:

1. Departmental overhead rates may not correctly assign overhead costs due to: 

A. the use of direct labor hours in allocating overhead costs to products rather than machine time or quantity of
materials used.
B. the high correlation between direct labor-hours and the incurrence of overhead costs.
C. overreliance on volume as a basis for allocating overhead costs where products differ regarding the number
of units produced, lot size, or complexity of production.
D. difficulties associated with identifying cost pools for the first stage of the allocation process.

2. Which of the following statements about product costs is true? 

A. Product costs are deducted from revenue when the production process is completed.
B. Product costs are deducted from revenue as expenditures are made.
C. Product costs associated with unsold finished goods and work in process appear on the balance sheet as
assets.
D. Product costs appear on financial statements only when products are sold.

3. The following inventory balances relate to Komiza Manufacturing Corporation at the beginning and end of
the year:

   

Komiza's cost of goods available for sale was $622,000. What was Komiza's cost of goods manufactured? 
A. $581,000
B. $615,000
C. $629,000
D. $663,000

4. Avery Co. uses a predetermined overhead rate based on direct labor-hours to apply manufacturing overhead
to jobs. For the month of October, Avery's estimated manufacturing overhead cost was $300,000 based on an
estimated activity level of 100,000 direct labor-hours. Actual overhead amounted to $325,000 with actual direct
labor-hours totaling 110,000 for the month. How much was the overapplied or underapplied overhead? 

A. $25,000 overapplied
B. $25,000 underapplied

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C. $5,000 overapplied

 5. Huang Aerospace Corporation manufactures aviation control panels in two departments, Fabrication and
Assembly. In the Fabrication department, Huang uses a predetermined overhead rate of $30 per machine-hour.
In the Assembly department, Huang uses a predetermined overhead rate of $12 per direct labor-hour. During the
current year, Job #X2984 incurred the following number of hours in each department:

   

What is the total amount of manufacturing overhead that Huang should have applied to Job #X2984 during the
current year? 
A. $1,200
B. $1,500
C. $1,560
D. $1,734

6. Materials used in the operation of a factory, such as cleaning supplies, that are not an integral part of the final
product should be classified as: 
A. direct materials.
B. a period cost.
C. administrative expense.
D. manufacturing overhead.

7. Routsong Company had the following sales and production data for the past four years:

   

Selling price per unit, variable cost per unit, and total fixed cost are the same in each year. Which of the
following statements is not correct? 
A. Under variable costing, net operating income for Year 1 and Year 2 would be the same.

B. Because of the changes in production levels, under variable costing the unit product cost will change each
year.

C. The total net operating income for all four years combined would be the same under variable and absorption
costing.

D. Under absorption costing, net operating income in Year 4 would be less than the net operating income in
Year 2.
 

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8. E.D. Manufacturing, Inc. produces and sells ice skates. The current net operating income is $40,000, with a
degree of operating leverage of 3. If sales increase by 10%, how much total net operating income should be
expected? 
A. $12,000
B. $52,000
C. $44,000
D. None of these.
 
9. Clayton Company produces a single product. Last year, the company's variable production costs totaled
$8,000 and its fixed manufacturing overhead costs totaled $4,800. The company produced 4,000 units during
the year and sold 3,600 units. Assuming no units in the beginning inventory: 

A. under variable costing, the units in ending inventory will be costed at $3.20 each.

B. the net operating income under absorption costing for the year will be $480 lower than net operating income
under variable costing.

C. the ending inventory under variable costing will be $480 lower than the ending inventory under absorption
costing.

D. the net operating income under absorption costing for the year will be $800 lower than net operating income
under variable costing.

10. At the beginning of June, Varetoni Manufacturing Company had a $320 balance in its Work in Process
inventory account. At the end of June, Varetoni's Work in Process inventory account had a balance of $970.
During June, Varetoni made the following journal entries:

   

Based on the information above, what is Varetoni's cost of goods manufactured for June? 
A. $5,180
B. $5,510bm
C. $6,160
D. $6,480

Part 2: Alam Company is a manufacturing firm that uses job-order costing. At the beginning of the year, the
company's inventory balances were as follows:

   
The company applies overhead to jobs using a predetermined overhead rate based on machine-hours. At the
beginning of the year, the company estimated that it would work 45,000 machine-hours and incur $180,000 in
manufacturing overhead cost. The following transactions were recorded for the year:
a. Raw materials were purchased, $416,000.
b. Raw materials were requisitioned for use in production, $420,000 ($380,000 direct and $40,000 indirect).
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c. The following employee costs were incurred: direct labor, $414,000; indirect labor, $60,000; and
administrative salaries, $212,000.
d. Selling costs, $141,000.
e. Factory utility costs, $20,000.
f. Depreciation for the year was $81,000 of which $73,000 is related to factory operations and $8,000 is related
to selling, general, and administrative activities.
g. Manufacturing overhead was applied to jobs. The actual level of activity for the year was 48,000 machine-
hours.
h. The cost of goods manufactured for the year was $1,004,000.
i. Sales for the year totaled $1,416,000 and the costs on the job cost sheets of the goods that were sold totaled
$989,000.
j. The balance in the Manufacturing Overhead account was closed out to Cost of Goods Sold.

Required:
Prepare the appropriate journal entry for each of the items above (a. through j.). You can assume that all
transactions with employees, customers, and suppliers were conducted in cash. 

Part 3.
Data concerning Tietz Corporation's single product appear below:

   

Fixed expenses are $1,044,000 per month. The company is currently selling 9,000 units per month.

Required:

The marketing manager would like to introduce sales commissions as an incentive for the sales staff. The
marketing manager has proposed a commission of $14 per unit. In exchange, the sales staff would accept an
overall decrease in their salaries of $110,000 per month. The marketing manager predicts that introducing this
sales incentive would increase monthly sales by 400 units. What should be the overall effect on the company's
monthly net operating income of this change? Show your work! 

Part 4:

In all respects, Company A and Company B are identical except that Company A’s costs are mostly variable,
whereas Company B’s costs are mostly fixed. When sale increase, which company will tend to realize the
greatest increase in profits? Explain

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