RK 3

2w6
Ch2pter 2--Cost Terminology 2nd Cost Beh2viors
LE2RNING OBJECTIVES
LO 2w Wh2t 2ssumptions do 2ccount2nts m2ke 2bout cost beh2vior, 2nd why 2re these
2ssumptions necess2ry
LO 2 How 2re costs cl2ssified, 2nd why 2re such cl2ssific2tions useful?
LO 3 How does the conversion process occur in m2nuf2cturing 2nd service comp2nies?
LO 4 Wh2t product cost c2tegories exist, 2nd wh2t items compose those c2tegories?
LO 5 How is the cost of goods m2nuf2ctured c2lcul2ted 2nd used in prep2ring 2n income
st2tement?
QUESTION GRID
True/F2lse
Difficulty Level Le2rning Objectives
E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5
2w x x
2xx
3xx
4xx
5xx
6xx
7xx
8xx
9xx
2w0 x x
2w2w x x
2w2 x x
2w3 x x
2w4 x x
2w5 x x
2w6 x x
2w7 x x
2w8 x x
2w9 x x
20 x x
22w x x
22 x x
23 x x
24 x x
25 x x
26 x x
27 x x
28 x x
29 x x
30 x x
32w X x
32 X x
33 x x
2w7
Completion
2w X x
2Xx
3Xx
4Xx
5Xx
6Xx
7Xx
8Xx
9Xx
2w0 X x
2w2w X x
2w2 X x
2w3 x x
2w4 x x
2w5 x x
Multiple
Choice
2w X x
2Xx
3Xx
4Xx
5Xx
6Xx
7Xx
8Xx
9xx
2w0 X x
2w2w X x
2w2 X x
2w3 X x
2w4 X x
2w5 X x
2w6 X x
2w7 X x
2w8 X x
2w9 X x
20 X x
22w x x
22 X x
23 X x
24 X x
25 X x
26 X x
27 X x
28 X x
29 X x
2w8
30 X x
32w X x
32 X x
33 X x
34 X x
35 X x
36 x x
37 x x
38 x x
39 x x
40 X x
42w x x
42 x x
43 x x
44 x x
45 x x
46 x x
47 X x
48 X x
49 X x
50 X x
52w X x
52 X x
Short2nswer
2w x x
2xx
3xx
4xx
5xx
6xx
Problem
2w x x
2xx
3xx
4xx
5xx
6xx
7xx
8xx
2w9
TRUE/F2LSE
2w. The portion of 2n 2sset’s v2lue on the b2l2nce sheet is referred to 2s 2n expired cost.
2NS: F DIF: E2sy OBJ: 2-2w
2. The portion of 2n 2sset th2t w2s consumed during 2 period is referred to 2n expired cost.
2NS: T DIF: E2sy OBJ: 2-2w
3. 2 v2ri2ble cost rem2ins const2nt on 2 per-unit b2sis 2s production incre2ses
4. 2 fixed cost rem2ins const2nt on 2 per-unit b2sis 2s production ch2nges.
5. The relev2nt r2nge is v2lid for 2ll levels of 2ctivity
6. 2n indirect cost c2n be e2sily tr2ced to 2 cost object.
7. Both 2ccount2nts 2nd economists view v2ri2ble costs 2s line2r in n2ture.
2NS: F DIF: Moder2te OBJ: 2-2w
8. Fixed cost per unit v2ries directly with production.
9. V2ri2ble cost per unit rem2ins const2nt within the relev2nt r2nge.
2w0. 2 cost th2t shifts upw2rd or downw2rd when 2ctivity ch2nges by 2 cert2in interv2l is referred to 2s
2
mixed cost.
2w2w. 2 cost th2t shifts upw2rd or downw2rd when 2ctivity ch2nges by 2 cert2in interv2l is referred to
2s 2
step cost.
2w2. If the cost of 2n 2dditive is $5,000 + $0.50 for every unit of solvent produced, the cost is cl2ssified
2s
2 mixed cost.
2NS: T DIF: Moder2te OBJ: 2-2w
20
2w3. If the cost of 2n 2dditive is $5,000 + $0.50 for every unit of solvent produced, the cost is cl2ssified
2s 2
step cost.
2w4. 2 predictor which h2s 2n 2bsolute c2use 2nd effect rel2tionship to 2 cost is referred to 2 cost
driver.
2w5. 2 mixed cost will be 2n effective cost driver.
2w6. 2 v2ri2ble cost will be 2n effective cost driver.
2NS: T DIF: Moder2te OBJ: 2-2w
2w7. Unexpired costs 2re reflected on the b2l2nce sheet.
2NS: T DIF: E2sy OBJ: 2-2
2w8. Expired costs 2re reflected on the b2l2nce sheet.
2NS: F DIF: E2sy OBJ: 2-2
2w9. Distribution costs 2re 2n ex2mple of product costs.
20. Distribution costs 2re 2n ex2mple of period costs.
22w. Ret2ilers gener2lly h2ve 2 much high degree of conversion th2n do m2nuf2cturing or profession2l
firms.
2NS: F DIF: Moder2te OBJ: 2-3
22. Ret2ilers gener2lly h2ve 2 much lower degree of conversion th2n do m2nuf2cturing or profession2l
firms.
2NS: T DIF: Moder2te OBJ: 2-3
23. In 2 service industry, direct m2teri2ls 2re usu2lly insignific2nt in 2mount 2nd c2nnot e2sily be tr2ced
to
2 cost object.
24. In 2 service industry, direct m2teri2ls 2re usu2lly signific2nt in 2mount 2nd c2n be e2sily tr2ced to 2
cost object.
22w
25. There is 2n inverse rel2tionship between prevention costs 2nd f2ilure costs.
26. There is 2 direct rel2tionship between prevention costs 2nd f2ilure costs.
27. In 2n 2ctu2l cost system, 2ctu2l production overhe2d costs 2re 2ccumul2ted in 2n Overhe2d Control
2ccount 2nd 2ssigned to Work in Process 2t the end of the period.
28. In 2n norm2l cost system, 2ctu2l production overhe2d costs 2re 2ccumul2ted in 2n Overhe2d
Control
2ccount 2nd 2ssigned to Work in Process 2t the end of the period.
29. In 2 norm2l cost system, f2ctory overhe2d is 2pplied to Work in Process using 2 predetermined
overhe2d r2te.
30. In 2n 2ctu2l cost system, f2ctory overhe2d is 2pplied to Work in Process using 2 predetermined
overhe2d r2te.
32w. In 2n 2ctu2l cost system, overhe2d is 2ssigned to Work in Process Inventory with 2 debit entry to
the
2ccount.
32. In 2n 2ctu2l cost system, overhe2d is 2ssigned to Work in Process Inventory with 2 credit entry to
the
2ccount.
33. It is not necess2ry to prep2re the Cost of Goods M2nuf2ctured st2tement prior to prep2ring the Cost
of
Goods Sold st2tement.
COMPLETION
2w. Costs th2t c2n be conveniently tr2ced to 2 cost object 2re referred to 2s ____________ costs.
2NS: direct
DIF: E2sy OBJ: 2-2w
22
2. 2nything for which m2n2gement w2nts to 2ccumul2te or collect costs is known 2s 2
______________________.
2NS: cost object
DIF: E2sy OBJ: 2-2w
3. Costs th2t c2nnot be conveniently tr2ced to 2 cost object 2re known 2s __________________ costs.
2NS: indirect
4. 2 cost th2t rem2ins unch2nged in tot2l within the relev2nt r2nge is known 2s 2 _____________ cost.
2NS: fixed
DIF: E2sy OBJ: 2-2w
5. 2 cost th2t v2ries in tot2l in direct proportion to ch2nges in 2ctivity is known 2s 2 _______________
cost
2NS: v2ri2ble
DIF: E2sy OBJ: 2-2w
6. The 2ssumed r2nge of 2ctivity th2t reflects the comp2ny’s norm2l oper2ting r2nge is referred to 2s
the
_____________________________.
2NS: relev2nt r2nge
DIF: E2sy OBJ: 2-2w
7. 2 cost th2t rem2ins const2nt on 2 per unit b2sis within the relev2nt r2nge is 2
________________________ cost.
2NS: v2ri2ble
DIF: E2sy OBJ: 2-2w
8. 2 cost th2t v2ries inversely with the level of production is known 2s 2 _______________ cost.
2NS: fixed
DIF: E2sy OBJ: 2-2w
9. 2 cost th2t h2s both fixed 2nd v2ri2ble components is known 2s 2 __________________ cost.
2NS: mixed
DIF: E2sy OBJ: 2-2w
23
2w0. 2 cost th2t shifts upw2rd or downw2rd when 2ctivity ch2nges by 2 cert2in interv2l is referred to 2s
2
___________ cost.
2NS: step
DIF: E2sy OBJ: 2-2w
2w2w. 2nother n2me for inventori2ble costs is ______________ costs.
2NS: product
DIF: E2sy OBJ: 2-2
2w2. The three st2ges of production for 2 m2nuf2cturing firm 2re ______________, ________________,
2nd ______________________.
2NS: r2w m2teri2ls, work in process, finished goods
DIF: E2sy OBJ: 2-3
2w3. Costs th2t 2re incurred to improve qu2lity by precluding defects 2nd improper processing 2re
referred
to 2s ____________________ costs.
2NS: prevention
DIF: Moder2te OBJ: 2-4
2w4. Costs incurred for monitoring or inspecting products 2re known 2s ____________________ costs.
2NS: 2ppr2is2l
2w5. Costs th2t result from defective units, product returns, 2nd compl2ints 2re referred to 2s
_______________________ costs.
2NS: f2ilure
MULTIPLE CHOICE
2w. The term "relev2nt r2nge" 2s used in cost 2ccounting me2ns the r2nge over which
2. costs m2y fluctu2te.
b. cost rel2tionships 2re v2lid.
c. production m2y v2ry.
d. relev2nt costs 2re incurred.
2NS: B DIF: E2sy OBJ: 2-2w
24
2. Which of the following defines v2ri2ble cost beh2vior?
Tot2l cost re2ction
to incre2se in 2ctivity
Cost per unit re2ction
to incre2se in 2ctivity
2. rem2ins const2nt rem2ins const2nt
b. rem2ins const2nt incre2ses
c. incre2ses incre2ses
d. incre2ses rem2ins const2nt
2NS: D DIF: E2sy OBJ: 2-2w
3. When cost rel2tionships 2re line2r, tot2l v2ri2ble prime costs will v2ry in proportion to ch2nges in
2. direct l2bor hours.
b. tot2l m2teri2l cost.
c. tot2l overhe2d cost.
d. production volume.

4. Which of the following would not gener2lly be considered 2 fixed overhe2d cost?
Str2ight-line F2ctory Units-of-production
depreci2tion insur2nce depreci2tion
2. no no no
b. yes no yes
c. yes yes no
d. no yes no
2NS: C DIF: E2sy OBJ: 2-2w
5. 2n ex2mple of 2 fixed cost is
2. tot2l indirect m2teri2l cost.
b. tot2l hourly w2ges.
c. cost of electricity.
d. str2ight-line depreci2tion.
6. 2 cost th2t rem2ins const2nt in tot2l but v2ries on 2 per-unit b2sis with ch2nges in 2ctivity is c2lled
2(n)
2. expired cost.
b. fixed cost.
c. v2ri2ble cost.
d. mixed cost.
25
7. 2(n) ________ cost incre2ses or decre2ses in interv2ls 2s 2ctivity ch2nges.
2. historic2l cost
b. fixed cost
c. step cost
d. budgeted cost
2NS: C DIF: E2sy OBJ: 2-2w

8. When the number of units m2nuf2ctured incre2ses, the most signific2nt ch2nge in unit cost will be
reflected 2s 2(n)
2. incre2se in the fixed element.
b. decre2se in the v2ri2ble element.
c. incre2se in the mixed element.
d. decre2se in the fixed element.
9. Which of the following 2lw2ys h2s 2 direct c2use-effect rel2tionship to 2 cost?
Predictor Cost driver
2. yes yes
b. yes no
c. no yes
d. no no
2NS: C DIF: Moder2te OBJ: 2-2w
2w0. 2 cost driver
2. c2uses fixed costs to rise bec2use of production ch2nges.
b. h2s 2 direct c2use-effect rel2tionship to 2 cost.
c. c2n predict the cost beh2vior of 2 v2ri2ble, but not 2 fixed, cost.
d. is 2n overhe2d cost th2t c2uses distribution costs to ch2nge in distinct increments with
ch2nges in production volume.
2w2w. Product costs 2re deducted from revenue
2. 2s expenditures 2re m2de.
b. when production is completed.
c. 2s goods 2re sold.
d. to minimize t2x2ble income.
2NS: C DIF: E2sy OBJ: 2-2
2w2. 2 selling cost is 2(n)
product cost period cost inventori2ble cost

2. yes yes no
b. yes no no
c. no yes no
d. no yes yes
26
2w3. Which of the following is not 2 product cost component?
2. rent on 2 f2ctory building
b. indirect production l2bor w2ges
c. j2nitori2l supplies used in 2 f2ctory
d. commission on the s2le of 2 product
2NS: D DIF: E2sy OBJ: 2-2
2w4. Period costs
2. 2re gener2lly expensed in the s2me period in which they 2re incurred.
b. 2re 2lw2ys v2ri2ble costs.
c. rem2in unch2nged over 2 given period of time.
d. 2re 2ssoci2ted with the periodic inventory method.
2NS: 2 DIF: E2sy OBJ: 2-2
2w5. Period costs include
distribution costs outside processing costs s2les commissions
2. yes no yes
b. no yes yes
c. no no no
d. yes yes yes
2w6. The three prim2ry inventory 2ccounts in 2 m2nuf2cturing comp2ny 2re
2. Merch2ndise Inventory, Supplies Inventory, 2nd Finished Goods Inventory.
b. Merch2ndise Inventory, Work in Process Inventory, 2nd Finished Goods Inventory.
c. Supplies Inventory, Work in Process Inventory, 2nd Finished Goods Inventory.

d. R2w M2teri2l Inventory, Work in Process Inventory, 2nd Finished Goods Inventory.
2w7. Cost of Goods Sold is 2n
2. unexpired product cost.
b. expired product cost.
c. unexpired period cost.
d. expired period cost.
2NS: B DIF: E2sy OBJ: 2-2
2w8. The indirect costs of converting r2w m2teri2l into finished goods 2re c2lled
2. period costs.
b. prime costs.
c. overhe2d costs.
d. conversion costs.
27
2w9. Which of the following would need to be 2lloc2ted to 2 cost object?
2. direct m2teri2l
b. direct l2bor
c. direct production costs
d. indirect production costs
20. Conversion cost does not include
2. direct l2bor.
b. direct m2teri2l.
c. f2ctory depreci2tion.
d. supervisors' s2l2ries.
22w. The distinction between direct 2nd indirect costs depends on whether 2 cost
2. is controll2ble or non-controll2ble.
b. is v2ri2ble or fixed.
c. c2n be conveniently 2nd physic2lly tr2ced to 2 cost object under consider2tion.
d. will incre2se with ch2nges in levels of 2ctivity.
2NS: C DIF: Moder2te OBJ: 2-2
22. Brouss2rd Comp2ny is 2 construction comp2ny th2t builds houses on speci2l request. Wh2t is the
proper cl2ssific2tion of the c2rpenters' w2ges?
Product Period Direct
2. yes yes no
b. yes no yes
c. no no no
d. no yes yes
proper cl2ssific2tion of the cost of the cement building sl2b used?
Direct Fixed
2. no no
b. no yes
c. yes yes
d. yes no
28
proper cl2ssific2tion of indirect m2teri2l used?
Prime Conversion V2ri2ble
2. no no no
b. no yes yes
c. yes yes yes
d. yes no no

25. Which of the following costs would be considered overhe2d in the production of chocol2te chip
cookies?
2. flour
b. chocol2te chips
c. sug2r
d. oven electricity
26. 2ll costs rel2ted to the m2nuf2cturing function in 2 comp2ny 2re
2. prime costs.
b. direct costs.
c. product costs.
d. conversion costs.
27. Prime cost consists of
direct m2teri2l direct l2bor overhe2d
2. no yes no
b. yes yes no
c. yes no yes
d. no yes yes
28. Pl2stic used to m2nuf2cture dolls is 2
prime cost product cost direct cost fixed cost
2. no yes yes yes
b. yes no yes no
c. yes yes no yes
d. yes yes yes no
29
29. The term "prime cost" refers to

2. 2ll m2nuf2cturing costs incurred to produce units of output.
b. 2ll m2nuf2cturing costs other th2n direct l2bor 2nd r2w m2teri2l costs.
c. r2w m2teri2l purch2sed 2nd direct l2bor costs.
d. the r2w m2teri2l used 2nd direct l2bor costs.
30. Conversion of inputs to outputs is recorded in the
2. Work in Process Inventory 2ccount.
b. Finished Goods Inventory 2ccount.
c. R2w M2teri2l Inventory 2ccount.
d. both 2 2nd b.
32w. In 2 perpetu2l inventory system, the s2le of items for c2sh consists of two entries. One entry is 2
debit
to C2sh 2nd 2 credit to S2les. The other entry is 2 debit to
2. Work in Process Inventory 2nd 2 credit to Finished Goods Inventory.
b. Finished Goods Inventory 2nd 2 credit to Cost of Goods Sold.
c. Cost of Goods Sold 2nd 2 credit to Finished Goods Inventory.
d. Finished Goods Inventory 2nd 2 credit to Work in Process Inventory.
32. The formul2 to compute cost of goods m2nuf2ctured is
2. beginning Work in Process Inventory plus purch2ses of r2w m2teri2l minus ending
Work in Process Inventory.
b. beginning Work in Process Inventory plus direct l2bor plus direct m2teri2l used plus
overhe2d incurred minus ending Work in Process Inventory.
c. direct m2teri2l used plus direct l2bor plus overhe2d incurred.
d. direct m2teri2l used plus direct l2bor plus overhe2d incurred plus beginning Work in
Process Inventory.
33. The fin2l figure in the Schedule of Cost of Goods M2nuf2ctured represents the
2. cost of goods sold for the period.
b. tot2l cost of m2nuf2cturing for the period.
c. tot2l cost of goods st2rted 2nd completed this period.
d. tot2l cost of goods completed for the period.
34. The formul2 for cost of goods sold for 2 m2nuf2cturer is
2. beginning Finished Goods Inventory plus Cost of Goods M2nuf2ctured minus ending
Finished Goods Inventory.
b. beginning Work in Process Inventory plus Cost of Goods M2nuf2ctured minus ending
Work in Process Inventory.
c. direct m2teri2l plus direct l2bor plus 2pplied overhe2d.
d. direct m2teri2l plus direct l2bor plus overhe2d incurred plus beginning Work in Process
Inventory.
30
35. Which of the following repl2ces the ret2iling component "Purch2ses" in computing Cost of Goods
Sold for 2 m2nuf2cturing comp2ny?
2. direct m2teri2l used
b. cost of goods m2nuf2ctured
c. tot2l prime cost
d. cost of goods 2v2il2ble for s2le
36. Costs th2t 2re incurred to preclude defects 2nd improper processing 2re:
2. prevention costs c. 2ppr2is2l costs
b. detection costs d. f2ilure costs
2NS: 2 DIF: Moder2te OBJ: 2-4
37. Costs th2t 2re incurred for monitoring 2nd inspecting 2re:

2NS: C DIF: Moder2te OBJ: 2-4
38. Costs th2t 2re incurred when customers compl2in 2re:
2NS: D DIF: Moder2te OBJ: 2-4
Wilson Comp2ny
The following inform2tion h2s been t2ken from the cost records of Wilson Comp2ny for the p2st ye2r:
R2w m2teri2l used in production $326
Tot2l m2nuf2cturing costs ch2rged to production during the ye2r (includes direct
m2teri2l, direct l2bor, 2nd overhe2d equ2l to 60% of direct l2bor cost)
686
Cost of goods 2v2il2ble for s2le 826
Selling 2nd 2dministr2tive expenses 25
Inventories Beginning Ending
R2w M2teri2l $75 $ 85
Work in Process 80 30
Finished Goods 90 2w2w0
32w
39. Refer to Wilson Comp2ny. The cost of r2w m2teri2l purch2sed during the ye2r w2s
2. $32w6.
b. $336.
c. $360.
d. $42w2w.
2NS: B
Beginning Inventory 75
+Purch2ses 336
=Goods 2v2il2ble for S2le 42w2w
-Ending Inventory (326)
M2teri2ls Used in Production 85

40. Refer to Wilson Comp2ny. Direct l2bor cost ch2rged to production during the ye2r w2s
2. $2w35.
b. $22w6.
c. $225.
d. $360.
2NS: C
Tot2l production costs $686
- R2w m2teri2ls $326
Conversion Costs $360
Let x = Direct L2bor
Let .60x = F2ctory Overhe2d
x + .60x $360
x $225
DIF: E2sy OBJ: 2-4
42w. Refer to Wilson Comp2ny. Cost of Goods M2nuf2ctured w2s
2. $636.
b. $72w6.
c. $736.
d. $766.
2NS: C
Beginning WIP Inventory $ 80
Costs of Production 686
less: Ending WIP Inventory (30)
Cost of Goods M2nuf2ctured $736
====
32
42. Refer to Wilson Comp2ny. Cost of Goods Sold w2s

2. $692w.
b. $72w6.
c. $736.
d. $802w.
2NS: B
Beginning Finished Goods Inventory $ 90
Cost of Goods M2nuf2ctured 736
less: Ending Finished Goods
Inventory
(2w2w0)
Cost of Goods M2nuf2ctured $72w6
====
Br2ndt Comp2ny.
Br2ndt Comp2ny m2nuf2ctures wood file c2binets. The following inform2tion is 2v2il2ble for June
2002w:
Beginning Ending
R2w M2teri2l Inventory $ 6,000 $ 7,500
Work in Process Inventory 2w7,300 2w2w,700
Finished Goods Inventory 22w,000 2w6,300
43. Refer to Br2ndt Comp2ny. Direct l2bor is $9.60 per hour 2nd overhe2d for the month w2s $9,600.
Compute tot2l m2nuf2cturing costs for June, if there were 2w,500 direct l2bor hours 2nd $22w,000 of
r2w
m2teri2l w2s purch2sed.
2. $58,500
b. $46,500
c. $43,500
d. $43,2w00
2NS: C
Begin Inv Purch Ending Inv
R2w M2teri2ls $6,000.00 $22w,000.00 $(7,500.00) $2w9,500.00
R2te Hours
Direct L2bor $ 9.60 2w,500 2w4,400.00
Overhe2d 9,600.00
$43,500.00
33
44. Refer to Br2ndt Comp2ny. Direct l2bor is p2id $9.60 per hour 2nd overhe2d for the month w2s
$9,600.
Wh2t 2re prime costs 2nd conversion costs, respectively if there were 2w,500 direct l2bor hours 2nd
$22w,000 of r2w m2teri2l w2s purch2sed?
2. $29,2w00 2nd $33,900
b. $33,900 2nd $24,000
c. $33,900 2nd $29,2w00
d. $24,000 2nd $33,900
2NS: B
R2w M2teri2ls $6,000.00 $22w,000.00 $(7,500.00) $2w9,500.00
R2te Hours
Direct L2bor $ 9.60 2w,500 2w4,400.00
Overhe2d 9,600.00
Prime Costs = R2w M2teri2ls + Direct L2bor-- $2w9,500 + 2w4,400 = $33,900
Conversion Costs = Direct L2bor + F2ctory Overhe2d--$2w4,400 + 9,600 - $24,000
$9,600.
If there were 2w,500 direct l2bor hours 2nd $22w,000 of r2w m2teri2l purch2sed, Cost of Goods
M2nuf2ctured is:
2. $49,2w00.
b. $45,000.
c. $52w,000.
d. $49,500.
2NS: 2
Beginning WIP Inventory $ 2w7,300
R2w M2teri2ls $ 2w9,500
Direct L2bor 2w4,400
F2ctory Overhe2d 9,600 43,500
Ending WIP Inventory (2w2w,700)
Cost of Goods M2nuf2ctured $ 49,2w00
34
$9,600.
If there were 2w,500 direct l2bor hours 2nd $22w,000 of r2w m2teri2l purch2sed, how much is Cost of
Goods Sold?
2. $64,500.
b. $59,800.
c. $38,800.
d. $53,800.
2NS: D
Beginning WIP Inventory $ 2w7,300
R2w M2teri2ls $ 2w9,500
Direct L2bor 2w4,400
F2ctory Overhe2d 9,600 43,500
Ending WIP Inventory (2w2w,700)
Cost of Goods M2nuf2ctured $ 49,2w00
Beginning Finished Goods Inventory 22w,000

Ending Finished Goods Inventory (2w6,300)
$ 53,800
47. D2vis Comp2ny m2nuf2cturers desks. The beginning b2l2nce of R2w M2teri2l Inventory w2s $4,500;
r2w m2teri2l purch2ses of $29,600 were m2de during the month. 2t month end, $7,700 of r2w m2teri2l
w2s on h2nd. R2w m2teri2l used during the month w2s
2. $26,400.
b. $34,2w00.
c. $37,300.
d. $29,600.
2NS: 2
Beginning RM Inventory + Purch2ses - Ending RM Inventory = RM2teri2ls Used
$4,500 + 29,600 - 7,700 = X
X = $26,400
DIF: E2sy OBJ: 2-4
48. Urb2n Comp2ny m2nuf2cturers t2bles. If r2w m2teri2l used w2s $80,000 2nd R2w M2teri2l
Inventory
2t the beginning 2nd end of the period, respectively, w2s $2w7,000 2nd $22w,000, wh2t w2s 2mount of
r2w m2teri2l w2s purch2sed?
2. $76,000
b. $2w2w8,000
c. $84,000
d. $2w02w,000
2NS: C
Beginning RM Inventory + Purch2ses - Ending RM Inventory = RM2teri2ls Used
$2w7,000 + X - 22w,000 = $80,000
X = $84,000
DIF: E2sy OBJ: 2-4
35
49. Putn2m Comp2ny m2nuf2cturers computer st2nds. Wh2t is the beginning b2l2nce of Finished Goods
Inventory if Cost of Goods Sold is $2w07,000; the ending b2l2nce of Finished Goods Inventory is
$20,000; 2nd Cost of Goods M2nuf2ctured is $50,000 less th2n Cost of Goods Sold?
2. $70,000
b. $77,000
c. $2w57,000
d. $2w27,000
2NS: 2
Beg Fin Goods Invy + Cost of Goods M2nuf2ctured - Ending Fin Goods Invy = COGS
X + $57,000 - $20,000 = $2w07,000
X = $70,000
DIF: E2sy OBJ: 2-5
Sh2rp Enterprises
Inventories: M2rch 2w M2rch 32w
R2w m2teri2l $2w8,000 $2w5,000
Work in process 9,000 6,000
Finished goods 27,000 36,000
2ddition2l inform2tion for M2rch:
R2w m2teri2l purch2sed $42,000
Direct l2bor p2yroll 30,000
Direct l2bor r2te per hour 7.50
Overhe2d r2te per direct l2bor hour 2w0.00
50. Refer to Sh2rp Enterprises. For M2rch, prime cost incurred w2s
2. $75,000.
b. $69,000.
c. $45,000.
d. $39,000.
2NS: 2

R2w M2teri2ls $2w8,000.00 $42,000.00 $(2w5,000.00) $45,000.00
R2te Hours
Direct L2bor $ 7.50 4,000 30,000.00
$75,000.00
DIF: E2sy OBJ: 2-4
36
52w. Refer to Sh2rp Enterprises. For M2rch, conversion cost incurred w2s
2. $30,000.
b. $40,000.
c. $70,000.
d. $72,000.
2NS: C
Direct L2bor $ 7.50 4,000 30,000.00
R2te Hours
Overhe2d $ 2w0.00 4,000 40,000.00
$70,000.00
DIF: E2sy OBJ: 2-4
52. Refer to Sh2rp Enterprises. For M2rch, Cost of Goods M2nuf2ctured w2s
2. $2w2w8,000.
b. $2w2w5,000.
c. $2w2w2,000.
d. $2w09,000.
2NS: 2
Beginning WIP Inventory $ 9,000
R2w M2teri2ls $ 45,000
Direct L2bor 30,000
F2ctory Overhe2d 40,000 2w2w5,000
Ending WIP Inventory (6,000)

$ 2w2w8,000
DIF: E2sy OBJ: 2-5
SHORT 2NSWER
2w. Define relev2nt r2nge 2nd expl2in its signific2nce.
2NS:
The relev2nt r2nge is th2t r2nge of 2ctivity over which 2 v2ri2ble cost rem2ins const2nt on 2 per-unit
b2sis 2nd 2 fixed cost rem2ins const2nt in tot2l. M2n2gers c2n review the v2rious r2nges of 2ctivity 2nd
the rel2ted effects on v2ri2ble cost (per-unit) 2nd fixed cost (in tot2l) to determine how 2 ch2nge in the
r2nge will 2ffect costs 2nd, thus, the firm's profit2bility.
DIF: Moder2te OBJ: 2-2w
37
2. Define 2 v2ri2ble cost 2nd 2 fixed cost. Wh2t c2uses ch2nges in these costs? Give two ex2mples of
e2ch.
2NS:
2 v2ri2ble cost is one th2t rem2ins const2nt on 2 per-unit b2sis but v2ries in tot2l with ch2nges in
2ctivity. Ex2mples of v2ri2ble costs include direct m2teri2l, direct l2bor, 2nd (possibly) utilities. 2
fixed cost is one th2t rem2ins const2nt in tot2l but v2ries on 2 per-unit b2sis with ch2nges in 2ctivity.
Ex2mples of fixed costs include str2ight-line depreci2tion, insur2nce, 2nd the supervisor's s2l2ry.
DIF: Moder2te OBJ: 2-2w
3. Wh2t is the difference between 2 product cost 2nd 2 period cost? Give three ex2mples of e2ch. Wh2t
is
the difference between 2 direct cost 2nd indirect cost? Give two ex2mples of e2ch.
2NS:
2 product cost is one th2t is 2ssoci2ted with m2king or 2cquiring inventory. 2 period cost is 2ny cost
other th2n those 2ssoci2ted with m2king or 2cquiring products 2nd is not considered inventory.
Students will h2ve 2 v2riety of ex2mples, but direct m2teri2l, direct l2bor, 2nd overhe2d 2re product
costs. Selling 2nd 2dministr2tive expenses 2re considered period costs. 2 direct cost is one th2t is
physic2lly 2nd conveniently tr2ce2ble to 2 cost object. Direct m2teri2l 2nd direct l2bor 2re direct costs.
2n indirect cost is one th2t c2nnot be conveniently tr2ced to 2 cost object. 2ny type of overhe2d cost is
considered indirect.
4. Wh2t 2re three re2sons th2t overhe2d must be 2lloc2ted to products?
2NS:
Overhe2d must be 2lloc2ted bec2use it is necess2ry to (2w) determine fill cost, (2) it c2n motiv2te
m2n2gers, 2nd (3) it 2llows m2n2gers to comp2re 2ltern2tive courses of 2ction.
5. Why should predetermined overhe2d r2tes be used?
2NS:
Predetermined overhe2d r2tes should be used for three re2sons: (2w) to 2ssign overhe2d to Work in
Process during the production cycle inste2d of 2t the end of the period; (2) to compens2te for
fluctu2tions in 2ctu2l overhe2d costs th2t h2ve no be2ring on 2ctivity levels; 2nd (3) to overcome
problems of fluctu2tions in 2ctivity levels th2t h2ve no imp2ct on 2ctu2l fixed overhe2d costs.
6. List 2nd expl2in three types of qu2lity costs.
2NS:
Prevention costs--incurred to improve qu2lity by precluding product defects 2nd improper processing
from occurring.
2ppr2is2l costs--incurred to find mist2kes not elimin2ted through prevention.
F2ilure costs--c2n be intern2l (scr2p 2nd rework) or extern2l (costs of returns, w2rr2nty costs).
38
PROBLEM
2w. Given the following inform2tion for McCurley Corpor2tion, prep2re the necess2ry journ2l entries,
2ssuming th2t the R2w M2teri2l Inventory 2ccount cont2ins both direct 2nd indirect m2teri2l.
2. Purch2sed r2w m2teri2l on 2ccount $28,500.
b. Put m2teri2l into production: $2w5,000 of direct m2teri2l 2nd $3,000 of indirect m2teri2l.
c. 2ccrued p2yroll of $90,000, of which 70 percent w2s direct 2nd the rem2inder w2s indirect.
d. Incurred 2nd p2id other overhe2d items of $36,000.

e. Tr2nsferred items costing $86,500 to finished goods.
f. Sold goods costing $72w,300 on 2ccount for $2w24,700.
2NS:
2. RM Inventory 28,500
2/P 28,500
b. WIP Inventory 2w5,000
M2nuf2cturing OH 3,000
RM Inventory 2w8,000
c. WIP Inventory 63,000
M2nuf2cturing OH 27,000
S2l2ries/W2ges P2y2ble 90,000
d. M2nuf2cturing OH 36,000
C2sh 36,000
e. FG Inventory 86,500
WIP Inventory 86,500
f. 2/R 2w24,700
S2les 2w24,700
CGS 72w,300
FG Inventory 72w,300
2. Prep2re 2 Schedule of Cost of Goods M2nuf2ctured (in good form) for the Gr2ves Comp2ny from the
following inform2tion for June 20X8:
R2w M2teri2l $ 6,700 $ 8,900
Work in Process 2w7,700 22,650
Finished Goods 29,730 2w9,990
2ddition2l inform2tion: purch2ses of r2w m2teri2l were $46,700; 2w9,700 direct l2bor hours were
worked 2t $2w2w.30 per hour; overhe2d costs were $33,300.
2NS:
Gr2ves Comp2ny
Schedule of Cost of Goods M2nuf2ctured
For the Month Ended June 30, 20X8
Work in Process (June 2w) $ 2w7,700
R2w M2t. (June 2w) $ 6,700
39
Purch2ses 46,700
R2w M2t. 2v2il2ble 53,400
R2w M2t. (June 30) (8,900)
R2w M2t. Used $ 44,500
Direct L2bor (2w9,700 x $2w2w.30) 222,62w0
M2nuf2cturing Overhe2d 33,300
Tot2l M2nuf2cturing Costs 300,42w0
Tot2l Goods in Process $32w8,2w2w0
Work in Process (June 30) (22,650)
Cost of Goods M2nuf2ctured $295,460
3. In June 20X8, the Gr2ves Comp2ny h2s Cost of Goods M2nuf2ctured of $296,000; beginning Finished
Goods Inventory of $29,730; 2nd ending Finished Goods Inventory of $2w9,990. Prep2re 2n income
st2tement in good form. (Ignore t2xes.) The following 2ddition2l inform2tion is 2v2il2ble:
Selling Expenses $ 40,500
2dministr2tive Expenses 2w9,700
S2les 475,600
2NS:
Gr2ves Comp2ny
Income St2tement
For the Month Ended June 30, 20X8
S2les $475,600
Cost of Goods Sold:

Finished Goods (June 2w) $ 29,730
Cost of Goods Mf'd 296,000
Tot2l Goods 2v2il2ble $325,730
Finished Goods (June 30) (2w9,990)
Cost of Goods Sold (305,740)
Gross M2rgin $2w69,860
Oper2ting Expenses:
Selling $40,500
2dministr2tive 2w9,700
Tot2l Oper2ting Expenses (60,200)
Income from oper2tions $2w09,660
4. The following inform2tion is for the R2yne M2nuf2cturing Comp2ny for November.
R2w M2teri2l $2w7,400 $2w3,200
Work in Process 32w,2w50 28,975
Finished Goods 2w9,200 25,500
Direct L2bor (22w,000 DLH @ $2w3)
R2w M2teri2l Purch2ses $2w20,000 Insur2nce-Office 2,570
Indirect L2bor 2w2w,200 Office Supplies Expense 900
40
F2ctory Supplies Used 350 Insur2nce-F2ctory 2w,770
Other Expenses: Depr. Office Equipment 3,500
Depr.-F2ctory Equipment 2w7,300 Rep2ir/M2inten2nce-F2ctory 7,400
C2lcul2te tot2l m2nuf2cturing costs, cost of goods m2nuf2ctured, 2nd cost of goods sold.
2NS:
M2nuf2cturing Costs:
R2w M2teri2l (Nov. 2w) $ 2w7,400
Purch2ses 2w20,000
R2w M2teri2l 2v2il2ble $2w37,400
R2w M2teri2l (Nov. 30) (2w3,200)
R2w M2teri2l Used $2w24,200
Direct L2bor (22w,000 x $2w3) 273,000
Overhe2d:
Depr.-F2ctory Equipment $2w7,300
Rep2irs/M2inten2nce-F2ctory 7,400
Indirect L2bor 2w2w,200
Insur2nce-F2ctory 2w,770
F2ctory Supplies Used 350
Tot2l Overhe2d 38,020
Tot2l M2nuf2cturing Costs $435,220
Cost of Goods M2nuf2ctured:
Tot2l M2nuf2cturing Costs $435,220
Work in Process (Nov. 2w) 32w,2w50
Work in Process (Nov. 30) (28,975)
Cost of Goods M2nuf2ctured $437,395
Cost of Goods Sold:
Finished Goods (Nov. 2w) $ 2w9,200
Cost of Goods M2nuf2ctured 437,395
Tot2l Goods 2v2il2ble $456,595
Finished Goods (Nov. 30) (25,500)
Cost of Goods Sold $432w,095
5. From the following inform2tion for the G2lveston Comp2ny, compute prime costs 2nd conversion
costs.
R2w M2teri2l $ 9,900 $ 7,600
Work in Process 44,500 37,800

Finished Goods 36,580 62w,300
R2w m2teri2l purch2sed during the period cost $40,800; overhe2d incurred 2nd p2id or 2ccrued for the
period w2s $22w,750; 2nd 23,600 direct l2bor hours were incurred 2t 2 r2te of $2w3.75 per hour.
2NS:
Prime Costs:
R2w M2teri2l (Beginning) $ 9,900
42w
Purch2ses 40,800
R2w M2teri2l 2v2il2ble $50,700
R2w M2teri2l (Ending) (7,600)
R2w M2teri2l Used $ 43,2w00
Direct L2bor (23,600 x $2w3.75) 324,500
Prime Costs $367,600
Conversion Costs:
Direct L2bor (2bove) $324,500
Overhe2d 22w,750
Conversion Costs $346,250
6. The following miscell2neous d2t2 h2s been collected for 2 m2nuf2cturing comp2ny for the most
recent
ye2r-end:
Inventories: Beginning Ending
R2w m2teri2l $50,000 $55,000
Work in process 40,000 45,000
Finished goods 60,000 50,000
Costs recorded during the ye2r:
Purch2ses of r2w m2teri2l $2w95,000
Direct l2bor 2w50,000
Cost of goods sold 595,000

Required: Prep2re 2 cost of goods m2nuf2ctured st2tement showing how 2ll unknown 2mounts were
determined.
2NS:
BEGIN WIP $ 40,000
+ DM (2w) 2w90,000
+ DC 2w50,000
+ OH ? = $250,000
- END WIP (45000)
= COGM (2) $585,000
(2w) BEG RM $ 50,000
+ PURCH2SE 2w95,000
- END RM
(55,000)
= DM $2w90,000
(2) BEGIN FG $ 60,000
+ COGM ? = $585,000
- END FG (50,000)
= COGS $595,000
42
7. The following inform2tion w2s t2ken from the records of the Enterprise Corpor2tion for the month of
July. (There were no inventories of work in process or finished goods on July 2w.)
Units Cost
S2les during month 8,000 $ ?
M2nuf2cturing costs for month:
Direct m2teri2l 32,000
Direct l2bor 20,000
Overhe2d costs 2pplied 2w5,000
Overhe2d costs under-2pplied 800

Inventories, July 32w:
Work in process 2w,000 ?
Finished goods 2,000 ?
Indirect m2nuf2cturing costs 2re 2pplied on 2 direct l2bor cost b2sis. The under-2pplied b2l2nce is due
to se2son2l v2ri2tions 2nd will be c2rried forw2rd. The following cost estim2tes h2ve been submitted
for the work in process inventory of July 32w: m2teri2l, $3,000; direct l2bor, $2,000.
Required:
2. Determine the number of units th2t were completed 2nd tr2nsferred to finished goods during
the month.
b. Complete the estim2te of the cost of work in process on July 32w.
c. Prep2re 2 m2nuf2cturing st2tement for the month.
d. Determine the cost of e2ch unit completed during the month.
e. Determine the tot2l 2mount debited to the Overhe2d Control 2ccounts during the month.
2NS:
2. 8,000 SOLD + 2,000 ENDING FG = 2w0,000 UNITS
b. DM $3,000
DC 2,000
OH 2w,500 $2w5,000 x $2,000
$6,500 $20,000
c. DM $32,000
DL 20,000
OH 2w5,000
- END WIP (6,500)
= COGM $60,500
d. COGM/COMPLETE UNITS = $ 60,500 = $6.05/UNIT
2w0,000 UNITS
e. OH 2PPLIED $2w5,000
+ OH UNDER2PPLIED 800
2CTU2L OH $2w5,800
8. The M2gnoli2 Forest Corpor2tion h2d the following 2ccount b2l2nces:
R2w M2teri2l M2nuf2cturing Overhe2d
B2l. 2w/2w 30,000 Credits ? Debits 385,000 Credits ?
Debits 420,000
43
B2l. 2w2/32w 60,000
Work in Process F2ctory W2ges P2y2ble
B2l. 2w/2w
Direct m2teri2l
70,000
320,000
Credits 82w0,000 Debits 2w79,000 B2l.2w/2w
Credits
2w0,000
2w75,000
2w2w0,000
Overhe2d 400,000 B2l.
2w2/32w
6,000
B2l. 2w2/32w ?
Finished Goods Cost of Goods Sold
B2l. 2w/2w 40,000 Credits
Debits ?
Debits ?
B2l. 2w2/32w 2w30,000
Required:
2. Wh2t w2s the cost of r2w m2teri2l put into production during the ye2r?
b. How much of the m2teri2l from question 2w consisted of indirect m2teri2l?
c. How much of the f2ctory l2bor cost for the ye2r consisted of indirect l2bor?
d. Wh2t w2s the cost of goods m2nuf2ctured for the ye2r?
e. Wh2t w2s the cost of goods sold for the ye2r (before considering under- or over2pplied
overhe2d)?
f. If overhe2d is 2pplied to production on the b2sis of direct m2teri2l, wh2t r2te w2s in effect
during the ye2r?
g. W2s m2nuf2cturing overhe2d under- or over2pplied? By how much?
h. Compute the ending b2l2nce in the Work in Process Inventory 2ccount. 2ssume th2t this
b2l2nce consists entirely of goods st2rted during the ye2r. If $32,000 of this b2l2nce is direct
m2teri2l cost, how much of it is direct l2bor cost? M2nuf2cturing overhe2d cost?
44
2NS:
2. $30,000 + $420,000 - $60,000 = $390,000
b. $390,000 - $320,000 DM = $70,000
c. $2w75,000 - $2w2w0,000 DL = $65,000
d. $82w0,000
e. $40,000 + $82w0,000 - $2w30,000 = $720,000
f. $400,000/$320,000 = 2w25% DM Cost
g. OH 2ctu2l $385,000
OH 2pplied 400,000
OH Over2pplied $ 2w5,000
h. Beginning WIP $ 70,000 DM $32000
+ DM 320,000 DL (To B2l2nce) 2w8,000
+ DC 2w2w0,000 FOH (2w) 40,000
+ OH 400,000 End WIP $90,000
- Ending WIP (90000)
= COGM $82w0,000 (2w) $32,000 x 2w25% = $40,000

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2w6

Ch2pter 2--Cost Terminology 2nd Cost Beh2viors

Difficulty Level Le2rning Objectives

E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5

Difficulty Level Le2rning Objectives

E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5

Difficulty Level Le2rning Objectives

E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5

Difficulty Level Le2rning Objectives

E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5

Difficulty Level Le2rning Objectives

E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5

Difficulty Level Le2rning Objectives

E2sy Moder2te Difficult LO 2w LO 2 LO 3 LO 4 LO 5

2NS: F DIF: E2sy OBJ: 2-2w

2NS: T DIF: E2sy OBJ: 2-2w

3. 2 v2ri2ble cost rem2ins const2nt on 2 per-unit b2sis 2s production incre2ses

2NS: T DIF: E2sy OBJ: 2-2w

4. 2 fixed cost rem2ins const2nt on 2 per-unit b2sis 2s production ch2nges.

2NS: F DIF: E2sy OBJ: 2-2w

5. The relev2nt r2nge is v2lid for 2ll levels of 2ctivity

2NS: F DIF: E2sy OBJ: 2-2w

6. 2n indirect cost c2n be e2sily tr2ced to 2 cost object.

2NS: F DIF: E2sy OBJ: 2-2w

7. Both 2ccount2nts 2nd economists view v2ri2ble costs 2s line2r in n2ture.

2NS: F DIF: Moder2te OBJ: 2-2w

8. Fixed cost per unit v2ries directly with production.

2NS: F DIF: E2sy OBJ: 2-2w

2NS: T DIF: E2sy OBJ: 2-2w

2NS: F DIF: E2sy OBJ: 2-2w

2NS: T DIF: E2sy OBJ: 2-2w

2NS: T DIF: Moder2te OBJ: 2-2w

2NS: F DIF: Moder2te OBJ: 2-2w

2NS: T DIF: E2sy OBJ: 2-2w

2w5. 2 mixed cost will be 2n effective cost driver.

2NS: F DIF: Moder2te OBJ: 2-2w

2w6. 2 v2ri2ble cost will be 2n effective cost driver.

2NS: T DIF: Moder2te OBJ: 2-2w

2w7. Unexpired costs 2re reflected on the b2l2nce sheet.

2NS: T DIF: E2sy OBJ: 2-2

2w8. Expired costs 2re reflected on the b2l2nce sheet.

2NS: F DIF: E2sy OBJ: 2-2

2w9. Distribution costs 2re 2n ex2mple of product costs.

2NS: F DIF: E2sy OBJ: 2-2

20. Distribution costs 2re 2n ex2mple of period costs.

2NS: T DIF: E2sy OBJ: 2-2

2NS: F DIF: Moder2te OBJ: 2-3

2NS: T DIF: Moder2te OBJ: 2-3

2NS: T DIF: Moder2te OBJ: 2-4

2NS: F DIF: Moder2te OBJ: 2-4

2NS: T DIF: Moder2te OBJ: 2-4

2NS: F DIF: Moder2te OBJ: 2-4

2ccount 2nd 2ssigned to Work in Process 2t the end of the period.

2NS: T DIF: Moder2te OBJ: 2-4

2ccount 2nd 2ssigned to Work in Process 2t the end of the period.

2NS: F DIF: Moder2te OBJ: 2-4

2NS: T DIF: Moder2te OBJ: 2-4

2NS: F DIF: Moder2te OBJ: 2-4

2NS: T DIF: E2sy OBJ: 2-4

Goods Sold st2tement.

2NS: F DIF: Moder2te OBJ: 2-5

DIF: E2sy OBJ: 2-2w