Deck 2: Basic Cost Management Concepts

Question 1

Scott Corporation engages in mass customization and direct sales, the latter by accepting customer orders over the Internet. As a result, Scott:

A)would probably begin the manufacturing process upon receipt of a customer's order.
B)would typically have fairly low inventory levels for the amount of sales revenue generated.
C)would typically have fairly high inventory levels for the amount of sales revenue generated.
D)would probably begin the manufacturing process upon receipt of a customer's order and typically have fairly low inventory levels for the amount of sales revenue generated.
E)would probably begin the manufacturing process upon receipt of a customer's order and typically have fairly high inventory levels for the amount of sales revenue generated.

Answer 1

D

Question 2

ElizabethtownMotors Ltd. manufactures all-wheel drive (AWD) automobiles. Which of the following would not be classified as direct materials by the company?

A)Sheet metal used in the automobile's body.
B)CD player.
C)Wheel lubricant.
D)Tires.
E)Interior leather.

Answer 2

C

Question 3

Should direct materials be classified as a part of any or all of the following: conversion cost, manufacturing cost, and prime cost?

A)Conversion cost and manufacturing cost.
B)Conversion cost and prime cost.
C)Manufacturing cost and prime cost.
D)Conversion cost, manufacturing cost, and prime cost.
E)Conversion cost only.

Answer 3

C

Question 4

Ranges Ltd. produces refrigerators and stoves in an assembly-line process. Labour costs incurred during a recent period were: corporate executives, $100,000; assembly-line workers, $80,000; security guards, $18,000. The total of Ranges' direct labour cost was:

A)$18,000
B)$80,000.
C)$98,000.
D)$118,000.
E)$198,000

Question 5

Costs that are expensed when incurred are called:

A)product costs.
B)direct costs.
C)inventoriable costs.
D)period costs.
E)indirect costs.

Question 6

Which of the following entities would most likely have raw materials, work in process, and finished goods?

A)Ultramar Corporation.
B)Leon's Furniture Store.
C)Harvey's.
D)West Jet Airlines.
E)Memorial University.

Question 7

Which of the following inventories would a company ordinarily hold for sale?

A)Raw-materials.
B)Work-in-process.
C)Finished-goods.
D)Raw materials and finished goods.
E)Work in process and finished goods.

Question 8

Which of the following is a period cost?

A)Direct materials.
B)Direct labour.
C)Indirect materials.
D)Insurance on a manufacturing plant.
E)Sales commissions.

Question 9

The accounting records of Banff Corporation revealed the following selected costs: Sales commissions, $25,000; plant supervision, $88,600; and administrative expenses, $179,400. Banff Corporation's period costs total:

A)$25,000.
B)$88,600.
C)$179,400.
D)$204,400.
E)$293,000.

Question 10

Which of the following inventories would a discount retailer such as Zellers report as an asset?

A)Raw-materials.
B)Work-in-process.
C)Finished-goods.
D)Merchandise inventory.
E)Direct materials.

Question 11

Product costs are:

A)expensed when incurred.
B)inventoried.
C)treated in the same manner as period costs.
D)treated in the same manner as advertising costs.
E)subtracted from cost of goods sold.

Question 12

Which of the following statements is true?

A)The word "cost" has the same meaning in all situations in which it is used.
B)Cost data, once classified and recorded for a specific application, are appropriate for use in any application.
C)Different cost concepts and classifications are used for different purposes.
D)All organizations incur the same types of costs.
E)Costs incurred in one year are always meaningful in the following year.

Question 13

Which of the following costs is not a component of manufacturing overhead?

A)Indirect materials.
B)Factory utilities.
C)Factory equipment.
D)Indirect labour.
E)Property taxes on the manufacturing plant.

Question 14

Which of the following is a period cost?

A)Direct material.
B)Manufacturing overhead.
C)Depreciation on cars driven by a firm's president and treasurer.
D)Miscellaneous supplies used in production activities.
E)Indirect labour.

Question 15

Chant Corporation recently computed total product costs of $647,000 and total period costs of $549,000. On the basis of this information, Chant's income statement should reveal operating expenses of:

A)$98,000.
B)$488,000.
C)$549,000.
D)$647,000.
E)$1,196,000.

Question 16

The accounting records of Perth Company revealed the following costs, among others: $\begin{array} { l r } \text { Factory insurance } & \$ 32,000 \\\text { Raw materials used } & 256,000 \\\text { Customer entertainment } & 15,000 \\\text { Indirect labour } & 45,000 \\\text { Depreciation on salespersons' cars } & 22,000 \\\text { Production equipment rental costs } & 72,000\end{array}$ Costs that would be considered in the calculation of manufacturing overhead total:

A)$149,000.
B)$171,000.
C)$186,000.
D)$420,000.
E)$442,000.

Question 17

The accounting records of Niagara Manufacturing Company revealed the following costs: direct materials used, $120,000; direct labour, $275,000; manufacturing overhead, $350,000; and selling and administrative expenses, $400,000. Niagara's product costs total:

A)$395,000.
B)$400,000.
C)$625,000.
D)$745,000.
E)$1,145,000.

Question 18

Depreciation of factory equipment is classified as:

A)operating cost.
B)opportunity cost.
C)manufacturing overhead.
D)prime cost.
E)administrative cost.

Question 19

Which of the following is a product cost for external financial reporting purposes?

A)Amortization of office equipment used by the CEO.
B)Advertising costs.
C)The salary paid to the Vice President of Finance.
D)Rent on a factory.
E)Sales commissions.

Question 20

Companies that engage in mass customization:

A)tend to have a relatively low production volume.
B)tend to have a high production volume that involves highly standardized end-products.
C)tend to have a high production volume, many standardized components, and customer-specified combinations of components.
D)tend to have a high production volume, many unique components, and customer-specified combinations of components.
E)could be typified by the refining operations of Shell Oil.

Question 21

Which of the following is not an example of a variable cost?

A)Straight-line depreciation on a machine that has a five-year service life.
B)Wages of manufacturing workers whose pay is based on hours worked.
C)Tires used in the production of tractors.
D)Aluminum used to make patio furniture.
E)Commissions paid to sales personnel.

Question 22

Conversion costs are:

A)direct material, direct labour, and manufacturing overhead.
B)direct material and direct labour.
C)direct labour and manufacturing overhead.
D)prime costs.
E)period costs.

Question 23

An employee accidentally understated the year's advertising expense by $150,000. Which of the following correctly depicts the effect of this error?

A)Cost of goods manufactured will be overstated by $150,000.
B)Cost of goods sold will be overstated by $150,000.
C)Both cost of goods manufactured and cost of goods sold will be overstated by $150,000.
D)Cost of goods sold will be overstated by $150,000, and cost of goods manufactured will be understated by $150,000.
E)Income will be overstated by $150,000.

Question 24

Work-in-process inventory is composed of:

A)direct material and direct labour.
B)direct labour and manufacturing overhead.
C)direct material and manufacturing overhead.
D)prime costs.
E)direct material, direct labour, and manufacturing overhead.

Question 25

Which of the following is an example of a fixed cost?

A)Paper used in the manufacture of textbooks.
B)Surgical supplies used in a hospital's operating room
C)The wages of part-time workers who are paid $8 per hour.
D)Gasoline consumed by salespersons' cars.
E)Property taxes paid by a firm to the City of Hamilton.

Question 26

Variable costs are those costs that:

A)vary inversely with changes in activity.
B)vary directly with changes in activity.
C)remain constant in total as activity changes.
D)decrease on a per-unit basis as activity increases.
E)increase on a per-unit basis as activity increases.

Question 27

Which costs will change with a decrease in activity?

A)Total fixed costs and total variable costs.
B)Unit fixed cost and total variable costs.
C)Unit variable cost and unit fixed cost.
D)Unit fixed cost and total fixed cost.
E)Unit variable cost and fixed manufacturing overhead.

Question 28

The accounting records of Greenwood Company revealed the following information: $\begin{array} { l r } \text { Work in process inventory - Jan 1 } & \$ 58,000 \\\text { Work in process inventory - Dec } 31 & 49,000 \\\text { Finished goods inventory - Jan 1 } & 125,000 \\\text { Finished goods inventory - Dec } 31 & 158,000 \\\text { Cost of goods manufactured } & 754,000\end{array}$ Greenwood's cost of goods sold is:

A)$721,000.
B)$730,000.
C)$739,000.
D)$778,000.
E)$787,000.

Question 29

The accounting records of Dauphin Company revealed the following information: $\begin{array} { l r } \text { Total manufacturing eosts } & \$ 530,000 \\\text { Work in process inventory - Jan 1 } & 56,000 \\\text { Work in process inventory - Dec 31 } & 78,000 \\\text { Finished goods inventory - Jan 1 } & 146,000 \\\text { Finished goods inventory - Dee 31 } & 123,000\end{array}$ Dauphin's cost of goods sold is:

A)$508,000.
B)$529,000.
C)$531,000.
D)$553,000.
E)$575,000.

Question 30

Which of the following statements is true?

A)Product costs affect only the balance sheet.
B)Product costs affect only the income statement.
C)Period costs affect only the balance sheet.
D)Period costs affect both the balance sheet and the income statement.
E)Product costs eventually affect both the balance sheet and the income statement.

Question 31

Which of the following would likely be a suitable cost driver for the amount of direct materials used?

A)The number of units sold.
B)The number of direct labour hours worked.
C)The number of machine hours worked.
D)The number of employees working in the factory.
E)The number of units produced.

Question 32

Which of the following statements is correct?

A)Overtime premiums should be treated as a component of manufacturing overhead.
B)Overtime premiums should be treated as a component of direct labour.
C)Idle time should be treated as a component of direct labour.
D)Idle time should be accounted for as a special type of loss.
E)Overtime premiums should be treated as a component of manufacturing overhead and as a component of direct labour.

Question 33

In a manufacturing company, the cost of goods manufactured during the period would include which of the following elements?

A)Raw materials used.
B)Beginning finished goods inventory.
C)Marketing costs.
D)Depreciation of delivery trucks.
E)Selling and Administrative costs.

Question 34

The variable costs per unit are $4 when a company produces 10,000 units of product. What are the variable costs per unit when 8,000 units are produced?

A)$2.00.
B)$4.00.
C)$4.50.
D)$5.00.
E)$5.50.

Question 35

The choices below depict five costs of Benton Corporation and a possible driver for each cost. Which of these choices likely contains an inappropriate cost driver?

A)Gasoline consumed; number of miles driven.
B)Manufacturing overhead incurred in a heavily automated facility; direct labour hours.
C)Sales commissions; gross sales revenue.
D)Building maintenance cost; building square footage.
E)Human resources department cost; number of employees.

Question 36

Mike's Machinery Ltd. reported the cost of goods manufactured of $300,000, and the firm's year-end balance sheet reported work in process and finished goods of $50,000 and $67,000, respectively. If supplemental information disclosed raw materials used in production of $25,000, direct labour of $80,000, and manufacturing overhead of $90,000, the company's beginning work in process must have been:

A)$38,000.
B)$55,000.
C)$155,000.
D)$172,000.
E)$245,000.

Question 37

Maplewood Company reported manufacturing overhead of $300,000 with the company's year-end balance sheet revealing work in process and finished goods of $80,000 and $150,000, respectively. If supplemental information disclosed raw materials used in production of $70,000, direct labour of $130,000, and beginning work in process of $30,000, the company's cost of goods manufactured have been:

A)$150,000.
B)$380,000.
C)$450,000
D)$550,000.
E)$610,000.

Question 38

Prime costs are comprised of:

A)direct materials and manufacturing overhead.
B)direct labour and manufacturing overhead.
C)direct materials, direct labour, and manufacturing overhead.
D)direct materials and direct labour.
E)direct materials and indirect materials.

Question 39

The accounting records for Ferguson Manufacturing revealed that the company began the month of September with a finished-goods inventory of $150,000. The finished-goods inventory at the end of September was $70,000 and the cost of goods sold during the month was $125,000. The cost of goods manufactured during September was:

A)$45,000.
B)$55,000.
C)$205,000.
D)$275,000.
E)$345,000.

Question 40

Which of the following equations is used to calculate the cost of goods sold during the period?

A)Beginning finished goods + cost of goods manufactured + ending finished goods.
B)Beginning finished goods - ending finished goods.
C)Beginning finished goods + cost of goods manufactured.
D)Beginning finished goods + cost of goods manufactured - ending finished goods.
E)Beginning finished goods + ending finished goods - cost of goods manufactured.

Question 41

Tiny Totts is a nursery school for kindergarten children. When there are twenty children enrolled, total revenues and total costs are $6,000 and $3,200, respectively. When there are twenty-one children enrolled, total revenues and total costs are $6,300 and $3,255, respectively. The average cost when there are twenty children enrolled in the school is:

A)$55.
B)$160.
C)$162.75.
D)$300
E)$315.

Question 42

Eastside Manufacturing produces small electric engines. Identify the following costs as direct materials (DM), direct labour (DL), manufacturing overhead (MOH), or a period cost (PC). Also indicate whether the cost is variable (V) or fixed (F) with respect to behaviour.
A. Commissions paid to salespeople
B. Straight-line depreciation on the factory building
C. Salary of the plant supervisor
D. Wages of the assembly-line workers
E. Machine lubricant used in production activities
F. Engine casings used in production activities
G. Advertising placed in trade journals
H. Lease payments for the president's automobile
I. Property taxes paid on the factory facilities

Question 43

If the total cost of alternative A is $600,000 and the total cost of alternative B is $200,000, then $400,000 is termed the:

A)opportunity cost.
B)average cost.
C)sunk cost.
D)out-of-pocket cost.
E)differential cost.

Question 44

Consider the three firms that follow: (1) Air Canada, (2) Chrysler Canada and (3) Zellers. These firms, examples of service providers, manufacturers, and merchandisers, tend to have different characteristics with respect to costs and financial-statement disclosures.
Required:
Determine which of the preceding firms (1, 2, and/or 3) would likely:
A. Disclose operating expenses on the income statement.
B. Have product costs.
C. Have period costs.
D. Disclose cost of goods sold on the income statement.
E. Have no meaningful investment in inventory.
F. Maintain raw-material, work-in-process, and finished-goods inventories.
G. Have variable and fixed costs.

Question 45

Which of the following would not be considered a direct cost with respect to the service department of a new car dealership?

A)Wages of repair technicians.
B)Property taxes paid by the dealership.
C)Repair parts consumed.
D)Salary of the department manager.
E)Depreciation on new equipment used to analyze engine problems.

Question 46

Tiny Totts is a nursery school for kindergarten children. When there are twenty children enrolled, total revenues and total costs are $6,000 and $3,200, respectively. When there are twenty-one children enrolled, total revenues and total costs are $6,300 and $3,255, respectively. The marginal cost when the twenty-first student enrolls in the school is:

A)$55.
B)$155.
C)$300.
D)$3,045.
E)$3,255.

Question 47

Total costs are $200,000 when 20,000 units are produced; of this amount, variable costs are $84,000. What are the total costs when 26,000 units are produced?

A)$150,800.
B)$214,800.
C)$225,200.
D)$260,000.
E)$369,200.

Question 48

The fixed costs per unit are $20 when a company produces 10,000 units of product. What are the fixed costs per unit when 25,000 units are produced?

A)$4.
B)$6.
C)$8.
D)$10.
E)$20.

Question 49

The following selected information was extracted from the 2012 accounting records of Cooper Products. *Forty percent of the company's building was devoted to production activities; the remaining 60% was used for selling and administrative functions.
Cooper's beginning and ending work-in-process inventories amounted to $290,000 and $315,000, respectively. The company's beginning and ending finished-goods inventories were $404,000 and $450,000, respectively.
Required:
A. Calculate Cooper's manufacturing overhead for the year.
B. Calculate Cooper's cost of goods manufactured.
C. Compute the company's cost of goods sold.

Question 50

Draper Textiles Inc. had the following data for the period just ended. Required:
A. Calculate Draper's cost of goods manufactured.
B. Calculate Draper's cost of goods sold.

Question 51

Hampton Company had the following inventory balances at the beginning and end of the year:
During the year, the company purchased $100,000 of raw material and spent $340,000 on direct labour. Other data: manufacturing overhead incurred, $450,000; sales, $1,560,000; selling and administrative expenses, $90,000; income tax rate, 30%.
Required:
A. Calculate cost of goods manufactured.
B. Calculate cost of goods sold.
C. Determine Hampton's net income.

Question 52

Costs that can be easily traced to a specific department are called:

A)direct costs.
B)indirect costs.
C)product costs.
D)manufacturing costs.
E)processing costs.

Question 53

The tuition fee that will be paid next semester by a college student who pursues a degree is a(n):

A)sunk cost.
B)out-of-pocket cost.
C)indirect cost.
D)average cost.
E)marginal cost.

Question 54

Consider the following cost items:
1. Sales commissions earned by a company's sales force.
2. Raw materials purchased during the period.
3. Current year's depreciation on a firm's manufacturing facilities.
4. Year-end completed production of a carpet manufacturer.
5. The cost of products sold to customers of an apparel store.
6. Wages earned by machine operators in a manufacturing plant.
7. Income taxes incurred by an airline.
8. Marketing costs of an electronics manufacturer.
9. Indirect labour costs incurred by a manufacturer of office equipment.
Required:
Required:
A. Evaluate the costs just cited and determine whether the associated dollar amounts would be found on the firm's balance sheet, income statement, or schedule of cost of goods manufactured. (Note: In some cases, more than one answer will apply.)
B. What major asset will normally be insignificant for service enterprises and relatively substantial for retailers, wholesalers, and manufacturers? Briefly discuss.
C. Briefly explain the similarity and difference between the merchandise inventory of a retailer and the finished-goods inventory of a manufacturer.

Question 55

Indirect costs:

A)can be traced to a cost object.
B)cannot be traced to a particular cost object.
C)are always fixed.
D)are always variable.
E)may be indirect with respect to Disney World but direct with respect to one of its major components, Epcot Center.

Question 56

Which of the following costs should be ignored when choosing among alternatives?

A)Opportunity costs.
B)Sunk costs.
C)Out-of-pocket costs.
D)Differential costs.
E)Average cost.

Question 57

Which of the following would not be characterized as a cost object?

A)An automobile manufactured by General Motors.
B)A Burger King restaurant located in Burlington, Ontario.
C)A West Jet Airlines flight from Toronto to Winnipeg.
D)A Fairmont hotel located in Montebello, Quebec.
E)The salary of a Honda plant manager.

Question 58

The salary that is sacrificed by a college student who pursues a degree full time is a(n):

A)sunk cost.
B)out-of-pocket cost.
C)opportunity cost.
D)differential cost.
E)marginal cost.

Question 59

Consider the following items:
A. Tomatoes used in the manufacture of Heinz ketchup
B. Administrative salaries of executives employed by Air Canada
C. Wages of assembly-line workers at a Ford plant
D. Marketing expenditures of the Toronto Blue Jays Baseball Club
E. Commissions paid to Coca-Cola's salespeople
F. Straight-line depreciation on manufacturing equipment owned by Dell Computer
G. Shipping charges incurred by Office Depot on out-going orders
H. Speakers used in Sony home-theater systems
I. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant
Required:
Complete the table that follows and classify each of the costs listed as (1) a product or period cost and (2) a variable or fixed cost by placing an "X" in the appropriate column.

Question 60

The following selected costs were extracted from the accounting records of Brampton Machining:
1. Direct materials used in production
2. Wages of machine operators
3. Factory utilities
4. Sales commissions
5. Salary of Brampton's president
6. Factory depreciation
7. Wages of plant security guards
8. Uncollectible accounts expense
9. Machine lubricant used in production
Required:
By the use of numbers, identify the costs that would be used to calculate:
A. cost of goods manufactured.
B. manufacturing overhead.
C. total period costs.
D. total conversion costs.
E. total direct costs of Brampton's credit and collections department.
F. Brampton's inventory cost.

Question 61

Manufacturers have established a cost classification called product costs. Define the term "product cost" and note where these costs appear in the financial statements. Be specific.

Question 62

Horne Builders began business on January 1 of the current year, producing a single product that is popular with contractors. Demand was very strong, allowing the company to sell its entire manufacturing output of 100,000 units. The following unit costs were incurred: Horne anticipates an increase in productive output to 150,000 units and sales of 145,000 units in the next accounting period. The company uses appropriate drivers to determine cost behaviour and estimates.
Required:
A. Assuming that present cost behaviour patterns continue, compute the total expected costs in the upcoming accounting period.
B. The company Controller is about to prepare a graph that shows the unit cost behaviour for variable selling and administrative cost. If the graph's horizontal axis is volume and the vertical axis is dollars, briefly describe what the graph should look like.
C. Determine whether the following costs are variable or fixed in terms of behaviour:
1. Yearly lease payments for a state-of-the-art cutting machine.
2. A fee paid to a consultant who provided advice about quality issues. The fee was based on the number of consulting hours provided.
3. Cost of an awards dinner for "star" salespeople.

Question 63

The income statements and balance sheets of service, retailing, and manufacturing businesses tend to differ.
Required:
A. Which of these businesses will disclose a cost-of-goods-sold figure on the income statement? Why?
B. Briefly describe the difference between a retailing firm and manufacturer's disclosure of inventories on the balance sheet.
A. Retailers and manufacturers will disclose a cost-of-goods-sold figure because both of these entities sell goods. Service businesses, in contrast, do not given that such firms provide services.
A. Which of these businesses will disclose a cost-of-goods-sold figure on the income statement? Why?
B. A retailer will typically disclose inventories as one-line item entitled merchandise inventories. Manufacturers, on the other hand, carry three different types of inventories: raw materials, work in process, and finished goods.
B. Briefly describe the difference between a retailing firm and manufacturer's disclosure of inventories on the balance sheet.

Question 64

The following terms are used to describe various economic characteristics of costs.
Required:
Choose one of the preceding terms to characterize each of the amounts described below. Each term may be used only once.
A. The cost of including one extra child in a day-care center.
B. The cost of merchandise inventory purchased five years ago. The goods are now obsolete.
C. The cost of feeding 300 children in a public school cafeteria is $450 per day, or $1.50 per child per day. What economic term describes this $1.50 cost?
D. The management of a high-rise office building uses 3,000 square feet of space in the building for its own administrative functions. This space could be rented for $30,000. What economic term describes this $30,000 of lost rental revenue?
E. The cost of building an automated assembly line in a factory is $700,000; a manually operated assembly line would cost $250,000. What economic term is used to describe the $450,000 variation between these two amounts?
F. Refer to the preceding question and assume that the firm is currently building the assembly line for $700,000. What economic term is used to describe the $700,000 construction cost?

Question 65

Waterdown Manufacturing, which began operations on January 1 of the current year, produces an industrial scraper that sells for $325 per unit. Information related to the current year's activities follows. Waterdown carries its finished-goods inventory at the average unit cost of production. There was no work in process at year-end.
Required:
A. Compute the company's average unit cost of production.
B. Determine the cost of the December 31 finished-goods inventory.
C. Compute the company's cost of goods sold.
D. If next year's production increases to 23,000 units and general cost behaviour patterns do not change, what is the likely effect on:
1. The direct-labour cost of $35 per unit? Why?
2. The fixed manufacturing overhead cost of $400,000? Why?

Question 66

Austin Muffler, Inc., operates an automobile service facility. The table below shows the cost incurred during a month when 500 mufflers were replaced. Required:
Insert the missing amounts, labelled A through O, in the table.

Question 67

TomKat Corporation has a single facility that it uses for manufacturing, sales, and administrative activities. Should the company's building depreciation charge be expensed in its entirety or is a different accounting procedure appropriate? Explain.

Question 68

Sedgwick Corporation sold 12,500 units of its single product during the year, reporting a cost of goods sold that totaled $250,000. A review of the company's accounting records disclosed the following information. Required:
A. Determine the selling price per unit.
B. Management established a goal at the beginning of the year to reduce the company's investment in finished-goods inventory and work-in-process inventory.
1. Analyze cost of goods sold and determine if management's goal was achieved with respect to finished-goods inventory. Show computations.
2. Analyze the firm's manufacturing costs and determine if management's goal was achieved with respect to work-in-process inventory. Show computations.
C. Is the company profitable? Show calculations.

Question 69

The selected amounts that follow were taken from Shawville Corporation's accounting records: Required:
Compute the following:
A. Manufacturing overhead.
B. Work-in-process inventory on December 31.
C. Finished-goods inventory on January 1.
D. Cost of goods sold.
E. Gross margin.
F. Net income.

Question 70

Describe the economic characteristics of sunk costs and opportunity costs, and explain the impact that these costs may have on decisions.