Deck 2: Cost Concepts, Behaviour and Estimation

Question 1

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
In this decision, Noel would consider the sunk cost to be

A)£50.
B)£650.
C)£700.
D)£500.

Answer 1

£500.

Question 2

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
If Noel produced 10,000 units his fixed cost per unit would be:

A)£1.
B)£100.
C)£1,000.
D)£0.

Answer 2

£1.

Question 3

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-If Noel produced only one unit his fixed cost per unit would be:

A)£10,000.
B)£100.
C)£1,000.
D)£0.

Answer 3

£10,000.

Question 4

The cost of factory machinery purchased last year is

A)an opportunity cost.
B)a differential cost.
C)a direct materials cost.
D)a sunk cost.

Question 5

A direct cost is a cost that can be easily traced to the particular cost object under consideration.

Question 6

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
If Noel produced 1,000 units his total cost would be:

A)£20,000.
B)£21,000.
C)£12,100.
D)£11,000.

Question 7

At a sales volume of 40,000 units, Lonnie Company's total fixed costs are £40,000 and total variable costs are £60,000.
The relevant range is 30,000 to 50,000 units.

-If Lonnie were to sell 50,000 units, the total expected cost per unit would be:

A)£2.20.
B)£2.30.
C)£2.50.
D)£2.00.

Question 8

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
If Noel produced 100 units his fixed cost per unit would be:

A)£10,000.
B)£100.
C)£1,000.
D)£0.

Question 9

Which of the following costs would be included both as part of prime cost and as part of conversion cost

A)Direct materials.
B)Direct labour.
C)Manufacturing overhead.
D)None of these.

Question 10

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.
In making his decision, Noel would consider the differential cost to be

A)£50.
B)£200.
C)£150.
D)£500

Question 11

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
If Noel produced 100 units his total cost would be:

A)£10,010.
B)£11,000.
C)£11,100.
D)£1,000.

Question 12

Morton Company's manufacturing costs last year were as follows:
Conversion cost was:
$\begin{array}{lrr} \text { Direct materials } &£300,000\\ \text { Direct labour } &400,000\\ \text { Manutacturing overhead: } &\\ \text {variable. } &80,000\\ \text {Fixed } &50,000\\\end{array}$

A)£400,000.
B)£480,000.
C)£530,000.
D)£830,000.

Question 13

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
In this decision the company is better off by:

A)£150.
B)£350.
C)£300.
D)£0.

Question 14

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-
In this decision, Noel would consider the relevant material cost to be:

A)£300.
B)£650.
C)£600.
D)£0.

Question 15

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-If Noel produced only one unit his total cost would be:

A)£10,010.
B)£10,000.
C)£10,100.
D)£10.

Question 16

Noel Stewart bought a machine two years ago for £500. He must now replace the old machine by buying a new model 206 for £700 or a used model 204 for £650. Noel has decided to buy model 204.
Noel Stewart has estimated that the total fixed costs for his department are £10,000. He also estimated that his variable cost per unit is £10.
Noel Stewart bought some materials 2 years ago for £300. These materials have simply been left in stock as they were not needed. A new customer offers to buy a product that uses these materials. The conversion cost is £500 and the customer has offered to pay £650 for the product. Noel decides to accept the order.

-In this decision, Noel would consider the sunk cost to be:

A)£500.
B)£650.
C)£600.
D)£300.

Question 17

A department accepts a new order from a customer. It has already incurred £100 for design costs. It has also incurred costs of £200 for visits by sales staff. If the order is accepted a quality inspector will be transferred from another department. The inspector earns £20,000 per year. If the order is accepted there will be additional training costs of £700.

-
In this decision the differential costs for visits by staff are:

A)£0.
B)£100.
C)£200.
D)£300.

Question 18

At a sales volume of 40,000 units, Lonnie Company's total fixed costs are £40,000 and total variable costs are £60,000.
The relevant range is 30,000 to 50,000 units.

-If Lonnie were to sell 42,000 units, the total expected cost would be:

A)£105,000.
B)£100,000.
C)£103,000.
D)£102,000.

Question 19

Data for Morton Co:
Prime cost was:
$\begin{array}{lrr} \text { Direct materials } &£300,000\\ \text { Direct labour } &400,000\\ \text { Manutacturing overhead: } &\\ \text {variable. } &80,000\\ \text {Fixed } &50,000\\\end{array}$

A)£300,000.
B)£380,000.
C)£700,000.
D)£830,000.

Question 20

Direct materials cost is a: I. Period Cost or II. Product Cost

A)Only I
B)Neither I nor II
C)Only II
D)Both I and II

Question 21

In a manufacturing company, direct labour costs combined with direct materials costs are known as

A)period costs.
B)conversion costs.
C)prime costs.
D)opportunity cost.

Question 22

A department accepts a new order from a customer. It has already incurred £100 for design costs. It has also incurred costs of £200 for visits by sales staff. If the order is accepted a quality inspector will be transferred from another department. The inspector earns £20,000 per year. If the order is accepted there will be additional training costs of £700.

-
In this decision the differential design costs are:

A)£0.
B)£100.
C)£200.
D)£300.

Question 23

Last month a manufacturing company had the following operating results:
What was the cost of goods manufactured for the month?
$\begin{array}{lrr} \text { Beginning finished goods inventory} &£ 84,000 \\ \text { Ending finished goods inventory} &£ 71,000\\ \text { Sales } &£ 505,000\\ \text {Gross margin } &£ 63,000\\\end{array}$

A)£429,000
B)£492,000
C)£442,000
D)£455,000

Question 24

The following data (in thousands of pounds) have been taken from the accounting records of Karmint Corporation for the just completed year:


-The cost of goods manufactured (finished) for the year (in thousands of pounds) was:

A)£480.
B)£490.
C)£440.
D)£510.

Question 25

The inventory of finished goods on hand at the end of a period would be considered an asset, but inventories of raw materials and work-in-process would not be considered assets until production is completed

Question 26

During the month of May, Cassidy Manufacturers incurred £30,000, £40,000 and £20,000 of direct material, direct labour and manufacturing overhead costs respectively. If the cost of goods manufactured was £95,000 and the ending work in process inventory was £15,000, the beginning inventory of work in process must have been

A)£ 10,000.
B)£ 20,000.
C)£110,000.
D)£ 5,000.

Question 27

The three cost elements ordinarily included in the stock cost of a manufactured product are direct materials, direct labour, and marketing costs

Question 28

The following data (in thousands of pounds) have been taken from the accounting records of Karmint Corporation for the just completed year:


-The cost of goods sold for the year (in thousands of pounds) was

A)£540.
B)£420.
C)£460.
D)£520.

Question 29

Which of the following combinations of costs make up conversion cost

A)Direct materials cost and manufacturing overhead cost.
B)Direct labour cost and manufacturing overhead cost.
C)Marketing cost and administrative cost.
D)Direct materials costs and direct labour cost.

Question 30

The following data (in thousands of pounds) have been taken from the accounting records of Karmint Corporation for the just completed year:


-
The net operating profit for the year (in thousands of pounds) was:

A)£140.
B)£170.
C)£110.
D)£410.

Question 31

In general only the differences between alternatives are relevant to decisions

Question 32

A sunk cost is

A)a cost that may be saved by not adopting an alternative.
B)a cost that may be shifted to the future with little or no effect on current operations.
C)a cost that cannot be avoided because it has already been incurred.
D)a cost which does not entail any pound outlay but which is relevant to the decision-making process.

Question 33

The following data (in thousands of pounds) have been taken from the accounting records of Karmint Corporation for the just completed year:


-The cost of the raw materials used in production during the year (in thousands of pounds) was:

A)£190.
B)£160.
C)£140.
D)£200.

Question 34

In April direct labour was 70% percent of conversion cost. If the manufacturing overhead cost for the month was £42,000 and the direct materials cost was £28,000, the direct labour cost was

A)£98,000.
B)£65,333.
C)£18,000.
D)£12,000.

Question 35

Abburi Company's manufacturing overhead is 60% of its total conversion costs. If direct labour is £52,000 and if direct materials are £28,000, the manufacturing overhead is

A)£34,667.
B)£78,000.
C)£42,000.
D)£120,000.

Question 36

When volume or level of activity decreases, variable costs will

A)increase per unit.
B)increase in total.
C)decrease in total.
D)decrease per unit.

Question 37

A department accepts a new order from a customer. It has already incurred £100 for design costs. It has also incurred costs of £200 for visits by sales staff. If the order is accepted a quality inspector will be transferred from another department. The inspector earns £20,000 per year. If the order is accepted there will be additional training costs of £700.

-In this decision the sunk costs are:

A)£20,000.
B)£100.
C)£200.
D)£300.

Question 38

Higgins Company's manufacturing overhead is 40% of its total conversion costs. If direct labour is £18,000 and if direct materials are £24,000, the manufacturing overhead is

A)£27,000.
B)£28,000.
C)£16,000.
D)£12,000.

Question 39

A department accepts a new order from a customer. It has already incurred £100 for design costs. It has also incurred costs of £200 for visits by sales staff. If the order is accepted a quality inspector will be transferred from another department. The inspector earns £20,000 per year. If the order is accepted there will be additional training costs of £700.

-In this decision the differential costs total:

A)£0.
B)£300.
C)£20,700.
D)£700.

Question 40

A department accepts a new order from a customer. It has already incurred £100 for design costs. It has also incurred costs of £200 for visits by sales staff. If the order is accepted a quality inspector will be transferred from another department. The inspector earns £20,000 per year. If the order is accepted there will be additional training costs of £700.

-In this decision the differential costs for the inspector are:

A)£0.
B)£100.
C)£20,000.
D)£300.

Question 41

The following costs were incurred in June:
Conversion costs during the month totaled:
$\begin{array}{lrr} \text { Direct materials. } &£ 37,000\\ \text { Direct labour. } &£ 28,000\\ \text { Manufacturing overhead. } &£ 38,000\\ \text { Selling expenses. } &£ 12,000\\ \text { Administrative expenses. } & £ 20,000\\\end{array}$

A)£133,000.
B)£73,000.
C)£65,000.
D)£64,000.

Question 42

Variable costs are costs that vary, in total, in direct proportion to changes in the volume or level of activity

Question 43

Commissions paid to salespersons are a variable selling expense

Question 44

The cost of goods manufactured is computed by deducting the beginning inventory of work in process from the total manufacturing costs incurred during a given period.

Question 45

Wages paid to the factory supply shop foreman are considered an example of: I. Direct Labour or II. Period Cost

A)Both I and II
B)Only I
C)Only II
D)Neither I nor II

Question 46

The following costs were incurred in May:
Conversion costs during the month totaled:
$\begin{array}{lrr} \text { Direct materials. } &£ 41,000\\ \text { Direct labour. } &£ 13,000\\ \text { Manufacturing overhead. } &£ 46,000\\ \text { Selling expenses. } &£ 18,000\\ \text { Administrative expenses. } & £ 15,000\\\end{array}$

A)£54,000.
B)£133,000.
C)£59,000.
D)£87,000.

Question 47

Gable Inc. is a merchandising company. Last month the company's merchandise purchases totaled £86,000. The company's beginning merchandise inventory was £15,000 and its ending merchandise inventory was £11,000. What was the company's cost of goods sold for the month

A)£86,000
B)£112,000
C)£82,000
D)£90,000

Question 48

Which of the following statements is correct in describing manufacturing overhead costs

A)Manufacturing overhead when combined with direct material cost forms conversion cost.
B)Manufacturing overhead consists of all manufacturing cost except for prime cost.
C)Manufacturing overhead is a period cost.
D)Manufacturing overhead when combined with direct labour cost forms prime cost.

Question 49

All of the following can be differential costs except

A)variable costs.
B)sunk costs.
C)opportunity costs.
D)fixed costs.

Question 50

In June direct labour was 60% percent of conversion cost. If the manufacturing overhead cost for the month was £36,000 and the direct materials cost was £22,000, the direct labour cost was

A)£33,000.
B)£14,667.
C)£24,000.
D)£54,000.

Question 51

Like product costs, period costs are not necessarily treated as expenses in the period in which they are incurred

Question 52

Depreciation on manufacturing equipment is a period cost

Question 53

The cost of goods manufactured is included in the cost of goods available for sale in a manufacturing company

Question 54

During April, the cost of goods manufactured was £74,000. The beginning finished goods inventory was £17,000 and the ending finished goods inventory was £14,000. What was the cost of goods sold for the month

A)£74,000
B)£71,000
C)£77,000
D)£105,000

Question 55

The cost of goods that have been completed but are not yet sold are part of work in process inventory

Question 56

Within the relevant range

A)variable cost per unit decreases as production decreases.
B)fixed cost per unit increases as production decreases.
C)fixed cost per unit decreases as production decreases.
D)variable cost per unit increases as production decreases.

Question 57

All of the following costs would be found in a company's accounting records except:

A)sunk cost.
B)opportunity cost.
C)indirect costs.
D)direct costs.

Question 58

Which of the following would most likely be included as part of manufacturing overhead in the production of a wooden table

A)The amount paid to the individual who stains the table.
B)The commission paid to the salesperson who sold the table.
C)Rent of the factory.
D)The cost of the wood used in the table.

Question 59

The potential benefit that is given up when one alternative is selected over another is called a sunk cost

Question 60

Direct labour combined with direct materials is known as prime cost

Question 61

The variable portion of the cost of electricity for a manufacturing plant is a: I. Conversion Cost or II. Period Cost

A)Only I
B)Both I and II
C)Only II
D)Neither I nor II

Question 62

Salaries and wages incurred in the factory would be product costs

Question 63

Explain why in practice it is important to distinguish between period and product costs?

Question 64

Differential costs do not include fixed costs.

Question 65

Access the report by Fitzgerald, Johnston, Brignall, Silvestro and Voss (1991) mentioned on page 32 of Chapter 2. Discuss the differences that you see between costing for service industries and manufacturing. Give examples

Question 66

The following costs were incurred in April:
Conversion costs during the month totalled:
$\begin{array}{lrr} \text { Direct materials. } &£ 18,000\\ \text { Direct labour. } &£ 21,000\\ \text { Manufacturing overhead. } &£ 33,000\\ \text { Selling expenses. } &£ 14,000\\ \text { Administrative expenses. } & £ 19,000\\\end{array}$

A)£39,000.
B)£54,000.
C)£105,000.
D)£51,000.

Question 67

Define the following.
Prime cost, conversion cost & manufacturing overhead

Question 68

Gabriel Inc. is a merchandising company. Last month the company's merchandise purchases totaled £70,000. The company's beginning merchandise inventory was £15,000 and its ending merchandise inventory was £22,000. What was the company's cost of goods sold for the month

A)£63,000
B)£77,000
C)£107,000
D)£70,000

Question 69

Define the following.
Product cost & period cost

Question 70

Define the following
Direct cost, indirect cost, variable cost, fixed cost,

Question 71

During June, the cost of goods manufactured was £71,000. The beginning finished goods inventory was £18,000 and the ending finished goods inventory was £11,000. What was the cost of goods sold for the month

A)£64,000
B)£100,000
C)£71,000
D)£78,000