Study Unit 1: External Financial Statements and Revenue Recognition
Subunit 1: Concepts of Financial Accounting
Question: 1A primary objective of external financial reporting is
A. Direct measurement of the value of a business enterprise.
B. Provision of information that is useful to present and potential investors, creditors, and others in making
rational financial decisions regarding the enterprise.
Answer (B) is correct.
According to the FASB’s Conceptual Framework, the objectives of external financial reporting are to
provide information that (1) is useful to present and potential investors, creditors, and others in making
rational financial decisions regarding the enterprise; (2) helps those parties in assessing the amounts,
timing, and uncertainty of prospective cash receipts from dividends or interest and the proceeds from
sale, redemption, or maturity of securities or loans; and (3) concerns the economic resources of an
enterprise, the claims thereto, and the effects of transactions, events, and circumstances that change its
resources and claims thereto.
C. Establishment of rules for accruing liabilities.
D. Direct measurement of the enterprise’s stock price.
Question: 2Which of the following is true regarding the comparison of managerial and financial accounting?
A. Managerial accounting is generally more precise.
B. Managerial accounting has a past focus, and financial accounting has a future focus.
C. The emphasis on managerial accounting is relevance, and the emphasis on financial accounting is
timeliness.
D. Managerial accounting need not follow generally accepted accounting principles (GAAP), while financial
accounting must follow them.
Answer (D) is correct.
Managerial accounting assists management decision making, planning, and control. Financial
accounting addresses accounting for an entity’s assets, liabilities, revenues, expenses, and other
elements of financial statements. Financial statements are the primary method of communicating to
external parties information about the entity’s results of operations, financial position, and cash flows.
For general-purpose financial statements to be useful to external parties, they must be prepared in
conformity with accounting principles that are generally accepted in the United States. However,
managerial accounting information is primarily directed to specific internal users. Hence, it ordinarily
need not follow such guidance.
Question: 3An objective of financial reporting is
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A. Providing information useful to investors, creditors, donors, and other users for decision making.
Answer (A) is correct.
The objective is to report financial information that is useful in making decisions about providing
resources to the reporting entity. Primary users of financial information are current or prospective
investors and creditors who cannot obtain it directly. Their decisions depend on expected returns.
B. Assessing the adequacy of internal control.
C. Evaluating management results compared with standards.
D. Providing information on compliance with established procedures.
Question: 4An entity that sprays chemicals in residences to eliminate or prevent infestation of insects requires
that customers prepay for 3 months’ service at the beginning of each new quarter. Select the term that appropriately
describes this situation from the viewpoint of the entity.
A. Deferred income.
Answer (A) is correct.
The future inflow of economic benefits is not sufficiently certain given that the entity has not done
what is required to be entitled to those benefits. Thus, the receipt of cash in anticipation of goods to be
delivered or services to be performed must be recognized as a liability, usually called deferred (or
unearned) revenue or deferred (or unearned) income.
B. Earned income.
C. Accrued income.
D. Prepaid expense.
Question: 5The financial statements included in the annual report to the shareholders are least useful to which
one of the following?
A. Stockbrokers.
B. Bankers preparing to lend money.
C. Competing businesses.
D. Managers in charge of operating activities.
Answer (D) is correct.
Accrual-basis amounts used in financial reporting are not useful to managers making day-to-day
operating decisions. The practice of management accounting fulfills the needs of these users.
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Question: 6The accounting measurement that is not consistent with the going concern concept is
A. Historical cost.
B. Realization.
C. The transaction approach.
D. Liquidation value.
Answer (D) is correct.
Financial accounting principles assume that a business entity is a going concern in the absence of
evidence to the contrary. The concept justifies the use of depreciation and amortization schedules, and
the recording of assets and liabilities using attributes other than liquidation value.
Question: 7Which of the following is a true statement about the objective of general-purpose financial
reporting?
A. Financial reporting is ordinarily focused on industries rather than individual entities.
B. The objective applies only to information that is useful for investment professionals.
C. Financial reporting directly measures management performance.
D. The information provided relates to the entity’s economic resources and claims.
Answer (D) is correct.
The information reported relates to the entity’s economic resources and claims to them (financial
position) and to changes in those resources and claims.
Question: 8Which basis of accounting is most likely to provide the best assessment of an entity’s past and future
ability to generate net cash inflows?
A. Cash basis of accounting.
B. Modified cash basis of accounting.
C. Accrual basis of accounting.
Answer (C) is correct.
Accrual accounting reports the effects of transactions and other events and circumstances even if the
resulting cash flows occur in a different period. The advantage of accrual accounting is that
information about an entity’s economic resources and claims and changes in them during a period
provides a better basis for assessing past and future performance than information solely about cash
flows.
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D. Tax basis of accounting.
Question: 9Which of the following is least likely to be accomplished by providing general-purpose financial
information useful for making decisions about providing resources to an entity?
A. To provide information about changes in an entity’s economic resources and claims to them.
B. To provide information to help investors and creditors assess the amount, timing, and uncertainty of
prospective net cash inflows to the entity.
C. To provide sufficient information to determine the value of the entity.
Answer (C) is correct.
General-purpose financial reports are significantly based on estimates and do not suffice to determine
the value of the entity.
D. To provide information about management’s performance.
Question: 10All of the following support the objective of financial reporting except providing information that
A. Is useful for making investment and credit decisions.
B. Helps management evaluate alternative projects.
Answer (B) is correct.
The role of general purpose external financial reporting is to provide information that is useful to
current and potential investors and creditors, not merely to management.
C. Concerns enterprise resources and claims to those resources.
D. Helps investors and creditors predict future cash flows.
Question: 11General purpose external financial reporting of a corporation focuses primarily on the needs of
which of the following users?
A. Regulatory and taxing authorities.
B. Investors and creditors and their advisors.
Answer (B) is correct.
The objective is to report financial information that is useful in making decisions about providing
resources to the reporting entity. Primary users of financial information are current and potential
investors and creditors who cannot obtain it directly.
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C. The board of directors of the corporation.
D. The management of the corporation.
Question: 12For financial reporting to be useful, it must
A. Be in accordance with generally accepted accounting principles.
B. Provide information useful for making business and investment decisions.
Answer (B) is correct.
The objective of general-purpose financial reporting is to report financial information that is useful in
making decisions about providing resources to the reporting entity. This information must have the
fundamental qualitative characteristics of relevance and faithful representation.
C. Be understandable to those who have a limited knowledge of business activities.
D. Directly measure the value of the entity being reported on.
Question: 13What is the primary objective of financial reporting?
A. To provide economic information that is comprehensible to all users.
B. To provide management with an accurate evaluation of their financial performance.
C. To provide forecasts for future cash flows and financial performance.
D. To provide information that is useful for economic decision making.
Answer (D) is correct.
The overall objective is to report financial information that is useful to current and potential investors
and creditors in making decisions about providing resources to an individual reporting entity.
Subunit 2: Statement of Financial Position (Balance Sheet)
Question: 1The primary purpose of the statement of financial position is to reflect
A. The fair value of the firm’s assets at some moment in time.
B. The status of the firm’s assets in case of forced liquidation of the firm.
C. The success of a company’s operations for a given amount of time.
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D. Items of value, debt, and net worth.
Answer (D) is correct.
The balance sheet presents three major financial accounting elements: assets (items of value), liabilities
(debts), and equity (net worth). According to the FASB’s Conceptual Framework, assets are probable
future economic benefits resulting from past transactions or events. Liabilities are probable future
sacrifices of economic benefits arising from present obligations as a result of past transactions or
events. Equity is the residual interest in the assets after deduction of liabilities.
Question: 2Prepaid expenses are valued on the statement of financial position at the
A. Cost to acquire the asset.
B. Face amount collectible at maturity.
C. Cost to acquire minus accumulated amortization.
D. Cost less expired or used portion.
Answer (D) is correct.
Prepaid expenses, such as supplies, prepaid rent, and prepaid insurance, are reported on the balance
sheet at cost minus the expired or used portion. These are typically current assets.
Question: 3A statement of financial position allows investors to assess all of the following except the
A. Efficiency with which enterprise assets are used.
B. Liquidity and financial flexibility of the enterprise.
C. Capital structure of the enterprise.
D. Net realizable value of enterprise assets.
Answer (D) is correct.
Assets are usually measured at original historical cost in a statement of financial position, although
some exceptions exist. For example, some short-term receivables are reported at their net realizable
value. Thus, the statement of financial position cannot be relied upon to assess NRV.
Question: 4The accounting equation (assets – liabilities = equity) reflects the
A. Entity point of view.
B. Fund theory.
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C. Proprietary point of view.
Answer (C) is correct.
The equation is based on the proprietary theory. Equity in an enterprise is what remains after the
economic obligations of the enterprise are deducted from its economic resources.
D. Enterprise theory.
Question: 5Long-term obligations that are or will become callable by the creditor because of the debtor’s
violation of a provision of the debt agreement at the balance sheet date should be classified as
A. Long-term liabilities.
B. Current liabilities unless the debtor goes bankrupt.
C. Current liabilities unless the creditor has waived the right to demand repayment for more than 1 year
from the balance sheet date.
Answer (C) is correct.
Long-term obligations that are or will become callable by the creditor because of the debtor’s violation
of a provision of the debt agreement at the balance sheet date normally are classified as current
liabilities. However, the debt need not be reclassified if the violation will be cured within a specified
grace period or if the creditor formally waives or subsequently loses the right to demand repayment for
a period of more than a year from the balance sheet date (also, reclassification is not required if the
debtor expects and has the ability to refinance the obligation on a long-term basis).
D. Contingent liabilities until the violation is corrected.
Question: 6A statement of financial position is intended to help investors and creditors
A. Assess the amount, timing, and uncertainty of prospective net cash inflows of a firm.
B. Evaluate economic resources and obligations of a firm.
Answer (B) is correct.
The statement of financial position, or balance sheet, provides information about an entity’s resource
structure (assets) and financing structure (liabilities and equity) at a moment in time. According to the
FASB’s Conceptual Framework, the statement of financial position does not purport to show the value
of a business, but it enables investors, creditors, and other users to make their own estimates of value.
It helps users assess liquidity, financial flexibility, profitability, and risk.
C. Evaluate economic performance of a firm.
D. Evaluate changes in the ownership equity of a firm.
Question: 7The purchase of treasury stock is recorded on the statement of financial position as a(n)
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A. Increase in assets.
B. Decrease in liabilities.
C. Increase in shareholders’ equity.
D. Decrease in shareholders’ equity.
Answer (D) is correct.
The purchase of treasury stock is recorded on the statement of financial position as a decrease in
shareholders’ equity.
Question: 8When classifying assets as current and noncurrent for reporting purposes,
A. The amounts at which current assets are carried and reported must reflect realizable cash values.
B. Prepayments for items such as insurance or rent are included in an “other assets” group rather than as
current assets as they will ultimately be expensed.
C. The time period by which current assets are distinguished from noncurrent assets is determined by the
seasonal nature of the business.
D. Assets are classified as current if they are reasonably expected to be realized in cash or consumed during
the normal operating cycle.
Answer (D) is correct.
For financial reporting purposes, current assets consist of cash and other assets or resources expected
to be realized in cash, sold, or consumed during the longer of 1 year or the normal operating cycle of
the business.
Question: 9A corporation uses a calendar year for financial and tax reporting purposes and has $100 million of
mortgage bonds due on January 15, Year 2. By January 10, Year 2, the corporation intends to refinance this debt
with new long-term mortgage bonds and has entered into a financing agreement that clearly demonstrates its ability
to consummate the refinancing. This debt is to be
A. Classified as a current liability on the statement of financial position at December 31, Year 1.
B. Classified as a long-term liability on the statement of financial position at December 31, Year 1.
Answer (B) is correct.
Short-term obligations expected to be refinanced should be reported as current liabilities unless the
firm both plans to refinance and has the ability to refinance the debt on a long-term basis. The ability to
refinance on a long-term basis is evidenced by a post-balance-sheet date issuance of long-term debt or
a financing arrangement that will clearly permit long-term refinancing.
C. Retired as of December 31, Year 1.
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D. Considered off-balance-sheet debt.
Question: 10A statement of financial position provides a basis for all of the following except
A. Computing rates of return.
B. Evaluating capital structure.
C. Assessing liquidity and financial flexibility.
D. Determining profitability and assessing past performance.
Answer (D) is correct.
The statement of financial position, also known as the balance sheet, reports an entity’s financial
position at a moment in time. It is therefore not useful for assessing past performance for a period of
time. A balance sheet can be used to help users assess liquidity, financial flexibility, and risk.
Question: 11A company intends to refinance a portion of its short-term debt in Year 2 and is negotiating a longterm financing agreement with a local bank. This agreement would be noncancelable and would extend for a period
of 2 years. The amount of short-term debt that the company can exclude from its statement of financial position at
December 31, Year 1,
A. May exceed the amount available for refinancing under the agreement.
B. Depends on the demonstrated ability to consummate the refinancing.
Answer (B) is correct.
If an enterprise intends to refinance short-term obligations on a long-term basis and demonstrates an
ability to consummate the refinancing, the obligations should be excluded from current liabilities and
classified as noncurrent. The ability to consummate the refinancing may be demonstrated by a postbalance-sheet-date issuance of a long-term obligation or equity securities, or by entering into a
financing agreement that meets certain criteria. These criteria are that the agreement does not expire
within 1 year, it is noncancelable by the lender, no violation of the agreement exists at the balance
sheet date, and the lender is financially capable of honoring the agreement.
C. Is reduced by the proportionate change in the working capital ratio.
D. Is zero unless the refinancing has occurred by year end.
Question: 12A manufacturer receives an advance payment for special-order goods that are to be manufactured
and delivered within the next year. The advance payment should be reported in the manufacturer’s current-year
statement of financial position as a(n)
A. Current liability.
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Answer (A) is correct.
The entity has not substantially completed what it must do to be entitled to the benefits of the advance
payment, and the receipt of future economic benefits is not sufficiently certain to justify income
recognition. Accordingly, the receipt of cash in anticipation of goods to be delivered or services to be
performed must be recognized as a liability, usually called deferred (or unearned) revenue or deferred
(or unearned) income. Because the manufacturer must deliver the goods within the next year, this
liability is current.
B. Noncurrent liability.
C. Contra asset amount.
D. Accrued revenue.
Question: 13A company has outstanding accounts payable of $30,000 and a short-term construction loan in the
amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but
before issuance of financial statements. How should these liabilities be recorded in the balance sheet?
A. Noncurrent liabilities of $130,000.
B. Current liabilities of $130,000.
C. Current liabilities of $30,000, noncurrent liabilities of $100,000.
Answer (C) is correct.
Accounts payable are properly classified as current liabilities because they are for items entering into
the operating cycle. Short-term debt that is refinanced by a post-balance-sheet-date issuance of longterm debt should be classified as noncurrent. (The ability to refinance on a long-term basis has been
demonstrated.) Thus, the short-term construction loan is classified as noncurrent. Accordingly, the
entity records current liabilities of $30,000 and noncurrent liabilities of $100,000.
D. Current liabilities of $130,000, with required footnote disclosure of the refinancing of the loan.
Question: 14Noncurrent debt should be included in the current section of the statement of financial position if
A. It is to be converted into common stock before maturity.
B. It matures within the year and will be retired through the use of current assets.
Answer (B) is correct.
Current liabilities include those obligations that are expected to be satisfied by the (1) payment of cash,
(2) use of current assets other than cash, or (3) creation of new current liabilities within 1 year from the
balance sheet date (or operating cycle, if longer).
C. Management plans to refinance it within the year.
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D. A bond retirement fund has been set up for use in its scheduled retirement during the next year.
Question: 15A company has the following items recorded on its financial records:
Available-for-sale debt securities $200,000
Prepaid expenses
400,000
Treasury stock
100,000
The total amount of the above items to be shown as assets on the statement of financial position is
A. $400,000
B. $500,000
C. $600,000
Answer (C) is correct.
Available-for-sale debt securities (an investment) and prepaid expenses are assets, but treasury stock is
an equity item. The total of the assets reported is therefore $600,000 ($200,000 + $400,000).
D. $700,000
Question: 16A receivable classified as current on the statement of financial position is expected to be collected
within
A. The current operating cycle.
B. 1 year.
C. The current operating cycle or 1 year, whichever is longer.
Answer (C) is correct.
Current assets are reasonably expected to be realized in cash, sold, or consumed during the normal
operating cycle of the business or within 1 year, whichever is longer. The operating cycle is the time
between the acquisition of materials or services and the final cash realization from the earning process.
D. The current operating cycle or 1 year, whichever is shorter.
Question: 17Current assets are reasonably expected to be realized in cash or sold or consumed during the normal
operating cycle of the business. Current assets most likely include
A. Intangible assets.
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B. Purchased goodwill.
C. Organizational costs.
D. Trading securities.
Answer (D) is correct.
Current assets include, in descending order of liquidity, cash and cash equivalents; certain individual
trading, available-for-sale, and held-to-maturity debt securities; receivables; inventories; and prepaid
expenses. Trading securities are expected to be sold in the near term, so they are likely to be classified
as current.
Question: 18A corporation was incorporated on January 1, Year 6, with $500,000 from the issuance of stock and
borrowed funds of $75,000. During the first year of operations, net income was $25,000. On December 15, the
corporation paid a $2,000 cash dividend. No additional activities affected equity in Year 6. At December 31, Year 6,
the corporation’s liabilities had increased to $94,000. In the corporation’s December 31, Year 6 balance sheet, total
assets should be reported at
A. $598,000
B. $600,000
C. $617,000
Answer (C) is correct.
Total assets equal the sum of total liabilities and equity. Total liabilities were $94,000 at year end, and
equity amounted to $523,000 ($500,000 from issuance of stock + $25,000 net income – $2,000 cash
dividend). Total assets are therefore $617,000 ($523,000 + $94,000).
D. $692,000
Question: 19An entity had the following account balances at year end.
Sales
$452,000
Cash
23,400
Accounts payable
14,300
Rent expense
3,700
Accounts receivable
9,400
Cost of goods sold
214,000
Land
104,000
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Unearned revenue
6,800
Gain on sale
17,500
Equipment
28,800
Inventories
2,200
Notes payable
67,000
What is the amount of total current assets reported on the balance sheet?
A. $35,000
Answer (A) is correct.
The major categories of current assets are cash and cash equivalents, certain investments, receivables,
inventories, and prepaid expenses. The entity’s total current assets are $35,000 ($23,400 cash + $9,400
accounts receivable + $2,200 inventories).
B. $39,900
C. $59,300
D. $63,800
Question: 20All of the following are limitations of the balance sheet except that
A. The balance sheet is prepared using management judgments and estimates.
B. Assets and liabilities are usually recorded at historical cost, which might differ significantly from current
market value.
C. The balance sheet provides information on the liquidity and solvency of the company.
Answer (C) is correct.
The balance sheet provides information about economic resources and claims, which helps to evaluate
liquidity, solvency, financing needs, and the probability of obtaining financing. This is an advantage of
the balance sheet.
D. The balance sheet omits many items that cannot be recorded objectively but which have financial value to
the company.
Question: 21Which of the following is not an example of off-balance-sheet financing?
A. Use of debt covenants.
Answer (A) is correct.
A debt covenant is a promise in a debt agreement; it does not keep the liability from appearing on the
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balance sheet. Off-balance-sheet financing is an accepted accounting method for recording assets and
liabilities so that they are not shown on the balance sheet. Examples would include factoring
receivables with or without recourse, establishing special purpose entities, and participating in joint
ventures. With any of these activities, the liability does not appear on the company’s balance sheet. A
debt covenant is a promise in a formal debt agreement that certain activities will or will not be carried
out. Covenants in finance most often relate to terms in a financial contracting, such as a loan document
stating the limits at which the borrower can acquire additional funds. Covenants are put in place by
lenders to protect themselves from borrowers defaulting on their obligations due to financial actions
detrimental to themselves.
B. Factoring receivables.
C. Using special purpose entities.
D. Joint ventures.
Question: 22Heavy use of off-balance-sheet lease financing will tend to
A. Make a company appear riskier than it actually is because its stated debt ratio will appear higher.
B. Make a company appear less risky than it actually is because its stated debt ratio will appear lower.
Answer (B) is correct.
Off-balance-sheet financing will make a company appear less risky than it really is because some
liabilities exist but are not shown on the balance sheet. The lease financing will affect a company’s
cash flow because cash will have to be paid periodically on the lease contract.
C. Affect a company’s cash flows but not its degree of risk.
D. Have no effect on either cash flows or risk because the cash flows are already reflected in the income
statement.
Question: 23Which one of the following would not be classified as a current liability?
A. Security deposits received from renters for a one-year lease.
B. Rent for the current year received on January 2 of the current year.
C. Undistributed stock dividends.
Answer (C) is correct.
Current liabilities are those debts that must be paid during the upcoming year or current operating
cycle, whichever period is longer. Examples include accounts payable, wages payable, prepaid rents
received from tenants, security deposits from tenants, and the current portion of long-term debt.
Undistributed stock dividends are not liabilities because they are not to be paid in cash but are
distributed as shares of stock. Undistributed stock dividends are merely reclassifications of different
equity accounts and are not liabilities.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Ten-year bonds sold 110 months ago.
Question: 24A company received an invoice in January for the electricity used by its warehouse in December,
and it recorded the expense in January. The company uses the accrual basis of accounting. What is the impact to the
company’s December financial statements?
A. Current liabilities were understated, and retained earnings were overstated.
Answer (A) is correct.
Failure to record an expense in December will result in current liabilities being understated. Also,
retained earnings will be overstated due to the failure to record the expense.
B. Operating expenses were overstated, and retained earnings were overstated.
C. Cash and cash equivalents were overstated, and retained earnings were understated.
D. Accrued expenses were overstated, and retained earnings were understated.
Question: 25When treasury stock is accounted for at cost, the cost is reported on the balance sheet as a(n)
A. Asset.
B. Reduction of retained earnings.
C. Reduction of additional paid-in-capital.
D. Unallocated reduction of equity.
Answer (D) is correct.
Treasury stock is a corporation’s own stock that has been reacquired but not retired. In the balance
sheet, treasury stock recorded at cost is subtracted from the total of the capital stock balances,
additional paid-in capital, retained earnings, and accumulated other comprehensive income.
Question: 26Which one of the following statements regarding treasury stock is correct?
A. It is unretired but no longer outstanding, yet it has all the rights of outstanding shares.
B. It is an asset representing shares that can be sold in the future or otherwise issued in stock option plans or
in effectuating business combinations.
C. It is unable to participate in the liquidation proceeds of the firm but able to participate in regular cash
dividend distributions as well as stock dividends and stock splits.
D. It is reflected in shareholders’ equity as a contra account.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Treasury stock recorded at cost is a reduction of total equity. Treasury stock recorded at par is a direct
reduction of the pertinent contributed capital balance, e.g., common stock or preferred stock.
Question: 27A corporation purchased 10,000 shares of its own $5 par-value common stock for $25 per share.
This stock originally sold for $28 per share. The corporation used the cost method to record this transaction. If the
par-value method had been used rather than the cost method, which of the following accounts would show a
different dollar amount?
A. Treasury stock and total shareholders’ equity.
B. Additional paid-in capital and retained earnings.
C. Paid-in capital from treasury stock and retained earnings.
D. Additional paid-in capital and treasury stock.
Answer (D) is correct.
Under the cost method, the treasury stock account was debited for the full market price of the shares;
had the par-value method been used, treasury stock would only have been debited for the par value of
the shares. Under the cost method, the additional paid-in capital account was not affected; had the parvalue method been used, additional paid-in capital would have been debited for the excess of the
market price of the shares over par.
Subunit 3: Income Statement and Statement of Comprehensive
Income
Question: 1The profit and loss statement of an entity includes the following information for the current fiscal
year:
Sales
$160,000
Gross profit
48,000
Year-end finished goods inventory
58,300
Opening finished goods inventory
60,190
The cost of goods manufactured by the entity for the current fiscal year is
A. $46,110
B. $49,890
C. $110,110
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
The entity’s cost of goods manufactured can be calculated as follows:
Sales
$160,000
Less: Gross profit
(48,000)
Cost of goods sold
$112,000
Add: Ending finished goods
Goods available for sale
58,300
$170,300
Less: Beginning finished goods
Cost of goods manufactured
(60,190)
$110,110
D. $113,890
Question: 2In a multiple-step income statement for a retail company, all of the following are included in the
operating section except
A. Sales.
B. Cost of goods sold.
C. Dividend revenue.
Answer (C) is correct.
The operating section of a retailer’s income statement includes all revenues and costs necessary for the
operation of the retail establishment, e.g., sales, cost of goods sold, administrative expenses, and
selling expenses. Dividend revenue, however, is classified under other revenues. In a statement of cash
flows, cash dividends received are considered an operating cash flow.
D. Administrative and selling expenses.
Question: 3Which one of the following would be shown on a multiple-step income statement but not on a
single-step income statement?
A. Loss from discontinued operations.
B. Gross profit.
Answer (B) is correct.
A single-step income statement combines all revenues and gains, combines all expenses and losses,
and subtracts the latter from the former in a “single step” to arrive at net income. Gross profit, being
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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the difference between sales revenue and cost of goods sold, does not appear on a single-step income
statement.
C. Cost of goods sold.
D. Net income from continuing operations.
Question: 4A retail entity maintains a markup of 25% based on cost. The entity has the following information
for the current year:
Purchases of merchandise $690,000
Freight-in on purchases
Sales
25,000
900,000
Ending inventory
80,000
Beginning inventory was
A. $40,000
B. $85,000
Answer (B) is correct.
Cost of goods sold for a period equals beginning inventory, plus purchases, plus freight-in, minus
ending inventory. Given that sales reflect 125% of cost, cost of goods sold must equal $720,000
($900,000 sales ÷ 1.25). Consequently, the beginning inventory must have been $85,000 ($720,000
COGS + $80,000 EI – $690,000 purchases – $25,000 freight-in).
C. $110,000
D. $265,000
Question: 5The financial statement that provides a summary of the firm’s operations for a period of time is the
A. Income statement.
Answer (A) is correct.
The results of operations for a period of time are reported in the income statement (statement of
earnings) on the accrual basis using an approach oriented to historical transactions.
B. Statement of financial position.
C. Statement of shareholders’ equity.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Statement of retained earnings.
Question: 6Comprehensive income is best defined as
A. Net income excluding extraordinary gains and losses.
B. The change in net assets for the period including contributions by owners and distributions to owners.
C. Total revenues minus total expenses.
D. The change in net assets for the period excluding owner transactions.
Answer (D) is correct.
Comprehensive income includes all changes in equity of a business entity except those changes
resulting from investments by owners and distributions to owners. Comprehensive income includes
two major categories: net income and other comprehensive income (OCI). Net income includes the
results of operations classified as income from continuing operations and discontinued operations.
Components of comprehensive income not included in the determination of net income are included in
OCI, for example, unrealized gains and losses on available-for-sale debt securities (except those that
are hedged items in a fair value hedge).
Question: 7Which one of the following items is included in the determination of income from continuing
operations?
A. Discontinued operations.
B. Extraordinary loss.
C. Cumulative effect of a change in an accounting principle.
D. Unusual loss from a write-down of inventory.
Answer (D) is correct.
Items are not to be treated as extraordinary gains and losses. Rather, they are included in the
determination of income from continuing operations. These gains and losses include those from writedowns of receivables and inventories, sale of productive assets, strikes, and accruals on long-term
contracts. A write-down of inventory is therefore included in the computation of income from
continuing operations.
Question: 8Because of inexact estimates of the service life and the residual value of a plant asset, a fully
depreciated asset was sold in the current year at a material gain. This gain most likely should be reported
A. In the other revenues and gains section of the current income statement.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
Revenues occur in the course of ordinary activities. Gains may or may not occur in the course of
ordinary activities. For example, gains may occur from the sale of noncurrent assets. Thus, the gain on
the sale of a plant asset is not an operating item and should be classified in an income statement with
separate operating and nonoperating sections in the other revenues and gains section.
B. As part of sales revenue on the current income statement.
C. In the extraordinary item section of the current income statement.
D. As an adjustment to prior periods’ depreciation on the statement of changes in equity.
Question: 9In recording transactions, which of the following best describes the relation between expenses and
losses?
A. Losses are extraordinary charges to income, whereas expenses are ordinary charges to income.
B. Losses are material items, whereas expenses are immaterial items.
C. Losses are expenses that may or may not arise in the course of ordinary activities.
Answer (C) is correct.
Expenses are outflow or other usage of assets or incurrences of liability (or both) from activities that
qualify as ongoing major or central operations. Losses are similar to expenses but generally do not
occur in ordinary activities. For example, losses may result from the sale of noncurrent assets or from
natural disasters.
D. Expenses can always be prevented, whereas losses can never be prevented.
Question: 10An entity has a 50% gross margin, general and administrative expenses of $50, interest expense of
$20, and net income of $10 for the year just ended. If the corporate tax rate is 50%, the level of sales revenue for the
year just ended was
A. $90
B. $135
C. $150
D. $180
Answer (D) is correct.
Net income equals sales minus cost of sales, G&A expenses, interest, and tax. Given a 50% tax rate,
income before tax must have been $20 [$10 net income ÷ (1.0 – 0.5 tax rate)]. Accordingly, income
before interest and tax must have been $40 ($20 income before tax + $20 interest), and the gross
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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margin (sales – cost of sales) must have been $90 ($40 income before interest and tax + $50 G&A
expenses). If the gross margin is 50% of sales, sales equals $180 ($90 gross margin ÷ 0.5).
Question: 11Assume that employees confessed to a $500,000 inventory theft but are not able to make restitution.
How should this material fraud be shown in the company’s financial statements?
A. Classified as a loss and shown as a separate line item in the income statement.
Answer (A) is correct.
Losses may or may not occur in the course of ordinary activities. For example, they may result from
nonreciprocal transactions (e.g., theft), reciprocal transactions (e.g., a sale of plant assets), or from
holding assets or liabilities. Losses are typically displayed separately.
B. Initially classified as an accounts receivable because the employees are responsible for the goods.
Because they cannot pay, the loss would be recognized as a write-off of accounts receivable.
C. Included in cost of goods sold because the goods are not on hand, losses on inventory shrinkage are
ordinary, and it would cause the least amount of attention.
D. Recorded directly to retained earnings because it is not an income-producing item.
Question: 12An entity had the following opening and closing inventory balances during the current year:
1/1
12/31
Finished goods
$ 90,000 $260,000
Raw materials
105,000
130,000
Work-in-progress
220,000
175,000
The following transactions and events occurred during the current year:
 $300,000 of raw materials were purchased, of which $20,000 were returned because of defects.
 $600,000 of direct labor costs were incurred.
 $750,000 of production overhead costs were incurred.
The cost of goods sold for the current year ended December 31 would be
A. $1,480,000
Answer (A) is correct.
Cost of goods sold equals cost of goods manufactured (COGM) adjusted for the change in finished
goods. COGM equals the sum of raw materials used, direct labor costs, and production overhead,
adjusted for the change in work-in-progress. Raw materials used equals $255,000 ($105,000 BI +
$300,000 purchases – $20,000 returns – $130,000 EI). Thus, COGM equals $1,650,000 ($255,000 RM
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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+ $600,000 DL + $750,000 OH + $220,000 BWIP – $175,000 EWIP), and COGS equals $1,480,000
($1,650,000 COGM + $90,000 BFG – $260,000 EFG).
B. $1,500,000
C. $1,610,000
D. $1,650,000
Question: 13If the beginning balance for May of the materials inventory account was $27,500, the ending
balance for May is $28,750, and $128,900 of materials were used during the month, the materials purchased during
the month cost
A. $101,400
B. $127,650
C. $130,150
Answer (C) is correct.
Purchases equals usage adjusted for the inventory change. Hence, purchases equals $130,150
($128,900 used – $27,500 BI + $28,750 EI).
D. $157,650
Question: 14Given the following data for a company, what is the cost of goods sold?
Beginning inventory of finished goods $100,000
Cost of goods manufactured
700,000
Ending inventory of finished goods
200,000
Beginning work-in-process inventory
300,000
Ending work-in-process inventory
50,000
A. $500,000
B. $600,000
Answer (B) is correct.
The company’s cost of goods sold can be calculated as follows:
Beginning inventory of finished goods
$ 100,000
Add: Cost of goods manufactured
700,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Less: Ending inventory of finished goods
Cost of goods sold
(200,000)
$ 600,000
C. $800,000
D. $950,000
Question: 15The following information was taken from last year’s accounting records of a manufacturing
company.
Inventory
January 1 December 31
Raw materials
$38,000 $ 45,000
Work-in-process
21,000
10,000
Finished goods
78,000
107,000
Other information
Direct labor
$236,000
Shipping costs on outgoing orders
6,500
Factory rent
59,000
Factory depreciation
18,700
Advertising expense
24,900
Net purchases of raw materials
115,000
Corporate administrative salaries
178,000
Material handling costs
35,800
On the basis of this information, the company’s cost of goods manufactured and cost of goods sold are
A. $460,500 and $489,500, respectively.
B. $468,500 and $439,500, respectively.
Answer (B) is correct.
This solution requires a series of computations.
Beginning raw materials
$ 38,000
Add: Net purchases raw materials
$115,000
Materials available
$153,000
Less: Ending materials
(45,000)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Materials used in production
$108,000
Direct labor
236,000
Manufacturing overhead
Factory rent
$59,000
Factory depreciation
18,700
Material handling costs
35,800
Total Manufacturing overhead
Total manufacturing costs
Add: Beginning work-in-process
Less: Ending work-in-process
113,500
$457,500
21,000
(10,000)
Costs of Goods Manufactured
$468,500
Add: Beginning finished goods
78,000
Less: Ending finished goods
(107,000)
Cost of Goods Sold
$439,500
C. $468,500 and $470,900, respectively.
D. $646,500 and $617,500, respectively.
Question: 16The following information pertains to a corporation’s income statement for the 12 months just
ended. The company has an effective income tax rate of 40%.
Discontinued operations
$(70,000)
Income from continuing operations (net of tax)
72,000
Cumulative effect of change in accounting principle
60,000
Net income for the year is
A. $36,000
B. $12,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $8,000
D. $30,000
Answer (D) is correct.
Net income for the year is calculated as follows:
Income from continuing operations (net of tax)
Discontinued operations
Income
Times:
Statement
Tax
As
Item
Effect
Reported
$(70,000) (1.0 – .40)
$ 72,000
(42,000)
Net income
$30,000
Question: 17Which of the following items is not classified as other comprehensive income (OCI)?
A. Extraordinary gains from extinguishment of debt.
Answer (A) is correct.
Comprehensive income is divided into net income and other comprehensive income (OCI). Under
existing accounting standards, OCI includes (1) unrealized gains and losses on available-for-sale debt
securities (except those that are hedged items in a fair value hedge); (2) gains and losses on derivatives
designated, qualifying, and effective as cash flow hedges; (3) certain amounts associated with
recognition of the funded status of postretirement defined benefit plans; and (4) certain foreign
currency items, including foreign currency translations.
B. Foreign currency translation adjustments.
C. Prior service cost adjustment resulting from amendment of a defined benefit pension plan.
D. Unrealized gains for the year on available-for-sale debt securities.
Question: 18Which of the following are acceptable formats for reporting comprehensive income?
I. In one continuous financial statement
II. In a statement of changes in equity
III. In a separate statement of net income
IV. In two separate but consecutive financial statements
A. I and II only.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. I, II, and III only.
C. III and IV only.
D. I and IV only.
Answer (D) is correct.
If an entity that presents a full set of financial statements has items of other comprehensive income
(OCI), it must present comprehensive income either (1) in a single continuous statement of
comprehensive income or (2) in two separate but consecutive statements (an income statement and a
statement of OCI).
Question: 19A company reports the following information as of December 31:
Sales revenue
$800,000
Cost of goods sold
600,000
Operating expenses
90,000
Unrealized holding gain on available-for-sale debt securities, net of tax
30,000
What amount should the company report as comprehensive income as of December 31?
A. $30,000
B. $110,000
C. $140,000
Answer (C) is correct.
Comprehensive income includes net income and other comprehensive income. Net income equals
$110,000 ($800,000 sales revenue – $600,000 COGS – $90,000 operating expenses). Unrealized
holding gains on available-for-sale debt securities ($30,000) are included in other comprehensive
income. Thus, comprehensive income is $140,000 ($110,000 + $30,000).
D. $200,000
Question: 20All of the following are defined as elements of an income statement except
A. Expenses.
B. Shareholders’ equity.
Answer (B) is correct.
Equity of a business entity (or the net assets of a nonbusiness organization) is a residual amount that
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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reflects the basic accounting equation: assets minus liabilities equals equity (or net assets). It is
reported on the statement of financial position.
C. Gains and losses.
D. Revenues.
Question: 21According to U.S. GAAP, where on the income statement should a multinational company report
the loss from the disposal sale of a major operating unit?
A. Report the loss, pretax, in a separate section between income from continuing operations and net income.
B. Report the loss, net of tax, in a separate section between income from continuing operations and net
income.
Answer (B) is correct.
Gain or loss on the disposal of a major operating unit is reported net of tax in discontinued operations.
Discontinued operations are reported between income from continuing operations and net income.
C. Report the loss, pretax, in a separate section between income from operations and income before income
tax.
D. Report the loss, net of tax, in a separate section between income before tax and net income.
Question: 22A company reported first quarter revenues of $10,000,000, gross profit margin of 25%, and
operating income of 15%. To reduce overhead expenses, a consultant recommends that the company outsource some
of its operating activities beginning with the second quarter. This recommendation is anticipated to reduce operating
expenses by 20% without affecting sales volume. The company has an income tax rate of 35%. Assuming cost of
sales remains at 75%, what is the impact on the income statement if the company implements the recommendation?
A. Gross profit will increase by 8.0%.
B. Operating income will increase by 8.7%.
C. Operating income will increase by $200,000.
Answer (C) is correct.
Revenues
$10,000,000
COGS
(7,500,000)*
Gross profit
Operating expenses
2,500,000
($10,000,000 × 25%)
(1,000,000)**
Operating income $ 1,500,000
($10,000,000 × 15%)
* COGS = Revenues – Gross profit
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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** Operating expenses = Gross profit – Operating income
If operating expenses are reduced by 20%:
Gross profit
$ 2,500,000
($10,000,000 × 25%)
Operating expenses
(800,000)
($1,000,000 × 80%)
Operating income
1,700,000
Accordingly, a 20% reduction in operating expenses results in a $200,000 ($1,700,000 – $1,500,00)
increase in operating income.
D. Operating expenses will be reduced by $300,000.
Question: 23A company incurred $200,000 of manufacturing cost during the month, with a beginning finished
goods inventory of $20,000 and an ending finished goods inventory of $15,000. Assuming no work-in-process
inventories, the company’s cost of goods sold was
A. $220,000
B. $205,000
Answer (B) is correct.
Cost of goods sold = Beginning inventory + Cost of goods manufactured – Ending inventory
Thus, cost of goods sold = $20,000 + $200,000 – $15,000 = $205,000.
C. $200,000
D. $105,000
Question: 24To comply with the matching principle, the cost of labor services of an employee who participates
in the manufacturing of a product normally should be charged to the income statement in the period in which the
A. Work is performed.
B. Employee is paid.
C. Product is completed.
D. Product is sold.
Answer (D) is correct.
The matching principle states that expenses should be recognized in the same period as the revenues
that those expenses helped produce. Revenues related to the employee’s labor are not recognized until
the goods are sold.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Subunit 4: Statement of Changes in Equity and Equity Transactions
Question: 1Items reported as prior-period adjustments
A. Do not include the effect of a mistake in the application of accounting principles, as this is accounted for
as a change in accounting principle rather than as a prior-period adjustment.
B. Do not affect the presentation of prior-period comparative financial statements.
C. Do not require further disclosure in the body of the financial statements.
D. Are reflected as adjustments of the opening balance of the retained earnings of the earliest period
presented.
Answer (D) is correct.
Prior-period adjustments are made for the correction of errors. The effects of errors on prior-period
financial statements are reported as adjustments to beginning retained earnings for the earliest period
presented in the retained earnings statement. Such errors do not affect the income statement for the
current period.
Question: 2Unless the shares are specifically restricted, a holder of common stock with a preemptive right may
share proportionately in all of the following except
A. The vote for directors.
B. Corporate assets upon liquidation.
C. Cumulative dividends.
Answer (C) is correct.
Common stock does not have the right to accumulate unpaid dividends. This right is often attached to
preferred stock.
D. New issues of stock of the same class.
Question: 3On December 1, a corporation’s board of directors declared a property dividend, payable in stock
held in a company. The dividend was payable on January 5. The investment in the company had an original cost of
$100,000 when acquired 2 years ago. The market value of this investment was $150,000 on December 1, $175,000
on December 31, and $160,000 on January 5. The amount to be shown on the corporation’s statement of financial
position at December 31 as property dividends payable would be
A. $100,000
B. $150,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
When a property dividend is declared, the property is remeasured at its fair value as of the declaration
date. This amount is then reclassified from retained earnings to property dividends payable.
C. $160,000
D. $175,000
Question: 4The statement of shareholders’ equity shows a
A. Reconciliation of the beginning and ending balances in shareholders’ equity accounts.
Answer (A) is correct.
The statement of shareholders’ equity (changes in equity) presents a reconciliation in columnar format
of the beginning and ending balances in the various shareholders’ equity accounts. A statement of
changes in equity may include, for example, columns for (1) totals, (2) comprehensive income, (3)
retained earnings, (4) accumulated OCI (but the components of OCI are presented in another
statement), (5) common stock, and (6) additional paid-in capital.
B. Listing of all shareholders’ equity accounts and their corresponding dollar amounts.
C. Computation of the number of shares outstanding used for earnings per share calculations.
D. Reconciliation of net income to net operating cash flow.
Question: 5Which one of the following statements regarding dividends is correct?
A. A stock dividend of 15% of the outstanding common shares results in a debit to retained earnings at the
par value of the stock distributed.
B. At the declaration date of a 30% stock dividend, the carrying value of retained earnings will be reduced
by the fair market value of the stock distributed.
C. The declaration of a cash dividend will have no effect on book value per share.
D. The declaration and payment of a 10% stock dividend will result in a reduction of retained earnings at the
fair market value of the stock.
Answer (D) is correct.
When a small stock dividend is declared (less than 20% to 25% of the previously outstanding common
shares), retained earnings is debited for the fair value of the stock.
Question: 6Which one of the following statements is correct regarding the effect preferred stock has on a
company?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. The firm’s after-tax profits are shared equally by common and preferred shareholders.
B. Control of the firm is now shared by the common and preferred shareholders, with preferred shareholders
having greater control.
C. Preferred shareholders’ claims take precedence over the claims of common shareholders in the event of
liquidation.
Answer (C) is correct.
Preferred stockholders have preference over common stockholders with respect to dividend and
liquidation rights, but payment of preferred dividends, unlike bond interest is not mandatory. In
exchange for these preferences, the preferred stockholders give up the right to vote. Consequently,
preferred stock is a hybrid of debt and equity.
D. Nonpayment of preferred dividends places the firm in default, as does nonpayment of interest on debt.
Question: 7An adjusted trial balance at December 31, Year 6, includes the following account balances:
Common stock, $3 par
$600,000
Additional paid-in capital
800,000
Treasury stock, at cost
50,000
Net unrealized holding loss on
available-for-sale securities
20,000
Retained earnings: appropriated for
uninsured earthquake losses
150,000
Retained earnings: unappropriated
200,000
What amount should be reported as total equity in the December 31, Year 6, balance sheet?
A. $1,680,000
Answer (A) is correct.
Total credits to equity equal $1,750,000 ($600,000 common stock at par + $800,000 additional paid-in
capital + $350,000 retained earnings). The treasury stock recorded at cost is subtracted from (debited
to) total equity, and the unrealized holding loss on available-for-sale securities is debited to other
comprehensive income, a component of equity. Because total debits equal $70,000 ($50,000 cost of
treasury stock + $20,000 unrealized loss on available-for-sale securities), total equity equals
$1,680,000 ($1,750,000 – $70,000).
B. $1,720,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $1,780,000
D. $1,820,000
Question: 8A public company has declared a property dividend of one share of its investment in M corporation
for every 10 shares of its common stock outstanding. The M shares were originally purchased by the company for
$50 per share; on the date the dividend was declared, the market value was $75 per share. As a result of this
declaration, the company should recognize
A. A loss of $25 per share to be distributed.
B. A gain of $25 per share to be distributed.
Answer (B) is correct.
When a property dividend is declared, the property is remeasured at its fair value as of the declaration
date ($75 – $50 = $25).
C. No gain or loss.
D. An appropriate gain or loss based on the market value on the date of distribution.
Question: 9A corporation has 10,000,000 shares of $10 par-value stock authorized, of which 2,000,000 shares
are issued and outstanding. The Board of Directors declared a 2-for-1 stock split on November 30 to be issued on
December 30. The stock was selling for $30 per share on the date of declaration. In addition, the Board has amended
the articles of incorporation to allow for a proportional increase in the number of authorized shares. The par-value
information appearing in the shareholder’s equity section of the statement of financial position at December 31 will
be
A. $5
Answer (A) is correct.
As a result of the 2-for-1 stock split, the par value of Grand’s shares is halved to $5.
B. $10
C. $15
D. $30
Question: 10A company has 1,000,000 shares of common stock authorized, of which 100,000 shares are held as
treasury shares; the remainder are held by the company shareholders. On November 1, the Board of Directors
declared a cash dividend of $.10 per share to be paid on January 2. At the same time, the Board declared a 5% stock
dividend to be issued on December 31. On the date of the declaration, the stock was selling for $10 a share, and no
fractional shares were to be issued. The total amount of these declarations to be shown as current liabilities on the
statement of financial position as of December 31 is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $90,000
Answer (A) is correct.
Cash dividends are only paid on outstanding shares. Thus, the dividend payable at December 31 is
$90,000 (900,000 × $.10). Stock dividends distributable are reported in equity, not current liabilities.
B. $100,000
C. $540,000
D. $600,000
Question: 11How would a stock split affect the par value of the stock and the company’s shareholders’ equity?
Par Value Shareholders’ Equity
A. Decrease Increase
B. Decrease No change
Answer (B) is correct.
A stock split reduces the par value of the stock and increases the number of shares outstanding, making
it more attractive to investors. As with a stock dividend, each shareholder’s proportionate interest in
the company and total book value remain unchanged.
C. Increase Decrease
D. Increase No change
Question: 12An undistributed stock dividend declared by the Board of Directors should be reported as a(n)
A. Current liability.
B. Long-term liability.
C. Footnote to the financial statements.
D. Item in the shareholders’ equity section.
Answer (D) is correct.
In accounting for a stock dividend, the fair value of the additional shares issued is reclassified from
retained earnings to capital stock and the difference to additional paid in capital. Stock dividend
distributable is an item of shareholders’ equity and not a liability.
Question: 13Which one of the following transactions does not affect the balance of retained earnings?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Declaration of a stock dividend.
B. A quasi-reorganization.
C. Declaration of a stock split.
Answer (C) is correct.
In a stock split, no journal entry is recorded and no retained earnings are reclassified.
D. Declaration of a property dividend.
Question: 14A corporation’s common stock is currently selling for $108 per share. The corporation is planning a
new stock issue in the near future and would like to stimulate interest in the company. The Board, however, does not
want to distribute capital at this time. Therefore, the corporation is considering whether to offer a 2-for-1 common
stock split or a 100% stock dividend on its common stock. The best reason for opting for the stock split is that
A. It will not decrease shareholders’ equity.
B. It will not impair the company’s ability to pay dividends in the future.
Answer (B) is correct.
A 2-for-1 stock split doubles the number of shares outstanding; retained earnings is not affected. Under
a stock dividend, however, a portion of retained earnings is reclassified as common stock. Since
dividends are restricted by the amount of available retained earnings, a stock dividend, but not a stock
split, will impair the firm’s ability to pay dividends in the future.
C. The impact on earnings per share will not be as great.
D. The par value per share will remain unchanged.
Question: 15A change in the estimate for bad debts should be
A. Treated as an error.
B. Handled retroactively.
C. Considered as an extraordinary item.
D. Treated as affecting only the period of the change.
Answer (D) is correct.
A change in estimate for bad debts requires prospective application (i.e., the effect of the change
should be treated as affecting the period of the change and any future periods). Changes in estimates
are viewed as normal recurring corrections, and retrospective treatment is prohibited.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 16A chain of supermarkets specializing in gourmet food, has been using the average cost method to
value its inventory. During the current year, the company changed to the first-in, first-out method of inventory
valuation. The president of the company reasoned that this change was appropriate since it would more closely
match the flow of physical goods. This change should be reported on the financial statements as
A. Cumulative-effect type accounting change.
Answer (A) is correct.
The change in inventory valuation method is a change in accounting principle, which should be
presented on a retrospective basis to maintain consistency and comparability.
B. Affecting only future periods.
C. Change in accounting estimate.
D. Correction of an error.
Question: 17A publicly-traded company has 100,000 outstanding shares of common stock with a par value of
$5. The company uses U.S. GAAP to prepare its financial statements. The company recently declared a 5% stock
dividend. On the date the stock dividend was declared, the company’s stock was trading at $25 per share. On the
date of declaration, the company’s
A. Additional paid-in capital will increase.
Answer (A) is correct.
A stock dividend involves no distribution of cash or other property. Stock dividends are accounted for
as a reclassification of different equity accounts. When a stock dividend is declared, the company will
debit retained earnings and credit common stock and additional paid-in capital. Thus, additional paidin capital will increase.
B. Retained earnings will increase.
C. Total shareholders’ equity will decrease.
D. Outstanding shares will decrease.
Question: 18The major segments of the statement of retained earnings for a period are
A. Dividends declared, prior period adjustments, and changes due to treasury stock transactions.
B. Before-tax income or loss and dividends paid or declared.
C. Prior-period adjustments, before-tax income or loss, income tax, and dividends paid.
D. Net income or loss, prior-period adjustments, and dividends paid or declared.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
The statement of retained earnings is a basic financial statement. Together with the income statement,
the statement of retained earnings is meant to broadly reflect the results of operations. The statement of
retained earnings consists of beginning retained earnings adjusted for any prior period adjustment (net
of tax), with further adjustments for income (loss), dividends, and in certain other rare adjustments,
e.g., quasi-reorganizations. The final figure is ending retained earnings.
Question: 19On December 15, a company distributed a cash dividend of $120,000 and declared a 5% stock
dividend with a market value of $100,000. If the company uses U.S. GAAP, these two transactions would decrease
the company’s total shareholders’ equity by
A. $0
Answer (A) is correct.
The distribution of previously declared cash dividends will not have any effect on a company’s
shareholders’ equity. At the time that a dividend is declared, the amount of the dividend becomes a
liability. It was at the time of declaration that the dividend reduced equity. The payment of that liability
at a later date does not affect equity. The distribution of a stock dividend never affects the amount of
equity since it merely represents a repackaging of the company’s equity accounts.
B. $100,000
C. $120,000
D. $220,000
Question: 20Preferred stock and common stock differ in that
A. Preferred stock has a higher priority than common stock with regard to earnings and assets in the event of
bankruptcy.
Answer (A) is correct.
Preferred stocks have a higher priority than common stock with regard to earnings and assets in the
event of a bankruptcy.
B. Failure to pay dividends on common stock will not force the company into bankruptcy while failure to
pay dividends on preferred stock will force the company into bankruptcy.
C. Preferred shareholders generally control the management of the company while common shareholders
have limited voting rights.
D. Preferred stock earnings are deductible for tax purposes while common stock earnings are not.
Fact Pattern:
The trial balance of Mint Corp. at December 31, Year 6, is presented below and has been adjusted except for
income tax expense. Other financial data for the year ended December 31, Year 6, are as follows:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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 During Year 6, estimated tax payments of $450,000 were charged to prepaid taxes. Mint has not recorded
income tax expense. There were no temporary or permanent differences, and Mint’s tax rate is 30%.

Dr.
Cash
$
Cr.
600,000
Accounts receivable, net
3,500,000
Contract asset
1,600,000
Contract liability
$
Prepaid taxes
700,000
450,000
Fixed assets, net
1,480,000
Note payable -- noncurrent
1,620,000
Common stock
750,000
Additional paid-in capital
2,000,000
Retained earnings -- unappropriated
900,000
Retained earnings -- restricted for note payable
160,000
Earnings from long-term contracts
Costs and expenses
6,680,000
5,180,000
$12,810,000
$12,810,000
Question: 21In Mint’s December 31, Year 6, balance sheet, what amount should be reported as total retained
earnings?
A. $1,950,000
B. $2,110,000
Answer (B) is correct.
Earnings before taxes equals $1,500,000 ($6,680,000 revenues – $5,180,000 expenses). Income tax
expense is thus $450,000 ($1,500,000 × 30%) and net income $1,050,000 ($1,500,000 – $450,000).
Year-end retained earnings is therefore $2,110,000 ($900,000 unappropriated RE + $160,000 restricted
RE + $1,050,000 net income).
C. $2,400,000
D. $2,560,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 22A company pays more than the fair value to acquire treasury stock. The difference between the
price paid to acquire the treasury stock and the fair value should be recorded as
A. An asset.
B. A liability.
C. Shareholders’ equity.
Answer (C) is correct.
Apart from cash paid or received, a firm cannot recognize assets, liabilities, gains, or losses from
transactions in its own stock. Treasury stock is reported on the balance sheet as a subtraction from
equity.
D. An expense.
Question: 23Data regarding Ball Corp.’s investment in available-for-sale debt securities follow:
Cost
Fair Value
December 31, Year 3 $150,000 $130,000
December 31, Year 4
150,000
160,000
Differences between cost and fair values are considered temporary. The decline in fair value was considered
temporary and was properly accounted for at December 31, Year 3. Ball’s Year 4 statement of changes in equity
should report an increase of
A. $30,000
Answer (A) is correct.
Available-for-sale debt securities are measured at fair value in the financial statements. Unrealized
holding gains or losses on their remeasurement to fair value are reported in OCI. On 12/31/Year 3, the
amount reported was $130,000. The increase in the fair value in Year 4 of $30,000 ($160,000 –
$130,000) is recognized as an unrealized holding gain in Year 4 OCI. The OCI for the period (a
temporary account) is closed to accumulated OCI (a permanent account) that is reported in the equity
section of the balance sheet. Thus, the unrealized holding gain of $30,000 increases the accumulated
OCI in Year 4. The statement of changes in equity reports the changes in all the equity accounts,
including accumulated OCI.
B. $20,000
C. $10,000
D. $0
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 24United, Inc.’s unadjusted current assets section and equity section of its December 31, Year 1,
balance sheet are as follows:
Current Assets
Cash
$ 60,000
Investments in equity securities (including
$300,000 of United common stock)
400,000
Trade accounts receivable
340,000
Inventories
148,000
Total
$948,000
Equity
Common stock
$2,224,000
Retained earnings (deficit)
Total
(224,000)
$2,000,000
The investments and inventories are reported at their costs, which approximate fair values. In its Year 1 statement of
equity, United’s total amount of equity at December 31, Year 1, is
A. $2,224,000
B. $2,000,000
C. $1,924,000
D. $1,700,000
Answer (D) is correct.
The $300,000 of United common stock is treasury stock that should be reported as a contra item in the
shareholders’ equity section, not as a current asset. Thus, total equity is $1,700,000 ($2,224,000
common stock – $224,000 deficit in retained earnings – $300,000 treasury stock).
Question: 25In Year 1, Company A recorded the following transactions related to the equity section of its
balance sheet:
1/4/Year 1 Issued 100,000 shares of $3 par value common stock for $500,000
3/1/Year 1 Repurchased 50,000 shares of common stock for $4 per share
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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8/8/Year 1 Reissued 50,000 shares of common stock at $6 per share
12/1/Year 1 Declared, but did not pay, dividends of $1 per common share
12/31/Year 1 Recorded net income of $75,000 for Year 1
Assume that at the beginning of Year 1, A’s equity consisted only of $100,000 of retained earnings. Additionally,
assume that A uses the cost method of accounting for treasury stock. What is A’s Year 1 ending equity balance?
A. $675,000
Answer (A) is correct.
Starting with an equity balance of $100,000, the issuance of common stock increases total equity to
$600,000 ($100,000 + $500,000). The repurchase of treasury stock reduces total equity by $200,000
(50,000 shares × $4); however, the subsequent reissuance increases total equity by $300,000 (50,000
shares × $6). Furthermore, the declaration of dividends, although not paid, reduces retained earnings
by $100,000 [$1 × 100,000 shares (100,000 issued on 1/4/Year 1 – 50,000 repurchased on 3/1/Year 1 +
50,000 reissued on 8/8/Year 1). Finally, the net income is closed out to retained earnings, thus total
equity increases by $75,000. Accordingly, the ending balance of equity is $675,000 ($100,000 +
$500,000 – $200,000 + $300,000 – $100,000 + $75,000).
B. $775,000
C. $575,000
D. $600,000
Subunit 5: Statement of Cash Flows
Question: 1When preparing the statement of cash flows, companies are required to report separately as operating
cash flows all of the following except
A. Interest received on investments in bonds.
B. Interest paid on the company’s bonds.
C. Cash collected from customers.
D. Cash dividends paid on the company’s stock.
Answer (D) is correct.
In general, the cash flows from transactions and other events that enter into the determination of
income are to be classified as operating. Cash receipts from sales of goods and services, from interest
on loans, and from dividends on equity securities are from operating activities. Cash payments to
suppliers for inventory; to employees for wages; to other suppliers and employees for other goods and
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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services; to governments for taxes, duties, fines, and fees; and to lenders for interest are also from
operating activities. However, distributions to owners (cash dividends on a company’s own stock) are
cash flows from financing, not operating, activities.
Question: 2A statement of cash flows is intended to help users of financial statements
A. Evaluate a firm’s liquidity, solvency, and financial flexibility.
Answer (A) is correct.
The primary purpose of a statement of cash flows is to provide information about the cash receipts and
payments of an entity during a period. If used with information in the other financial statements, the
statement of cash flows should help users to assess the entity’s ability to generate positive future net
cash flows (liquidity), its ability to meet obligations (solvency) and pay dividends, the need for
external financing, the reasons for differences between income and cash receipts and payments, and the
cash and noncash aspects of the investing and financing activities.
B. Evaluate a firm’s economic resources and obligations.
C. Determine a firm’s components of income from operations.
D. Determine whether insiders have sold or purchased the firm’s stock.
Question: 3Which of the following items is specifically included in the body of a statement of cash flows?
A. Operating and nonoperating cash flow information.
Answer (A) is correct.
The body of a statement of cash flows provides information about cash flows from operating activities
and nonoperating activities (i.e., investing activities and financing activities). All noncash transactions
are excluded from the body of the statement of cash flows to avoid undue complexity and detraction
from the objective of providing information about cash flows.
B. Conversion of debt to equity.
C. Acquiring an asset through a capital lease.
D. Purchasing a building by giving a mortgage to the seller.
Question: 4With respect to the content and form of the statement of cash flows, the
A. Pronouncements covering the cash flow statement encourage the use of the indirect method.
B. Indirect method adjusts ending retained earnings to reconcile it to net cash flows from operations.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Direct method of reporting cash flows from operating activities includes disclosing the major classes of
gross cash receipts and gross cash payments.
Answer (C) is correct.
The FASB encourages use of the direct method of reporting major classes of operating cash receipts
and payments, but the indirect method may be used. The minimum disclosures of operating cash flows
under the direct method are cash collected from customers, interest and dividends received, other
operating cash receipts, cash paid to employees and other suppliers of goods or services, interest paid,
income taxes paid, and other operating cash payments.
D. Reconciliation of the net income to net operating cash flow need not be presented when using the direct
method.
Question: 5Depreciation expense is added to net income under the indirect method of preparing a statement of
cash flows in order to
A. Report all assets at gross carrying amount.
B. Ensure depreciation has been properly reported.
C. Reverse noncash charges deducted from net income.
Answer (C) is correct.
The indirect method begins with net income and then removes the effects of past deferrals of operating
cash receipts and payments, accruals of expected future operating cash receipts and payments, and net
income items not affecting operating cash flows (e.g., depreciation).
D. Calculate net carrying amount.
Question: 6All of the following should be classified under the operating section in a statement of cash
flows except a
A. Decrease in inventory.
B. Depreciation expense.
C. Decrease in prepaid insurance.
D. Purchase of land and building in exchange for a long-term note.
Answer (D) is correct.
Operating activities include all transactions and other events not classified as investing and financing
activities. Operating activities include producing and delivering goods and providing services. Cash
flows from such activities are usually included in the determination of net income. However, the
purchase of land and a building in exchange for a long-term note is a noncash investing activity.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 7Which one of the following transactions should be classified as a financing activity in a statement of
cash flows?
A. Purchase of equipment.
B. Purchase of treasury stock.
Answer (B) is correct.
Financing activities are defined to include the issuance of stock, the payment of dividends, the receipt
of donor-restricted resources to be used for long-term purposes, treasury stock transactions (purchases
or sales), the issuance of debt, the repayment of amounts borrowed, obtaining and paying for other
resources obtained from creditors on long-term credit.
C. Sale of trademarks.
D. Payment of interest on a mortgage note.
Question: 8A company entered into the following transactions during the year:
 Purchased stock for $200,000
 Purchased electronic equipment for use on the manufacturing floor for $300,000
 Paid dividends to shareholders of the company in the amount of $800,000
The amount to be reported in the investing activities section of the company’s statement of cash flows would be
A. $200,000
B. $500,000
Answer (B) is correct.
The statement of cash flows classifies an enterprise’s cash flows into three categories. Investing
activities typically include the purchase and sale of securities of other entities and the purchase and
sale of property, plant, and equipment. Thus, the amount to be reported in the investing activities
section of the company’s statement of cash flows is $500,000 ($200,000 + $300,000).
C. $800,000
D. $1,300,000
Question: 9Which one of the following transactions should not be classified as a financing activity in the
statement of cash flows?
A. Issuance of common stock.
B. Purchase of treasury stock.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Payment of dividends.
D. Income tax refund.
Answer (D) is correct.
Financing activities include obtaining resources from owners and providing them with a return on, and
a return of, their investment. Cash inflows from financing activities include proceeds from issuing
equity instruments. Cash outflows include outlays to reacquire the enterprise’s equity instruments, and
outlays to pay dividends. However, an income tax refund is an operating activity.
Question: 10All of the following should be classified as investing activities in the statement of cash
flows except
A. Cash outflows to purchase manufacturing equipment.
B. Cash inflows from the sale of bonds of other entities.
C. Cash outflows to lenders for interest.
Answer (C) is correct.
Investing activities include the lending of money and the collecting of those loans; the acquisition,
sale, or other disposal of debt or equity instruments; and the acquisition, sale, or other disposition of
assets (excluding inventory) that are held for or used in the production of goods or services. Investing
activities do not include acquiring and disposing of certain loans or other debt or equity instruments
that are acquired specifically for resale. Cash outflows to lenders for interest are cash from an
operating, not an investing, activity.
D. Cash inflows from the sale of a manufacturing plant.
Question: 11All of the following should be included in the reconciliation of net income to net operating cash
flow in the statement of cash flows except a(n)
A. Decrease in inventory.
B. Decrease in prepaid insurance.
C. Purchase of land and building in exchange for a long-term note.
Answer (C) is correct.
The purchase of land and a building in exchange for a long-term note is a noncash investing activity
and therefore is not included in the reconciliation of net income to net operating cash flow in the
statement of cash flows.
D. Increase in income tax payable.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 12In preparing a statement of cash flows, an item included in determining net cash flow from
operating activities is the
A. Amortization of a bond premium.
Answer (A) is correct.
The debtor (issuer) on a bond sold at a premium debits or reduces the bond premium for the excess of
cash interest paid over interest expense recognized under the effective interest method. The lender
(buyer) likewise reduces the bond premium (by a credit) for the excess of cash interest received over
interest income recognized. Interest paid (received) is a cash outflow (inflow) from an operating
activity. In a reconciliation of net income to net cash flow from operating activities, both the issuer of
the bond and the purchaser must make an adjustment for the difference between the cash flow and the
effect on net income. Because the issuer’s cash outflow exceeded interest expense, it must deduct the
difference (premium amortization) from net income in performing the reconciliation. The purchaser’s
cash inflow is greater than interest income, so it must add the difference (premium amortization) to net
income to arrive at net cash flow from operating activities.
B. Proceeds from the sale of equipment for cash.
C. Cash dividends paid.
D. Purchase of treasury stock.
Question: 13The information reported in the statement of cash flows should help investors, creditors, and others
to assess all of the following except the
A. Amount, timing, and uncertainty of prospective net cash inflows of a firm.
B. Company’s ability to pay dividends and meet obligations.
C. Company’s ability to generate future cash flows.
D. Management of the firm with respect to the efficient and profitable use of its resources.
Answer (D) is correct.
The statement of cash flows is not designed to provide information with respect to the efficient and
profitable use of the firm’s resources. Financial reporting provides information about an enterprise’s
performance during a period when it was under the direction of a particular management but does not
directly provide information about that management’s performance. Financial reporting does not try to
separate the impact of a particular management’s performance from the effects of prior management
actions, general economic conditions, the supply and demand for an enterprise’s inputs and outputs,
price changes, and other events.
Question: 14To calculate cash flows using the indirect method, which one of the following items must be added
back to net income?
A. Revenue.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Marketing expense.
C. Depreciation expense.
Answer (C) is correct.
The indirect method begins with accrual-basis net income or the change in net assets and removes
items that did not affect operating cash flow. Depreciation is a non-cash item and thus does not affect
the cash flows. This amount must be added back to net income because it decreased net income even
though it had no cash effect.
D. Interest income.
Question: 15A company acquired land by assuming a mortgage for the full acquisition cost. This transaction
should be disclosed on its statement of cash flows as a(n)
A. Financing activity.
B. Investing activity.
C. Operating activity.
D. Noncash financing and investing activity.
Answer (D) is correct.
The exchange of debt for a long-lived asset does not involve a cash flow. It is therefore classified as a
noncash financing and investing activity.
Question: 16Net income was $3,000,000 for the year ended December 31. Additional information is as follows:
Depreciation on fixed assets
$1,500,000
Gain from cash sale of land
200,000
Increase in accounts payable
300,000
Dividends paid on preferred stock
400,000
The net cash provided by operating activities in the statement of cash flows for the year ended December 31 should
be
A. $4,200,000
B. $4,500,000
C. $4,600,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
Net operating cash flow may be determined by adjusting net income. Depreciation is an expense not
directly affecting cash flows that should be added back to net income. The increase in accounts
payable is added to net income because it indicates that an expense has been recorded but not paid. The
gain on the sale of land is an accrual-basis item affecting net income and thus should be subtracted.
The dividends paid on preferred stock are cash outflows from financing, not operating, activities and
do not require an adjustment. Thus, net cash flow from operations is $4,600,000 ($3,000,000 +
$1,500,000 – $200,000 + $300,000).
D. $4,800,000
Fact Pattern: Royce Company had the following transactions during the fiscal year ended
December 31, Year 2:
 Accounts receivable decreased from $115,000 on December 31,
Year 1, to $100,000 on December 31, Year 2.
 Royce’s board of directors declared dividends on December 31,
Year 2, of $.05 per share on the 2.8 million shares outstanding,
payable to shareholders of record on January 31, Year 3. The
company did not declare or pay dividends for fiscal Year 1.
 Sold a truck with a net carrying
amount of $7,000 for $5,000
cash, reporting a loss of $2,000.
 Paid interest to bondholders of
$780,000.
 The cash balance was $106,000
on December 31, Year 1, and
$284,000 on December 31,
Year 2.
Question: 17Royce Company uses the direct method to prepare its statement of cash flows at December 31, Year
2. The interest paid to bondholders is reported in the
A. Financing section, as a use or outflow of cash.
B. Operating section, as a use or outflow of cash.
Answer (B) is correct.
Payment of interest on debt is considered a cash outflow from an operating activity, although
repayment of debt principal is a financing activity.
C. Investing section, as a use or outflow of cash.
D. Debt section, as a use or outflow of cash.
Fact Pattern: Royce Company had the following transactions during the fiscal year ended
December 31, Year 2:
 Accounts receivable decreased from $115,000 on December 31,
Year 1, to $100,000 on December 31, Year 2.
 Royce’s board of directors declared dividends on December 31,
Year 2, of $.05 per share on the 2.8 million shares outstanding,
 Sold a truck with a net carrying
amount of $7,000 for $5,000
cash, reporting a loss of $2,000.
 Paid interest to bondholders of
$780,000.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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payable to shareholders of record on January 31, Year 3. The
company did not declare or pay dividends for fiscal Year 1.
 The cash balance was $106,000
on December 31, Year 1, and
$284,000 on December 31,
Year 2.
Question: 18Royce Company uses the indirect method to prepare its Year 2 statement of cash flows. It reports
a(n)
A. Source or inflow of funds of $5,000 from the sale of the truck in the financing section.
B. Use or outflow of funds of $140,000 in the financing section, representing dividends.
C. Deduction of $15,000 in the operating section, representing the decrease in year-end accounts receivable.
D. Addition of $2,000 in the operating section for the $2,000 loss on the sale of the truck.
Answer (D) is correct.
The indirect method determines net operating cash flow by adjusting net income. Under the indirect
method, the $5,000 cash inflow from the sale of the truck is shown in the investing section. A $2,000
loss was recognized and properly deducted to determine net income. This loss, however, did not
require the use of cash and should be added to net income in the operating section.
Fact Pattern: Royce Company had the following transactions during the fiscal year ended
December 31, Year 2:
 Accounts receivable decreased from $115,000 on December 31,
Year 1, to $100,000 on December 31, Year 2.
 Royce’s board of directors declared dividends on December 31,
Year 2, of $.05 per share on the 2.8 million shares outstanding,
payable to shareholders of record on January 31, Year 3. The
company did not declare or pay dividends for fiscal Year 1.
 Sold a truck with a net carrying
amount of $7,000 for $5,000
cash, reporting a loss of $2,000.
 Paid interest to bondholders of
$780,000.
 The cash balance was $106,000
on December 31, Year 1, and
$284,000 on December 31,
Year 2.
Question: 19The total of cash provided (used) by operating activities plus cash provided (used) by investing
activities plus cash provided (used) by financing activities is
A. Cash provided of $284,000.
B. Cash provided of $178,000.
Answer (B) is correct.
The total of cash provided (used) by the three activities (operating, investing, and financing) should
equal the increase or decrease in cash for the year. During Year 2, the cash balance increased from
$106,000 to $284,000. Thus, the sources of cash must have exceeded the uses by $178,000.
C. Cash used of $582,000.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Equal to net income reported for fiscal year ended December 31, Year 2.
Question: 20The following information was taken from accounting records for the year ended December 31:
Proceeds from issuance of preferred stock F $4,000,000
Dividends paid on preferred stock F
400,000
Bonds payable converted to common stock
Payment for purchase of machinery
Proceeds from sale of plant building
2% stock dividend on common stock
Gain on sale of plant building
2,000,000
500,000
1,200,000
300,000
200,000
The net cash flows from investing and financing activities that should be presented on the statement of cash flows
for the year ended December 31 are, respectively,
A. $700,000 and $3,600,000.
Answer (A) is correct.
The relevant calculations are as follows:
Proceeds from sale of plant building
Payment for purchase of machinery
$1,200,000
(500,000)
Net cash provided by investing activities $ 700,000
Proceeds from issuance of preferred stock
Dividends paid on preferred stock
$4,000,000
(400,000)
Net cash provided by financing activities $3,600,000
B. $700,000 and $3,900,000.
C. $900,000 and $3,900,000.
D. $900,000 and $3,600,000.
Question: 21When using the statement of cash flows to evaluate a company’s continuing solvency,
the most important factor to consider is the cash
A. Balance at the end of the period.
B. Flows from (used for) operating activities.
Answer (B) is correct.
Solvency is the ability of an entity to pay its noncurrent debts as they become due. A statement of cash
flows provides information about, among other things, an entity’s activities in generating cash through
operations (operating activities) to (1) repay debt, (2) distribute dividends, or (3) reinvest to maintain
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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or expand operating capacity. Thus, cash flows from operating activities (net operating cash inflows),
which are generated by an entity’s ongoing major or central activities, are the best indicator of its
ability to remain solvent over the long term.
C. Flows from (used for) investing activities.
D. Flows from (used for) financing activities.
Question: 22Dividends paid to shareholders are shown on the statement of cash flows as
A. Operating cash inflows.
B. Operating cash outflows.
C. Cash flows from investing activities.
D. Cash flows from financing activities.
Answer (D) is correct.
The payment of dividends is a cash outflow from a financing activity. The receipt of dividends,
however, is generally considered a cash inflow from an operating activity.
Question: 23All of the following are classifications on the statement of cash flows except
A. Operating activities.
B. Equity activities.
Answer (B) is correct.
The three classifications used on the statement of cash flows are operating activities, investing
activities, and financing activities.
C. Investing activities.
D. Financing activities.
Question: 24The sale of available-for-sale securities should be accounted for on the statement of cash flows as
a(n)
A. Operating activity.
B. Investing activity.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
Investing activities include acquiring and disposing of debt or equity instruments.
C. Financing activity.
D. Noncash investing and financing activity.
Question: 25An entity reported net income of $150,000 for the current year. Changes occurred in several
balance sheet accounts during the current year as follows:
Investment in stock, all of which was acquired in the previous year, carried on the equity basis $5,500 increase
Premium on bonds payable
1,400 decrease
Deferred income tax liability (long-term)
1,800 increase
In the current year cash flow statement, the reported net cash provided by operating activities should be
A. $150,400
B. $146,800
C. $144,900
Answer (C) is correct.
The increase in the equity-based investment reflects the investor’s share of the investee’s net income
after adjustment for dividends received. Hence, it is a noncash revenue and should be subtracted in the
reconciliation of net income to net operating cash inflow. Amortization of bond premium is a noncash
income statement item that reduces accrual-basis expenses and therefore must be subtracted from net
income to arrive at net cash flow from operating activities. The increase in the deferred tax liability is a
noncash item that reduces net income and should be added in the reconciliation. Accordingly, net cash
provided by operations is $144,900 ($150,000 – $5,500 – $1,400 + $1,800).
D. $141,300
Question: 26A company reported net income for the year of $1,050,000. During the year, accounts receivable
decreased $300,000, prepaid expenses increased $150,000, accounts payable for merchandise decreased $150,000,
and liabilities for other expenses increased $100,000. Administrative expenses include depreciation expense of
$50,000, and the company reported a loss on the sale of obsolete equipment of $10,000. Calculate net cash flows
from operating activities during the year.
A. $1,790,000
B. $1,690,000
C. $1,210,000
Answer (C) is correct.
Net operating cash flow may be determined by adjusting net income. The depreciation expense,
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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decrease in accounts receivable, increase in liabilities, and loss on the sale of obsolete equipment must
be added back. The increase in prepaid expense and decrease in accounts payable must be subtracted
from net income. Thus, net cash flow from operations is $1,210,000 ($1,050,000 net income + $50,000
depreciation + $300,000 accounts receivable + $100,000 liabilities + $10,000 loss – $150,000 prepaid
expenses – $150,000 accounts payable).
D. $1,110,000
Question: 27A company’s year-end income statement shows the following:
Revenues
$5,000,000
Selling and general expenses (including depreciation expense of $200,000)
3,800,000
Interest expense
50,000
Gain on sale of equipment
40,000
Income tax expense (including deferred tax expense of $30,000)
Net income
320,000
$ 870,000
During the year, noncash current assets rose by $100,000, and current liabilities increased by $150,000. On its
statement of cash flows, the company would report cash provided by operating activities of
A. $1,080,000
B. $1,110,000
Answer (B) is correct.
Net operating cash flow may be determined by adjusting net income. Net income of $870,000 is
decreased by the increase in current assets of $100,000, increased by the increase in current liabilities
of $150,000, increased by depreciation expense of $200,000, decreased by the gain on sale of
equipment of $40,000, and increased by the deferred tax liability. Thus, cash provided by operating
activities would be $1,110,000.
C. $1,160,000
D. $1,190,000
Question: 28An accountant has gathered the following information to prepare the statement of cash flows for the
current year. Net income of $456,900 includes a deduction of $45,600 for depreciation expense. The company
issued $300,000 of dividends this year and purchased one new building for $275,000. The balance sheets from the
current period and prior period included the following balances:
Prior Year Current Year
Accounts receivable, net $ 56,860
Accounts payable
12,900
$ 45,300
10,745
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Inventory
186,700
194,320
Using the indirect method, what is the amount of cash provided by operating activities?
A. $202,500
B. $405,205
C. $504,285
Answer (C) is correct.
Net operating cash flow may be determined by adjusting net income. Depreciation is an expense not
directly affecting cash flows that should be added back to net income. The decrease in accounts
payable is subtracted from net income because it indicates that an expense has been paid, while the
decrease in accounts receivable should be added to net income. The increase in inventory should be
subtracted from net income because cash was used to purchase the inventory. The dividends paid on
preferred stock are cash outflows from financing, not operating, activities and do not require an
adjustment. Thus, net cash flow from operations is $504,285 ($456,900 + $45,600 + $11,560 – $2,155
– $7,620).
D. $521,405
Question: 29Which one of the following would result in a decrease in cash flow measured under the indirect
method of preparing a statement of cash flows?
A. Amortization expense.
B. Decrease in income taxes payable.
Answer (B) is correct.
The indirect method reconciles accrual-basis net income to net operating cash flow. A decrease in
income taxes payable implies an operating cash outflow not reflected in net income. Thus, the
reconciling adjustment is a subtraction from net income. The result is a lower measure of net operating
cash flow.
C. Proceeds from the issuance of common stock.
D. Decrease in inventories.
Question: 30A statement of cash flows prepared using the indirect method would have cash activities listed in
which one of the following orders?
A. Financing, investing, operating.
B. Investing, financing, operating.
C. Operating, financing, investing.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Operating, investing, financing.
Answer (D) is correct.
A statement of cash flows prepared using either the direct or the indirect method lists the categories of
cash flows in the following order: operating, investing, and financing.
Question: 31Which one of the following should be classified as a cash flow from an operating activity on the
statement of cash flows?
A. A decrease in accounts payable during the year.
Answer (A) is correct.
Operating activities are all transactions and other events that are not financing or investing activities. In
general, operating activities involve the production and delivery of goods and the provision of services.
Their effects normally are reported in earnings. A decrease in accounts payable indicates a cash
outflow to the entity’s suppliers in payment for goods or services.
B. An increase in cash resulting from the issuance of previously authorized common stock.
C. The payment of cash for the purchase of additional equipment needed for current production.
D. The payment of a cash dividend from money arising from current operations.
Question: 32The most commonly used method for calculating and reporting a company’s net cash flow from
operating activities on its statement of cash flows is the
A. Direct method.
B. Indirect method.
Answer (B) is correct.
The FASB has expressed a preference for the direct method. However, if the direct method is used, a
separate reconciliation based on the indirect method must be provided in a separate schedule. For this
reason, most entities use the indirect method. The same net operating cash flow is reported under both
methods.
C. Single-step method.
D. Multiple-step method.
Question: 33The presentation of the major classes of operating cash receipts (such as receipts from customers)
minus the major classes of operating cash disbursements (such as cash paid for merchandise) is best described as the
A. Direct method of calculating net cash provided or used by operating activities.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
The direct method converts the accrual-basis amounts in the income statement to the cash basis. It then
reports the separate categories of gross cash receipts and disbursements. Net cash flow from operating
activities is the difference between total cash receipts and total cash disbursements.
B. Cash method of determining income in conformity with generally accepted accounting principles.
C. Format of the statement of cash flows.
D. Indirect method of calculating net cash provided or used by operating activities.
Question: 34A controller is gathering data for the statement of cash flows for the most recent year end. The
controller is planning to use the direct method to prepare this statement and has made the following list of cash
inflows for the period:
 Collections of $100,000 for goods sold to customers
 Securities purchased for investment purposes with an original cost of $100,000 sold for $125,000
 Proceeds from the issuance of additional company stock totaling $10,000
The correct amount to be shown as cash inflows from operating activities is
A. $100,000
Answer (A) is correct.
Cash flows from operating activities are those generated by the firm’s major and ongoing activities.
They include cash flows from all activities not classified as investing or financing. Only the $100,000
of collections on sales to customers qualifies.
B. $135,000
C. $225,000
D. $235,000
Question: 35During the year, a firm acquired a long-term productive asset for $5,000 and also borrowed
$10,000 from a local bank. These transactions should be reported on the statement of cash flows as
A. Outflows for investing activities, $5,000; inflows from financing activities, $10,000.
Answer (A) is correct.
The acquisition and disposal of property, plant, equipment, and other productive assets are investing
activities. Borrowing money is a financing activity. The transactions should therefore be reported on its
statement of cash flows as a $5,000 outflow for investing activities and a $10,000 inflow from
financing activities.
B. Inflows from investing activities, $10,000; outflows for financing activities, $5,000.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Outflows for operating activities, $5,000; inflows from financing activities, $10,000.
D. Outflows for financing activities, $5,000; inflows from investing activities, $10,000.
Question: 36A company has recorded the following payments for the current period:
Purchase of investment stock $300,000
Dividends paid to shareholders 200,000
Repurchase of company stock
400,000
The amount to be shown in the investing activities section of the statement of cash flows should be
A. $300,000
Answer (A) is correct.
Financing activities include paying dividends and treasury stock transactions. Investing activities
include acquiring and disposing of debt and equity instruments. Thus, the amount to be shown in the
investing activities section of the statement of cash flows is $300,000.
B. $500,000
C. $700,000
D. $900,000
Question: 37A company has the following payments recorded for the current period:
Dividends paid to shareholders $150,000
Interest paid on bank loan
250,000
Purchase of equipment
350,000
The total amount of the above items to be shown in the operating activities section of the statement of cash flows
should be
A. $150,000
B. $250,000
Answer (B) is correct.
Cash flows from operating activities include cash flows from all activities not classified as investing or
financing. Their effects normally are reported in earnings. Operating cash flows include the payment
and collection of interest, dividends paid are a financing cash outflow, and the purchase of equipment
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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is an investing activity. Thus, the total amount to be reported in the operating activities section of the
statement of cash flows is $250,000.
C. $350,000
D. $750,000
Question: 38A company has recorded the following payments for the current period:
Interest paid on bank loan
$300,000
Dividends paid to shareholders 200,000
Repurchase of company stock
400,000
The amount to be shown in the financing activities section of the statement of cash flows should be
A. $300,000
B. $500,000
C. $600,000
Answer (C) is correct.
The payment and collection of interest are treated as cash flows from operating activities. Financing
activities include paying dividends and treasury stock transactions. Thus, the amount to be reported in
the financing activities section of the statement of cash flows is $600,000 ($200,000 + $400,000).
D. $900,000
Fact Pattern: Selected financial information for Kristina Company for the year just ended is
shown below.
Net income
$2,000,000
Increase in net accounts receivable
300,000
Decrease in inventory
100,000
Increase in accounts payable
200,000
Depreciation expense
400,000
Gain on the sale of available-for-sale securities
700,000
Cash receivable from the issue of common stock
800,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Cash paid for dividends
80,000
Cash paid for the acquisition of land
1,500,000
Cash received from the sale of available-for-sale securities 2,800,000
Question: 39Kristina’s cash flow from financing activities for the year is
A. $(80,000)
Answer (A) is correct.
Cash flows from financing activities for the year consist of the $80,000 outflow for dividends paid.
The issue of common stock is a financing activity, but the $800,000 of proceeds have not yet been
received.
B. $720,000
C. $800,000
D. $3,520,000
Fact Pattern: Selected financial information for Kristina Company for the year just ended is
shown below.
Net income
$2,000,000
Increase in net accounts receivable
300,000
Decrease in inventory
100,000
Increase in accounts payable
200,000
Depreciation expense
400,000
Gain on the sale of available-for-sale securities
700,000
Cash receivable from the issue of common stock
800,000
Cash paid for dividends
80,000
Cash paid for the acquisition of land
1,500,000
Cash received from the sale of available-for-sale securities 2,800,000
Question: 40Kristina’s cash flow from investing activities for the year is
A. $(1,500,000)
B. $1,220,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $1,300,000
Answer (C) is correct.
Cash flows from investing activities for the year include the $2,800,000 inflow from the sale of
available-for-sale securities and the $1,500,000 cash outflow for the purchase of land ($2,800,000 −
$1,500,000 = $1,300,000 net cash inflow).
D. $2,800,000
Fact Pattern: Selected financial information for Kristina Company for the year just ended is
shown below.
Net income
$2,000,000
Increase in net accounts receivable
300,000
Decrease in inventory
100,000
Increase in accounts payable
200,000
Depreciation expense
400,000
Gain on the sale of available-for-sale securities
700,000
Cash receivable from the issue of common stock
800,000
Cash paid for dividends
80,000
Cash paid for the acquisition of land
1,500,000
Cash received from the sale of available-for-sale securities 2,800,000
Question: 41Assuming the indirect method is used, Kristina’s cash flow from operating activities for the year is
A. $1,700,000
Answer (A) is correct.
The following is the net cash flow from operating activities calculated using the indirect method:
Net income
$2,000,000
Add: decrease in inventory
100,000
Add: increase in accounts payable
200,000
Add: depreciation expense
400,000
Minus: increase in net accounts receivable
(300,000)
Minus: gain on sale of securities
(700,000)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Net cash provided by operating activities $1,700,000
The adjustment from cost of goods sold (an accrual accounting amount used to calculate net income) to
cash paid to suppliers requires two steps: (1) from cost of goods sold to purchases and (2) from
purchases to cash paid to suppliers. The $100,000 decrease in inventory is added to net income. It
indicates that purchases were $100,000 less than cost of goods sold. The $200,000 increase in accounts
payable is added to net income. It indicates that cash paid to suppliers was $200,000 less than
purchases. Thus, the net effect of the changes in inventory and accounts payable is that cash paid to
suppliers was $300,000 ($100,000 + $200,000) less than the accrual basis cost of goods sold.
Depreciation expense ($400,000) is a noncash item included in net income. Hence, it is subtracted
from net income. The net accounts receivable balance increased by $300,000, implying that cash
collections were less than sales. If sales, collections, write-offs, and recognition of bad debt expense
were the only relevant transactions, $300,000 should be subtracted from net income. Use of the change
in net accounts receivable as a reconciliation adjustment is a short-cut method. It yields the same net
adjustment to net income as separately including the effects of the change in gross accounts receivable,
bad debt expense (a noncash item resulting in an addition), and bad debt write-offs (a subtraction to
reflect that write-offs did not result in collections). The sale of securities is an investing activity. It also
is subtracted from net income.
B. $2,000,000
C. $2,400,000
D. $3,100,000
Question: 42For the fiscal year just ended, an entity had the following results:
Net income
$920,000
Depreciation expense
110,000
Increase in accounts payable
45,000
Increase in net accounts receivable
73,000
Increase in deferred income tax liability
16,000
Net cash flow from operating activities is
A. $928,000
B. $986,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $1,018,000
Answer (C) is correct.
The following is the net cash flow from operating activities calculated using the indirect method:
Net income
$ 920,000
Add: increase in accounts payable
45,000
Add: increase in deferred tax liability
16,000
Add: depreciation expense
Minus: increase in net accounts receivable
110,000
(73,000)
Net cash provided by operating activities $1,018,000
The adjustment from cost of goods sold (an accrual accounting amount used to calculate net income) to
cash paid to suppliers requires two steps: (1) from cost of goods sold to purchases and (2) from
purchases to cash paid to suppliers. An increase in inventory is subtracted from net income. It indicates
that purchases were greater than cost of goods sold. A decrease in inventory is added to net income. It
indicates that purchases were less than cost of goods sold. However, the change in inventory is not
given, so it is assumed to be zero. The increase in accounts payable is added to net income. It indicates
that cash paid to suppliers was $45,000 less than purchases. Thus, the net effect of the changes in
inventory and accounts payable is that cash paid to suppliers was $45,000 ($0 + $45,000) less than the
accrual basis cost of goods sold. The increase in a deferred income tax liability (debit income tax
expense, credit deferred liability) is a noncash item. The adjustment is a $16,000 addition to net
income. Depreciation ($110,000) also is a noncash item that is added to net income. The net accounts
receivable balance increased by $73,000, implying that cash collections were less than sales. If sales,
collections, write-offs, and recognition of bad debt expense were the only relevant transactions,
$73,000 should be subtracted from net income. Use of the change in net accounts receivable as a
reconciliation adjustment is a short-cut method. It yields the same net adjustment to net income as
separately including the effects of the change in gross accounts receivable, bad debt expense (a
noncash item resulting in an addition), and bad debt write-offs (reflecting that write-offs did not result
in collections).
D. $1,074,000
Question: 43Three years ago, a company purchased stock at a cost of $100,000. This stock was sold for
$150,000 during the current fiscal year. The result of this transaction should be shown in the investing activities
section of the statement of cash flows as
A. Zero.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $50,000
C. $100,000
D. $150,000
Answer (D) is correct.
The statement of cash flows reports the cash effects of transactions. The accrual-basis gain on the stock
is not relevant.
Question: 44A controller has gathered the following information as a basis for preparing the statement of cash
flows. Net income for the current year was $82,000. During the year, old equipment with a cost of $60,000 and a net
carrying amount of $53,000 was sold for cash at a gain of $10,000. New equipment was purchased for $100,000.
Shown below are selected closing balances for last year and the current year.
Last Year
Current Year
$ 39,000
$ 85,000
Accounts receivable net
43,000
37,000
Inventories
93,000
105,000
Equipment
360,000
400,000
Cash
Accumulated depreciation -- equipment
70,000
83,000
Accounts payable
22,000
19,000
Notes payable
100,000
100,000
Common stock
250,000
250,000
Retained earnings
93,000
175,000
Net cash flow from operating activities for the current year is
A. $63,000
B. $73,000
C. $83,000
Answer (C) is correct.
The net operating cash flow may be determined by reconciling it with net income.
Net income
$ 82,000
Add: Decrease in receivables
6,000
Add: Depreciation expense
20,000
Minus: Increase in inventories
(12,000)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Minus: Decrease in payables
Minus: Gain on sale of equipment
(3,000)
(10,000)
Net cash provided by operating activities $ 83,000
An increase in current operating assets and a decrease in current operating liabilities must be
subtracted from net income. Therefore, the increase in inventories of $12,000 and the decrease in
accounts payable of $3,000 must be subtracted from net income.
A decrease in current operating assets and an increase in current operating liabilities must be added to
net income. Therefore, the decrease in receivables of $6,000 must be added to net income. A gain on
sale of equipment is a gain whose cash effect is related to investing activities. Thus, the gain on sale of
equipment of $10,000 must be subtracted from net income. The depreciation expense for the year of
$20,000 ($83,000 ending accumulated depreciation + $7,000 accumulated depreciation on equipment
sold – $70,000 beginning accumulated depreciation) is a noncash expense included in net income.
Thus, it must be added to net income to determine the net cash flow from operating activities.
D. $93,000
Question: 45A mail order supplier of camping gear is putting together its current-year statement of cash flow. A
comparison of the firm’s year-end balance sheet with the prior year’s balance sheet shows the following changes
from a year ago.
Assets
Cash & marketable securities $ (600)
Accounts receivable
200
Inventories
(100)
Gross fixed assets
4,600
Accumulated depreciation
Total
(500)
$3,600
Liabilities & Net Worth
Accounts payable
Accruals
Long-term note
Long-term debt
Common stock
Retained earnings
Total
$ 250
50
(300)
1,400
0
2,200
$3,600
The firm’s payout ratio is 20%. During the current year, net cash provided by operations amounted to
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $2,900
B. $3,050
C. $3,450
Answer (C) is correct.
The net profit after taxes equals the change in retained earnings divided by 1 minus the dividend
payout ratio, or $2,750 [$2,200 ÷ (1.0 – 0.2)]. Adjusting this amount for noncash items yields the net
cash provided by operations. Depreciation is a noncash expense that should be added. To adjust for the
difference between cost of goods sold and purchases, the inventory decrease is added (COGS exceeded
purchases). To adjust for the difference between purchases and cash paid to suppliers, the increase in
accounts payable is also added (purchases exceeded cash paid to suppliers). The increase in accounts
receivable is subtracted because it indicates that accrued revenues were greater than cash collections.
Finally, the increase in accrued liabilities is added. Thus, the net cash provided by operations is $3,450
($2,750 + $500 + $100 + $250 – $200 + $50).
D. $4,050
Question: 46For a manufacturing firm, which of the following would be included in cash outflows from
financing activities on the Statement of Cash Flows?
A. Payments of salaries and wages.
B. Repayment of the principal portion of firm debt.
Answer (B) is correct.
Cash repayments of an amount borrowed are cash outflows from financing activities on the statement
of cash flows.
C. Issuance of new stock.
D. Interest payments on firm debt.
Question: 47Below are the balances for the following accounts on the balance sheet of a company as of the end
of Year 20X2 and Year 20X1.
Year 20X2 Year 20X1
Cash
Marketable securities
Inventory
Wages and salaries payable
$1,000
$ 800
?
7,200
500
500
2,000
2,500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Accounts payable
1,300
1,000
Accounts receivable
5,000
6,000
Prepayments
1,200
500
The company has net income for Year 20X2 of $1,900, has no fixed assets, and has no investing or financing
activities. Using the indirect method for preparing the cash flow statement, what is the balance in the marketable
securities account as of the end of Year 20X2?
A. $7,000
B. $8,800
C. $9,000
Answer (C) is correct.
There was a $200 increase in cash ($1,000 – $800). The calculation of that increase would be as
follows:
Net income
$1,900
+ Increase in accounts payable
300
+ Decrease in accounts receivable 1,000
– Decrease in wages payable
(500)
– Increase in prepayments
(700)
Total increase without
marketable securities
$2,000
Because the total increase is only $200, the difference between the above $2,000 and the known
difference of $200 must be attributable to the increase in marketable securities. Thus, $2000 – $200
means that $1,800 has been expended on marketable securities. The original balance was $7,200, so an
increase of $1,800 would bring the year-end total to $9,000 ($7,200 plus apparent purchase of $1,800).
D. $9,900
Question: 48An accountant is preparing the statement of cash flows using the indirect method. She found on the
balance sheet that the prior year’s net balance of equipment (equipment less accumulated depreciation) was
$295,700, and the current year’s balance of equipment is $304,000. Depreciation expense during the current year
was $22,400. During the year, the company sold equipment for $40,000, resulting in a gain of $21,600. On the
statement of cash flows, what is the cash outflow for the purchase of equipment this year?
A. $4,300
B. $49,100
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
The following equation should be solved for the cash outflow:
Ending equipment balance = Beginning balance – Depreciation – Carrying
amount of the asset sold + Cash paid for equipment
The cash outflow for the purchase of equipment therefore may be determined as follows:
Equipment at year-end (net)
Beginning balance
$304,000
(295,700)
Depreciation
22,400
Carrying amount of asset sold
($40,000 sale – $21,600 gain)
Cash outflow – Purchase price
18,400
$ 49,100
C. $52,300
D. $70,700
Question: 49A company had a balance of $100,000 in retained earnings at the beginning of the year and of
$125,000 at the end of the year. Net income for this time period was $40,000. The statement of financial position
indicated that the dividends payable account had decreased by $5,000 throughout the year, despite the fact that both
cash dividends and a stock dividend were declared. The amount of the stock dividend was $8,000. When preparing
its statement of cash flows for the year, the company should show cash paid for dividends as
A. $20,000
B. $15,000
C. $12,000
Answer (C) is correct.
The amount of total dividends declared during the year can be calculated as follows:
Beginning retained earnings
$100,000
Net income for the year
40,000
Ending retained earnings
(125,000)
Dividends declared during the year $ 15,000
Since $8,000 is the amount of stock dividends declared, the amount of cash dividends declared this
year is $7,000 ($15,000 – $8,000). The amount of cash dividends paid during the year can be
calculated as follows:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Decrease in the cash dividends payable account during the period $ 5,000
Cash dividends declared during the year
Cash paid for dividends during the year
7,000
$12,000
NOTE: Stock dividends declared does not affect the dividends payable account.
D. $5,000
Question: 50The management of an entity is analyzing the financial statements of a corporation because the
entity is strongly considering purchasing a block of the corporation’s ordinary shares that would give the entity
significant influence over the corporation. Which financial statement should the entity primarily use to assess the
amounts, timing, and certainty of future cash flows of the corporation?
A. Income statement.
B. Statement of changes in equity.
C. Statement of cash flows.
Answer (C) is correct.
A statement of cash flows provides information about the cash receipts and cash payments of an entity
during a period. This information helps investors, creditors, and other users to assess the entity’s ability
to generate cash and cash equivalents and the needs of the entity to use those cash flows. Historical
cash flow data indicate the amount, timing, and certainty of future cash flows. It is also a means of
verifying past cash flow assessments and of determining the relationship between profits and net cash
flows and the effects of changing prices.
D. Statement of financial position.
Question: 51Cash flows from transactions in which of the following securities are most likely to be considered
cash flows from operating activities?
A. Held-to-maturity securities.
B. Trading debt securities.
Answer (B) is correct.
Cash flows from purchases, sales, and maturities of trading debt securities are cash flows from
operating activities.
C. Available-for-sale debt securities.
D. Noncurrent debt securities.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 52In a statement of cash flows, interest payments to lenders and other creditors should be classified as
cash outflows for
A. Operating activities.
Answer (A) is correct.
Cash receipts from sales of goods and services, interest on loans, and dividends on equity securities are
from operating activities. Cash payments to (1) suppliers for inventory; (2) employees for services;
(3) other suppliers for other goods and services; (4) governments for taxes, duties, fines, and fees; and
(5) lenders for interest are also from operating activities.
B. Borrowing activities.
C. Lending activities.
D. Financing activities.
Question: 53Consider the following financial data for a company that is preparing its cash flow statement:
Amortization expense
$ 150,000
Cash dividends paid to common shareholders
Net income
75,000
1,500,000
Work-in-process inventory increase over the prior year
Gain on sale of equipment
300,000
50,000
Using the indirect method, cash flow from operating activities would be
A. $1,225,000
B. $1,300,000
Answer (B) is correct.
Under the indirect method, net income must be adjusted for any of the following items:
1.
Noncash revenue and expenses that were included in net income,
2.
flows,
Items included in net income whose cash effects relate to investing or financing cash
3.
All deferrals of past operating cash flows, and
4.
All accruals of expected future operating cash flows.
Thus, amortization expense (noncash expense) must be added back, and the gain on the sale of
equipment (investing activity) and the increase in inventory over the prior year (deferral of past
operating cash flows) must be subtracted.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Net income
$1,500,000
Amortization expense
150,000
Gain on sale of equipment
(50,000)
Increase in WIP inventory
(300,000)
Cash flow from operations $1,300,000
C. $1,350,000
D. $1,375,000
Subunit 6: Revenue from Contracts with Customers
Question: 1ABC operates a catering service that specializes in business luncheons for large corporations. ABC
requires customers to place their orders 2 weeks in advance of the scheduled events. ABC bills its customers on the
10th day of the month following the date of service and requires that payment be made within 30 days of the billing
date. Conceptually, ABC should recognize revenue from its catering services at the date when a
A. Customer places an order.
B. Luncheon is served.
Answer (B) is correct.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a
promised good or service (an asset) to a customer. Accordingly, ABC recognizes revenue when a
luncheon is served.
C. Billing is mailed.
D. Customer’s payment is received.
Question: 2A company provides fertilization, insect control, and disease control services for a variety of trees,
plants, and shrubs on a contract basis. For $50 per month, the company will visit the subscriber’s premises and apply
appropriate mixtures. If the subscriber has any problems between the regularly scheduled application dates, the
company’s personnel will promptly make additional service calls to correct the situation. Some subscribers elect to
pay for an entire year because the company offers an annual price of $540 if paid in advance. For a subscriber who
pays the annual fee in advance, the company should recognize the related revenue
A. When the cash is collected.
B. Evenly over the year as the services are performed.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a
promised good or service (an asset) to a customer. A performance obligation can be satisfied either
over time or at a point in time. Under the former scenario, an entity recognizes revenue as it satisfies
the performance obligation. Thus, the company should recognize the advancement evenly over the
year as the services are performed.
C. At the end of the contract year after all of the services have been performed.
D. At the end of the fiscal year.
Question: 3On February 1, Year 1, a computer software firm agrees to program a software package. Twelve
payments of $10,000 on the first of each month are to be made, with the first payment March 1, Year 1. The
software is accepted by the client June 1, Year 2. How much Year 1 revenue should be recognized?
A. $0
Answer (A) is correct.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a
promised good or service (an asset) to a customer. A contract liability is recognized for an entity’s
obligation to transfer goods or services to a customer for which the entity has received consideration
from the customer. Deposits and other advance payments by the customer are recognized as contract
liabilities. Thus, no revenue is recognized in Year 1 because all performance occurred in Year 2.
However, a contract liability for $100,000 is recognized in Year 1 because it represents consideration
received from the customer in Year 1 for a promise the firm was still obligated to perform at the end of
Year 1.
B. $100,000
C. $110,000
D. $120,000
Question: 4An airline should recognize revenue from airline tickets in the period when
A. Passenger reservations are booked.
B. Passenger reservations are confirmed.
C. Tickets are issued.
D. Related flights occur.
Answer (D) is correct.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a
promised good or service (an asset) to a customer. An airline’s performance obligation regarding
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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airline tickets is to ensure promised flights occur. Thus, an airline should recognize revenue from
airline tickets when related flights occur.
Question: 5A department store sells gift certificates that may be redeemed for merchandise. Each certificate
expires 3 years after issuance. The revenue from the gift certificates should be recognized
A. Evenly over 3 years from the date of issuance.
B. In the period the certificates are sold.
C. In the period the certificates expire.
D. In the period the certificates are redeemed or in the period they expire if they are allowed to lapse.
Answer (D) is correct.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a
promised good or service (an asset) to a customer. However, if an entity is relieved of a performance
obligation upon the passage of time (e.g., an expiration date), then revenue also is recognized at such
time. Accordingly, the performance obligation is satisfied when the certificates are redeemed or expire.
Question: 6An individual who recently founded a company that produces baseball bats and balls wants to
determine their policy for revenue recognition. According to the revenue recognition principle, the most appropriate
time to recognize revenue would be when
A. The sale occurs.
Answer (A) is correct.
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a
promised good or service (an asset) to a customer. Because transfers ordinarily occur at the point of
sale, the most appropriate time to recognize revenue is when the sale occurs.
B. Cash is received.
C. Production is completed.
D. Quarterly financial statements are prepared.
Question: 7A software developer enters into a contract with a new customer to sell a software license and
perform installation services. The entity sometimes sells the license and installation services separately. The
installation service is routinely performed by other entities and does not significantly modify the software. The
entity historically provided to new customers technical support for a 5-year period for no additional consideration.
The contract does not specify the terms or conditions for the technical support services. According to the revenue
recognition principle governing contracts with customers, which of the following represents the performance
obligations identified by the entity in this contract?
A. One performance obligation: (1) Software license plus installation services.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Two performance obligations: (1) Software license and (2) installation services.
C. Three performance obligations: (1) Software license, (2) installation services, and (3) technical support
services.
Answer (C) is correct.
The transfer of the software license and the performance of installation services are separately
identifiable from other promises in the contract. The installation services do not significantly modify or
customize the software itself. In addition, on the basis of the entity’s customary business practice, at
contract inception, it made an implicit promise to provide technical support services. The entity’s past
practice of providing these services creates a valid expectation that the customer will receive these
services. Consequently, the entity identifies the following performance obligations in the contract:
(1) software license, (2) installation services, and (3) technical support services.
D. Two performance obligations: (1) Software license plus installation services and (2) technical support
services.
Question: 8According to the revenue recognition principle governing contracts with customers, which of the
following, if any, determines the transaction price of a contract with a significant financing component?
Undiscounted Cash Flows Variable Consideration
A. Yes Yes
B. Yes No
C. No Yes
Answer (C) is correct.
The revenue recognized must reflect the price that a customer would have paid for the promised goods
or services if the cash payment had been made when the goods or services were transferred to the
customer (the cash selling price). Thus, the transaction price should be adjusted for the effect of the
time value of money when the contract includes a significant financing component. Also, an entity
must estimate the amount of consideration to which it will be entitled in exchange for transferring the
promised goods or services to a customer. For example, the transaction price may vary due to
discounts, refunds, incentives, or contingencies (uncertainties based on the occurrence or
nonoccurrence of a future event). Thus, variable consideration also determines the transaction price. In
this case, variable consideration must be estimated at the inception of the contract.
D. No No
Question: 9Under the revenue recognition principle governing contracts with customers, adjustment of the
transaction price to reflect the time value of money results in
A. Revenue from contracts with customers in the income statement.
B. An item of other comprehensive income.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Interest income or expense that is presented in the income statement separately from revenue.
Answer (C) is correct.
The transaction price should be adjusted for the effect of the time value of money when the contract
includes a significant financing component. The interest income or expense is recognized using the
effective interest method. Interest income or expense must be presented in the income statement
separately from revenue from contracts with customers.
D. An unusual item in the income statement.
Question: 10The transaction price from contracts with customers generally should not be adjusted for the effect
of the time value of money when
A. The transfer of goods is at the discretion of the seller.
B. A substantial amount of the consideration is contingent on a future event that is not within the control of
the seller.
Answer (B) is correct.
The transaction price should not be adjusted for the effect of the time value of money if
 The time between the payment and the delivery of the promised good or service to the
customer is 1 year or less.
 The transfer of goods or services is at the discretion of the customer (e.g., a bill-and-hold
contract in which the seller provides storage services for goods it sold to the buyer).
 A substantial amount of the consideration promised is variable, and its amount or timing
varies on the basis of future circumstances that are not within the control of the entity or the
customer. An example is a sales-based royalty contract in which the amount of consideration
depends on sales by the customer to third parties.
C. The time between the payment and the delivery of the promised goods in the contract to the customer is
18 months.
D. The selling price of the product and the consideration promised in the contract differ significantly.
Question: 11The best evidence of a standalone selling price of a promised good or service to a customer is
A. Expected cost.
B. Expected cost plus an appropriate margin.
C. An observable price.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
The standalone selling price is the price at which an entity would sell a promised good or service
separately to a customer. The best evidence of a standalone selling price is the observable price of a
good or service when it is sold separately in similar circumstances and to similar customers (e.g., a
contractually stated price or list price of a good or service).
D. Competitor’s selling price.
Question: 12The standalone selling price of a performance obligation in a contract with customers may not be
directly observable. Alternatives for estimating the standalone selling price include
Estimation of the Price
in the Seller’s Market Residual Approach
A. No Yes
B. No No
C. Yes No
D. Yes Yes
Answer (D) is correct.
The adjusted market assessment, the expected cost plus an appropriate margin, and a residual are
among the acceptable estimates of the standalone selling price of a performance obligation when that
price is not directly observable. Using the adjusted market assessment approach, an entity evaluates the
market in which it sells goods or services and estimates the price that a customer in that market would
be willing to pay for them. Using the expected cost plus an appropriate margin approach, an entity
forecasts its expected costs of satisfying a performance obligation and adds an appropriate margin for
that cost. In limited circumstances, a residual approach also may be used. A residual is the total
transaction price minus the observable prices for other items promised in the contract. The residual
approach may be applied only when the standalone price is (1) highly variable or (2) uncertain.
Question: 12The standalone selling price of a performance obligation in a contract with customers may not be
directly observable. Alternatives for estimating the standalone selling price include
Estimation of the Price
in the Seller’s Market Residual Approach
A. No Yes
B. No No
C. Yes No
D. Yes Yes
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
The adjusted market assessment, the expected cost plus an appropriate margin, and a residual are
among the acceptable estimates of the standalone selling price of a performance obligation when that
price is not directly observable. Using the adjusted market assessment approach, an entity evaluates the
market in which it sells goods or services and estimates the price that a customer in that market would
be willing to pay for them. Using the expected cost plus an appropriate margin approach, an entity
forecasts its expected costs of satisfying a performance obligation and adds an appropriate margin for
that cost. In limited circumstances, a residual approach also may be used. A residual is the total
transaction price minus the observable prices for other items promised in the contract. The residual
approach may be applied only when the standalone price is (1) highly variable or (2) uncertain.
Question: 12The standalone selling price of a performance obligation in a contract with customers may not be
directly observable. Alternatives for estimating the standalone selling price include
Estimation of the Price
in the Seller’s Market Residual Approach
A. No Yes
B. No No
C. Yes No
D. Yes Yes
Answer (D) is correct.
The adjusted market assessment, the expected cost plus an appropriate margin, and a residual are
among the acceptable estimates of the standalone selling price of a performance obligation when that
price is not directly observable. Using the adjusted market assessment approach, an entity evaluates the
market in which it sells goods or services and estimates the price that a customer in that market would
be willing to pay for them. Using the expected cost plus an appropriate margin approach, an entity
forecasts its expected costs of satisfying a performance obligation and adds an appropriate margin for
that cost. In limited circumstances, a residual approach also may be used. A residual is the total
transaction price minus the observable prices for other items promised in the contract. The residual
approach may be applied only when the standalone price is (1) highly variable or (2) uncertain.
Question: 13A promised asset is transferred in full satisfaction of a performance obligation in a contract when
the customer
A. Obtains control of the asset.
Answer (A) is correct.
Revenue is recognized when a performance obligation is satisfied by transferring a promised good or
service to a customer. It happens when the customer obtains control of the good or service (i.e., an
asset). Control of an asset is transferred to the customer when the customer (1) has the ability to direct
the use of the asset and (2) obtains substantially all of the remaining benefits (potential cash flows)
from the asset.
B. Can direct use of the product.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Has physical possession of the asset.
D. Pays for the asset in full.
Question: 13A promised asset is transferred in full satisfaction of a performance obligation in a contract when
the customer
A. Obtains control of the asset.
Answer (A) is correct.
Revenue is recognized when a performance obligation is satisfied by transferring a promised good or
service to a customer. It happens when the customer obtains control of the good or service (i.e., an
asset). Control of an asset is transferred to the customer when the customer (1) has the ability to direct
the use of the asset and (2) obtains substantially all of the remaining benefits (potential cash flows)
from the asset.
B. Can direct use of the product.
C. Has physical possession of the asset.
D. Pays for the asset in full.
Question: 14A hotel enters into a contract with a customer to provide 10 rooms for 10 nights for $200 per room
per night. In addition to the room price per night, the hotel collects a city occupancy tax of $7 per room per night.
According to the hotel’s promotion, each customer that purchases in total more than 50 room nights is entitled to a
credit of $3,000 on the entire purchase. What is the total transaction price of the contract?
A. $20,000
B. $17,700
C. $17,000
Answer (C) is correct.
The transaction price is the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer. It excludes amounts collected on
behalf of third parties. Thus, the amount collected for city occupancy taxes must not be included in the
transaction price. In addition, any consideration payable to the customer, such as coupons, credit, or
vouchers, reduces the transaction price. Accordingly, the total transaction price of the contract is
$17,000 [(10 × 10 × $200) – $3,000].
D. $20,700
Question: 15On January 1, Year 1, an entity sold a product to a customer for $64,751 payable 36 months after
delivery. The customer obtains control of the product at contract inception. The cash selling price of the product is
$50,000. This price is the amount that the customer would pay upon delivery at contract inception assuming the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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same product is sold under otherwise identical terms and conditions. The contract includes an implicit interest rate
of 9%. What amounts of revenue and interest income from this contract, if any, were recognized by the entity in
Year 1?
Revenue from
Customers
Interest Income
A. $64,751 $0
B. $50,000 $4,500
Answer (B) is correct.
The revenue recognized must reflect the price that a customer would have paid for the promised goods
or services if the cash payment had been made when the goods were transferred to the customer (the
cash selling price). Thus, $50,000 of revenue from the customer must be recognized on 1/1/Year 1.
The contract includes a significant financing component. This amount is the difference between the
amount of promised consideration of $64,751 and the cash selling price of $50,000. The interest
income from the adjustment of the transaction price for the effect of the time value of money is
recognized using the effective interest method. Accordingly, the interest income recognized in Year 1
is $4,500 ($50,000 × 9%).
C. $50,000 $14,751
D. $54,500 $0
Question: 16On January 1, Year 1, Sam Co. entered into a contract with a customer to sell a machine for two
annual payments of $144,049 starting at the end of Year 1. The customer obtains control of the machine at contract
inception. The cash selling price of the machine is $250,000. Sam determined that (1) the contract includes a
significant financing component and (2) the contract includes an implicit interest rate of 10%. What amounts of
revenue and interest income from this contract, if any, were recognized by Sam in Year 2?
Revenue from
Customers
Interest Income
A. $0 $13,095
Answer (A) is correct.
The revenue recognized must reflect the price that a customer would have paid for the promised goods
or services if the cash payment had been made when the goods were transferred to the customer (the
cash selling price). Because the customer obtained control over the machine at contract inception, the
revenue from this contract of $250,000 was recognized on 1/1/Year 1. The contract includes a
significant financing component. Thus, interest income from the adjustment of the transaction price for
the effect of the time value of money must be recognized using the effective interest method. The
interest component of the first installment payment on 12/31/Year 1 is $25,000 ($250,000 × 10%). The
remaining amount of the principal to be paid is $130,951 [$250,000 – ($144,049 annual payment –
$25,000 Year 1 interest)]. Interest income for Year 2 is therefore $13,095 ($130,951 × 10%).
B. $144,049 $0
C. $125,000 $19,049
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $250,000 $25,000
Question: 17An entity enters into a contract with a customer to sell products X, Y, and Z in exchange for
$250,000. Control over the products will be transferred to the customer at different points in time. The entity
determines that the delivery of each product is a distinct performance obligation. Products X and Y are regularly
sold separately and their standalone selling prices of $40,000 and $120,000, respectively, are directly observable.
The standalone selling price of product Z of $160,000 was estimated using the adjusted market assessment
approach. The entity determined that the discount provided to the customer does not relate to one or more specific
products in the contract. What revenue will be recognized by the entity on the sale of product X?
A. $40,000
B. $22,500
C. $31,250
Answer (C) is correct.
The transaction price should be allocated to performance obligations in the contract based on their
standalone selling prices. The sum of the products’ standalone selling prices is $320,000 ($40,000 +
$120,000 + $160,000), and the standalone selling price of product X is $40,000. Thus, $31,250
[($40,000 ÷ $320,000) × $250,000] of the total contract price should be allocated to product X.
D. $62,500
Question: 18For contracts with customers, a contract modification is accounted for as a separate contract if the
additional promised goods are <List A> and the price for these additional goods is <List B>.
List A
List B
A. Distinct Based on the price of the original contract
B. Not distinct Their incremental selling price
C. Distinct Their standalone selling price
Answer (C) is correct.
A contract modification exists when the parties approve a change in the scope or price of a contract.
A contract modification is accounted for as a separate contract if (1) it results in the addition to the
contract of promised goods or services that are distinct and (2) the price for these additional goods or
services is their standalone selling price.
D. Not distinct Cumulative catch-up adjustment to revenue
Question: 19Which of the following is not a criterion that must be met for a contract with a customer to be
accounted for under the revenue recognition standard?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. The contract must have commercial substance.
B. The payment terms can be identified.
C. The costs to fulfill the contract are expected to be recovered.
Answer (C) is correct.
A contract is accounted for under the revenue recognition standard if all the following criteria are met:
(1) The contract was approved by both parties, (2) the contract has commercial substance, (3) each
party’s rights regarding (a) goods or services to be transferred and (b) the payment terms can be
identified, and (4) it is probable that the entity will collect the consideration to which it is entitled
according to the contract.
D. Each party’s rights regarding goods or services to be transferred can be identified.
Question: 20On October 1, Year 1, Company A sold 100,000 gallons of Product X to Company B at $3 per
gallon. Fifty thousand gallons were delivered to Company B on December 21, Year 1, and the remaining quantity
was delivered to Company B on January 8, Year 2. Payment terms are 50% due on October 1, Year 1, 25% due on
first delivery, and 25% on second delivery. What amount should Company A accrue as revenue related to this
transaction on December 31, Year 1?
A. $75,000
B. $150,000
Answer (B) is correct.
Under the accrual basis of accounting, revenue is recognized when earned. Revenue is earned when (or
as) a performance obligation is satisfied. In this case, the delivery of 50,000 gallons on December 21
would have been earned during Year 1. Accordingly, Company A would accrue $150,000 (50,000
gallons × $3) as revenue on December 31, Year 1. The remaining half of the order would be
recognized in January. The timing of the cash payment is not a consideration of when the revenue is to
be recognized.
C. $225,000
D. $300,000
Question: 21A cable television entity receives deposits from customers that are refunded when service is
terminated. The average customer stays with the entity 8 years. How should these deposits be shown on the financial
statements?
A. Operating revenue.
B. Other revenue.
C. Paid-in capital.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Contract liability.
Answer (D) is correct.
A contract liability is recognized for an entity’s obligation to transfer goods or services to a customer
for which the entity has received consideration from the customer. Deposits and other advance
payments by the customer, such as sales of gift certificates, are recognized as contract liabilities.
Question: 22On January 1, Year 1, an entity receives a payment of $20,000 for delivering a product to a
customer at the end of Year 3. Based on the contract’s terms, the performance obligation will be satisfied at a point
in time (upon delivery of the product). The entity determined that (1) the contract includes a significant financing
component and (2) a financing rate of 6% is an appropriate discount rate. What amount of interest expense and
contract liability will be recognized in the entity’s December 31, Year 2, financial statements?
Year 2 Interest Expense Contract Liability on December 31, Year 2
A. $1,200 $21,200
B. $2,400 $22,400
C. $1,272 $22,472
Answer (C) is correct.
Until the product is delivered to the customer, all payments received are recognized as a contract
liability. Because the contract includes a significant financing component, interest expense is
recognized using the effective interest method. The contract liability at the beginning of Year 2 equals
$21,200 ($20,000 × 1.06). Thus, Year 2 interest expense equals $1,272 ($21,200 × 6%), and the
contract liability at the end of Year 2 equals $22,472 ($21,200 × 1.06).
D. $1,348 $0
Question: 22On January 1, Year 1, an entity receives a payment of $20,000 for delivering a product to a
customer at the end of Year 3. Based on the contract’s terms, the performance obligation will be satisfied at a point
in time (upon delivery of the product). The entity determined that (1) the contract includes a significant financing
component and (2) a financing rate of 6% is an appropriate discount rate. What amount of interest expense and
contract liability will be recognized in the entity’s December 31, Year 2, financial statements?
Year 2 Interest Expense Contract Liability on December 31, Year 2
A. $1,200 $21,200
B. $2,400 $22,400
C. $1,272 $22,472
Answer (C) is correct.
Until the product is delivered to the customer, all payments received are recognized as a contract
liability. Because the contract includes a significant financing component, interest expense is
recognized using the effective interest method. The contract liability at the beginning of Year 2 equals
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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$21,200 ($20,000 × 1.06). Thus, Year 2 interest expense equals $1,272 ($21,200 × 6%), and the
contract liability at the end of Year 2 equals $22,472 ($21,200 × 1.06).
D. $1,348 $0
Question: 23A company provides the following information:
Cash Receipts from Customers:
From Year 1 sales
From Year 2 sales
Year 1
Year 2
Year 3
$95,000 $120,000
200,000 $ 75,000
From Year 3 sales
50,000
225,000
What is the accrual-based revenue for Year 2?
A. $200,000
B. $275,000
Answer (B) is correct.
Under the accrual method, revenues and gains are realized when goods or services have been
exchanged for cash or claims to cash, not when that cash is collected. Consequently, given that total
cash collected for Year 2 sales is $275,000 ($200,000 Year 2 + $75,000 Year 3), revenue for Year 2 is
$275,000.
C. $320,000
D. $370,000
Question: 24An entity that owns a new professional basketball team sells season tickets to its team’s games. The
first season lasts from November Year 1 through April Year 2, with 10 games played each month. In Year 1, the
entity collected US $3 million from advance season-ticket sales. Its fiscal year-end is December 31. Based on this
information, the entity should
A. Report income of US $3 million on its Year 1 income statement.
B. Report income of US $2 million on its Year 1 income statement.
C. Report income of US $1 million on its Year 1 income statement.
Answer (C) is correct.
An entity recognizes revenue for the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in the exchange. Revenue is
recognized when the performance obligation is satisfied. Consideration received for an obligation yet
to be satisfied (i.e., advance payment) is recorded as deferred (or unearned) income, a liability. Thus,
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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cash collections from sales of season tickets are recorded initially as unearned income. As the service
is performed (as the performance obligation is satisfied by playing the games), portions of this liability
are reclassified as earned income. The entity should recognize US $1 million as income in Year 1 [(US
$3,000,000 ÷ 6 months) × 2 months]. The remaining US $2 million will be reported as a liability for
Year 1.
D. Report no income from season-ticket sales.
Question: 25On December 31, Year 2, a company prepaid the $72,000 rental fee for a parking lot it leases. The
rental fee covered a 3-year period beginning January 1, Year 3. What is the effect of this transaction on the
December 31, Year 3, financial statements for each of the following?
Current
Prepaid
Expenses Expenses
A. $0
$72,000
B. $22,000 $50,000
C. $24,000 $48,000
Answer (C) is correct.
Under the matching principle, expenses should be recognized in the same period as the related
revenues. The $72,000 rental fee should be recognized as expense evenly over the 36-month duration
of the lease. In Year 3, $24,000 should be debited to current expenses [($72,000 ÷ 36 months) × 12
months], and $48,000 should be deferred as prepaid expense.
D. $72,000 $0
Question: 26An entity had cash receipts from sales of US $175,000 during Year 2. At the end of Year 1, the
company had US $40,000 of deferred revenue, all of which was earned in Year 2. The company’s sales revenue for
Year 2 would be
A. US $40,000
B. US $135,000
C. US $175,000
D. US $215,000
Answer (D) is correct.
The sales revenue earned in Year 2 equals Year 2 cash receipts (assuming no deferred revenue from
Year 2 sales), plus the revenue earned from cash receipts in Year 1, or US $215,000 ($175,000 +
$40,000).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Subunit 7: Recognition of Revenue over Time
Question: 1An entity is calculating the income recognized in the third year of a 5-year construction contract. It
uses the input method based on costs incurred to measure the progress toward completion. The ratio used in
calculating income is
A. Costs incurred in Year 3 to total billings.
B. Costs incurred in Year 3 to total estimated costs.
C. Total costs incurred to date to total billings.
D. Total costs incurred to date to total estimated costs.
Answer (D) is correct.
The entity is using a cost-to-cost accounting method. The input method based on costs incurred to
measure the progress toward completion recognizes gross profit or revenue based on the ratio of costs
to date to estimated total costs.
Question: 2Haft Construction Co. has consistently used the input method based on costs incurred to measure
progress toward completion of the project. On January 10, Year 3, Haft began work on a $3 million construction
contract. At the inception date, the estimated cost of construction was $2,250,000. The following data relate to the
progress of the contract:
Gross profit recognized at 12/31/Yr 3
$ 300,000
Costs incurred 1/10/Yr 3 through 12/31/Yr 4 1,800,000
Estimated cost to complete at 12/31/Yr 4
600,000
In its income statement for the year ended December 31, Year 4, what amount of gross profit should Haft report?
A. $450,000
B. $300,000
C. $262,500
D. $150,000
Answer (D) is correct.
The input method based on costs incurred provides for the recognition of gross profit based on the
relationship between the costs incurred to date and estimated total costs for the completion of the
contract. The total anticipated gross profit is multiplied by the ratio of the costs incurred to date to the
total estimated costs, and the product is reduced by previously recognized gross profit. The percentageof-completion at 12/31/Yr 4 is 75% [$1,800,000 ÷ ($1,800,000 + $600,000)]. The total anticipated
gross profit is $600,000 ($3,000,000 contract price – $2,400,000 expected total costs). Consequently, a
gross profit of $150,000 [($600,000 total gross profit × 75%) – $300,000 previously recognized gross
profit] is recognized for Year 4.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 3Which of the following is used in calculating the gross profit recognized in the fourth and final year
of a contract accounted for under the input method based on costs incurred to measure progress toward completion
of the contract?
Actual
Gross Profit
Total Costs Previously Recognized
A. Yes Yes
Answer (A) is correct.
The cost-to-cost method recognizes revenues, costs, and gross profit depending on the progress made
on the contract. Gross profit recognized in the last year of the contract equals the contract price, minus
actual total costs, minus gross profit previously recognized.
B. Yes No
C. No Yes
D. No No
Question: 4Gow Constructors, Inc., has consistently used the input method based on costs incurred to measure
the progress toward completion of a long-term construction contract. In Year 1, Gow started work on an $18 million
construction contract that was completed in Year 2. The following information was taken from Gow’s Year 1
accounting records:
Costs incurred
Collections
$ 5,400,000
4,200,000
Estimated costs to complete 10,800,000
What amount of gross profit should Gow have recognized in Year 1 on this contract?
A. $1,400,000
B. $1,200,000
C. $900,000
D. $600,000
Answer (D) is correct.
In Year 1, one-third of the estimated costs of this construction project were incurred [$5,400,000 ÷
($5,400,000 + $10,800,000)]. The entity should therefore have recognized one-third of the estimated
gross profit in Year 1. At year-end, the estimated gross profit was $1,800,000 [$18,000,000 price –
$16,200,000 total estimated costs ($5,400,000 costs incurred + $10,800,000 estimated costs to
complete)]. In Year 1, $600,000 ($1,800,000 × 1/3) should have been recognized as gross profit.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 5Kechara Corp. started a long-term construction project on a customer’s land in Year 1. The following
data relate to this project:
Contract price
$4,200,000
Costs incurred in Year 1
1,750,000
Estimated costs to complete
1,750,000
Amounts billed
900,000
Collections on amounts billed
800,000
The project is accounted for using the input method based on costs incurred to measure progress toward completion
of the contract. In Kechara’s Year 1 income statement, what amount of gross profit should be reported for this
project?
A. $350,000
Answer (A) is correct.
In Year 1, one-half of the estimated costs of this construction project were incurred [$1,750,000 ÷
($1,750,000 + $1,750,000)]. The company should therefore recognize one-half of the estimated gross
profit in Year 1. At year-end, the estimated gross profit is $700,000, equal to the contract price minus
total estimated costs [$4,200,000 – ($1,750,000 + $1,750,000)]. In Year 1, $350,000 should be
recognized as gross profit ($700,000 × 50%).
B. $150,000
C. $133,333
D. $100,000
Question: 6Hansen Construction, Inc., has consistently used the input method based on costs incurred to
recognize revenue over time. During Year 1, Hansen started work on a $3 million fixed-price construction contract.
The accounting records disclosed the following data for the year ended December 31, Year 1:
Costs incurred
$ 930,000
Estimated costs to complete 2,170,000
Amounts billed
Collections
1,100,000
700,000
How much loss should Hansen have recognized in Year 1?
A. $230,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $100,000
Answer (B) is correct.
As soon as an estimated loss becomes evident, it must be recognized in full. The total of the costs
incurred in Year 1 plus estimated costs to complete is $3,100,000 ($930,000 + $2,170,000). Because
this sum exceeds the $3 million fixed-price construction contract amount, a $100,000 loss should be
recognized.
C. $30,000
D. $0
Fact Pattern: Data pertaining to Pell Co.’s long-term construction jobs, which commenced
during Year 1, are as follows:
Project 1 Project 2
Contract price
$420,000 $300,000
Costs incurred during Year 1
240,000 280,000
Estimated costs to complete
120,000
Billed to customers during Year 1
Received from customers during Year 1
40,000
150,000 270,000
90,000 250,000
Question: 7If Pell used the input method based on costs incurred to measure its progress toward completion of
the contract, what amount of gross profit/loss would Pell report in its Year 1 income statement?
A. $(20,000)
B. $20,000
Answer (B) is correct.
At the end of Year 1, Project 1 is 66 2/3% complete [$240,000 ÷ ($240,000 + $120,000)] and Project 2
is 87 1/2% complete [$280,000 ÷ ($280,000 + $40,000)]. Each project’s percentage of completion is
multiplied by its expected total gross profit. Accordingly, Pell recognizes $40,000 [($420,000 contract
price – $240,000 costs incurred – $120,000 additional estimated costs) × 66 2/3%] of gross profit for
Project 1. However, Project 2 estimates indicate a loss of $20,000 ($300,000 – $280,000 – $40,000).
Because the full amount of a loss is reported immediately irrespective of the accounting method used,
a gross profit of $20,000 [$40,000 Project 1 + $(20,000) Project 2] is recognized.
C. $22,500
D. $40,000
Question: 8A construction company recognizes revenue from construction contracts over time using the input
method based on costs incurred. It reports the following:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Year 1 Year 2
Construction costs
Estimated cost to complete at year-end
$100
$200
300
0
The contract price is $1,000. What is the profit recognized in Year 2?
A. $150
B. $400
C. $550
Answer (C) is correct.
At the end of Year 1, total cost was expected to be $400 ($100 incurred + $300 estimated cost to
complete), and estimated total profit was $600 ($1,000 price – $400 estimated total cost). Thus, the
amount of profit recognized in Year 1 was $150 [$600 × ($100 cost incurred ÷ $400 estimated total
cost)]. The project was completed in Year 2 at an additional cost of $200. Actual profit was therefore
$700 ($1,000 – $300 actual total cost). Profit recognized in Year 2 is $550 ($700 total – $150
recognized in Year 1).
D. $800
Question: 9Paulson Company uses the input method based on costs incurred to measure progress toward
completion of long-term construction contracts. The following information relates to a contract that was awarded at
a price of $700,000. The estimated costs were $500,000, and the contract duration was 3 years.
Cumulative cost to date
Year 1
Year 2
Year 3
$300,000
$390,000
$530,000
Costs to complete at year end
250,000
130,000
0
Progress billings
325,000
220,000
155,000
Collections on account
300,000
200,000
200,000
Assuming that $65,000 was recognized as gross profit in Year 1, the amount of gross profit Paulson recognized in
Year 2 was
A. $35,000
B. $70,000
Answer (B) is correct.
Determining the annual recognized gross profit requires calculation of the estimated total gross profit.
Contract price
Year 1
Year 2
$700,000
$700,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Minus: Estimated total costs
Costs to date
$300,000
$390,000
250,000
130,000
Estimated total costs
$550,000
$520,000
Estimated total gross profit
$150,000
$180,000
Estimated costs to complete
The completion percentage for Year 2 is the ratio of costs incurred to date to estimated total costs
($390,000 ÷ $520,000 = 75%). The cumulative gross profit recognized at the end of Year 2 is therefore
$135,000 ($180,000 × 75%). Because $65,000 was recognized in Year 1, the amount recognized in
Year 2 is $70,000 ($135,000 – $65,000).
C. $135,000
D. $170,000
Question: 10Frame Construction Company’s contract requires the construction of a bridge on a customer’s land
in 3 years. The expected total cost of the bridge is $2,000,000, and Frame will receive $2,500,000 for the project.
The actual costs incurred to complete the project were $500,000, $900,000, and $600,000, respectively, during each
of the 3 years. Progress payments received by Frame were $600,000, $1,200,000, and $700,000, respectively.
Assuming that the input method based on costs incurred to measure progress toward completion of the contract is
used, what amount of gross profit would Frame report during the last year of the project?
A. $120,000
B. $125,000
C. $140,000
D. $150,000
Answer (D) is correct.
The expected gross profit is $500,000 ($2,500,000 price – $2,000,000 expected cost). Recognized
gross profit in Year 1 is $125,000 [$500,000 × ($500,000 ÷ $2,000,000)]. Cumulative recognized gross
profit in Year 2 is $350,000 {$500,000 × [($500,000 + $900,000) ÷ $2,000,000]}. Recognized gross
profit in Year 3 is $150,000 [($2,500,000 price – $500,000 – $900,000 – $600,000) actual gross profit
– $350,000 previously recognized].
Question: 11Howard Co. had the following first-year amounts for a $7,000,000 construction contract:
Actual costs
$2,000,000
Estimated costs to complete 6,000,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Progress billings
1,800,000
Cash collected
1,500,000
What gross profit (loss) is recognized using the input method based on costs incurred to measure progress toward
completion of the contract?
A. $(1,000,000)
Answer (A) is correct.
Using the cost-to-cost method, the estimated loss from the project is $1,000,000 ($7,000,000 contract
price – $2,000,000 actual costs in the first year – $6,000,000 estimated remaining costs to complete the
project). As soon as an estimated loss on any project becomes apparent, it must be recognized in full.
Therefore, the total $1,000,000 loss must be recognized.
B. $(200,000)
C. $800,000
D. $1,750,000
Question: 12When revenue from contracts with customers is recognized over time, the progress toward
complete satisfaction of a performance obligation may be measured using the
A. Point-in-time method.
B. Zero-profit-margin method.
C. Estimated gross profit method.
D. Input method.
Answer (D) is correct.
When revenue is recognized over time, the progress toward complete satisfaction of a performance
obligation must be measured. This progress must be measured either by the output method or the input
method. To determine the appropriate method, an entity must consider the nature of the good or service
that it promised to transfer to the customer. The chosen method should measure the entity’s
performance in transferring control of the promised asset to the customer. The input method recognizes
revenue on the basis of (1) the entity’s inputs to the satisfaction of the performance obligation relative
to (2) the total expected inputs to the satisfaction of that performance obligation. Examples of input
methods include (1) resources consumed, (2) labor hours expended, (3) costs incurred, (4) time
elapsed, or (5) machine hours used. When an entity’s inputs are incurred evenly over time, recognition
of revenue on a straight-line basis may be appropriate.
Question: 13An entity entered into a contract to construct a building. Based on the contract’s terms, the entity
appropriately determined that the performance obligation in the contract will be satisfied over time. At an early stage
of the contract, the entity cannot reasonably measure the outcome of the contract, but it expects to recover the costs
incurred in the construction of the building. The revenue from the contract should be recognized
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Only to the extent of the costs incurred.
Answer (A) is correct.
When the outcome of the contract is not reasonably measurable but the costs incurred in satisfying the
performance obligation are expected to be recovered, revenue must be recognized only to the extent of
the costs incurred. Revenue recognized is based on a zero profit margin until the entity can reasonably
measure the outcome of the performance obligation.
B. Only upon completion of the construction.
C. Evenly over the contract period on a straight-line basis.
D. Based on the progress toward completion of the project.
Question: 14An entity recognizes revenue from a long-term contract over time. However, early in the
performance of the contract, it cannot reasonably measure the outcome, but it expects to recover the costs incurred.
Revenue should be recognized based on
A. The output method.
B. A straight-line calculation.
C. A zero profit margin.
Answer (C) is correct.
When the outcome of the contract is not reasonably measurable but the costs incurred in satisfying the
performance obligation are expected to be recovered, revenue must be recognized only to the extent of
the costs incurred. Revenue recognized is based on a zero profit margin until the entity can reasonably
measure the outcome of the performance obligation.
D. The completed-contract method.
Question: 15On January 1, Year 1, an entity enters into a contract with a customer to build a robot. The
construction of the robot is expected to be completed at the end of Year 2. The entity also determines that
 It has no alternative use for the robot.
 It has an enforceable right to payment for the performance completed to date.
 The progress toward complete construction of the robot is reasonably measurable using the input method
based on costs incurred.
The contract price is $800,000, and expected total costs are $500,000. The following additional information relates
to the actual and expected costs incurred:
Year 1
Year 2
Costs incurred during each year $250,000 $350,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Costs expected in future
$250,000 $
0
What amounts of revenue, cost of goods sold, and gross profit are recognized by the entity for Year 2?
Revenue Cost of Goods Sold Gross Profit
A. $400,000 $350,000 $50,000
Answer (A) is correct.
Revenue must be recognized over time, that is, over the 2 years of the construction period, because
(1) the robot has no alternative use to the entity and (2) the entity has an enforceable right to payment
for the performance completed to date. In Year 1, 50% ($250,000 ÷ $500,000) of expected costs has
been incurred. Using the input method based on costs incurred, the entity recognizes 50% of the
expected revenue from the contract for Year 1 ($800,000 contract price × 50% = $400,000). The total
gross profit from the contract is expected to be $300,000 ($800,000 – $500,000). Thus, $150,000
($300,000 × 50%) of gross profit ($400,000 revenue – $250,000 cost of goods sold) is recognized in
Year 1. In Year 2, the contract is completed, and the total gross profit from the contract is $200,000
[$800,000 contract price – ($250,000 + $350,000) total costs incurred]. Because $150,000 of gross
profit was recognized in Year 1, $50,000 ($200,000 – $150,000) of gross profit is recognized in Year
2. The total revenue from the contract is $800,000. Revenue of $400,000 was recognized in Year 1, so
Year 2 revenue is $400,000 ($800,000 – $400,000). Cost of goods sold in Year 2 equals the actual
costs incurred of $350,000.
B. $400,000 $250,000 $150,000
C. $800,000 $350,000 $450,000
D. $800,000 $600,000 $200,000
Question: 16A building contractor has a fixed-price contract to construct a building on the customer’s land. The
building is expected to be completed in 2 years. Progress billings will be sent to the customer at quarterly intervals.
Which of the following describes the preferable point for revenue recognition for this contract if its outcome can be
reasonably measured?
A. After the contract is signed.
B. As progress is made toward completion of the contract.
Answer (B) is correct.
An entity must recognize revenue when (or as) it satisfies each performance obligation in the contract
by transferring the promised good or service to a customer. Because the customer controls the building
as it is constructed, the contract meets the criteria for recognition of revenue over time. Thus, the
contractor must recognize revenue as progress is made toward completion of the contract.
C. As cash is received.
D. As and only to the extent of costs incurred.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Question: 17Cinnabar Construction Company has consistently used the input method based on costs incurred to
recognize revenue from a performance obligation satisfied over time. During Year 1, Cinnabar entered into a fixedprice contract to construct an office building for $10 million. Information relating to the contract is as follows:
December 31
Year 1
Year 2
20%
60%
Progress to completion
Estimated total costs
at completion
$7,500,000
$8,000,000
500,000
1,200,000
Gross profit recognized
(cumulative)
Contract costs incurred during Year 2 were
A. $3,200,000
B. $3,300,000
Answer (B) is correct.
If the progress to completion is based on the relationship of the cumulative costs incurred to date to
estimated total costs at completion, the cumulative amount incurred at 12/31/Year 1 was $1,500,000
($7,500,000 × 20%). At 12/31/Year 2, the cumulative amount incurred was $4,800,000 ($8,000,000 ×
60%). The difference of $3,300,000 ($4,800,000 – $1,500,000) equals contract costs incurred during
Year 2.
C. $3,500,000
D. $4,800,000
Question: 18A company began work on a long-term construction contract in Year 1. The contract price was
$3,000,000. Year-end information related to the contract is as follows:
Year 1
Estimated total cost
Year 2
Year 3
$2,000,000
$2,000,000
$2,000,000
Cost incurred
700,000
900,000
400,000
Billings
800,000
1,200,000
1,000,000
Collections
600,000
1,200,000
1,200,000
Under the input method based on costs incurred, the gross profit to be recognized in Year 1 is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $(100,000)
B. $100,000
C. $200,000
D. $350,000
Answer (D) is correct.
The input method based on costs incurred recognizes revenue based on the stage of completion of the
contract. The progress toward completion of the project is the calculation of ratio of the contract costs
incurred to date to the estimated total costs. The percentage-of-completion at year-end on the cost-tocost basis is 35% ($700,000 ÷ $2,000,000). The gross profit for Year 1 is the anticipated gross profit
on the contract times the completion percentage. Thus, profit for Year 1 is $350,000 [($3,000,000 –
$2,000,000) × 35%].
Fact Pattern: On January 1, Year 1, Big Co. enters into a contract with a customer to build a
bridge on the customer’s land for $2,500,000. The construction of the bridge is expected to be
completed at the end of Year 3. Big determines that the progress toward completion of the bridge
is reasonably measurable using the input method based on costs incurred. At contract inception,
Big estimates that the expected total cost of construction will be $1,700,000. Below are the (1)
actual costs incurred during each year, (2) expected costs to complete the construction, and (3)
amounts billed to the customer:
Year 1
Year 2
Year 3
Costs incurred each year
$ 700,000 $500,000
$800,000
Costs expected in the following years
1,300,000
675,000
0
Amounts billed to (and paid by) the customer each year
700,000
950,000
850,000
Question: 19What amount of revenue on this contract is recognized by Big in its Year 1 income statement?
A. $875,000
Answer (A) is correct.
By the end of Year 1, 35% [$700,000 ÷ ($700,000 + $1,300,000)] of total expected costs have been
incurred. Using the input method based on costs incurred, 35% of the revenue from the contract is
recognized in Year 1. Thus, $875,000 ($2,500,000 × 35%) of revenue from this contract is recognized
in Year 1.
B. $650,000
C. $700,000
D. $175,000
Fact Pattern: On January 1, Year 1, Big Co. enters into a contract with a customer to build a
bridge on the customer’s land for $2,500,000. The construction of the bridge is expected to be
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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completed at the end of Year 3. Big determines that the progress toward completion of the bridge
is reasonably measurable using the input method based on costs incurred. At contract inception,
Big estimates that the expected total cost of construction will be $1,700,000. Below are the (1)
actual costs incurred during each year, (2) expected costs to complete the construction, and (3)
amounts billed to the customer:
Year 1
Year 2
Year 3
Costs incurred each year
$ 700,000 $500,000
$800,000
Costs expected in the following years
1,300,000
675,000
0
Amounts billed to (and paid by) the customer each year
700,000
950,000
850,000
Question: 20What amount of gross profit on this contract is recognized by Big in its Year 2 income statement?
A. $400,000
B. $225,000
Answer (B) is correct.
Revenue and gross profit are recognized over the 3 years of the construction period using the input
method based on costs incurred in measuring the progress toward completion. At the end of Year 2,
64% [($700,000 + $500,000) ÷ ($700,000 + $500,000 + $675,000)] of expected costs have been
incurred. At the end of Year 2, the total expected gross profit from the contract is $625,000
[$2,500,000 – ($700,000 + $500,000 + $675,000)]. Thus, the gross profit in the first 2 years of the
contract is $400,000 ($625,000 × 64%). In Year 1, gross profit of $175,000 [$500,000 total expected
gross profit estimated at the end of Year 1 × ($700,000 ÷ $2,000,000) progress of completion at the
end of Year 1] was recognized. Thus, the gross profit recognized in Year 2 is $225,000 ($400,000
gross profit for the first 2 years – $175,000 gross profit recognized in Year 1).
C. $450,000
D. $0
Fact Pattern: On January 1, Year 1, Big Co. enters into a contract with a customer to build a
bridge on the customer’s land for $2,500,000. The construction of the bridge is expected to be
completed at the end of Year 3. Big determines that the progress toward completion of the bridge
is reasonably measurable using the input method based on costs incurred. At contract inception,
Big estimates that the expected total cost of construction will be $1,700,000. Below are the (1)
actual costs incurred during each year, (2) expected costs to complete the construction, and (3)
amounts billed to the customer:
Year 1
Year 2
Year 3
Costs incurred each year
$ 700,000 $500,000
$800,000
Costs expected in the following years
1,300,000
675,000
0
Amounts billed to (and paid by) the customer each year
700,000
950,000
850,000
Question: 21What amount of gross profit on this contract is recognized by Big in its Year 3 income statement?
A. $500,000
B. $50,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $100,000
Answer (C) is correct.
In this contract, revenue is recognized over time and based on the progress toward completion. The
progress toward completion is measured using the input method based on costs incurred. The
construction was completed in Year 3. Accordingly, the entire gross profit from the contract of
$500,000 [$2,500,000 – ($700,000 + $500,000 + $800,000)] must be recognized by the end of Year 3.
At the end of Year 2, the total expected gross profit from the contract was $625,000 [$2,500,000 –
($700,000 + $500,000 + $675,000)]. By the end of Year 2, 64% [($700,000 + $500,000) ÷ ($700,000 +
$500,000 + $675,000)] of the expected contract costs had been incurred. Because the recognized gross
profit in the first 2 years of the contract was $400,000 ($625,000 × 64%), the gross profit recognized in
Year 3 is $100,000 ($500,000 – $400,000).
D. $166,667
Fact Pattern: On January 1, Year 1, Big Co. enters into a contract with a customer to build a
bridge on the customer’s land for $2,500,000. The construction of the bridge is expected to be
completed at the end of Year 3. Big determines that the progress toward completion of the bridge
is reasonably measurable using the input method based on costs incurred. At contract inception,
Big estimates that the expected total cost of construction will be $1,700,000. Below are the (1)
actual costs incurred during each year, (2) expected costs to complete the construction, and (3)
amounts billed to the customer:
Year 1
Year 2
Year 3
Costs incurred each year
$ 700,000 $500,000
$800,000
Costs expected in the following years
1,300,000
675,000
0
Amounts billed to (and paid by) the customer each year
700,000
950,000
850,000
Question: 22What amount of revenue on this contract is recognized by Big in its Year 3 income statement?
A. $900,000
Answer (A) is correct.
In this contract, revenue is recognized over time based on progress toward completion. The progress
toward completion is measured using the input method based on costs incurred. The construction was
completed in Year 3. Accordingly, by the end of Year 3, the entire $2,500,000 of revenues should be
recognized. At the end of Year 2, 64% [($700,000 + $500,000) ÷ ($700,000 + $500,000 + $675,000)]
of the estimated construction costs had been incurred. Thus, revenue of $900,000 [$2,500,000 × (100%
– 64%)] is recognized in Year 3.
B. $850,000
C. $2,500,000
D. $833,333
Question: 23On October 1, Year 1, Little Co. enters into a contract with a customer to build a factory on the
customer’s land for $1,000,000. The construction of the factory is expected to be completed at the end of Year 5.
Based on Little’s accounting policies, the progress toward completion of the factory is measured using the input
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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method based on costs incurred. During Year 1, Little incurred $450,000 in costs in respect to this contract and
billed the customer for $600,000. At the end of Year 1, Little cannot reasonably estimate the total expected costs of
the construction and cannot reasonably estimate the progress toward completion of the factory. However, Little
expects to recover the costs incurred in the construction. What amount of revenue from this contract will be
recognized in Little’s Year 1 income statement?
A. $150,000
B. $600,000
C. $450,000
Answer (C) is correct.
When the outcome of the contract is not reasonably measurable, but the costs incurred in satisfying the
performance obligation are expected to be recovered, revenue must be recognized only to the extent of
the costs incurred. Revenue recognized is based on a zero profit margin until the entity can reasonably
measure the outcome of the performance obligation. Because the costs incurred are expected to be
recovered, revenue is recognized equal to the costs incurred of $450,000 in Year 1.
D. $0
Question: 24A building contractor has a contract to construct a large building. It is estimated that the building
will take 2 years to complete. Progress billings will be sent to the customer at quarterly intervals. Which of the
following describes the preferable point for revenue and gross profit recognition for this contract?
A. After the contract is signed.
B. As progress is made toward completion of the contract.
Answer (B) is correct.
Two methods are used for revenue and gross profit recognition for long-term construction-type
contracts: the percentage-of-completion method and the completed-contract method. Under the
percentage-of-completion method, revenue and gross profit are recognized each period based upon the
progress of the construction. The presumption is that the percentage-of-completion approach is the
better method and that the completed-contract method should be used only when the percentage-ofcompletion method is inappropriate.
C. As cash is received.
D. When the contract is completed.
Question: 25Saskia Company’s construction projects extend over several years, and collection of receivables is
reasonably certain. Each project has a firm contract price, reliable estimates of the extent of progress and cost to
finish, and a contract that is specific as to the rights and obligations of all parties. The contractor and the buyer are
expected to fulfill their contractual obligations on each project. Saskia should recognize revenue from the projects
A. As cash is collected from customers.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Based on the progress toward complete satisfaction of the performance obligation for each project.
Answer (B) is correct.
For each performance obligation satisfied over time, an entity must recognize revenue over time. For
this purpose, the entity measures the progress toward complete satisfaction using the output method or
the input method.
C. Only to the extent of the costs incurred.
D. At a point in time.
Question: 26A company used the input method based on costs incurred to measure the progress toward
completion of a 4-year construction contract. Which of the following items should be used to calculate the gross
profit recognized in the second year?
Gross Profit
Previously Amounts Billed
Recognized
to Date
A. Yes Yes
B. No Yes
C. Yes No
Answer (C) is correct.
The cost-to-cost method provides for the recognition of gross profit based on the relationship between
the costs incurred to date and estimated total costs for the completion of the contract. The amount of
gross profit (based on the latest available estimated costs) recognized in the second year of a 4-year
contract is calculated as follows: The total anticipated gross profit is multiplied by the ratio of the costs
incurred to date to the total estimated costs, and the product is reduced by previously recognized gross
profit. Gross profit previously recognized is therefore used to calculate gross profit to be recognized in
the second year. However, amounts billed to date have no effect on the amount of gross profit to be
recognized in the second year.
D. No No
Question: 27How should the balances of progress billings and construction in progress be shown at reporting
dates prior to the completion of a long-term contract?
A. Progress billings as deferred income, construction in progress as a deferred expense.
B. Progress billings as income, construction in progress as inventory.
C. Net, as a current asset if debit balance and current liability if credit balance.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
The difference between construction in progress (costs and recognized gross profit) and progress
billings to date must be reported as a current asset if construction in progress exceeds total billings, and
as a current liability if billings exceed construction in progress. Separate recognition is required for
each project.
D. Net, as gross profit from construction if credit balance, and loss from construction if debit balance.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Study Unit 2: Measurement, Valuation, and Disclosure: Investments
and Short-Term Items
Subunit 1: Accounts Receivable
Question: 1Statements of financial position on December 31, Year 1, and December 31, Year 2, are presented
below:
Dec. 31,
Year 1
Dec. 31,
Year 2
Assets:
Cash
$ 50,000
$ 60,000
95,000
89,000
Allowance for uncollectible accounts
Inventory
(4,000)
120,000
(3,000)
140,000
Property, plant, and equipment
295,000
(102,000)
340,000
(119,000)
Accounts receivable
Accumulated depreciation
Total Assets
$ 454,000
$ 507,000
$ 62,000
8,000
200,000
$ 49,000
11,000
200,000
Liabilities and equity:
Trade accounts payable
Interest payable
Bonds payable
Unamortized bond discount
Equity
(15,000)
199,000
Total liabilities and equity
$ 454,000
(10,000)
257,000
$ 507,000
Additional information for Year 2:
1.
Sales revenue was $338,000.
2.
$3,000 of accounts receivable was written off.
Cash collections from customers in Year 2 were
A. $341,000
Answer (A) is correct.
Cash collections from customers equals beginning accounts receivable, plus sales revenue, minus
accounts written off, minus ending accounts receivable. In Year 2, cash collections from customers
were $341,000 ($95,000 + $338,000 – $3,000 – $89,000).
B. $338,000
C. $344,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $335,000
Question: 2An analysis of an entity’s $150,000 accounts receivable at year end resulted in a $5,000 ending
balance for its allowance for uncollectible accounts and a bad debt expense of $2,000. During the past year,
recoveries on bad debts previously written off were correctly recorded at $500. If the beginning balance in the
allowance for uncollectible accounts was $4,700, what was the amount of accounts receivable written off as
uncollectible during the year?
A. $1,200
B. $1,800
C. $2,200
Answer (C) is correct.
Under the allowance method, uncollectible accounts are written off by a debit to the allowance and a
credit to accounts receivable. The $500 of recovered bad debts is accounted for by a debit to accounts
receivable and a credit to the allowance. The $2,000 bad debt expense is also credited to the allowance.
The amount of accounts receivable written off can be calculated as follows:
Beginning allowance $4,700
Bad debt expense
Recoveries
Ending allowance
A/R written off
2,000
500
(5,000)
$2,200
D. $2,800
Question: 3The following information applies to a manufacturing company, which has a 6-month operating
cycle:
Cash sales
$100,000
Credit sales during the sixth month with net 30 days terms
150,000
Credit sale during the fifth month with special terms of net 9 months
10,000
Interest earned and accrued on an investment that matures during month 3 of the next cycle
2,000
The total of the company’s trade accounts receivable at the end of the current cycle is
A. $152,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $160,000
Answer (B) is correct.
A receivable classified as current on the statement of financial position is expected to be collected
within the current operating cycle or 1 year, whichever is longer. The total of the trade accounts
receivable at the end of the current cycle is therefore $160,000 ($150,000 + $10,000).
C. $260,000
D. $262,000
Question: 4A company uses the allowance method to account for uncollectible accounts receivable. After
recording the estimate of uncollectible accounts expense for the current year, the company decided to write off in the
current year the $10,000 account of a customer who had filed for bankruptcy. What effect does this write-off have
on the company’s current net income and total current assets, respectively?
Net Income
Total Current Assets
A. Decrease Decrease
B. No effect Decrease
C. Decrease No effect
D. No effect No effect
Answer (D) is correct.
The company uses the allowance method. Thus, when a specific amount is written off, the journal
entry is
Allowance for doubtful accounts $10,000
Accounts receivable
$10,000
The write-off of a bad debt has no effect on expenses, net income, and total current assets.
Question: 5Based on the industry average, a corporation estimates that its bad debts should average 3% of credit
sales. The balance in the allowance for uncollectible accounts at the beginning of Year 3 was $140,000. During Year
3, credit sales totaled $10,000,000, accounts of $100,000 were deemed to be uncollectible, and payment was
received on a $20,000 account that had previously been written off as uncollectible. The entry to record bad debt
expense at the end of Year 3 would include a credit to the allowance for uncollectible accounts of
A. $300,000
Answer (A) is correct.
Bad debt expense is based on the income statement approach. It treats bad debt expense as a function
of sales on account. Thus, it is projected to be $300,000 ($10,000,000 × 3%). The entry to record bad
debt is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Bad debt expense
$300,000
Allowance for doubtful accounts
$300,000
B. $260,000
C. $240,000
D. $160,000
Question: 6The following information has been compiled by a manufacturing company:
 Sale of company products for the period to customers with net 30-day terms amounting to $150,000.
 Sale of company products for the period to a customer, supported by a note for $25,000, with special terms
of net 180 days.
 Balance of trade receivables at the end of the last period was $300,000.
 Collections of open trade receivables during the period was $200,000.
 Rental income for the period, both earned and accrued but not yet collected, from the manufacturing
company’s credit union for use of company facilities was $2,000.
The open trade receivables balance to be shown on the statement of financial position for the period is
A. $250,000
Answer (A) is correct.
The open trade receivables balance is calculated as follows:
Previous ending balance
Add: Sales to customers (terms net 30)
$300,000
150,000
Minus: Collections during period
(200,000)
Open trade receivables reported
$250,000
B. $252,000
C. $275,000
D. $277,000
Question: 7The following information relates to accounts receivable for the year just ended:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Accounts receivable, 1/1
$ 650,000
Credit sales for the year
2,700,000
Sales returns for the year
75,000
Accounts written off during the year
40,000
Collections from customers during the year
Estimated future sales returns at 12/31
2,150,000
50,000
Estimated uncollectible accounts at 12/31
110,000
What amount should be reported for accounts receivable, before allowances for sales returns and uncollectible
accounts, at December 31?
A. $1,200,000
B. $1,125,000
C. $1,085,000
Answer (C) is correct.
The ending balance in accounts receivable consists of the $650,000 beginning debit balance, plus
debits for $2,700,000 of credit sales, minus credits for $2,150,000 of collections, $40,000 of accounts
written off, and $75,000 of sales returns.
Accounts Receivable (in 000s)
1/1
Credit sales
$ 650
2,700
12/31
$1,085
$ 75 Sales returns
2,150 Collections
40 Write-offs
The $110,000 of estimated uncollectible receivables and the $50,000 of estimated sales returns are not
relevant because they affect the allowance accounts but not gross accounts receivable.
D. $925,000
Question: 8A shoe retailer allows customers to return shoes within 90 days of purchase. The company estimates
that 5% of sales will be returned within the 90-day period. During the month, the company has sales of $200,000
and returns of sales made in prior months of $5,000. What amount should the company record as net sales revenue
for new sales made during the month?
A. $185,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $190,000
Answer (B) is correct.
The company has $200,000 of sales and estimates that 5% of sales will be returned. Thus, the company
will recognize $10,000 ($200,000 × 5%) for sales returns (contra revenue) and for a corresponding
allowance for sales returns (contra asset). This amount is subtracted from total sales to find net sales
revenue of $190,000 ($200,000 – $10,000).
C. $195,000
D. $200,000
Question: 9An internal auditor is deriving cash flow data based on an incomplete set of facts. Bad debt expense
was $2,000. Additional data for this period follows:
Credit sales
$100,000
Gross accounts receivable -- beginning balance
5,000
Allowance for bad debts -- beginning balance
(500)
Accounts receivable written off
1,000
Increase in net accounts receivable (after subtraction of allowance for bad debts)
30,000
How much cash was collected this period on credit sales?
A. $64,000
B. $68,000
Answer (B) is correct.
The beginning balance of gross accounts receivable (A/R) was $5,000 (debit). Thus, net beginning A/R
was $4,500 ($5,000 – $500 credit in the allowance for bad debts). The allowance was credited for the
$2,000 bad debt expense. Accordingly, the ending allowance (credit) was $1,500 ($500 – $1,000 writeoff + $2,000). Given a $30,000 increase in net A/R, ending net A/R must have been $34,500 ($4,500
beginning net A/R + $30,000), with ending gross A/R of $36,000 ($34,500 + $1,500). Collections were
therefore $68,000 ($5,000 beginning gross A/R – $1,000 write-off + $100,000 credit sales – $36,000
ending gross A/R).
Gross A/R
$
5,000 Beg. Bal. $ 1,000 Write-off
100,000 Cr. Sales
68,000 Collections
$ 36,000 End. Bal.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $68,500
D. $70,000
Question: 10An entity had the following sales and accounts receivable balances, prior to any adjustments at year
end:
Credit sales
$10,000,000
Accounts receivable
3,000,000
Allowance for uncollectible accounts
50,000
The entity uses 3% of accounts receivable to determine its allowance for uncollectible accounts at year end. By what
amount should the entity adjust its allowance for uncollectible accounts at year end?
A. $0
B. $40,000
Answer (B) is correct.
The entity uses the percentage of accounts receivable method to estimate the allowance. The year-end
balance should be $90,000 ($3,000,000 A/R × 3%). Hence, the year-end adjustment is $40,000
($90,000 – $50,000) unadjusted balance.
C. $90,000
D. $140,000
Question: 11When the allowance method of recognizing uncollectible accounts is used, the entry to record the
write-off of a specific account
A. Decreases both accounts receivable and the allowance for uncollectible accounts.
Answer (A) is correct.
When an account receivable is written off, both accounts receivable and the allowance for uncollectible
accounts are decreased. If an account previously written off is collected, the account must be reinstated
by increasing both accounts receivable and the allowance. The account receivable is then decreased by
the amount of cash collected.
B. Decreases accounts receivable and increases the allowance for uncollectible accounts.
C. Increases the allowance for uncollectible accounts and decreases net income.
D. Decreases both accounts receivable and net income.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 12A company had the following account balances at December 31:
Accounts receivable
$ 900,000
Allowance for uncollectible accounts
(before any provision for the year
uncollectible accounts expense)
16,000
Credit sales for the year
1,750,000
The company is considering the following methods of estimating uncollectible accounts expense for the year:
 Based on credit sales at 2%
 Based on accounts receivable at 5%
What amount should the company charge to uncollectible accounts expense under each method?
Percentage of
Percentage of
Credit Sales Accounts Receivable
A. $51,000 $45,000
B. $51,000 $29,000
C. $35,000 $45,000
D. $35,000 $29,000
Answer (D) is correct.
Uncollectible accounts expense is estimated in two ways. One emphasizes asset valuation, while the
other emphasizes income measurement. The first is based on an aging of the receivables to determine
the balance in the allowance for uncollectible accounts. Bad debt expense is the amount necessary to
adjust the allowance account to this estimated balance. The second recognizes bad debt expense as a
percentage of sales. The corresponding credit is to the allowance for uncollectible accounts. Under the
first method, if uncollectible accounts are estimated to be 5% of gross accounts receivable, the
allowance account should have a balance of $45,000 ($900,000 × 5%), and the entry is to debit
uncollectible accounts expense and credit the allowance for $29,000 ($45,000 – $16,000 existing
balance). Under the second method, bad debt expense is $35,000 ($1,750,000 × 2%).
Question: 13On March 31, there was an unadjusted credit balance of $1,000 in the allowance for uncollectible
accounts. An analysis of trade accounts receivable at that date revealed the following:
Estimated
Age
Amount
Uncollectible
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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0-30 days $60,000
5%
31-60 days
4,000
10%
Over 60 days
2,000
70%
What amount should be reported as allowance for uncollectible accounts in the March 31 balance sheet?
A. $4,800
Answer (A) is correct.
The aging schedule determines the balance in the allowance for uncollectible accounts. Of the accounts
that are no more than 30 days old, the amount uncollectible is $3,000 ($60,000 × 5%). Accounts that
are 31-60 days old and over 60 days old have estimated uncollectible balances of $400 ($4,000 × 10%)
and $1,400 ($2,000 × 70%), respectively. Hence, the amount recorded in the allowance for
uncollectible accounts is $4,800 ($3,000 + $400 + $1,400). The $1,000 balance already in the account
is disregarded because the aging schedule determines the balance that should be in the account.
B. $4,000
C. $3,800
D. $3,000
Question: 14Which method of recording uncollectible accounts expense is consistent with accrual accounting?
Allowance Direct Write-Off
A. Yes Yes
B. Yes No
Answer (B) is correct.
The allowance method attempts both to match the expense with the related revenue and to determine
the NRV of the accounts receivable. This method is acceptable under GAAP. The direct write-off
method debits expense and credits accounts receivable at the time uncollectibility is established. This
method does not match revenue and expense or state receivables at NRV. It is not acceptable under
GAAP.
C. No Yes
D. No No
Question: 15Under the allowance method of recognizing uncollectible accounts, the entry to write-off an
uncollectible account
A. Increases the allowance for uncollectible accounts.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Has no effect on the allowance for uncollectible accounts.
C. Has no effect on net income.
Answer (C) is correct.
The entry to record bad debt expense under the allowance method is to debit bad debt expense and
credit the allowance account. When a specific account is then written off, the allowance is debited and
accounts receivable credited. Net income is affected when bad debt expense is recognized, not at the
time of the write-off. Because accounts receivable and the allowance account are decreased by the
same amount, a write-off of an account also has no effect on the net amount of accounts receivable.
D. Decreases net income.
Question: 16The following accounts were abstracted from an unadjusted trial balance at December 31:
Debit
Accounts receivable
Credit
$1,000,000
Allowance for uncollectible accounts
8,000
Net credit sales
$3,000,000
It is estimated that 3% of the gross accounts receivable will become uncollectible. After adjustment at December 31,
the allowance for uncollectible accounts should have a credit balance of
A. $90,000
B. $82,000
C. $38,000
D. $30,000
Answer (D) is correct.
The allowance for uncollectible accounts at year end should have a credit balance of $30,000. This
amount is equal to the $1 million of accounts receivable multiplied by the 3% that are estimated to
become uncollectible.
Question: 17An entity’s allowance for uncollectible accounts was $100,000 at the end of Year 2 and $90,000 at
the end of Year 1. For the year ended December 31, Year 2, the entity reported bad debt expense of $16,000 in its
income statement. What amount did the entity debit to the appropriate account in Year 2 to write off actual bad
debts?
A. $6,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Answer (A) is correct.
When uncollectible accounts are written off, a debit is made to the allowance and a credit to accounts
receivable. The beginning balance in the allowance account is $90,000, the ending balance is
$100,000, and the bad debt expense is $16,000. Because write-offs equal the beginning balance, plus
the bad debt expense, minus the ending balance, $6,000 of accounts must have been written off.
Allowance
Write-offs $6,000
$ 90,000 12/31/Yr 1
16,000 Bad debt expense
$100,000 12/31/Yr 2
B. $10,000
C. $16,000
D. $26,000
Subunit 2: Inventory – Fundamentals
Question: 1DEF is the consignee for 1,000 units of product X for ABC Company. ABC should recognize the
revenue from these 1,000 units when
A. The agreement between DEF and ABC is signed.
B. ABC ships the goods to DEF.
C. DEF receives the goods from ABC.
D. DEF sells the goods and informs ABC of the sale.
Answer (D) is correct.
Under a consignment arrangement, the consignor ships goods to the consignee, who acts as sales agent
for the consignor. The goods are in the physical possession of the consignee but remain the property of
the consignor and are included in the consignor’s inventory. Revenue and the related cost of goods
sold from consigned goods are recognized by the consignor only when the merchandise is sold and
delivered to the final customer. Accordingly, recognition occurs when notification is received that the
consignee has sold the goods.
Question: 2An entity had the following account balances in the pre-closing trial balance:
Opening inventory $100,000
Closing inventory
150,000
Purchases
400,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Transportation-in
6,000
Purchase discounts
40,000
Purchase allowances
15,000
Returned purchases
5,000
The entity had net purchases for the period of
A. $340,000
B. $346,000
Answer (B) is correct.
Purchase discounts, allowances, and returns are subtractions from purchases because they are
reductions of cost. Transportation-in is an addition because it increases cost. Thus, net purchases
equals $346,000 ($400,000 + $6,000 – $40,000 – $15,000 – $5,000).
C. $370,000
D. $376,000
Question: 3A physical inventory count showed an entity had inventory costing $1,000,000 on hand at
December 31, Year 1. Excluded from this amount were the following:
 Goods costing $82,000, shipped to a customer free on board (FOB) shipping point on December 28,
Year 1. They were expected to be received by the customer on January 4, Year 2.
 Goods costing $122,000, shipped to a customer free on board (FOB) destination December 30, Year 1.
They were expected to be received by the customer on January 5, Year 2.
Compute the correct ending inventory to be reported on the shipper’s statement of financial position at
December 31, Year 1.
A. $1,000,000
B. $1,082,000
C. $1,122,000
Answer (C) is correct.
The goods shipped FOB shipping point should be counted in the buyer’s, not the seller’s, inventory
because title and risk of loss pass at the time and place of shipment. These goods were properly
excluded from ending inventory. The goods shipped FOB destination were improperly excluded from
the seller’s ending inventory. The title and risk of loss did not pass until the time and place where the
goods reached their destination and were duly tendered. Thus, the correct ending inventory is
$1,122,000 ($1,000,000 beginning balance + $122,000 goods shipped FOB destination).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $1,204,000
Question: 4The following selected data from statements of financial position on December 31, Year 1, and
December 31, Year 2, are presented below:
12/31/Year 1 12/31/Year 2
Inventory
Trade accounts payable
$120,000
$140,000
62,000
49,000
Additional information for Year 2:
1.
Cash payments to suppliers of merchandise were $180,000.
Cost of goods sold in Year 2 was
A. $147,000
Answer (A) is correct.
Cost of goods sold equals beginning inventory, plus purchases, minus ending inventory. To determine
cost of goods sold, purchases must be calculated. Purchases equal $167,000 ($49,000 ending accounts
payable + $180,000 payments to suppliers – $62,000 beginning accounts payable). Thus, cost of goods
sold equals $147,000 ($120,000 beginning inventory + $167,000 purchases – $140,000 ending
inventory).
B. $160,000
C. $167,000
D. $180,000
Question: 5
An entity with a December 31 year end purchased $2,000 of inventory on account. The seller was responsible for
delivery to the shipping point, with freight of $50 paid at destination by the buyer. The invoice date was December
27, Year 1, and the goods arrived on January 3, Year 2.
Now assume the terms required the seller to deliver to the destination instead of the shipping point. What is the
correct amount of inventory and freight-in relating to this purchase on the Year 1 financial statements?
Inventory Freight-In
A. $0
$0
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
Title and risk of loss passed to the buyer at the destination, and the seller incurred the expense of
delivery to that point. The goods did not arrive until after year end, so they should not be included in
Year 1 inventory. Freight-in should also not be recorded until Year 2.
B. $2,050 $0
C. $0
$50
D. $2,000 $50
Fact Pattern: An entity had the following opening and closing inventory balances during the
current year:
1/1
Finished goods
12/31
$ 90,000 $260,000
Raw materials
105,000
130,000
Work-in-progress
220,000
175,000
The following transactions and events occurred during the current year:
 $300,000 of raw materials were purchased, of which $20,000 were returned because of defects.
 $600,000 of direct labor costs were incurred.
 $750,000 of production overhead costs were incurred.
Question: 6If the entity’s raw materials inventory as of December 31 of the current year (ending inventory) was
miscounted and the true figure was higher than $130,000, one effect on the year-end financial statements would be
that
A. Profit is overstated.
B. Cost of goods sold is overstated.
Answer (B) is correct.
If the ending inventory of raw materials is understated, raw materials used is overstated, cost of goods
produced is overstated, and cost of goods sold is overstated.
C. Working capital is overstated.
D. Cost of goods produced is understated.
Question: 7The following information is available for an entity for the quarter ended March 31, of the current
year:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Merchandise inventory, as of
January 1 of the current year $ 30,000
Sales
200,000
Purchases
190,000
The gross profit margin is normally 20% of sales. What is the estimated cost of the merchandise inventory at March
31, of the current year?
A. $20,000
B. $40,000
C. $60,000
Answer (C) is correct.
Using the gross profit method, cost of goods sold for the quarter is estimated to be $160,000 [$200,000
sales × (1.0 – 0.2)]. Goods available for sale was $220,000 ($30,000 beginning inventory + $190,000
purchases). Estimated ending inventory is therefore $60,000 ($220,000 goods available for sale –
$160,000 estimated cost of goods sold).
D. $180,000
Question: 8An internal auditor performs an analytical procedure to compare the gross margins of various
divisional operations with those of other divisions and with the individual division’s performance in previous years.
The internal auditor notes a significant increase in the gross margin at one division. The internal auditor does some
preliminary investigation and also notes that there were no changes in products, production methods, or divisional
management during the year. The most likely cause of the increase in gross margin is
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the product.
C. An overstatement of year-end inventory.
Answer (C) is correct.
An overstatement of year-end inventory results in an understatement of cost of goods sold, which
overstates gross margin.
D. An understatement of year-end accounts receivable.
Question: 9If certain goods owned by an entity were not recorded as a purchase and were not counted in ending
inventory, in error, then
A. Cost of goods sold for the period will be understated.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Cost of goods sold for the period will be overstated.
C. Net income for the period will be understated.
D. There will be no effect on cost of goods sold or profit for the period.
Answer (D) is correct.
The effects of the errors on cost of goods sold are offsetting. Purchases, which increase cost of goods
sold, and ending inventory, which decreases cost of goods sold, are understated by the same amount.
Neither cost of goods sold nor net income is affected.
Question: 10What is the cost of ending inventory given the following factors?
Beginning inventory $ 5,000
Total production costs 60,000
Cost of goods sold
55,000
Direct labor
40,000
A. $5,000
B. $10,000
Answer (B) is correct.
Beginning inventory, plus purchases (or other inventory additions), minus cost of goods sold, equals
ending inventory. Thus, ending inventory equals $10,000 ($5,000 + $60,000 – $55,000). Direct labor is
included in total production costs.
C. $45,000
D. $50,000
Question: 11A company’s inventory is overstated at December 31 of this year. The result will be
A. Understated income this year.
B. Understated retained earnings this year.
C. Understated retained earnings next year.
D. Understated income next year.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Cost of goods sold equals beginning finished goods, plus cost of goods manufactured for a
manufacturer or purchases for a retailer, minus ending finished goods. Overstated ending inventory
therefore results in understated cost of goods sold, overstated net income, and overstated retained
earnings in the period of the error. When these errors reverse in the following period, beginning
inventory and cost of goods sold will be overstated, and net income will be understated. Retained
earnings will be correct.
Question: 12Which one of the following errors will result in the overstatement of net income?
A. Overstatement of beginning inventory.
B. Overstatement of ending inventory.
Answer (B) is correct.
Cost of goods sold equals beginning finished goods, plus cost of goods manufactured for a
manufacturer or purchases for a retailer, minus ending finished goods. Overstated ending inventory
therefore results in understated cost of goods sold, overstated net income, and overstated retained
earnings in the period of the error.
C. Overstatement of goodwill amortization.
D. Overstatement of bad debt expense.
Question: 13The following information applies to the income statement of a company:
Gross sales
$1,000,000
Net sales
900,000
Freight-in
10,000
Ending inventory
Gross profit margin
200,000
40%
The company’s cost of goods available for sale is
A. $550,000
B. $560,000
C. $740,000
Answer (C) is correct.
The gross profit (gross margin) method calculates ending inventory at a given time by subtracting an
estimated cost of goods sold from the sum of beginning inventory and purchases (or cost of goods
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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manufactured). The estimated cost of goods sold equals sales minus the gross profit. The gross profit
equals sales multiplied by the gross profit percentage, an amount ordinarily determined on a historical
basis. Given that the gross margin percentage is 40% of net sales, cost of goods sold must be 60% of
net sales, or $540,000 ($900,000 × 60%). Goods available for sale equals cost of goods sold plus
ending inventory ($540,000 + $200,000 = $740,000).
D. $800,000
Subunit 3: Inventory -- Cost Flow Methods
Question: 1The inventory method yielding the same inventory measurement and cost of goods sold whether a
perpetual or periodic system is used is
A. Average cost.
B. First-in, first-out.
Answer (B) is correct.
A perpetual inventory system will result in the same dollar amount of ending inventory as a periodic
inventory system assuming a FIFO cost flow. Under both perpetual and periodic systems, the same
units are deemed to be in ending inventory.
C. Last-in, first-out.
D. Either first-in, first-out or last-in, first-out.
Question: 2An entity started in Year 1 with 200 scented candles on hand at a cost of $3.50 each. These candles
sell for $7.00 each. The following schedule represents the purchases and sales of candles during Year 1:
Transaction
Quantity
Unit Quantity
Number
Purchased
Cost
Sold
1
---
---
150
2
250
$3.30
---
3
---
---
100
4
200
3.10
---
5
---
---
200
6
350
3.00
---
7
---
---
300
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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If the entity uses periodic FIFO inventory pricing, the gross profit for Year 1 would be
A. $2,755
B. $2,805
Answer (B) is correct.
The FIFO method assumes that the first goods purchased are the first goods sold and that ending
inventory consists of the latest purchases. Moreover, whether the inventory system is periodic or
perpetual does not affect FIFO measurement. The cost of goods sold is $2,445 {beginning inventory
(200 units × $3.50) + purchases [(250 units × $3.30) + (200 units × $3.10) + (350 units × $3.00)] –
ending inventory (250 units × $3.00)}. Thus, the gross profit for Year 1 using FIFO is $2,805 [sales
(750 units × $7.00) – cost of goods sold of $2,445].
C. $2,854
D. $2,920
Question: 3The cost of materials has risen steadily over the year. Which of the following methods of estimating
the ending balance of the materials inventory account will result in the highest profit, assuming all other variables
remain constant?
A. Last-in, first-out (LIFO).
B. First-in, first-out (FIFO).
Answer (B) is correct.
Profit will be higher when cost of goods sold is lower, other factors held constant. Cost of goods sold
equals beginning inventory, plus purchases, minus ending inventory. Accordingly, cost of goods sold
will be lowest when the ending inventory is highest. In an inflationary environment, ending inventory
is highest under FIFO because the older, less expensive items are deemed to have been sold, leaving
the more expensive items in the ending inventory.
C. Weighted average.
D. Specific identification.
Question: 4When a right of return exists, an entity may recognize revenue from a sale of goods at the time of
sale only if
A. The amount of future returns can be reliably estimated.
Answer (A) is correct.
One condition for recognition of revenue from the sale of goods is the transfer of the significant risks
and rewards of ownership. Retention of significant risk may occur when, for example, the buyer may
rescind the purchase for a reason stipulated in the contract, and the buyer is uncertain about the
probability of return. However, if the entity can reliably estimate future returns and recognizes a
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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liability for returns based on experience and other pertinent information, revenue may be recognized at
the time of sale if the other conditions for revenue recognition also are met.
B. The seller retains the risks and rewards of ownership.
C. The buyer resells the goods.
D. The seller believes returns will not be material.
Fact Pattern: Illustrated below is a perpetual inventory card for the current year.
Date
Units Purchased Units Sold Units Balance
January 1
January 12
0
1,000
1,000 @ $2.00
300
March 15
May 5
500 @ $2.20
July 8
700
1,200
500
November 24 1,000 @ $1.65
700
1,700
Additional information:
 The entity had no opening inventory.
 The items sold on March 15 were purchased on January 12.
 The items sold on July 8 were purchased on May 5.
Question: 5The ending inventory balance under the first-in, first-out (FIFO) method of inventory valuation is
A. $3,050
B. $3,150
Answer (B) is correct.
Under the FIFO method, the 1,700 units of ending inventory are valued at the most recent prices.
Ending inventory is assumed to include 1,000 units purchased November 24, 500 units purchased May
5, and 200 units purchased January 12. Hence, the ending inventory is $3,150 [(1,000 × $1.65) + (500
× $2.20) + (200 × $2.00)].
C. $3,230
D. $3,430
Fact Pattern: Illustrated below is a perpetual inventory card for the current year.
Date
Units Purchased Units Sold Units Balance
January 1
January 12
0
1,000
1,000 @ $2.00
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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300
March 15
May 5
500 @ $2.20
July 8
700
1,200
500
November 24 1,000 @ $1.65
700
1,700
Additional information:
 The entity had no opening inventory.
 The items sold on March 15 were purchased on January 12.
 The items sold on July 8 were purchased on May 5.
Question: 6The cost of goods sold under the specific identification method of inventory valuation is
A. $1,320
B. $1,520
C. $1,600
D. $1,700
Answer (D) is correct.
Of the 800 units sold during the period, the 300 units sold on March 15 were purchased on January 12
at a cost of $2.00 per unit. The remaining 500 units were purchased on May 5 at a cost of $2.20 per
unit. The cost of goods sold under the specific identification method is therefore $1,700 [(300 units ×
$2.00) + (500 units × $2.20)].
Question: 7A merchandising company had the following inventory related transactions in its first year of
operations:
Date
Jan. 1
Purchases
Sales in
Balance
in Units
Units
in Units
10,000 @ $5
10,000
March 1 6,000 @ $6
16,000
May 1
July 1
3,000
8,000 @ $6.25
Sept. 1
Nov. 1
Dec. 1
13,000
21,000
12,000
5,000 @ $7
9,000
14,000
2,000
12,000
If the company uses the first-in-first-out (FIFO) method of inventory valuation, its ending inventory balance
(rounded) will be
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $62,000
B. $70,759
C. $78,750
Answer (C) is correct.
The first-in-first-out (FIFO) method treats the oldest units as being sold first and the newest units
remain in inventory. Because the company has 12,000 units remaining, ending inventory equals
$78,750 [(5,000 × $7) + (7,000 × $6.25)].
D. $84,000
Question: 8An entity has 8,000 units in inventory on January 1, valued at $10 per unit. During the year, the
entity sold 25,000 units and purchased inventory as follows:
Quantity
Date
Purchased Unit Price
April 1
15,000 units
$8
July 1
10,000 units
9
October 1 12,500 units
10
If the entity uses the weighted-average method of inventory valuation, cost of goods sold for the period will be
A. $186,978
B. $197,000
C. $228,023
Answer (C) is correct.
Under the weighted-average method, the weighted-average cost per unit is multiplied by the number of
units sold to determine the cost of goods sold for the period. The total units available for sale equaled
45,500 (8,000 + 15,000 + 10,000 + 12,500). The total cost of all units available for sale was $415,000
[(8,000 × $10) + (15,000 × $8) + (10,000 × $9) + (12,500 × $10)]. Thus, the weighted-average cost per
unit of inventory was $9.1209 ($415,000 ÷ 45,500), and cost of goods sold was $228,023 (25,000 ×
$9.1209).
D. $235,000
Question: 9Which inventory pricing method generally approximates current cost for each of the following?
Ending
Cost of
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Inventory Goods Sold
A. FIFO FIFO
B. LIFO FIFO
C. FIFO LIFO
Answer (C) is correct.
FIFO assigns the most recent acquisition costs to ending inventory and the earliest acquisition costs to
cost of goods sold. LIFO assigns the earliest acquisition costs to ending inventory (it is permitted by
U.S. GAAP but not by IFRS). Thus, FIFO approximates current cost for ending inventory, and LIFO
approximates current cost of goods sold.
D. LIFO LIFO
Question: 10Which of the following changes in accounting policies resulting from a significant change in the
expected pattern of economic benefit will increase profit?
A. A change from FIFO to LIFO inventory valuation when costs are rising.
B. A change from FIFO to weighted-average inventory valuation when costs are falling.
Answer (B) is correct.
In a period of falling costs, FIFO results in higher cost of goods sold than the weighted-average
method. FIFO includes the higher, earlier costs in cost of goods sold, and the weighted-average method
averages the later, lower costs with the higher, earlier costs. Thus, a change from FIFO to weightedaverage costing reduces cost of goods sold and increases reported profit.
C. A change from accelerated to straight-line depreciation in the later years of the depreciable lives of the
assets.
D. A change from straight-line to accelerated depreciation in the early years of the depreciable lives of the
assets.
Question: 11On January 1, a company has no opening inventory balance. The following purchases are made
during the year:
Units
Unit
Purchased
Cost
January 1
5,000
$10.00
April 1
5,000
9.00
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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July 1
5,000
8.00
October 1
5,000
7.50
There are 10,000 units in inventory on December 31.
If the company uses the last-in, first-out (LIFO) method of inventory valuation, cost of goods sold for the year will
be:
A. $77,500
Answer (A) is correct.
A total of 20,000 units was available for sale (0 beginning inventory + 20,000 purchased during year).
Since 10,000 remain in ending inventory, 10,000 were sold (20,000 available – 10,000 remaining).
Under the LIFO method, the units sold were those purchased in July and October. Cost of goods sold
for the year thus equaled $77,500 [(5,000 units x $8.00 July) + (5,000 units x $7.50 October)].
B. $86,250
C. $87,500
D. $95,000
Question: 12The advantage of the last-in, first-out inventory method is based on the assumption that
A. The most recently incurred costs should be allocated to the cost of goods sold.
Answer (A) is correct.
Under the LIFO method, the most recent costs of acquiring or producing inventory are expensed as
part of cost of goods sold. Given inflation, this method results in the highest cost of goods.
B. Costs should be charged to revenue in the order in which they are incurred.
C. Costs should be charged to cost of goods sold at average cost.
D. Current costs should be based on representative or normal conditions of efficiency and volume of
operations.
Question: 13Which inventory cost flow method is prohibited according to IFRS?
A. First-in, first-out (FIFO) method.
B. Specific identification method.
C. Weighted average cost method.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Last-in, first-out (LIFO) method.
Answer (D) is correct.
The last-in, first-out (LIFO) method is prohibited by IFRS. This method is based on the assumption
that the newest items are sold first. Its effect is to include current prices in cost of goods sold. But the
LIFO assumption ordinarily does not match actual inventory use.
Question: 13Which inventory cost flow method is prohibited according to IFRS?
A. First-in, first-out (FIFO) method.
B. Specific identification method.
C. Weighted average cost method.
D. Last-in, first-out (LIFO) method.
Answer (D) is correct.
The last-in, first-out (LIFO) method is prohibited by IFRS. This method is based on the assumption
that the newest items are sold first. Its effect is to include current prices in cost of goods sold. But the
LIFO assumption ordinarily does not match actual inventory use.
Question: 14In a period of rising prices, which one of the following inventory methods usually provides
the best matching of expenses against revenues?
A. Weighted average.
B. First-in, first-out.
C. Last-in, first-out.
Answer (C) is correct.
A significant advantage of the LIFO method is its matching of current revenues with the most recent
product costs. When prices are rising (which is most of the time), the most recent costs are the highest
costs, resulting in higher cost of goods sold and lower net income. The lower net income means lower
taxes.
D. Specific identification.
Question: 15Which one of the following actions would result in a decrease in income?
A. Liquidating last-in, first-out layers of inventory when prices have been increasing.
B. Changing from first-in, first-out to last-in, first-out inventory method when prices are decreasing.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Accelerating purchases at the end of the year when using last-in, first-out inventory method in times of
rising prices.
Answer (C) is correct.
Under the LIFO method, the most recent costs of acquiring or producing inventory are expensed as
part of cost of goods sold. In a time of rising prices, charging newer, higher-priced goods against
current revenues decreases income.
D. Changing the number of last-in, first-out pools.
Question: 16In periods of rising costs, which one of the following inventory cost flow assumptions will result in
higher cost of sales?
A. First-in, first-out.
B. Last-in, first-out.
Answer (B) is correct.
A significant advantage of the LIFO method is its matching of current revenues with the most recent
product costs. When prices are rising (which is most of the time), the most recent costs are the highest
costs, resulting in higher cost of goods sold and lower net income. The lower net income means lower
taxes.
C. Weighted average.
D. Moving average.
Fact Pattern: During January, Metro Co., which maintains a perpetual inventory system,
recorded the following information pertaining to its inventory:
Units
Unit Total
On
Units Cost Cost Hand
Balance on 1/1
1,000 $1 $1,000 1,000
Purchased on 1/7
600
Sold on 1/20
900
Purchased on 1/25 400
3
1,800 1,600
700
5
2,000 1,100
Question: 17Under the moving-average method, what amount should Metro report as inventory at January 31?
A. $2,640
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $3,225
Answer (B) is correct.
The moving-average system is only applicable to perpetual inventories. It requires that a new weighted
average be computed after every purchase. This moving average is based on remaining inventory held
and the new inventory purchased. Based on the calculations below, the moving-average cost per unit
for the 1/20 sale is $1.75, and the cost of goods sold (COGS) for January is $1,575 (900 units sold ×
$1.75). Thus, ending inventory is $3,225 ($1,000 beginning balance + $1,800 purchase on 1/7 – $1,575
COGS on 1/20 + $2,000 purchase on 1/25).
Moving-Average
Units
Cost/Unit
Total Cost
Balance 1/1 1,000
$1.00
$1,000
Purchase 1/7 600
3.00
1,800
1,600
$1.75
$2,800
C. $3,300
D. $3,900
Question: 18The weighted average for the year inventory cost flow method is applicable to which of the
following inventory systems?
Periodic Perpetual
A. Yes Yes
B. Yes No
Answer (B) is correct.
The weighted-average method determines an average cost only once (at the end of the period) and is
therefore applicable only to a periodic system. In contrast, the moving-average method requires
determination of a new weighted-average cost after each purchase and thus applies only to a perpetual
system.
C. No Yes
D. No No
Question: 19A retailer sells antique replica trunks to customers all over the world. The retailer’s inventory
records show the following:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Quantity (units) Cost (each)
Beginning inventory
200
$1,055
June 3
170
1,062
September 18
190
1,070
December 10
160
1,076
Purchases:
The retailer sells 470 units this year. Management is researching whether the company should use last in, first out
(LIFO) or first in, first out (FIFO). If the retailer’s management wants to lower the company’s income taxes, which
inventory cost flow assumption should it select?
A. FIFO, because the cost of goods sold will be $9,870 higher than LIFO.
B. FIFO, because the operating income will be $840 lower than LIFO.
C. LIFO, because the operating income will be $4,360 lower than FIFO.
Answer (C) is correct.
The FIFO method assumes that the first goods purchased are the first goods sold and that ending
inventory consists of the latest purchases. Thus, the cost of goods sold under FIFO is $498,540 [(200
units × $1,055) + (170 units × $1,062) + (100 units × $1,070)]. Under the LIFO method, the most
recent costs of acquiring or producing inventory are expensed as part of cost of goods sold. Thus, the
cost of goods sold under LIFO is $502,900 [(160 units × $1,076) + (190 units × $1,070) + (120 units ×
$1,062)]. In order to lower tax income, the company should use the LIFO method because the cost of
goods sold under LIFO is more than the cost of goods sold under FIFO. Therefore, the operating
income under LIFO is $4,360 ($502,900 – $498,540) lower than the operating income under FIFO.
D. LIFO, because the cost of goods sold will be $5,250 higher than FIFO.
Question: 20On December 1, a company had 1,000 units in inventory valued at $787,500. On December 12, the
company purchased 2,000 units for $1,562,400. Sales of 2,400 units were made on December 23, and on December
30, the company purchased another 2,000 units for $1,537,200. If the company uses a periodic system and the
weighted-average inventory valuation method, the company’s December 31 balance sheet would report inventory of
A. $2,025,660
B. $2,021,292
Answer (B) is correct.
Using a periodic inventory system, the ending value is not affected by when the sales and purchases of
units occurred. The company had 5,000 units available during the period (1,000 on December 1, 2,000
on December 12, and 2,000 on December 30). The total cost of these 5,000 units was $3,887,100
($787,500 + $1,562,400 + 1,537,200), or $777.42 per unit ($3,887,100 ÷ 5,000 units). Since 2,400
units were sold, the ending inventory would be $2,021,292 (2,600 units × $777.42 per unit).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $2,014,740
D. $2,007,180
Question: 21Flex Co. uses a periodic inventory system. The following are inventory transactions for the month
of January:
1/1 Beginning inventory 10,000 units at $3
1/5 Purchase
5,000 units at $4
1/15 Purchase
5,000 units at $5
1/20 Sales at $10 per unit 10,000 units
Flex uses the average pricing method to determine the value of its inventory. What amount should Flex report as
cost of goods sold on its income statement for the month of January?
A. $30,000
B. $37,500
Answer (B) is correct.
The total cost of beginning inventory and purchases is $75,000 ($30,000 + $20,000 + $25,000), and the
total number units of beginning inventory and purchases is 20,000. The average price of the beginning
inventory and purchases is $3.75 ($75,000 cost ÷ 20,000 units). The total cost of goods sold equals
$37,500 (10,000 units sold × $3.75).
C. $40,000
D. $100,000
Subunit 4: Measurement of Inventory Subsequent to Initial
Recognition
Question: 1In accounting for inventories, generally accepted accounting principles require departure from the
historical cost principle when the utility of inventory has fallen below cost. Under the “lower-of-cost-or-market”
rule, the term “market” means
A. Original cost minus allowance for obsolescence.
B. Original cost plus normal profit margin.
C. Replacement cost of the inventory.
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Answer (C) is correct.
Market is the replacement cost of the inventory as determined in the market in which the entity buys its
inventory, not the market in which it sells to customers. Market is limited to a ceiling amount equal to
net realizable value and a floor amount equal to net realizable value minus a normal profit margin.
D. Original cost minus cost to dispose.
Fact Pattern: Stockholm Co. accounts for its inventory using the first in, first out (FIFO)
method. The data below concern items in Stockholm Co.’s inventory.
Per Unit
Gear
Historical cost
$190.00 $106.00 $53.00
Selling price
Cost to complete and sell
Current replacement cost
Normal profit margin
Stuff
217.00 145.00
19.00
Wickets
73.75
8.00
2.50
203.00 105.00
51.00
32.00
29.00
21.25
Question: 2Under IFRS, what amount should Stockholm Co. compare with historical cost to measure the amount
at which the wickets should be measured?
A. $51.00
B. $50.00
C. $71.25
Answer (C) is correct.
Inventory is recorded at cost. However, inventory must be written down if its utility is no longer as
great as its cost. To make this determination under IFRS, historical cost is compared with the
inventory’s net realizable value (NRV). NRV is the estimated selling price in the ordinary course of
business minus estimated costs of completion and sale. NRV for the wickets is $71.25 ($73.75 selling
price – $2.50 estimated costs of completion and sale).
D. $73.75
Question: 3An entity that prepares its financial statements using IFRS reported the following selected per-unit
data relating to work-in-process:
Selling price
$100
Completion costs
10
Historical cost
91
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Replacement cost
108
Normal gross profit
Selling cost
20
5
In comparison with historical cost, what will be the per-unit effect on gross profit of measuring ending inventory?
A. No effect.
B. Reduction of $6.
Answer (B) is correct.
Under IFRS, inventories are measured subsequent to acquisition at the lower of cost or net realizable
value (NRV). NRV equals selling price minus estimated completion and selling costs. Given that
historical cost is $91 and NRV is $85 ($100 selling price – $10 completion cost – $5 selling cost), the
effect on per-unit gross profit is a reduction of $6. This amount is expensed.
C. Reduction of $26.
D. Increase of $5.
Question: 4The following data apply to a unit of inventory:
Selling price
$22
Selling cost
2
Normal profit margin
5
Replacement cost
10
Using the lower-of-cost-or-market (LCM) method of measuring inventory, what is the market amount for this unit of
inventory?
A. $10.00
B. $15.00
Answer (B) is correct.
Under the LCM method, market is current replacement cost subject to a maximum (ceiling) equal to
net realizable value and a minimum (floor) equal to net realizable value minus a normal profit margin.
NRV equals selling price minus costs of completion and disposal. Thus, the maximum market amount
is the $20 NRV ($22 selling price – $2 selling cost), and the minimum is $15 ($20 NRV – $5 normal
profit margin). Because the minimum exceeds the $10 replacement cost, it is the market amount.
C. $17.50
D. $20.00
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Question: 5Based on a physical inventory taken on December 31, a company determined its chocolate inventory
on a LIFO basis at $26,000 with a replacement cost of $20,000. The company estimated that, after further
processing costs of $12,000, the chocolate could be sold as finished candy bars for $40,000. The company’s normal
profit margin is 10% of sales. Under the lower-of-cost-or-market rule, what amount should the company report as
chocolate inventory in its December 31 balance sheet?
A. $28,000
B. $26,000
C. $24,000
Answer (C) is correct.
Market equals current replacement cost subject to maximum and minimum values. The maximum is
NRV, and the minimum is NRV minus normal profit. When replacement cost is within this range, it is
used as market. Cost is given as $26,000. NRV is $28,000 ($40,000 selling price – $12,000 additional
processing costs), and NRV minus a normal profit equals $24,000 [$28,000 – ($40,000 × 10%)].
Because the lowest amount in the range ($24,000) exceeds replacement cost ($20,000), it is used as
market. Because market value ($24,000) is less than cost ($26,000), it is also the inventory amount.
D. $20,000
Question: 6The lower-of-cost-or-market rule for inventories may be applied to total inventory, to groups of
similar items, or to each item. Which application generally results in the lowest inventory amount?
A. All applications result in the same amount.
B. Total inventory.
C. Groups of similar items.
D. Separately to each item.
Answer (D) is correct.
Applying the LCM rule to each item of inventory produces the lowest amount for each item and
therefore the lowest and most conservative measurement for the total inventory. The reason is that
aggregating items results in the inclusion of some items at amounts greater than LCM. For example, if
item A (cost $2, market $1) and item B (cost $3, market $4) are aggregated for LCM purposes, the
inventory measurement is $5. If the rule is applied separately to A and B, the LCM measurement is $4.
Question: 7Under the lower-of-cost-or-market method, the replacement cost of an inventory item would be used
as the designated market value
A. When it is below the net realizable value less the normal profit margin.
B. When it is below the net realizable value and above the net realizable value less the normal profit margin.
Answer (B) is correct.
Market is current replacement cost subject to maximum and minimum values. The maximum is net
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realizable value, and the minimum is net realizable value less normal profit. When replacement cost is
within this range, it is used as the market amount.
C. When it is above the net realizable value.
D. Regardless of net realizable value.
Question: 8A distribution company has determined its December 31 inventory on a LIFO basis at $200,000.
Information pertaining to that inventory follows:
Estimated selling price
$204,000
Estimated cost of disposal
10,000
Normal profit margin
30,000
Current replacement cost
180,000
The company records losses that result from applying the lower-of-cost-or-market rule. At December 31, the loss
that the company should recognize is
A. $0
B. $6,000
C. $14,000
D. $20,000
Answer (D) is correct.
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or
market (LCM). As indicated below, the $180,000 replacement cost falls between the $194,000 ceiling
and the $164,000 floor. Thus, it will be used as market in the LCM determination. Because the
$180,000 market value is $20,000 lower than the $200,000 historical cost, the inventory should be
valued at $180,000 and a $20,000 loss recognized.
NRV ($204,000 – $10,000)
$194,000
Replacement cost
$180,000
NRV – Normal profit ($194,000 – $30,000) $164,000
Question: 9The replacement cost of an inventory item is below the net realizable value and above the net
realizable value less the normal profit margin. The original cost of the inventory item is below the net realizable
value less the normal profit margin. Under the lower-of-cost-or-market (LCM) method, the inventory item should be
valued at
A. Net realizable value.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Net realizable value less the normal profit margin.
C. Original cost.
Answer (C) is correct.
When replacement cost is below the NRV and above the NRV less the normal profit margin, market
equals replacement cost. Given that the original cost of the inventory item is below market, the original
cost should be used to measure the inventory item under the LCM method.
D. Replacement cost.
Question: 10A firm has determined its fiscal year-end inventory on a LIFO basis to be $400,000. Information
pertaining to that inventory follows:
Estimated selling price
$408,000
Estimated cost of disposal
20,000
Normal profit margin
60,000
Current replacement cost
360,000
The firm records losses that result from applying the lower-of-cost-or-market (LCM) rule. At its year end, what
should be the net carrying value of the firm’s inventory?
A. $400,000
B. $388,000
C. $360,000
Answer (C) is correct.
Inventory accounted for using LIFO or the retail inventory method is measured at the lower of cost or
market (LCM). Under the LCM method, market is current replacement cost subject to a maximum
(ceiling) equal to net realizable value and a minimum (floor) equal to net realizable value minus a
normal profit. NRV equals selling price minus costs of completion and disposal. Here, original cost is
$400,000 and replacement cost is $360,000. The LCM method uses the lower of the two, $360,000, to
measure inventory. However, the inventory measure cannot exceed the NRV of $388,000 ($408,000
selling price – $20,000 cost of disposal). Furthermore, the inventory carrying amount cannot be lower
than NRV minus normal profit, or $328,000 ($388,000 NRV – $60,000 normal profit). Because the
lower of cost or market ($360,000) is between $388,000 (ceiling) and $328,000 (floor), the net
carrying amount is $360,000.
D. $328,000
Question: 11Which of the following is true regarding inventory adjustments under IFRS?
A. IFRS do not require inventory adjustments.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Reversals of adjustments are allowed in a subsequent period.
Answer (B) is correct.
Both IFRS and U.S. GAAP require the cost of inventory to be written down if the utility of the goods
is impaired. Under IFRS, inventories are measured subsequent to initial recognition at the lower of cost
and net realizable value (NRV), with NRV assessed each period. Moreover, unlike U.S. GAAP, IFRS
permit inventory to be written up to the lower of cost and NRV if previously written down. The
reversal is permissible only to the extent of the prior write-down.
C. A reversal of a previous write-down may be higher than the previous write-down.
D. Adjustments may not be reversed in a subsequent period.
Question: 12A company determined the following information for its FIFO basis inventory at the end of an
interim period on June 30, Year 2:
Historical cost
$80,000
Net realizable value (NRV) 77,000
Current replacement cost
Normal profit margin
76,000
2,000
The company expects that on December 31, Year 2, the inventory’s NRV will be at least $81,000. What amount of
inventory should the company report in its interim financial statements under IFRS and under U.S. GAAP on June
30, Year 2?
IFRS
U.S. GAAP
A. $77,000 $80,000
Answer (A) is correct.
Under U.S. GAAP, inventory that is accounted for using the FIFO method is measured at the lower of
cost or net realizable value. Although the NRV is lower than the historical cost, the inventory is
reported in the interim financial statements at its historical cost of $80,000 because no write-down of
inventory is reasonably anticipated for the year. Under IFRS, the inventory is measured at the lower of
cost ($80,000) or NRV ($77,000) for each interim reporting period. Whether a market decline is
expected to be reversed by the end of the annual period is not considered. Thus, the inventory is
reported at its NRV of $77,000.
B. $77,000 $77,000
C. $80,000 $80,000
D. $80,000 $81,000
Question: 13A multinational company maintains its financial records under both IFRS and U.S. GAAP. Last
year, the company determined its inventory was impaired because demand for its product collapsed when a
competitor launched a new product with innovative features. As a result, the company wrote down its inventory to
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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$0 with a carrying amount of $500,000. This year, however, government authorities unexpectedly announced that
the competitor’s product was defective and the product was removed from the market. As a result, the company’s
products were again in demand and the company estimated their net realizable value to be $750,000 at the end of the
current quarter. How should the company record this new development in the current quarter?
A. Under IFRS, $0 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.
B. Under IFRS, $500,000 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.
Answer (B) is correct.
Under U.S. GAAP, write-downs taken to reduce inventories can not be reversed for subsequent
increases in value. Under IFRS, write-downs taken to reduce inventories can be reversed for
subsequent increases in value, but the reversal is limited to the amount of the original write-down.
C. Under IFRS, $750,000 write-up of the inventory; under U.S. GAAP, $0 write-up of the inventory.
D. Under IFRS, $750,000 write-up of the inventory; under U.S. GAAP, $750,000 write-up of the inventory.
Question: 14A company uses IFRS to value its inventory of frozen foods. The company applies IFRS on a total
inventory basis, not directly to each item of frozen food. Information on the frozen food inventory at December 31
of the year just ended is provided below.
Replacement cost
$ 80,000
Net realizable value less profit margin
85,000
Weighted-average cost
90,000
Net realizable value
100,000
The company should value its inventory at
A. $80,000
B. $85,000
C. $90,000
Answer (C) is correct.
Under IFRS, inventories are measured at the lower of cost or net realizable value (NRV). Thus, the
company should value its inventory at $90,000.
D. $100,000
Subunit 5: Investments in Equity Securities
Question: 1On December 31, Ott Co. had investments in equity securities as follows:
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Fair
Cost
Man Co.
Value
$10,000 $ 8,000
Kemo, Inc.
9,000
11,000
Fenn Corp.
11,000
9,000
$30,000 $28,000
Ott’s December 31 balance sheet should report the equity securities as
A. $26,000
B. $28,000
Answer (B) is correct.
An investment in equity securities that does not result in significant influence or control over the
investee is reported at fair value, and unrealized holding gains and losses are included in earnings.
Consequently, the securities should be reported as $28,000.
C. $29,000
D. $30,000
Question: 2An entity should report an investment in marketable equity securities that does not result in
significant influence or control over the investee at
A. Lower of cost or market, with holding gains and losses included in earnings.
B. Lower of cost or market, with holding gains included in earnings only to the extent of previously
recognized holding losses.
C. Fair value, with holding gains included in earnings only to the extent of previously recognized holding
losses.
D. Fair value, with holding gains and losses included in earnings.
Answer (D) is correct.
Unrealized holding gains and losses on an investment in equity securities that do not result in
significant influence or control over the investee are reported in earnings. On a statement of financial
position, these securities are reported at fair value.
Question: 3Plack Co. purchased 10,000 shares (2% owner ship) of Ty Corp. on February 14 and did not elect the
fair value option. Plack received a stock dividend of 2,000 shares on April 30, when the market value per share was
$35. Ty paid a cash dividend of $2 per share on December 15. In its income statement for the year, what amount
should Plack report as dividend income?
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A. $20,000
B. $24,000
Answer (B) is correct.
Plack Co. owns 2% of the stock of Ty Corp. Accordingly, this investment should be accounted for
using the fair value method. If the fair value of the stock is not readily determinable, the measurement
alternative may be selected. This alternative is cost minus any impairment, plus or minus changes
resulting from observable price changes for the identical or a similar investment of the same issuer.
Under either method, dividends from an investee are accounted for by the investor as dividend income
unless a liquidating dividend is received. The recipient of a stock dividend does not recognize income.
Thus, Plack should report dividend income of $24,000 [(10,000 shares + 2,000 shares received as a
stock dividend on April 30) × $2 per share dividend].
C. $90,000
D. $94,000
Question: 4During Year 6, Wall Co. purchased 2,000 shares of Hemp Corp. common stock, properly classified
as trading securities, for $31,500. They represent 2% of ownership in Hemp Corp. The fair value of this investment
was $29,500 at December 31, Year 6. Wall sold all of the Hemp common stock for $14 per share on December 15,
Year 7, incurring $1,400 in brokerage commissions and taxes. In its income statement for the year ended December
31, Year 7, Wall should report a recognized loss of
A. $4,900
B. $3,500
C. $2,900
Answer (C) is correct.
A realized loss or gain is recognized when an individual equity security is sold or otherwise disposed
of. Wall would have included the $2,000 ($31,500 – $29,500) decline in the fair value of the equity
securities (an unrealized holding loss) in earnings at 12/31/Yr 6. Consequently, the realized loss on
disposal at 12/15/Yr 7 is $2,900 {$29,500 carrying amount – [(2,000 shares × $14) – $1,400]}.
D. $1,500
Question: 5At the end of Year 1, Lane Co. held an investment in equity securities that cost $86,000 and had a
year-end market value of $92,000. During Year 2, all of these securities were sold for $104,500. At the end of
Year 2, Lane had acquired additional equity securities that cost $73,000 and had a year-end market value of
$71,000. What is the impact of these stock activities on Lane’s Year 2 income statement?
A. Loss of $2,000.
B. Gain of $10,500.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
An investment in equity securities that does not result in significant influence or control over the
investee is measured at fair value in the financial statements. Changes in fair value are included in
earnings. In Year 1, Lane recorded the unrealized holding gain of $6,000 ($92,000 FV – $86,000 cost).
In Year 2, Lane recorded a realized gain of $12,500 [$104,500 price – ($86,000 cost + $6,000
unrealized gain recorded in Year 1)]. Also in Year 2, Lane recorded the unrealized holding loss of
$2,000 ($73,000 cost – $71,000 year-end FV). Accordingly, the Year 2 effect is a gain of $10,500
($12,500 – $2,000).
C. Gain of $16,500.
D. Gain of $18,500.
Question: 6Janson traded stock in Flax Co. marketable equity securities during Year 1 as follows:
Number of shares
purchased (sold)
Price per
share
February 3, Year 1
1,100
$11
April 15, Year 1
2,500
9
May 28, Year 1
(750)
13
July 5, Year 1
1,400
12
September 30, Year 1
(4,000)
15
No other transactions took place for Flax during the remainder of the year. At December 31, Year 1, Flax is trading
at $10 per share. Janson trades securities on a last in, first out basis. What amount is the net value of the investment
in Flax at year end?
A. $(250)
B. $2,500
Answer (B) is correct.
At each balance sheet date, an investment in equity securities that does not result in significant
influence or control over the investee is measured at fair value. During the year, Janson purchased
5,000 shares and sold 4,750 shares for an ending balance of 250 shares. At year end, the fair value of
each share is $10, so the year-end balance is $2,500 (250 shares × $10 per share).
C. $2,750
D. $3,750
Question: 7Company A acquired 30% of Company B’s voting rights on January 1, Year 1, and accounts for its
investment using the equity method. On January 1, Year 2, Company A sold 60% of its investment in Company B
for $150,000. The carrying amount of the investment on January 1, Year 2, before the sale was $210,000. The fair
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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value of the retained investment after the sale was $100,000. What gain or loss, if any, on the disposal of the
investment was recognized in the Year 2 income statement prepared under IFRS?
A. $0
B. Gain on disposal of $40,000.
Answer (B) is correct.
Under IFRS, when significant influence is lost, any retained investment is measured at fair value. The
gain or loss on the disposal of the investment is calculated as follows:
Fair value of retained investment
$100,000
+ Proceeds from disposal of the investment
150,000
– Carrying amount of the investment on the date significant influence is lost
(210,000)
= Gain on disposal of the investment
40,000
C. Gain on disposal of $24,000.
D. Loss on disposal of $60,000.
Question: 8Which of the following is a false statement about the measurement alternative for an investment in
equity securities that does not result in control or significant influence over the investee?
A. The investment is measured at fair value through net income.
Answer (A) is correct.
An entity may elect the measurement alternative for an investment in equity securities without a
readily determinable fair value. This alternative is cost minus impairment (if any), plus or minus
changes resulting from observable price changes for the identical or a similar investment of the same
issuer.
B. If the measurement alternative is selected, it must be applied until the investment has a readily
determinable fair value.
C. The measurement alternative cannot be elected when the fair value of the investment is readily
determinable.
D. Under the measurement alternative, an impairment loss is recognized for the excess of the carrying
amount of the investment over its fair value.
Question: 9Under the measurement alternative for an investment in equity securities, the investment is measured
at
A. Cost minus subsequent impairment, plus or minus changes resulting from observable price changes for
the identical or a similar investment of the same issuer.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
An investment in equity securities that does not result in control or significant influence over the
investee is measured at fair value through net income. However, an entity may elect the measurement
alternative for an investment in equity securities without a readily determinable fair value. This
alternative is cost minus impairment (if any), plus or minus changes resulting from observable price
changes for the identical or a similar investment of the same issuer.
B. Fair value minus subsequent impairment.
C. Lower of cost or net realizable value.
D. Amortized cost.
Question: 10A measurement alternative may be elected for an investment in equity securities if the
A. Fair value of the investment is not readily determinable and the investment does not result in control or
significant influence over the investee.
Answer (A) is correct.
An investment in equity securities that does not result in control or significant influence over the
investee is measured at fair value through net income. However, an entity may elect the measurement
alternative for an investment in equity securities without a readily determinable fair value. This
alternative is cost minus impairment (if any), plus or minus changes resulting from observable price
changes for the identical or a similar investment of the same issuer.
B. Investment allows significant influence over the investee.
C. Listed prices of the investment are not available and the investment allows control over the investee.
D. Listed prices of the investment are available and the investment does not result in control or significant
influence over the investee.
Subunit 6: Equity Method
Question: 1A company owns 10,000 shares of a corporation’s stock; the corporation currently has 40,000 shares
outstanding. During the year, the corporation had net income of $200,000 and paid $160,000 in dividends. At the
beginning of the year, there was a balance of $150,000 in the company’s equity method investment in the
corporation account. At the end of the year, the balance in this account should be
A. $110,000
B. $150,000
C. $160,000
Answer (C) is correct.
The company holds 25% (10,000 ÷ 40,000) of the corporation’s voting common stock. Under the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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equity method, (1) an investor recognizes its share of the investee’s net income as an increase in the
investment account:
Investment in the corporation ($200,000 × 25%) $50,000
Income -- equity-method investee
$50,000
(2) a dividend from the investee is treated as a return of an investment:
Cash ($160,000 × 25%)
$40,000
Investment in the corporation
$40,000
Thus, at the end of the year, the balance in the investment in the corporation account is $160,000
($150,000 + $50,000 – $40,000).
D. $240,000
Question: 2A corporation acquires a 30% voting interest in another corporation. In this situation, the long-term
investment is generally accounted for on the investor corporation’s books using which of the following reporting
methods?
A. Lower-of-cost-or-market.
B. Cost.
C. Consolidated.
D. Equity.
Answer (D) is correct.
If an investor can exercise significant influence over an investee, the investment should be accounted
for by the equity method. When a corporation owns 20% or more of the voting power of the investee,
the ability to exercise significant influence is presumed.
Question: 3An investor uses the equity method to account for an investment in common stock. The investor’s
equity in the earnings of the investee is affected by
A Change in Fair
Cash Dividends Value of the Investee’s
from Investee
Common Stock
A. No Yes
B. No No
Answer (B) is correct.
Under the equity method, an investor debits an investment and credits revenue for its share of the
investee’s earnings. The receipt of a cash dividend from the investee is treated as a return of an
investment. Thus, it is credited to the investment but does not affect equity-based earnings. A change
in fair value has no effect on an investment in securities accounted for under the equity method.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Yes No
D. Yes Yes
Question: 4An investor uses the equity method to account for an investment in common stock. After the date of
acquisition, the investment account of the investor is
A. Not affected by its share of the earnings or losses of the investee.
B. Not affected by its share of the earnings of the investee, but is decreased by its share of the losses of the
investee.
C. Increased by its share of the earnings of the investee, but is not affected by its share of the losses of the
investee.
D. Increased by its share of the earnings of the investee, and is decreased by its share of the losses of the
investee.
Answer (D) is correct.
After the date of acquisition, an equity-based investment in common stock account of an investor is
increased by its share of the earnings of the investee, decreased by its share of the losses of the
investee, and decreased by its share of cash dividends received from the investee.
Question: 5On January 1, a company acquired as a long-term investment a 20% common stock interest in E Co.
The company paid $700,000 for this investment when the fair value and carrying amount of E’s net assets was $3.5
million. The company can exercise significant influence over E’s operating and financial policies. For the year
ended December 31, E reported net income of $400,000 and declared and paid cash dividends of $160,000. How
much revenue from this investment should the company report for the year?
A. $32,000
B. $48,000
C. $80,000
Answer (C) is correct.
Because the investor can exercise significant influence over the investee’s operating and financial
policies, the investment should be accounted for using the equity method. The $700,000 paid for the
investment is equal to 20% of the $3.5 million fair value. Moreover, the carrying amount and fair value
of the net assets were the same. Thus, no goodwill impairment or other acquisition differential that
might require adjustment of the company’s share of the investee’s net income is associated with this
investment. Under these circumstances, revenue from the investment is 20% of the reported net income
of $400,000, or $80,000. The cash dividend does not affect the amount of income to be reported.
D. $112,000
Question: 6A corporation received a cash dividend from a common stock investment. Should the corporation
report an increase in the investment account if it uses the fair value method or the equity method of accounting?
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Fair Value Equity
A. No No
Answer (A) is correct.
Under the fair value method and the cost method, (used only if the fair value method and the equity
method are not applicable), dividends from an investee should be accounted for by the investor as
dividend income unless a liquidating dividend is received. Thus, assuming that the dividend is not
liquidating, it has no effect on the investment account under the fair value method. Under the equity
method, the investor recognizes its equity in the undistributed earnings of the investee. Consequently,
cash dividends decrease the investment account because the dividend is considered to be a return of
investment.
B. Yes Yes
C. Yes No
D. No Yes
Question: 7When an investor uses the equity method to account for investments in common stock, the
investment account will be increased when the investor recognizes
A. A proportionate interest in the net income of the investee.
Answer (A) is correct.
Under the equity method, the investor’s share of the investee’s net income is accounted for as an
addition to the carrying amount of the investment on the investor’s books. Losses and dividends are
reflected as reductions of the carrying amount.
B. A cash dividend received from the investee.
C. Periodic amortization of the goodwill related to the purchase.
D. Depreciation related to the excess of fair value over the carrying amount of the investee’s depreciable
assets at the date of purchase by the investor.
Question: 8A company owns 30% of the outstanding common stock and 100% of the outstanding noncumulative
nonvoting preferred stock of A Corp. In Year 1, A declared dividends of $100,000 on its common stock and $60,000
on its preferred stock. The company exercises significant influence over A’s operations and uses the equity method
to account for the investment in the common stock. What amount of dividend revenue should the company report in
its income statement for the year ended December 31, Year 1?
A. $0
B. $30,000
C. $60,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
Under the equity method, the receipt of a cash dividend from the investee should be credited to the
investment account. It is a return of, not a return on, the investment. However, the equity method is not
applicable to preferred stock. Thus, the company should report $60,000 of revenue when the preferred
dividends are declared.
D. $90,000
Question: 9On July 1, Year 1, a corporation purchased 3,000 shares of E Co.’s 10,000 outstanding shares of
common stock for $20 per share but did not elect the fair value option. On December 15, Year 1, E paid $40,000 in
dividends to its common shareholders. E’s net income for the year ended December 31, Year 1, was $120,000,
earned evenly throughout the year. In its Year 1 income statement, what amount of income from this investment
should the corporation report?
A. $36,000
B. $18,000
Answer (B) is correct.
The corporation’s purchase of 30% of E presumably allows it to exercise significant influence. Hence,
it should apply the equity method. The investor’s share of the investee’s income is a function of the
percentage of ownership and the length of time the investment was held. The income from this
investment was therefore $18,000 [$120,000 × 30% × (6 months ÷ 12 months)].
C. $12,000
D. $6,000
Question: 10A company has an equity investment with a historical cost of $500,000 that is traded in an active
market. On December 31, Year 1, the quoted price for an identical investment was $400,000, and the quoted price
for a similar investment was $430,000. Using the company’s internal present value of cash flows model, the
company arrived at a value of $410,000. What amount is the value of the investment on December 31, Year 1?
A. $400,000
Answer (A) is correct.
Investment in equity securities that does not result in control or significant influence over the investee
is measured at fair value each balance sheet date. Since the equity investment is traded in an active
market, the fair value of the investment is readily determinable. Thus, the investment is measured at
$400,000, the quoted price for an identical investment.
B. $410,000
C. $430,000
D. $500,000
Subunit 7: Investments in Debt Securities
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Question: 1Which one of the following statements with regard to marketable securities is incorrect?
A. In the trading portfolio of marketable equity securities, unrealized gains and losses are recorded on the
income statement.
B. In the available-for-sale portfolio of marketable debt securities, unrealized gains and losses are recorded
on the income statement.
Answer (B) is correct.
Assuming the fair value option has not been elected, unrealized holding gains and losses on availablefor-sale debt securities are reported in other comprehensive income.
C. The held-to-maturity portfolio consists only of debt securities.
D. Debt securities may be transferred from the held-to-maturity to the available-for-sale portfolio.
Question: 2The following information was extracted from a company’s December 31 balance sheet:
Debit Balance
Noncurrent assets:
Available-for-sale debt securities (carried at fair value)
Equity:
$96,450
Accumulated other comprehensive income (OCI)
Unrealized gains and losses on available-for-sale debt securities
Historical cost of the available-for-sale debt securities was
19,800
A. $63,595
B. $76,650
C. $96,450
D. $116,250
Answer (D) is correct.
The existence of an equity account with a debit balance signifies that the available-for-sale debt
securities are reported at fair value that is less than historical cost. The difference is the net unrealized
loss balance. Hence, historical cost must have been $116,250 ($96,450 available-for-sale debt
securities at fair value + $19,800 net unrealized loss).
Question: 3Investments classified as held-to-maturity are measured at
A. Fair value, with unrealized gains and losses reported in net income.
B. Fair value, with unrealized gains and losses reported in other comprehensive income (OCI).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Replacement cost, with no unrealized gains or losses reported.
D. Amortized cost, with no unrealized gains or losses reported.
Answer (D) is correct.
Assuming the fair value option has not been elected, held-to-maturity securities are reported at
amortized cost, with no unrealized gains or losses reported.
Question: 4The following pertains to Smoke, Inc.’s investment in debt securities:
 On December 31, Year 3, Smoke reclassified a security acquired during the year for $70,000. It had a
$50,000 fair value when it was reclassified from trading to available-for-sale.
 An available-for-sale security costing $75,000, written down to $30,000 in Year 2 because of an otherthan-temporary impairment of fair value, had a $60,000 fair value on December 31, Year 3.
What is the net effect of the above items on Smoke’s net income for the year ended December 31, Year 3?
A. No effect.
B. $10,000 increase.
C. $20,000 decrease.
Answer (C) is correct.
Unrealized holding gains and losses on trading debt securities are included in net income, and
reclassification is at fair value. Furthermore, if a security is transferred from the trading category, the
unrealized holding gain or loss at the date of transfer already has been recognized in net income and is
not reversed. Smoke therefore should include a $20,000 ($70,000 cost – $50,000 fair value at
12/31/Yr 3) unrealized holding loss in the determination of net income. After an available-for-sale debt
security has been written down to reflect an other-than-temporary decline in fair value, with the loss
included in net income, subsequent increases in its fair value are included in OCI. Thus, the
appreciation of this security has no effect on Year 3 net income.
D. $30,000 increase.
Question: 5Kale Co. purchased bonds at a discount on the open market as an investment and has the intent and
ability to hold these bonds to maturity. Absent an election of the fair value option, Kale should account for these
bonds at
A. Cost.
B. Amortized cost.
Answer (B) is correct.
Without an election of the fair value option, investments in debt securities that the investor has the
ability and positive intent to hold until maturity must be classified as held-to-maturity and measured at
amortized cost.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Fair value.
D. Lower of cost or market.
Question: 6On July 2, Year 4, Wynn, Inc., purchased as a short-term investment a $1 million face-value
Kean Co. 8% bond for $910,000 plus accrued interest to yield 10%. The bonds mature on January 1, Year 11, and
pay interest annually on January 1. On December 31, Year 4, the bonds had a fair value of $945,000. On February
13, Year 5, Wynn sold the bonds for $920,000. In its December 31, Year 4, balance sheet, what amount should
Wynn report for the bond if it is classified as an available-for-sale security?
A. $910,000
B. $920,000
C. $945,000
Answer (C) is correct.
Available-for-sale debt securities should be measured at fair value in the balance sheet. Thus, the bond
should be reported at its fair value of $945,000 to reflect the unrealized holding gain (change in fair
value).
D. $950,000
Question: 7The following information pertains to Lark Corp.’s available-for-sale debt securities:
December 31
Year 2
Cost
Year 3
$100,000 $100,000
Fair value
90,000
120,000
Differences between cost and fair values are considered to be temporary. The decline in fair value was properly
accounted for at December 31, Year 2. Ignoring tax effects, by what amount should other comprehensive income
(OCI) be credited at December 31, Year 3?
A. $0
B. $10,000
C. $20,000
D. $30,000
Answer (D) is correct.
Unrealized holding gains and losses on available-for-sale debt securities, including those classified as
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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current assets, are not included in earnings but ordinarily are reported in OCI, net of tax effects
(ignored in this question). At December 31, Year 2, OCI should have been debited for $10,000 for the
excess of cost over fair value to reflect an unrealized holding loss. At December 31, Year 3, OCI
should be credited to reflect a $30,000 unrealized holding gain ($120,000 fair value at 12/31/Year 3 –
$90,000 fair value at 12/31/Year 2).
Question: 8For available-for-sale debt securities included in noncurrent assets, which of the following amounts
should be included in the period’s net income?
I. Unrealized holding losses during the period
II. Realized gains during the period
III. Changes in fair value during the period
A. III only.
B. II only.
Answer (B) is correct.
The temporary decline below cost of the fair value of available-for-sale debt securities is recorded in
OCI, assuming they are not designated as being hedged in a fair value hedge. Thus, temporary changes
in the valuation of these securities do not flow through net income. A realized gain occurs when
securities are sold at an amount greater than their cost basis. Realized gains are included in net income
regardless of the classification of the securities.
C. I and II only.
D. I, II, and III.
Question: 9A reclassification of available-for-sale debt securities to the held-to-maturity category results in
A. The amortization of an unrealized gain or loss existing at the transfer date.
Answer (A) is correct.
The unrealized holding gain or loss on the date of transfer for available-for-sale debt securities
transferred to the held-to-maturity category continues to be reported in OCI. However, it is amortized
as an adjustment of yield in the same manner as the amortization of any discount or premium. This
amortization offsets or mitigates the effect on interest income of the amortization of the premium or
discount. Fair value accounting may result in a premium or discount when a debt security is transferred
to the held-to-maturity category.
B. The recognition in earnings on the transfer date of an unrealized gain or loss.
C. The reversal of any unrealized gain or loss previously recognized in earnings.
D. The reversal of any unrealized gain or loss previously recognized in other comprehensive income.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 10Jay Company acquired a wholly owned foreign subsidiary on January 1. The equity section of the
December 31 consolidated balance sheet follows:
Common stock
$ 500,000
Additional paid-in capital
200,000
Retained earnings
900,000
Accumulated other comprehensive income
(600,000)
Total equity
$1,000,000
The balance in accumulated OCI appropriately represents adjustments in translating the foreign subsidiary’s
financial statements into U.S. dollars.
The consolidated income statement included the excess of cost of investments in certain debt and equity
securities over their fair values, which is considered temporary, as follows:
Available-for-sale debt securities $200,000
Equity securities
100,000
Ignoring tax effects, the amounts for retained earnings and accumulated OCI in the consolidated statement of
financial position for the year ended December 31 are
Retained Earnings Accumulated OCI
A. $900,000
$(600,000)
B. $1,000,000 $(700,000)
C. $1,100,000 $(800,000)
Answer (C) is correct.
An investment in equity securities that does not result in significant influence or control over the
investee is measured at fair value through net income. The unrealized holding loss on available-forsale debt securities does not affect earnings (unless the securities are designated as being hedged in a
fair value hedge). Instead, it is debited to OCI. This amount is closed to accumulated OCI, a permanent
account reported in the equity section. Accordingly, retained earnings was understated by $200,000,
and accumulated OCI was overstated by $200,000. Their amounts should be $1,100,000 and $800,000,
respectively.
D. $1,200,000 $(900,000)
Question: 11When the fair value of an investment in debt securities exceeds its amortized cost, how should each
of the following debt securities be reported at the end of the year, given no election of the fair value option?
Debt Securities Classified As
Held-to-Maturity
Available-for-Sale
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A. Amortized cost
Amortized cost
B. Amortized cost
Fair value
Answer (B) is correct.
Investments in debt securities must be classified as held-to-maturity and measured at amortized cost in
the balance sheet if the reporting entity has the positive intent and ability to hold them to maturity.
Debt securities that are not expected to be sold in the near term and that are not held-to-maturity should
be classified as available-for-sale. Available-for-sale debt securities should be reported at fair value,
with unrealized holding gains and losses (except those on securities designated as being hedged in a
fair value hedge) excluded from net income and reported in OCI.
C. Fair value
Fair value
D. Fair value
Amortized cost
Question: 12An available-for-sale debt security was purchased on September 1, Year 4, between interest dates.
The next interest payment date was February 1, Year 5. Because of a permanent decline in fair value, the cost of the
debt security substantially exceeded its fair value at December 31, Year 4. On the balance sheet at December 31,
Year 4, the debt security should be carried at
A. Fair value plus the accrued interest paid.
B. Fair value.
Answer (B) is correct.
As a result of a permanent decline in fair value, the security should be written down to fair value, and
the loss should be treated as a realized loss. Accordingly, the loss is recognized in net income, and the
new cost basis is not adjusted for increases in the fair value of the security. Interest paid is not added to
the fair value because it is part of the cost.
C. Cost plus the accrued interest paid.
D. Cost.
Question: 13The amount by which the fair value of a debt security exceeds its cost should be accounted for in
the financial statements when the security is classified as
Trading Available-for-Sale
A. No No
B. No Yes
C. Yes Yes
Answer (C) is correct.
Unrealized holding gains and losses on trading debt securities must be recognized in earnings.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Unrealized holding gains and losses on available-for-sale debt securities are recognized in other
comprehensive income.
D. Yes No
Fact Pattern: Sun Corp. had investments in trading debt securities costing $650,000. On June
30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them as
available-for-sale debt securities on that date. The investments’ fair value was $575,000 at
December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year
2. Question: 14What amount of loss should Sun report in its Year 2 earnings?
A. $45,000
Answer (A) is correct.
Trading debt securities are recorded at fair value, and unrealized holding gains and losses are included
in earnings. When a trading security is reclassified, it should be transferred at fair value at the date of
transfer. The unrealized holding gain or loss at the date of transfer has already been recognized in
earnings and is not reversed. Accordingly, Sun must have recognized an unrealized holding loss of
$75,000 ($650,000 cost – $575,000 fair value) in Year 1 net income. The additional unrealized holding
loss at June 30, Year 2, of $45,000 ($575,000 fair value at 12/31/Yr 1 – $530,000 fair value at
6/30/Yr 2) is included in Year 2 net income. The unrealized holding loss that occurred after the transfer
($530,000 fair value at the date of transfer – $490,000 fair value at 12/31/Yr 2 = $40,000) is included
in other comprehensive income, not Year 2 net income, because the securities were deemed to be
available-for-sale debt securities after June 30, Year 2.
B. $85,000
C. $120,000
D. $160,000
Fact Pattern: Sun Corp. had investments in trading debt securities costing $650,000. On June
30, Year 2, Sun decided to hold the investments indefinitely and accordingly reclassified them as
available-for-sale debt securities on that date. The investments’ fair value was $575,000 at
December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year
2. Question: 15What amount should Sun report as net unrealized loss on available-for-sale securities in its Year 2
other comprehensive income?
A. $40,000
Answer (A) is correct.
The securities were available-for-sale securities after the reclassification, which was at fair value
($530,000 at 6/30/Yr 2). Subsequent unrealized holding gains and losses are excluded from net income
and reported in other comprehensive income until realized. Accordingly, the amount reported as net
unrealized loss on available-for-sale securities is $40,000 ($530,000 – $490,000 fair value at
12/31/Yr 2).
B. $45,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $85,000
D. $160,000
Question: 16On December 1, Wall Company purchased trading debt securities. Pertinent data are as follows:
Debt
Security Cost
Fair Value
at 12/31
A
$39,000
$36,000
B
50,000
55,000
C
96,000
85,000
On December 31, Wall reclassified its investment in security C from trading to available-for-sale because Wall
intends to retain security C. What net loss on its securities should be included in Wall’s income statement for the
year ended December 31?
A. $0
B. $9,000
Answer (B) is correct.
Unrealized holding gains and losses on trading debt securities are included in earnings, and
reclassification is at fair value. Furthermore, if a security is transferred from the trading category, the
unrealized holding gain or loss at the date of transfer has already been recognized in earnings and is
not reversed. Thus, the net unrealized holding loss at 12/31 is $9,000 ($3,000 loss on A – $5,000 gain
on B + $11,000 loss on C).
C. $11,000
D. $14,000
Question: 17When the fair value of an investment in securities exceeds its carrying amount, how should each of
the following assets be reported at the end of the year?
Held-to-Maturity Available-for-Sale
Securities
Securities
A. Fair value Carrying amount
B. Carrying amount Fair value
Answer (B) is correct.
When fair value exceeds the carrying amount of held-to-maturity securities, GAAP do not permit
recognition of the unrealized holding gain. Accordingly, these debt securities should be reported at
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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their carrying amount (amortized cost). However, fair value accounting applies to available-for-sale
and trading securities.
C. Carrying amount Carrying amount
D. Fair value Fair value
Question: 18On both December 31, Year 1, and December 31, Year 2, Kopp Co.’s only available-for-sale debt
security had the same fair value, which was below amortized cost. Kopp considered the decline in value to be
temporary in Year 1 but other than temporary in Year 2. At the end of both years the security was classified as a
noncurrent asset. What should be the effects of the determination that the decline was other than temporary on
Kopp’s Year 2 net noncurrent assets and net income?
A. No effect on both net noncurrent assets and net income.
B. No effect on net noncurrent assets and decrease in net income.
Answer (B) is correct.
Unrealized holding gains and losses on available-for-sale debt securities, including those classified as
current assets, are not included in earnings but are reported in other comprehensive income until
realized, net of tax effect. Thus, the unrealized holding loss would have been reflected in the
measurement of the asset at the end of Year 1 but not in Year 1 earnings. The other-than-temporary
decline identified in Year 2 should be included in earnings. Given that the decline in fair value below
amortized cost judged to be temporary in Year 1 equaled the impairment recognized in Year 2, the
measurement of the asset and of net noncurrent assets does not change.
C. Decrease in net noncurrent assets and no effect on net income.
D. Decrease in both net noncurrent assets and net income.
Question: 19At December 31, Hull Corp. had the following debt securities that were purchased during the year,
its first year of operations:
Fair
Cost
Unrealized
value
gain (loss)
In Current Assets:
Security A $ 90,000 $ 60,000
Security B
Totals
15,000
20,000
$105,000 $ 80,000
$(30,000)
5,000
$(25,000)
In Noncurrent Assets:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Security Y $ 70,000 $ 80,000 $ 10,000
Security Z
Totals
90,000
45,000
(45,000)
$160,000 $125,000
$(35,000)
All changes in fair value are considered temporary. Security A is a trading security, and the other securities are
available-for-sale securities. What amounts should be charged to earnings and other comprehensive income at
December 31?
Other Comprehensive
Earnings
Income
A. $(60,000) $0
B. $(30,000) $(30,000)
Answer (B) is correct.
The unrealized holding loss $(30,000) on the trading debt security (Security A) is included in earnings.
Unrealized holding gains and losses on available-for-sale debt securities, whether classified as current
or noncurrent, are included in other comprehensive income until realized. Thus, the net debit to other
comprehensive income is $30,000 ($45,000 loss on Z – $10,000 gain of Y – $5,000 gain on B).
C. $(25,000) $(30,000)
D. $(25,000) $0
Question: 20Reed, Inc., began operations on January 1. The following information pertains to Reed’s December
31 investments in debt securities:
Cost
Trading
Available-for-Sale
$360,000
$550,000
320,000
450,000
304,000
420,000
Fair value
Lower of cost or fair value
applied to each security
If the declines are judged to be temporary, what amounts should Reed report for its trading and available-for-sale
debt securities in the assets section of its December 31 balance sheet?
Trading Available-for-Sale
A. $360,000 $550,000
B. $360,000 $450,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $320,000 $450,000
Answer (C) is correct.
Fair value accounting applies to both trading and available-for-sale debt securities. The difference in
treatment is that the unrealized holding gains and losses are included in earnings for trading securities
and in other comprehensive income for available-for-sale securities, assuming the latter are not
designated as being hedged in a fair value hedge. Thus, these securities should be reported in the assets
section of the balance sheet at their fair values of $320,000 and $450,000, respectively.
D. $304,000 $420,000
Question: 21Beach Co. determined that the decline in the fair value (FV) of an investment in debt securities was
below the amortized cost and permanent in nature. The investment was classified as available-for-sale on Beach’s
books. The controller would properly record the decrease in FV by including it in which of the following?
A. Other comprehensive income section of the income statement only.
B. Earnings section of the income statement and writing down the cost basis to FV.
Answer (B) is correct.
The amortized cost basis is used to calculate the amount of any impairment. The amortized cost basis
should be distinguished from fair value, which equals the cost basis plus or minus the net unrealized
holding gain or loss. If a decline in fair value of an individual available-for-sale debt security below its
amortized cost basis is other than temporary, the amortized cost basis is written down to fair value as a
new cost basis. The write-down is deemed to be a realized loss and is included in earnings.
C. Discontinued operations section of the income statement, net of tax, and writing down the cost basis to
FV.
D. Other comprehensive income section of the income statement, and writing down the cost basis to FV.
Question: 22Debt securities held primarily for sale in the near term to generate income on short-term price
differences are known as
A. Available-for-sale securities.
B. Discontinued operations.
C. Held-to-maturity securities.
D. Trading securities.
Answer (D) is correct.
Trading debt securities are bought and held primarily for sale in the near term. They are purchased and
sold frequently. They are initially recorded at cost but are remeasured at fair value at each balance
sheet date, with the unrealized holding gains or losses recognized in earnings.
Question: 23Unrealized gains and losses on trading debt securities should be presented in the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Statement of financial position.
B. Income statement.
Answer (B) is correct.
Unrealized holding gains and losses on trading debt securities are included in earnings and are
therefore reported in the income statement.
C. Notes to the financial statements.
D. Statement of retained earnings.
Question: 24Vanity Corporation holds investments in debt securities. These investments were acquired last year
and have been properly classified as available-for-sale (AFS) securities. During the current year, the company sold
some of the AFS securities at a loss. At year end, the remaining portfolio of AFS securities had appreciated in total
value compared with the value at the end of last year. Based on these facts, which one of the following should
Vanity report in its financial statements at the end of the current year?
Income Statement
Balance sheet
A. Unrealized loss on sale of AFS securities
B. Realized loss on sale of AFS
securities
Unrealized holding gain on appreciation of AFS securities
Unrealized holding gain on appreciation of AFS
securities
Answer (B) is correct.
AFS debt securities are measured at fair value at each balance sheet date. Realized losses on the sale of
available-for-sale securities are included in the calculation of current period earnings. However,
unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are
reported as components of other comprehensive income.
C. Unrealized holding gain on appreciation of AFS
securities
Unrealized loss on sale of AFS
securities.
D. Realized loss on sale of AFS securities and unrealized
holding gain on appreciation of AFS securities
Unrealized holding gains/losses not
reported here on AFS securities
Question: 25In Year 1, a company reported in other comprehensive income an unrealized holding loss on an
investment in available-for-sale debt securities. During Year 2, these securities were sold at a loss equal to the
unrealized loss previously recognized. The reclassification adjustment should include which of the following?
A. The unrealized loss should be credited to the investment account.
B. The unrealized loss should be credited to the other comprehensive income account.
Answer (B) is correct.
Available-for-sale debt securities are measured at fair value, with unrealized holding gains and losses
recognized in OCI. The Year 1 entry to recognize the loss was a debit to OCI for a loss and a credit to
the allowance for securities fair value adjustments (or directly to available-for-sale securities). The
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Year 2 sale of the securities was at a loss equal to the recognized unrealized loss. Accordingly, the sale
was at their carrying amount. Assuming the securities had a cost of $100 and the unrealized loss was
$10, the Year 2 entry was
Cash
$90
Allowance
10
Loss
10
Securities
OCI
$100
10
This entry reclassifies the loss from OCI to earnings.
C. The unrealized loss should be debited to the other comprehensive income account.
D. The unrealized loss should be credited to beginning retained earnings.
Question: 26On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000
face value bonds that were issued by another publicly-traded corporation. Barton plans to sell the bonds in the first
quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what
amount should Barton report the bonds in its balance sheet at the end of the current year?
A. $900,000
B. $950,000
C. $1,000,000
D. $1,020,000
Answer (D) is correct.
An investment in a debt security is initially classified as available for sale if the entity does not (1) plan
to hold it to maturity or (2) intend to sell it in the near term. Consequently, the debt security is not
initially classifiable as held-to-maturity or trading, respectively. At the reporting date, the classification
is reassessed. Because Barton intends to sell the investment during the first quarter, the investment
should be reclassified as a trading debt security. Trading debt securities are measured at fair value.
Thus, the bonds should be reported at $1,020,000. NOTE: Available-for-sale debt securities also are
measured at fair value. But unrealized gains and losses are recognized in other comprehensive income,
not earnings.
Question: 27At the beginning of Year 2, a company invested $40,000 in a debt security. At that time the security
was appropriately classified as an available-for-sale security. At the end of Year 2, the security had a fair value of
$28,500. The change in fair value is deemed temporary. How should this change in fair value be reported in the
financial statements?
A. As a realized loss of $11,500 as part of net income.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. As a realized loss of $11,500 as part of other comprehensive income.
C. As an unrealized loss of $11,500 as part of net income.
D. As an unrealized loss of $11,500 as part of other comprehensive income.
Answer (D) is correct.
Available-for-sale (AFS) debt securities are recognized initially at cost (the amount paid). At the
balance sheet date, they are remeasured at fair value. Unrealized holding gains and losses from
remeasurement are reported in other comprehensive income (OCI) if they are temporary. Accordingly,
the $11,500 ($40,000 – $28,500) decline in fair value is reported in OCI. However, a permanent
decline in the fair value is recognized directly in earnings.
Question: 28Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were
included in Long’s other comprehensive income. How would Long classify this investment?
A. Held-to-maturity securities.
B. Trading securities.
C. Equity securities.
D. Available-for-sale debt securities.
Answer (D) is correct.
Available-for-sale debt securities are measured at fair value at each balance sheet date. Unrealized
holding gains and losses resulting from the remeasurement to fair value are reported in other
comprehensive income (OCI).
Question: 29An investment in trading securities is measured on the statement of financial position at the
A. Cost to acquire the asset.
B. Accumulated income minus accumulated dividends since acquisition.
C. Lower of cost or market.
D. Fair value.
Answer (D) is correct.
Under U.S. GAAP, trading securities are those held principally for sale in the near term. They are
classified as current and consist of debt securities with readily determinable fair values. Unrealized
holding gains and losses on trading securities are reported in earnings. Hence, these securities are
reported at fair value.
Question: 30An investment in available-for-sale securities is measured on the statement of financial position at
the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Cost to acquire the asset.
B. Accumulated income less accumulated dividends since acquisition.
C. Fair value.
Answer (C) is correct.
Under U.S. GAAP, available-for-sale securities are investments in debt securities. They are measured
at fair value in the balance sheet.
D. Par or stated value of the securities.
Subunit 8: Business Combinations and Consolidated Financial
Statements
Question: 12In a business combination, the sum of the amounts assigned by the acquiring entity to assets
acquired and liabilities incurred and assumed exceeds the consideration paid for the acquired entity. The excess
should be reported as a
A. Deferred credit.
B. Reduction of the amounts assigned to current assets and a deferred credit for any unallocated portion.
C. Gain immediately in the income statement.
D. Pro rata reduction of the amounts assigned to all acquired assets and a gain for any unallocated portion.
Question: 2A conglomerate entity acquired 100% of the net assets of a target entity for $900 cash. The target
entity’s statement of financial position just prior to the acquisition is presented below.
Target Entity (as of acquisition date)
Cash
Carrying
Fair
Amount
Value
$ 100
$100
Receivables
200
200
Inventory
150
200
600
400
$1,050
$900
Property, plant,
and equipment (net)
Total assets
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Current liabilities
$ 200
Share capital
200
Retained earnings
650
Total liabilities and equity
$200
$1,050
The amount of goodwill to be recorded by the conglomerate entity related to its purchase of the target entity is
A. $(200)
B. $50
C. $200
Answer (C) is correct.
Given no prior equity interest and no noncontrolling interest, goodwill is the excess of the fair value of
the consideration transferred over the net of the fair values of the identifiable net assets acquired. This
net fair value equals the sum of cash, receivables, inventory, and PPE, minus liabilities. Hence, the net
fair value acquired is $700, and goodwill is $200 ($900 fair value of the consideration transferred –
$700).
D. None of the answers are correct.
Question: 3Costs incurred in completing a business combination are listed below.
General administrative costs
$240,000
Consulting fees
120,000
Direct cost to register and issue equity securities
80,000
The amount charged to the expenses of the business combination is
A. $80,000
B. $120,000
C. $240,000
D. $360,000
Answer (D) is correct.
Acquisition-related costs, such as finder’s fees, professional and consulting fees, and general
administrative costs, are expensed as incurred. But direct issue costs of equity (underwriting, legal,
accounting, tax, registration, etc.) are debited to additional paid-in capital. Accordingly, the amount
expensed is $360,000 ($240,000 + $120,000).
Question: 4A corporation purchased 100% of the shares of J Corporation for $600,000. Financial information for
J Corporation is provided below.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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J Corporation ($000)
Carrying
Amount
Cash
Fair
Value
$ 50
$ 50
Accounts receivable
100
100
Inventory
150
100
300
250
500
600
$800
$850
$150
$150
200
200
350
350
Common stock
150
150
Paid-in capital
80
80
Total current assets
Property, plant, and equipment (net)
Total assets
Current liabilities
Long-term debt
Total liabilities
Retained earnings
220
Total shareholders’ equity
450
Total liabilities and shareholders’ equity
$800
The amount of goodwill resulting from this purchase, if any, would be
A. $200,000
B. $150,000
C. $100,000
Answer (C) is correct.
Goodwill is the excess of (1) the sum of the acquisition-date fair values of (a) the consideration
transferred ($600,000), (b) any noncontrolling interest in the acquiree ($0), and (c) the acquirer’s
previously held equity interest in the acquiree ($0) over (2) the net of the acquisition-date fair values of
the identifiable assets acquired ($850,000) and liabilities assumed ($350,000). The amount of goodwill
is calculated as follows:
Consideration transferred
$600,000
Acquisition-date fair value of net assets acquired ($850,000 – $350,000)
(500,000)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Goodwill
$100,000
D. $0
Question: 5Entity X owns 90% of Entity Y. Early in the year, X lent Y $1,000,000. No payments have been
made on the debt by year end. Proper accounting at year end in the consolidated financial statements would
A. Eliminate 100% of the receivable, the payable, and the related interest.
Answer (A) is correct.
In a consolidated statement of financial position, reciprocal balances, such as receivables and payables,
between a parent and a consolidated subsidiary should be eliminated in their entirety regardless of the
portion of the subsidiary’s shares held by the parent. Thus, all effects of the $1,000,000 loan should be
eliminated in the preparation of the year-end consolidated statement of financial position.
B. Eliminate 100% of the receivable and the payable but not any related interest.
C. Eliminate 90% of the receivable, the payable, and the related interest.
D. Eliminate 90% of the receivable and the payable but not any related interest.
Question: 6How should the acquirer recognize a bargain purchase in a business acquisition?
A. As negative goodwill in the statement of financial position.
B. As goodwill in the statement of financial position.
C. As a gain in earnings at the acquisition date.
Answer (C) is correct.
A bargain purchase is recognized in the consolidated financial statements as an ordinary gain at the
acquisition date. A bargain purchase occurs when the net of the acquisition-date fair values of
identifiable assets acquired and liabilities assumed exceeds the sum of the acquisition-date fair values
of the consideration transferred, any noncontrolling interest recognized, and any previously held equity
interest in the acquiree.
D. As a deferred gain that is amortized into earnings over the estimated future periods benefited.
Question: 7A corporation owns 60% of S Corp.’s outstanding capital stock. On May 1, the corporation advanced
S $70,000 in cash, which was still outstanding at December 31. What portion of this advance should be eliminated
in the preparation of the December 31 consolidated balance sheet?
A. $70,000
Answer (A) is correct.
In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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parent and a consolidated subsidiary should be eliminated in their entirety regardless of the portion of
the subsidiary’s stock held by the parent. Thus, the entire $70,000 advance should be eliminated in the
preparation of the year-end consolidated balance sheet.
B. $42,000
C. $28,000
D. $0
Question: 8A subsidiary has a receivable from its parent. Should this receivable be separately reported in the
subsidiary’s balance sheet and in the parent’s consolidated balance sheet?
Subsidiary’s Parent’s Consolidated
Balance Sheet
Balance Sheet
A. Yes No
Answer (A) is correct.
In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a
parent and a consolidated subsidiary are eliminated in their entirety, regardless of the portion of the
subsidiary’s stock held by the parent. However, intraentity transactions should not be eliminated from
the separate financial statements of the entities.
B. Yes Yes
C. No No
D. No Yes
Question: 9A company owns 80% of the outstanding common stock of F Co. On December 31, Year 3, F sold
equipment to the company at a price in excess of F’s carrying amount but less than its original cost. On a
consolidated balance sheet at December 31, Year 3, the carrying amount of the equipment should be reported at
A. The company’s original cost.
B. F’s original cost.
C. The company’s original cost minus F’s recorded gain.
Answer (C) is correct.
In consolidated financial statements, the effects of intraentity transactions should be eliminated. The
original amount recorded for the acquisition by the company of the equipment from F Co. was the
carrying amount on F’s balance sheet plus the gain on the sale. In the consolidated financial
statements, the equipment should be reported at the amount previously recorded on F’s balance sheet.
This amount is the original cost recorded by the company minus the gain recognized by F when the
transaction took place.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. The company’s original cost minus 80% of F’s recorded gain.
Question: 10In a business combination, the valuation of goodwill is a calculation
A. To offset the bargain purchase cost.
B. Of all of the unlimited life intangible assets.
C. Of the residual paid above the fair value of the identifiable net assets.
Answer (C) is correct.
According to ASC 350-20-20, goodwill is an asset representing the future economic benefits arising
from other assets acquired in a business combination that are not individually identified and separately
recognized. It is the excess of consideration transferred over the fair value of the net identifiable assets
acquired.
D. Of all of the increases in market valuation of the intangible assets acquired.
Question: 11For the past several years, Company S has invested in the ordinary shares of Company A. Company
S currently owns approximately 13% of the total of Company A’s outstanding voting ordinary shares. Recently,
managements of the two companies have discussed a possible combination of the two entities. If they decide to
combine, how should the resulting combination be accounted for?
A. Uniting of interests.
B. Acquisition.
Answer (B) is correct.
All business combinations must be accounted for using the acquisition method. It involves (1)
identifying the acquirer and the acquisition date; (2) recognizing and measuring the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest; and (3) recognizing and measuring
goodwill or a gain from a bargain purchase.
C. Part purchase, part uniting of interests.
D. Joint venture.
Question: 12In a business combination, the sum of the amounts assigned by the acquiring entity to assets
acquired and liabilities incurred and assumed exceeds the consideration paid for the acquired entity. The excess
should be reported as a
A. Deferred credit.
B. Reduction of the amounts assigned to current assets and a deferred credit for any unallocated portion.
C. Gain immediately in the income statement.
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Answer (C) is correct.
In a business combination, any excess of the fair value of the net assets acquired over the sum of the
consideration transferred, any noncontrolling interests, and any previously held equity interest must be
recognized immediately in the income statement as a gain.
D. Pro rata reduction of the amounts assigned to all acquired assets and a gain for any unallocated portion.
Subunit 9: Different Types of Expenses and Liabilities
Question: 1An entity sells appliances that include a 3-year assurance-type warranty. Service calls under the
warranty are performed by an independent mechanic under a contract with the entity. Based on experience, warranty
costs are estimated at $30 for each machine sold. When should the entity recognize these warranty costs?
A. Evenly over the life of the warranty.
B. When the service calls are performed.
C. When payments are made to the mechanic.
D. When the machines are sold.
Answer (D) is correct.
An assurance-type warranty creates a loss contingency. The accrual method therefore should be used if
(1) incurrence of warranty expense is probable, (2) the amount can be reasonably estimated, and (3) the
amount is material. Thus, a provision for costs incurred under an assurance-type warranty is made
when the related revenue is recognized.
Question: 2A company manufactures stereo systems that carry a 2-year assurance-type warranty against defects.
Based on past experience, warranty costs are estimated at 4% of sales for the warranty period. During the year,
stereo system sales totaled $3 million, and warranty costs of $67,500 were incurred. In its income statement for the
year ended December 31, the company should report warranty expense of
A. $52,500
B. $60,000
C. $67,500
D. $120,000
Answer (D) is correct.
An assurance-type warranty creates a loss contingency. The accrual method therefore should be used if
(1) incurrence of warranty expense is probable, (2) the amount can be reasonably estimated, and (3) the
amount is material. Thus, a provision for costs incurred under an assurance-type warranty is made
when the related revenue is recognized. Expense for the assurance-type warranty equals 4% of sales
for the period, or $120,000 ($3,000,000 × 4%).
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Question: 3During Year 3, a new product carrying a 2-year assurance-type warranty against defects was
introduced. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in
the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, Year
3 and Year 4, are as follows:
Actual Warranty
Sales
Expenditures
Year 3 $ 600,000
$ 9,000
Year 4 1,000,000
30,000
$1,600,000
$39,000
At December 31, Year 4, what amount of estimated warranty liability should be reported?
A. $0
B. $39,000
C. $57,000
Answer (C) is correct.
An assurance-type warranty creates a loss contingency. The accrual method therefore should be used if
(1) incurrence of warranty expense is probable, (2) the amount can be reasonably estimated, and (3) the
amount is material. Thus, a provision for costs incurred under an assurance-type warranty is made
when the related revenue is recognized. Because this product is new, the beginning balance in the
estimated warranty liability account at the beginning of Year 3 is $0. For Year 3, the estimated
warranty costs related to dollar sales are 6% (2% + 4%) of sales or $36,000 ($600,000 × 6%). For Year
4, the estimated warranty costs are $60,000 ($1,000,000 sales × 6%). These amounts are charged to
warranty expense and credited to the estimated warranty liability account. This liability account is
debited for expenditures of $9,000 and $30,000 in Year 3 and Year 4, respectively. Accordingly, the
estimated warranty liability at 12/31/Yr 4 is $57,000.
Estimated Warranty Liability
$
Year 3 expenditures $ 9,000
Year 4 expenditures 30,000
0
36,000
60,000
$57,000
1/1/Yr 3
Year 3 expense
Year 4 expense
12/31/Yr 4
D. $96,000
Question: 4On April 1, a corporation began offering a new product for sale under a standard 1-year assurancetype warranty. Of the 5,000 units in inventory at April 1, 3,000 had been sold by June 30. Based on its experience
with similar products, the corporation estimated that the average warranty cost per unit sold would be $8. Actual
warranty costs incurred from April 1 through June 30 were $7,000. At June 30, what amount should the corporation
report as estimated warranty liability?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $9,000
B. $16,000
C. $17,000
Answer (C) is correct.
An assurance-type warranty creates a loss contingency. Because the product is new, the balance of the
estimated warranty liability at the beginning of the year is $0. If 3,000 units were sold at an estimated
$8 per unit warranty cost, the total credits to the liability account equaled $24,000 (3,000 × $8). Given
that actual warranty costs of $7,000 were debited to the account, the ending balance must have been
$17,000 ($24,000 – $7,000).
D. $33,000
Question: 5A corporation entered into a purchase commitment to buy inventory. At the end of the accounting
period, the current market value of the inventory was less than the fixed purchase price by a material amount. Which
of the following accounting treatments is most appropriate?
A. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income
statement, and recognize a liability for the accrued loss.
Answer (A) is correct.
A commitment to acquire goods in the future is not recorded at the time of the agreement, e.g., by
debiting an asset and crediting a liability. But recognition in earnings of a loss on goods subject to a
firm purchase commitment is required if the market price of these goods declines below the
commitment price. The reason for current loss recognition is the same as that for inventory on hand. A
decrease (not an increase) in the future benefits of the commitment should be recognized when it
occurs. Thus, the lower of cost or market rule is followed. If material losses are expected to arise from
firm, noncancelable, and unhedged commitments for the future purchase of inventory, they should be
measured in the same way as inventory losses, and, if material, recognized and separately disclosed in
the income statement. The entry is to debit unrealized holding loss-earnings and to credit liabilitypurchase commitment. Furthermore, certain disclosures are required for unconditional purchase
obligations that are unrecorded. They include the nature and term of the obligation.
B. Describe the nature of the contract and the estimated amount of the loss in a note to the financial
statements, but do not recognize a loss in the income statement.
C. Describe the nature of the contract in a note to the financial statements, recognize a loss in the income
statement, and recognize a reduction in inventory equal to the amount of the loss by use of a valuation
account.
D. Neither describe the purchase obligation nor recognize a loss on the income statement or balance sheet.
Question: 6A liability arising from a loss contingency should be recorded if the
A. Amount of the loss can be reasonably estimated.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Contingent future events have a reasonably possible chance of occurring.
C. Contingent future events have a reasonably possible chance of occurring and the amount of the loss can
be reasonably estimated.
D. Contingent future events will probably occur and the amount of the loss can be reasonably estimated.
Answer (D) is correct.
A material contingent loss must be accrued when the following two conditions are met:
1.
It is probable that, at the balance sheet date, an asset has been impaired or a liability
has been incurred.
2.
The amount of the loss can be reasonably estimated.
Question: 7Net losses on firm purchase commitments to acquire goods for inventory result from a contract price
that exceeds the current market price. If a firm expects that losses will occur when the purchase occurs, expected
losses, if material,
A. Should be recognized in the accounts and separately disclosed as losses on the income statement of the
period during which the decline in price takes place.
Answer (A) is correct.
A loss is accrued in the income statement on goods subject to a firm purchase commitment if the
market price of these goods declines below the commitment price. This loss should be measured in the
same manner as inventory losses. Disclosure of the loss is also required.
B. Should be recognized in the accounts and separately disclosed as net unrealized losses on the balance
sheet at the end of the period during which the decline in price takes place.
C. Should be recognized in the accounts and separately disclosed as net unrealized losses on the balance
sheet at the end of the period during which the contract is executed.
D. Should not be recognized in the accounts until the contract is executed and need not be separately
disclosed in the financial statements.
Question: 8Which one of the following loss contingencies would be accrued as a liability rather than disclosed in
the notes to the financial statement?
A. A guarantee of the indebtedness of another.
B. A dispute over additional income taxes assessed for prior years (now in litigation).
C. A pending lawsuit with an uncertain outcome.
D. Liabilities for service or product warranties made as a regular part of business.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Similarly to the guidelines for loss contingencies, a liability for future warranty costs should be
accrued if (1) the incurrence of the expense is probable and (2) the amount can be reasonably
estimated. Warranty liabilities are usually probable and can be reasonably estimated.
Question: 9Linden Corporation is a defendant in a lawsuit where the plaintiff is seeking $1,000,000 in damages.
The company had terminated the plaintiff, George Russell, from his position with Linden after Russell allegedly
sold specifications for one of Linden’s new products to a competitor. Linden’s attorney believes that it is quite
possible Linden will lose the case and that, if so, damages could range from $100,000 to $200,000.
Regardless of the outcome of the case, Linden’s accountants estimate the company will incur an additional $5,000 in
unemployment costs because of Russell’s termination. The amount that Linden should accrue because of the
contingency in this situation is
A. $200,000
B. $100,000
C. $5,000
D. $0
Answer (D) is correct.
Loss contingencies are accrued when the loss is probable. The $5,000 in unemployment costs that will
probably be incurred are a routine cost of doing business.
Question: 10A company is the plaintiff in two lawsuits. The first suit involves a competitor who has made an
exact copy of one of the company’s products, and the company is suing for patent infringement. The attorneys
estimate a $5,000,000 award for the company; however, it is anticipated that the case will be in litigation for 2 to
3 years before final resolution. The second case also involves patent infringement; however, in this instance, the
attorneys do not believe the company has a strong case. It is estimated that the company has a 50% chance of
winning and the award, if any, would be in the $250,000 to $1,000,000 range. The most appropriate amount to be
recorded as a gain contingency is
A. $0
Answer (A) is correct.
Gain contingencies are not recorded; they are recognized only when realized. A gain contingency must
be adequately disclosed.
B. $5,000,000
C. $5,125,000
D. $5,250,000
Question: 11A company is being sued in a wrongful discharge suit for $500,000. The company attorney has
advised that the probability of the plaintiff prevailing and receiving the full amount is about 80%. The attorney also
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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indicated that the case would likely be tied up in the courts for 2 to 3 years. The most appropriate financial
statement presentation for this loss contingency would be to
A. Record $500,000 as a loss contingency.
Answer (A) is correct.
A liability arising from a loss contingency should be recorded if the contingent future event will
probably occur and the amount of the loss can be reasonably estimated.
B. Record $400,000 as a loss contingency.
C. Disclose the loss contingency in the footnotes.
D. Not record or footnote the loss contingency.
Question: 12In May Year 1, Caso Co. filed suit against Wayne, Inc., seeking $1.9 million in damages for patent
infringement. A court verdict in November Year 4 awarded Caso $1.5 million in damages, but Wayne’s appeal is
not expected to be decided before Year 6. Caso’s counsel believes it is probable that Caso will be successful against
Wayne for an estimated amount in the range between $800,000 and $1.1 million, with $1 million considered the
most likely amount. What amount should Caso record as income from the lawsuit in the year ended December 31,
Year 4?
A. $0
Answer (A) is correct.
Gain contingencies are not recognized until they are realized. Because the appeal is not expected to be
decided before Year 6, Caso should not record any revenue from the lawsuit in the Year 4 income
statement. This gain contingency should be disclosed; however, care should be taken to avoid
misleading implications as to the likelihood of realization.
B. $800,000
C. $1,000,000
D. $1,500,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Study Unit 3: Measurement, Valuation, and Disclosure: Long-Term
Items
Subunit 1: Property, Plant, and Equipment
Question: 1Which of the following is not an appropriate basis for measuring the cost of property, plant, and
equipment?
A. The purchase price, freight costs, and installation costs of a productive asset should be included in the
asset’s cost.
B. Proceeds obtained in the process of readying land for its intended purpose, such as from the sale of
cleared timber, should be recognized immediately as income.
Answer (B) is correct.
Accordingly, items of property, plant, and equipment (PPE) that meet the recognition criterion are
initially measured at cost. The cost includes the purchase price (minus trade discounts and rebates, plus
purchase taxes) and the directly attributable costs of bringing the assets to working condition for their
intended use. Directly attributable costs include site preparation, installation, initial delivery and
handling, architect and equipment fees, costs of removing the assets and restoring the site, etc.
Accordingly, the cost of land includes the cost of obtaining the land and readying it for its intended
uses, but it is inappropriate to recognize the proceeds related to site preparation immediately in profit
or loss. They should be treated as reductions in the price of the land.
C. The costs of improvements to equipment incurred after its acquisition should be added to the asset’s cost
if they increase future service potential.
D. All costs incurred in the construction of a plant building, from excavation to completion, should be
considered as part of the asset’s cost.
Question: 2The selected data from statements of financial position on December 31, Year 1, and December 31,
Year 2, is presented below:
Property, plant, and equipment
Accumulated depreciation
12/31/Year 1
12/31/Year 2
$295,000
$340,000
(102,000)
(119,000)
Additional information for Year 2:
1.
Equipment was acquired for $65,000.
2.
Depreciation expense was $30,000.
The carrying amount (cost minus accumulated depreciation) of property, plant, and equipment disposed of in Year 2
was
A. $7,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
The Year 2 beginning carrying amount is $193,000 ($295,000 – $102,000), and the Year 2 ending
carrying amount is $221,000 ($340,000 – $119,000). The carrying amount of PPE disposed of is
$7,000 ($193,000 beginning balance + $65,000 acquired during Year 2 – $30,000 depreciation expense
– $221,000 ending balance).
B. $17,000
C. $20,000
D. $32,000
Question: 3The board of directors of a corporation authorized the president of the corporation to pay as much as
$90,000 to purchase a tract of land adjacent to the main factory. The president negotiated a price of $75,800 for the
land, and legal fees for closing costs amounted to $820. A contractor cleared, filled, and graded the land for $6,800,
and dug the foundation for a new building for $4,300. A prefabricated building was erected at a cost of $181,000.
The building has an estimated useful life of 20 years with no residual value. The contractor’s bill indicated that the
cost of the parking lot and driveways was $7,060. The parking lot and the driveways will need to be replaced in 15
years. The proper amount to be recorded in the corporation’s land account is
A. $76,620
B. $83,420
Answer (B) is correct.
The cost of acquiring and preparing land for its expected use is capitalized. The amount to be recorded
in the land account is $83,420, consisting of the $75,800 purchase price, the $820 closing costs, and
the $6,800 site preparation costs.
C. $87,720
D. $90,480
Question: 4A corporation purchased manufacturing equipment for $100,000, with an estimated useful life of 10
years and a salvage value of $15,000. The second year’s depreciation for this equipment using the double-declining
balance method is
A. $8,500
B. $13,600
C. $16,000
Answer (C) is correct.
Under the double-declining balance method, the full cost of the asset, or $100,000, is depreciated, but
not below salvage value. Because the straight-line rate for a 10-year asset is 10% (100% ÷ 10), the
double-declining balance rate is 20% (10% × 2). The first year’s depreciation is $20,000 ($100,000 ×
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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20%), leaving a carrying amount for the second year of $80,000 ($100,000 – $20,000). The second
year’s depreciation is thus $16,000 ($80,000 × 20%).
D. $20,000
Question: 5When a fixed plant asset with a 5-year estimated useful life is sold during the second year, how
would the use of an accelerated depreciation method instead of the straight-line method affect the gain or loss on the
sale of the fixed plant asset?
Gain
Loss
A. Increase Increase
B. Increase Decrease
Answer (B) is correct.
An accelerated method reduces the carrying amount of the asset more rapidly in the early years of the
useful life than does the straight-line method. Hence, the effect of an early sale is to increase the gain
or decrease the loss that would have been recognized under the straight-line method.
C. Decrease Increase
D. Decrease Decrease
Question: 6Which one of the following characteristics is not required for an asset to be properly described as
property, plant, and equipment?
A. Held for use and not for investment.
B. Newly purchased.
Answer (B) is correct.
These assets are known variously as property, plant, and equipment; fixed assets; or plant assets.
1.
PPE are tangible. They have physical existence.
2.
PPE may be either personal property (something movable, e.g., equipment) or real
property (such as land or a building).
3.
PPE are used in the ordinary operations of an entity and are not held primarily for
investment, resale, or inclusion in another product. But they are often sold.
4.
PPE are noncurrent. They are not expected to be used up within 1 year or the normal
operating cycle of the business, whichever is longer.
However, an asset need not be newly purchased to be properly described as property, plant, and
equipment.
C. Expected life of more than 1 year.
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D. Tangible.
Question: 7Equipment bought by a company 3 years ago was charged to equipment expense in error. The cost of
the equipment was $100,000, with no expected salvage value and a 10-year estimated life. The company uses the
straight-line depreciation method on similar equipment. The error was discovered at the end of Year 3 prior to the
issuance of the company’s financial statements. After correction of the error, the correct carrying value of the
equipment will be
A. $30,000
B. $70,000
Answer (B) is correct.
The straight-line depreciation that should have been charged to the equipment had it been properly
capitalized is $30,000 [$100,000 × (3 ÷ 10 years)]. Thus, after correction of the error, the carrying
amount of the equipment will be $70,000 ($100,000 – $30,000).
C. $80,000
D. $100,000
Question: 8A company uses the sum-of-the-years’-digits (SYD) method of depreciation. On January 1, the
company purchased a machine for $50,000. It had an estimated life of 5 years and no residual value. Depreciation
for the first year would be
A. $10,000
B. $15,000
C. $16,667
Answer (C) is correct.
The SYD method multiplies a constant depreciable base (cost minus residual value) by a declining
fraction. The numerator is the number of years of the useful life minus the years elapsed (5 – 0 = 5).
The denominator is the sum of the digits of the years in the asset’s useful life (1 + 2 + 3 + 4 + 5). The
first year’s depreciation expense is therefore $16,667 [$50,000 × (5 ÷ 15)].
D. $20,000
Question: 9An entity has owned its present facilities since 1981, and the CEO has authorized various
expenditures to repair and improve the building during the current year. The building was beginning to sag, and
without repair, the building would only last another 8 years. To correct the problem, the foundation was reinforced
and several columns were added in the basement area at a cost of $47,200. As a result, engineers estimate that the
building will have a remaining useful life of 20 years. To install a new computer local area network (LAN) and be
ready for the next generation of computers, the phone lines and electrical systems were updated at a cost of $81,300.
The entity’s engineers estimate that these improvements should last 25 years. The offices and open work spaces
were rearranged to reduce exposure to electronic emissions at a materials cost of $31,000. The purchase and
installation of the computers and software for the LAN cost $102,700. The LAN hardware and software will have to
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be replaced in 6 years, but further rearrangement of the offices and work spaces will not be necessary. After the
above improvements were completed, the entire building was painted inside and outside at a cost of $9,450.
As controller of the entity, which one of the following actions would you recommend to be in conformity with
generally accepted accounting principles?
A. Treat all expenditures as expenses in the current year except the cost of rearrangement ($31,000), which
should be amortized over a period not to exceed 20 years.
B. Capitalize all expenditures because they represent additions, improvements, and rearrangements.
C. Capitalize all costs with the exception of the upgrade to the phone and electrical systems and the painting
because they represent maintenance expenses.
D. Capitalize all costs with the exception of the painting because it represents maintenance expense.
Answer (D) is correct.
Expenditures on capital assets that improve the asset’s performance or extend its useful life are
capitalized as part of the asset’s cost. Accordingly, the building repairs are capitalized. The substitution
of a better computer system is classified as an improvement, and the costs also should be capitalized.
Moreover, the entity capitalizes the costs of a rearrangement of the configurations of the offices and
open work spaces that (1) requires material outlays, (2) is separable from recurring expenses, and (3)
provides probable future benefits. However, expenditures that merely maintain the asset at an
acceptable level of productivity are expensed as they are incurred. Thus, the costs of painting the
building are routine, minor outlays that should be expensed immediately.
Question: 10The types of assets that qualify for interest capitalization are
A. Assets that are being used in the earning activities of the reporting entity.
B. Assets that are ready for their intended use in the activities of the reporting entity.
C. Assets that are constructed for the reporting entity’s own use.
Answer (C) is correct.
Interest should be capitalized for (1) assets constructed or otherwise produced for an entity’s own use,
including those constructed or produced by others; (2) assets intended for sale or lease that are
constructed or produced as discrete projects (e.g., ships); and (3) certain equity-based investments. An
asset constructed for an entity’s own use qualifies for capitalization of interest if (1) relevant
expenditures have been made, (2) activities necessary to prepare the asset for its intended use are in
progress, and (3) interest is being incurred. The investee must have activities in progress necessary to
commence its planned principal operations and be expending funds to obtain qualifying assets for its
operations.
D. Inventories that are manufactured in large quantities on a continuing basis.
Question: 11An entity installed an assembly line in Year 1. Four years later, $100,000 was invested to automate
the line. The automation increased the market value and productive capacity of the assembly line but did not affect
its useful life. Proper accounting for the cost of the automation should be to
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A. Report it as an expense in Year 5.
B. Establish a separate account for the $100,000.
C. Allocate the cost of automation between the asset and accumulated depreciation accounts.
D. Debit the cost to the property, plant, and equipment account.
Answer (D) is correct.
Subsequent costs are added to the carrying amount of an item of PPE if it is probable that, as a result,
future economic benefits will be received, and the costs are reliably measurable. An extended useful
life, improved output quantity or quality, and reduced operating costs are all future economic benefits.
Question: 12A theme park purchased a new, exciting ride and financed it through the manufacturer. The
following facts pertain:
Purchase price
$800,000
Delivery cost
50,000
Installation cost
70,000
Cost of trial runs
40,000
Interest charges for first year
60,000
The straight-line method is to be used. Compute the depreciation on the equipment for the first year assuming an
estimated service life of 5 years.
A. $160,000
B. $184,000
C. $192,000
Answer (C) is correct.
Under the straight-line method, the annual depreciation expense for an asset equals the asset’s amount
(cost – residual value) divided by the asset’s estimated useful life. The cost of the asset includes its
price and the directly attributable costs of bringing it to working condition for intended use. Thus, the
depreciation expense is $192,000 [($800,000 purchase price + $50,000 delivery cost + $70,000
installation cost + $40,000 trial-run cost) ÷ 5-year estimated service life]. Borrowing costs incurred
after the asset is prepared for its intended use are expensed even if the allowed alternative treatment of
such costs is followed, and the asset otherwise satisfies the criteria for capitalization of such expenses.
D. $204,000
Question: 13Which of the following is not an appropriate basis for measuring the historical cost of property,
plant, and equipment?
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A. Delivery and handling costs and installation costs of a productive asset should be included in the asset’s
cost.
B. The cost should include the purchase price without a deduction for trade discounts.
Answer (B) is correct.
An asset classified under property, plant, and equipment is measured initially at cost. This amount
includes the purchase price and any directly attributable costs of bringing the asset to working
condition for its intended use. Directly attributable costs include costs of, for example, site preparation,
initial delivery and handling, installation, professional fees (e.g., those of architects and engineers), and
dismantling and removing the asset and restoring the site. The purchase price is determined by adding
any import fees and nonrefundable purchase taxes and subtracting any trade discounts and rebates.
C. The costs of improvements to equipment incurred after its acquisition should be added to the asset’s cost
if they provide future economic benefits exceeding the originally assessed standard of performance.
D. All costs incurred in the construction of a plant building, from excavation to completion, should be
considered as part of the asset’s cost.
Question: 14On January 1, Year 1, an entity purchased an abandoned quarry for $1,200,000 to be used as a
landfill to service its trash collection contracts with nearby cities for the next 20 years. The entity depletes the quarry
using the units-of-production method based on a surveyor’s measurements of volume of the quarry’s pit. This
amount was 500,000 cubic yards when purchased and 350,000 cubic yards at year-end Year 5. What is the net
amount that should be shown on the entity’s December 31, Year 5, statement of financial position for the quarry?
A. $1,200,000
B. $900,000
C. $840,000
Answer (C) is correct.
The units-of-production method allocates cost based on output. The net amount reported as an asset for
the quarry using this method is $840,000 [(350,000 cubic yards ÷ 500,000 total cubic yards) ×
$1,200,000].
D. $360,000
Question: 15A new machine has an initial cost of $300,000, an estimated useful life of 2,000 hours of use over a
3-year period, and an estimated residual value of $70,000. Usage rates are estimated as 500 hours in the first year,
700 hours in the second year, and 800 hours in the third year. Depreciation expense in Year 2 under the units-ofproduction method of depreciation will be
A. $57,500
B. $75,000
C. $80,500
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Answer (C) is correct.
Depreciation expense equals cost minus residual value, times the estimated hours of use in Year 2
divided by the total estimated hours of use. Thus, depreciation expense is $80,500 [($300,000 –
$70,000) × (700 hours ÷ 2,000 hours)].
D. $105,000
Question: 16In making a cash flow analysis of property, plant, and equipment (PPE), the internal auditor
discovered that depreciation expense for the period was $10,000. PPE with a cost of $50,000 and related
accumulated depreciation of $30,000 was sold for a gain of $1,000. If the carrying amount of PPE increased by
$80,000 during the period, how much PPE was purchased this period?
A. $91,000
B. $100,000
C. $110,000
Answer (C) is correct.
The carrying amount of the PPE account, net of accumulated depreciation, is increased by the cost of
purchases and decreased by the carrying amount of items of PPE sold and depreciation. The net PPE
decreased by the carrying amount of items sold, or $20,000 ($50,000 cost – $30,000 accumulated
depreciation), and by the $10,000 of depreciation. If PPE still increased by $80,000, $110,000
($30,000 total decrease + $80,000 increase) of equipment must have been purchased.
D. $119,000
Question: 17A company uses straight-line depreciation for financial reporting purposes, but uses accelerated
depreciation for tax purposes. Which of the following account balances would be lower in the financial statements
used for tax purposes than it would be in the general purpose financial statements?
A. Accumulated depreciation.
B. Cash.
C. Retained earnings.
Answer (C) is correct.
Because the tax basis uses an accelerated method, depreciation expense and accumulated depreciation
will be greater. Moreover, taxable income will be lower than financial net income. Consequently, taxbasis retained earnings will be less than that in the general purpose financial statements.
D. Gross property, plant, and equipment.
Question: 18All of the following would be included as part of the cost of a depreciable asset except the
A. Costs to level land to make it usable for the company’s purposes.
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Answer (A) is correct.
Site preparation costs [clearing, draining, filling, leveling the property, and razing existing buildings,
minus any proceeds (such as timber sales)] are costs of the land, not of the building to be constructed
on the land.
B. Freight costs to ship new equipment to the company’s facility.
C. Actual interest costs incurred during the construction of a new building.
D. Costs to construct a driveway on the company’s property.
Question: 19An entity purchased a truck for $38,600 to transport equipment to various job sites. For this
purpose, storage bins were welded to the truck bed at a cost of $1,700. The controller of the entity estimates the
useful life of the truck to be 5 years and the residual value to be $1,000. Using the double-declining balance method,
the depreciation expense on the truck for its second year of use is
A. $9,024
B. $9,264
C. $9,432
D. $9,672
Answer (D) is correct.
Under the double-declining balance method, the full cost of the asset, or $40,300 ($38,600 + $1,700),
is depreciated, but not below salvage value. Because the straight-line rate for a 5-year asset is 20%
(100% ÷ 5), the double-declining balance rate is 40% (20% × 2). The first year’s depreciation is
$16,120 ($40,300 × 40%), leaving a carrying amount for the second year of $24,180 ($40,300 –
$16,120). The second year’s depreciation is thus $9,672 ($24,180 × 40%).
Question: 20Which one of the following methods of depreciation will result in the lowest reported net income in
the early life of a depreciable asset?
A. Composite depreciation method.
B. Group depreciation method.
C. Straight-line depreciation method.
D. Sum-of-the-years’-digits depreciation method.
Answer (D) is correct.
Sum-of-the-years’-digits depreciation has the highest depreciation expense in the early years of an
asset’s life, resulting in lower net income.
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Question: 21A distributor of silk goods is in its first year of operation. The company has purchased ten
computers at $3,500 each with an estimated life of 6 years; five desks at $500 each with an estimated life of 10
years; and two word processors at $300 each, with an estimated life of 4 years. No residual value is anticipated for
any of these assets. The distributor wants to adopt a depreciation method that will be easy to use and reflect an
appropriate depreciation expense for the business each accounting period. The most appropriate method would be
A. Composite depreciation.
Answer (A) is correct.
Group and composite depreciation methods use the straight-line technique for an aggregate of assets.
The composite method is used for dissimilar assets.
B. Group depreciation.
C. Inventory method.
D. Replacement method.
Question: 22In which of the following situations is the units-of-production method of
depreciation most appropriate?
A. An asset’s service potential declines with use.
Answer (A) is correct.
The units-of-production depreciation method allocates asset cost based on the level of production. As
production varies, so will the credit to accumulated depreciation. Consequently, when an asset’s
service potential declines with use, the units-of-production method is the most appropriate method.
B. An asset’s service potential declines with the passage of time.
C. An asset is subject to rapid obsolescence.
D. An asset incurs increasing repairs and maintenance with use.
Question: 23Under IFRS, according to the revaluation model, an item of property, plant, and equipment must be
carried at
A. Cost minus any accumulated depreciation.
B. Cost minus residual value.
C. Fair value minus any subsequent accumulated depreciation and impairment losses.
Answer (C) is correct.
Under the revaluation model, if the fair value of an item of property, plant, and equipment can be
reliably measured, it must be carried subsequent to initial recognition at a revalued amount. This
amount is fair value at the date of the revaluation minus any subsequent accumulated depreciation and
impairment losses. The revaluation model is permitted by IFRS, not U.S. GAAP.
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D. The lower of cost or net realizable value.
Question: 24A company purchased a machine costing $125,000 for its manufacturing operations and paid
shipping costs of $20,000. The company spent an additional $10,000 testing and preparing the machine for use.
What amount should the company record as the cost of the machine?
A. $155,000
Answer (A) is correct.
The amount to be recorded as the acquisition cost of a machine includes all costs necessary to prepare
it for its intended use. Thus, the cost of a machine used in the manufacturing operations of a company
includes the cost of testing and preparing the machine for use and the shipping costs. The acquisition
cost is $155,000 ($125,000 + $20,000 + $10,000).
B. $145,000
C. $135,000
D. $125,000
Question: 25According to IFRS, which accounting policy may an entity apply to measure investment property in
periods subsequent to initial recognition?
A. Cost model or revaluation model.
B. Cost model or fair value model.
Answer (B) is correct.
An entity may choose either the cost model or the fair value model as its accounting policy. But it must
apply that policy to all of its investment property. Under the cost model, investment property is carried
at its cost minus any accumulated depreciation and impairment losses. Under the fair value model,
investment property is measured at fair value, and gain or loss from a change in its fair value is
recognized immediately in profit or loss.
C. Fair value model only.
D. Fair value model or revaluation model.
Question: 26An expenditure to install an improved electrical system is a
Capital Expenditure Revenue Expenditure
A. No Yes
B. No No
C. Yes No
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Answer (C) is correct.
A betterment (improvement) occurs when a replacement asset is substituted for an existing asset, and
the result is increased productivity, capacity, or expected useful life. If the improvement benefits future
periods, it should be capitalized.
D. Yes Yes
Question: 27A firm began operating January 1 and spent $900,000 in the first month of operations on the
following items:
January advertising campaign $ 40,000
Computer equipment
280,000
12-month insurance policy
120,000
January building rent
60,000
January salaries
340,000
Office supplies
10,000
Automobile
30,000
January utilities
20,000
Total
$ 900,000
The total cash expenditures that should be capitalized as property, plant, and equipment is
A. $80,000
B. $310,000
Answer (B) is correct.
The assets purchased that are capitalized as property, plant, and equipment (PPE) are the computer
equipment and automobile. Therefore, PPE is $310,000 ($280,000 + $30,000).
C. $370,000
D. $440,000
Question: 28Majesty Amusement Park recently installed a new thrill ride. Although this attraction has an
average life of 40 years, Majesty estimates that the ride will be popular for 15 years, at which point it will be
disassembled and replaced with a different ride. Park attendance is based upon the local economy, which is difficult
to predict. The method Majesty should use to depreciate this ride is
A. Declining balance.
B. Straight-line with a 15-year life.
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Answer (B) is correct.
Depreciation is the process of systematically and rationally allocating the depreciable cost of a tangible
capital asset over its expected useful life. Estimated useful life is an estimated period over which
services or economic benefits are expected to be obtained by the asset. Thus, the amusement park
should depreciate its asset over a 15-year life since that is the period over which it is expected to be
used.
C. Straight-line with a 40-year life.
D. Units-of-output.
Subunit 2: Impairment and Disposal of Long-Lived Assets
Question: 1An entity purchased a machine on January 1, Year 1, for $1,000,000. The machine had an estimated
useful life of 9 years and a residual value of $100,000. The entity uses straight-line depreciation. On December 31,
Year 4, the machine was sold for $535,000. The gain or loss that should be recorded on the disposal of this machine
is
A. $35,000 gain.
B. $65,000 loss.
Answer (B) is correct.
The accumulated depreciation was $400,000 {[($1,000,000 historical cost – $100,000 residual value) ÷
9 years estimated useful life] × 4 years}, so the carrying amount was $600,000 ($1,000,000 –
$400,000). Thus, the loss was $65,000 ($600,000 carrying amount – $535,000 sales price).
C. $365,000 loss.
D. $465,000 loss.
Fact Pattern: Blake Corporation has determined that one of its machines has experienced an
impairment in value. However, the company expects to continue to use the asset for another 3
full years because no active market exists for this machine. Selected information on the impaired
asset (on the date that impairment was determined to exist) is provided below.
Original cost of the machine
$22,000
Carrying amount of the machine
20,000
Undiscounted future cash flows expected to be generated by the machine
15,000
Fair value of the machine (determined by calculating the present value of the future cash flows
expected to be generated by the machine)
12,000
Question: 2After recognition of the impairment loss, Blake’s carrying amount of the impaired asset will be
A. $0
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B. $12,000
Answer (B) is correct.
A long-lived asset (asset group) is impaired when its carrying amount is greater than its fair value.
However, a loss equal to this excess is recognized for the impairment only when the carrying amount is
not recoverable. The carrying amount is not recoverable when it exceeds the sum of the undiscounted
cash flows expected from the use and disposition of the asset (asset group).
The asset is impaired because its carrying amount ($20,000) exceeds its fair value ($12,000). This loss
($20,000 – $12,000 = $8,000) is recognized in full because the carrying amount ($20,000) exceeds the
undiscounted cash flows from the asset ($15,000). Thus, the carrying amount is reduced to $12,000.
C. $14,000
D. $15,000
Fact Pattern: Blake Corporation has determined that one of its machines has experienced an
impairment in value. However, the company expects to continue to use the asset for another 3
full years because no active market exists for this machine. Selected information on the impaired
asset (on the date that impairment was determined to exist) is provided below.
Original cost of the machine
$22,000
Carrying amount of the machine
20,000
Undiscounted future cash flows expected to be generated by the machine
15,000
Fair value of the machine (determined by calculating the present value of the future cash flows
expected to be generated by the machine)
12,000
Question: 3What is the amount of the impairment loss to be recorded by Blake?
A. $3,000
B. $5,000
C. $7,000
D. $8,000
Answer (D) is correct.
The impairment loss is the difference between the carrying amount and fair value of the asset
($20,000 – $12,000 = $8,000).
Question: 4An entity sells a piece of machinery, for cash, prior to the end of its estimated useful life. The sale
price is less than the carrying amount of the asset on the date of sale. The entry that the entity uses to record the sale
is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A.
Cash
Accumulated depreciation -- machinery
Loss on disposal of machinery
Machinery
Answer (A) is correct.
Cash is debited for the amount of the sale proceeds. Machinery and the related accumulated
depreciation are eliminated by a credit and a debit, respectively. Because the sale price was less than
the carrying amount of the asset on the date of sale, a loss on disposal should be recognized in net
income or loss.
B.
Cash
Accumulated depreciation -- machinery
Gain on disposal of machinery
Machinery
C.
Cash
Expense -- disposal of machinery
Accumulated depreciation -- machinery
Machinery
D.
Cash
Machinery
Accumulated depreciation -- machinery
Gain on disposal of machinery
Question: 5An entity purchased a machine for $700,000. The machine was depreciated using the straight-line
method and had a residual value of $40,000. The machine was sold on December 31, Year 1. The accumulated
depreciation related to the machine was $495,000 on that date. The entity reported a gain on the sale of the machine
of $75,000 in its income statement for the fiscal year ending December 31, Year 1. The selling price of the machine
was
A. $280,000
Answer (A) is correct.
The selling price minus the carrying amount of the machine equals the gain or loss on disposal. The
carrying amount equals $205,000 ($700,000 historical cost – $495,000 accumulated depreciation).
Thus, the selling price was $280,000 ($205,000 + $75,000 gain).
B. $240,000
C. $205,000
D. $115,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 6What is the journal entry recorded upon the sale of an item of property, plant, and equipment (PPE)
that was sold for cash in excess of its carrying amount?
A. No journal entry is required.
B. Debit cash
Debit accumulated depreciation
Debit income on disposal of PPE
Credit PPE
C. Debit cash
Debit PPE
Credit accumulated depreciation
Credit income on disposal of PPE
D. Debit cash
Debit accumulated depreciation
Credit PPE
Credit income on disposal of PPE
Answer (D) is correct.
The journal entry to record the sale of an item of PPE for cash in excess of its carrying amount should
debit the cash account to record the sale proceeds received. Accumulated depreciation should be
eliminated by debiting an amount equal to depreciation accumulated up to the start of the current
accounting period plus any depreciation that has accumulated between the start of the current period
and the date of disposal. Finally, the PPE account should be credited to eliminate the original cost of
the asset. The gain should be recorded as a credit and recognized as income on the income statement.
Question: 7An entity sold a depreciable asset in the middle of the fifth year of its estimated 10-year useful life.
The original cost of the asset was $100,000, and it was being depreciated on the straight-line basis. If the asset was
sold for $80,000, the gain on the sale will be
A. $20,000
B. $25,000
Answer (B) is correct.
The gain on the sale is the difference between the sale proceeds and the carrying amount of the asset
(its remaining undepreciated cost). Depreciation must be taken up to the time of sale. Assuming that
residual value is $0, annual depreciation is $10,000 ($100,000 ÷ 10 years). Thus, the gain is $25,000
{$80,000 sale proceeds – [$100,000 historical cost – ($10,000 × 4.5 years)]}.
C. $30,000
D. $35,000
Question: 8To determine whether to recognize the impairment of a depreciable fixed asset, a company must
compare the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Carrying amount of the asset and the present value of the future cash flows expected to be generated by
the asset.
B. Original cost of the asset and the fair value of the asset.
C. Carrying amount of the asset and the undiscounted future cash flows expected to be generated by the
asset.
Answer (C) is correct.
A long-lived asset (asset group) is impaired when its carrying amount is greater than its fair value.
However, a loss equal to this excess is recognized for the impairment only when the carrying amount is
not recoverable. The carrying amount is not recoverable when it exceeds the sum of the undiscounted
cash flows expected from the use and disposition of the asset (asset group).
D. Original cost of the asset and the carrying amount of the asset.
Question: 9Which of the following statements is true regarding impairment of long-lived assets?
A. U.S. GAAP requires a one-step impairment test, and IFRS requires a two-step impairment test.
B. Both IFRS and U.S. GAAP permit reversal of an impairment loss in subsequent periods.
C. Both IFRS and U.S. GAAP prohibit reversal of an impairment loss in subsequent periods.
D. Under U.S. GAAP, but not IFRS, reversal of an impairment loss in subsequent periods is prohibited.
Answer (D) is correct.
Under IFRS, an impairment loss on an asset may be reversed in subsequent periods if a change in the
estimates used to measure the recoverable amount has occurred. But an impairment loss recognized for
goodwill must not be reversed. Under U.S. GAAP, a previously recognized impairment loss must not
be reversed.
Question: 10An entity applies IFRS. On December 31, Year 1, it estimates the following information regarding
its headquarters building:
Fair value
$100,000
Cost to sell
$15,000
Value in use
$90,000
Residual value
$17,000
Net realizable value $82,000
According to the information above, what is the recoverable amount of the headquarters building on December 31,
Year 1?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $85,000
B. $90,000
Answer (B) is correct.
The recoverable amount of an asset is the higher of its fair value minus costs to sell and its value in
use. Thus, the recoverable amount is $90,000 [$90,000 value in use > ($100,000 – $15,000) FV minus
costs to sell].
C. $100,000
D. $82,000
Question: 11Testing for possible impairment of a long-lived asset (asset group) that an entity expects to hold
and use is required
A. At each interim and annual balance sheet date.
B. At annual balance sheet dates only.
C. Periodically.
D. Whenever events or changes in circumstances indicate that its carrying amount may not be recoverable.
Answer (D) is correct.
A long-lived asset (asset group) is tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable. The carrying amount is not
recoverable when it exceeds the sum of the undiscounted cash flows expected to result from the use
and disposition of the asset (asset group). If the carrying amount is not recoverable, an impairment loss
is recognized equal to the excess of the carrying amount over the fair value.
Question: 12A company has a long-lived asset with a carrying value of $120,000, expected future cash flows of
$130,000, present value of expected future cash flows of $100,000, and a market value of $105,000. What amount
of impairment loss should be reported?
A. $0
Answer (A) is correct.
An impairment loss is recognized when a long-lived asset’s carrying amount exceeds the sum of its
undiscounted cash flows. Because the sum of the undiscounted cash flows ($130,000) exceeds the
carrying amount ($120,000), the carrying amount is recoverable. Thus, no impairment is recognized.
B. $5,000
C. $15,000
D. $20,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 13An impairment loss on a long-lived asset (asset group) to be held and used is reported by a business
enterprise in
A. Discontinued operations.
B. Extraordinary items.
C. Other comprehensive income.
D. Income from continuing operations.
Answer (D) is correct.
An impairment loss is included in income from continuing operations before income taxes by a
business enterprise (income from continuing operations in the statement of activities by a not-for-profit
organization). When a subtotal for “income from operations” is reported, the impairment loss is
included.
Question: 14Last year, a firm reduced the carrying amount of its long-lived assets used in operations from
$120,000 to $100,000, in connection with its annual impairment review. During the current year, the firm
determined that the fair value of the same assets had increased to $130,000. Under U.S. GAAP, what amount should
the firm record as restoration of previously recognized impairment loss in the current year’s financial statements?
A. $0
Answer (A) is correct.
A previously recognized impairment loss may not be reversed under U.S. GAAP. Under IFRS, an
impairment loss (carrying amount > recoverable amount) on an asset (except goodwill) may be
reversed if a change in the estimates used to measure the recoverable amount has occurred.
Furthermore, IFRS permit an item of property, plant, and equipment to be carried at a revalued amount
if its fair value can be measured reliably. Thus, an increase in excess of the prior carrying amount is
permitted by IFRS.
B. $10,000
C. $20,000
D. $30,000
Question: 15Under IFRS, an asset is impaired when its carrying amount exceeds its recoverable amount. The
recoverable amount of an asset is
A. The lower of its fair value plus cost to sell or value in use.
B. The greater of its fair value plus cost to sell or value in use.
C. The lower of its fair value minus cost to sell or value in use.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. The greater of its fair value minus cost to sell or value in use.
Answer (D) is correct.
The recoverable amount of an asset is the greater of its fair value minus cost to sell or value in use.
Value in use is the present value of the asset’s expected cash flows. The recognized impairment loss is
the excess of the asset’s carrying amount over its recoverable amount.
Subunit 3: Intangible Assets
Question: 1A recognized intangible asset is amortized over its useful life
A. Unless the pattern of consumption of the economic benefits of the asset is not reliably determinable.
B. If that life is determined to be finite.
Answer (B) is correct.
A recognized intangible asset is amortized over its useful life if that useful life is finite, that is, unless
the useful life is determined to be indefinite. The useful life of an intangible asset is indefinite if no
foreseeable limit exists on the period over which it will contribute, directly or indirectly, to the
reporting entity’s cash flows.
C. Unless the precise length of that life is not known.
D. If that life is indefinite but not infinite.
Question: 2A corporation purchased a patent at the beginning of Year 1 for $22,100 that was to be amortized
over 17 years. On July 1 of Year 8, the corporation incurred legal costs of $11,400 to successfully defend the patent.
The amount of amortization expense that the corporation should record for Year 8 is
A. $2,500
B. $1,971
C. $1,900
Answer (C) is correct.
The corporation will amortize the cost of the patent on a straight-line basis at the rate of $1,300 per
year ($22,100 ÷ 17). The costs of a successful legal defense of a patent are capitalized and amortized
over the shorter of the remaining legal life or the estimated useful life of the patent. Because the legal
costs to defend the patent were incurred when the patent had 9.5 years of life remaining, they will be
amortized at a rate of $1,200 per year ($11,400 ÷ 9.5). Because Year 8 only includes a half year’s
depreciation for the legal costs, total amortization expense for that year is $1,900 ($1,300 + $600).
D. $1,300
Question: 3Which of the following costs associated with an internally developed patent should be capitalized?
Research and
Patent
Development Registration
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. No Yes
Answer (A) is correct.
Generally, R&D costs are expensed as incurred. Legal fees and registration fees are excluded from the
definition of R&D. Thus, the patent registration fees should be capitalized as a cost associated with an
internally developed patent. The patent’s R&D costs should have been expensed as they were incurred.
B. No No
C. Yes No
D. Yes Yes
Question: 4On July 1, a company acquired a patent on its new manufacturing process, which streamlines its
production operation. The cost of the patent was $17,000, and the company expects that the useful life of the new
process will be 10 years, although the legal life of the patent is 17 years. The company is a calendar-year corporation
and is preparing its December 31 Statement of Financial Position. At which amount should the patent be reported at
December 31 of the year of acquisition?
A. $15,300
B. $16,000
C. $16,150
Answer (C) is correct.
A patent is amortized over the shorter of its useful life or legal life, so annual amortization on this
patent is $1,700 ($17,000 ÷ 10 years). The depreciation expense for the year of acquisition is $850
[$1,700 × (6 ÷ 12 months)]. The patent should therefore be reported at December 31 at $16,150
($17,000 – $850).
D. $16,500
Question: 5Which of the following is not considered to be an intangible asset?
A. Goods on consignment.
Answer (A) is correct.
An intangible asset is an identifiable nonmonetary (nonfinancial) asset without physical
substance. Inventory is a tangible asset. Thus, goods on consignment are not intangible assets.
B. Patents.
C. Copyrights.
D. Trademarks.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 6Which of the following expenditures qualifies for asset capitalization?
A. Cost of materials used in prototype testing.
B. Costs of testing a prototype and modifying its design.
C. Salaries of engineering staff developing a new product.
D. Legal costs associated with obtaining a patent on a new product.
Answer (D) is correct.
Patents may be purchased or developed internally. The initial capitalized cost of a purchased patent is
normally the fair value of the consideration given, that is, its purchase price plus incidental costs, such
as registration and attorney’s fees. Internally developed patents are less likely to be capitalized because
related R&D costs generally are expensed when incurred. Thus, only relatively minor costs can be
capitalized, for example, patent registration fees and legal fees.
Question: 7During the year just ended, a company incurred research and development costs of $136,000 in its
laboratories relating to a patent that was granted on July 1. Costs of registering the patent equaled $34,000. The
patent’s legal life is 20 years, and its estimated economic life is 10 years. In its December 31 balance sheet, what
amount should the company report for the patent, net of accumulated amortization?
A. $32,300
Answer (A) is correct.
R&D costs generally are expensed as incurred. However, legal work in connection with patent
applications or litigation and the sale or licensing of patents are specifically excluded from the
definition of R&D. Hence, the legal costs of filing a patent should be capitalized. The patent should be
amortized over its estimated economic life of 10 years. Amortization for the year equals $1,700
[($34,000 ÷ 10) × (6 ÷ 12)]. Thus, the reported amount of the patent at year end equals $32,300
($34,000 – $1,700).
B. $33,150
C. $161,500
D. $165,000
Question: 8A purchased patent has a remaining legal life of 15 years. It should be
A. Expensed in the year of acquisition.
B. Amortized over 15 years regardless of its useful life.
C. Amortized over its useful life if less than 15 years.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
The amortization period for an intangible asset distinct from goodwill is the shorter of its useful life or
the legal life remaining after acquisition.
D. Amortized over 40 years.
Question: 9Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent
measurement only if
A. The useful life of the intangible asset can be reliably determined.
B. An active market exists for the intangible asset.
Answer (B) is correct.
An intangible asset is carried at cost minus any accumulated amortization and impairment losses, or at
a revalued amount. The revaluation model is similar to that for items of PPE (initial recognition of an
asset at cost). However, fair value must be determined based on an active market.
C. The cost of the intangible asset can be measured reliably.
D. The intangible asset is a monetary asset.
Question: 10Legal fees incurred by a company in defending its patent rights should be capitalized when the
outcome of litigation is
Successful Unsuccessful
A. Yes Yes
B. Yes No
Answer (B) is correct.
Legal fees incurred in the successful defense of a patent should be capitalized as part of the cost of the
patent and then amortized over its remaining useful life because that useful life is finite. Legal fees
incurred in an unsuccessful defense should be expensed as the costs are incurred.
C. No No
D. No Yes
Question: 11Gray Co. was granted a patent on January 2, Year 5, and appropriately capitalized $45,000 of
related costs. Gray was amortizing the patent over its estimated useful life of 15 years. During Year 8, Gray paid
$15,000 in legal costs in successfully defending an attempted infringement of the patent. After the legal action was
completed, Gray sold the patent to the plaintiff for $75,000. Gray’s policy is to take no amortization in the year of
disposal. In its Year 8 income statement, what amount should Gray report as gain from sale of patent?
A. $15,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $24,000
Answer (B) is correct.
The patent was capitalized at $45,000 in Year 5. Annual amortization of $3,000 ($45,000 ÷ 15 years)
for Year 5, Year 6, and Year 7 reduced the carrying amount to $36,000. The $15,000 in legal costs for
successfully defending an attempted infringement may be capitalized, which increases the carrying
amount of the patent to $51,000 ($36,000 + $15,000). Accordingly, the gain from the sale is $24,000
($75,000 – $51,000).
C. $27,000
D. $39,000
Question: 12Which of the following assets, if any, acquired this year in an exchange transaction is(are)
potentially amortizable for public companies?
Goodwill Trademarks
A. No No
B. No Yes
Answer (B) is correct.
Goodwill is tested for impairment at least annually but is never amortized for public companies.
Trademarks, however, may be amortized but only if they have finite useful lives.
C. Yes Yes
D. Yes No
Question: 13Goodwill should be tested for value impairment at which of the following levels?
A. Each identifiable long-term asset.
B. Each reporting unit.
Answer (B) is correct.
The cost of an acquired entity minus the net amount assigned to assets acquired and liabilities assumed
is goodwill. Goodwill is not amortized. However, goodwill is assigned to a reporting unit that
benefited from the business combination for the purpose of testing impairment. Testing occurs each
year at the same time, but different reporting units may be tested at different times. Furthermore,
additional testing also may be indicated. Potential impairment of goodwill is deemed to exist only if
the carrying amount (including goodwill) of a reporting unit is greater than its fair value. Thus,
accounting for goodwill is based on the units of the combined entity into which the acquired entity was
absorbed. A reporting unit is an operating segment or one of its components, that is, one level below an
operating segment. A component qualifies as a reporting unit if (1) it is a business for which discrete
financial information is available, and (2) segment management regularly reviews its operating results.
However, similar components are aggregated. These provisions, including the determination of
operating segments, apply even if the reporting entity is not required to report segment information.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Each acquisition unit.
D. Entire business as a whole.
Question: 14A company should recognize goodwill in its balance sheet at which of the following points?
A. Costs have been incurred in the development of goodwill.
B. Goodwill has been created in the purchase of a business.
Answer (B) is correct.
Goodwill can be recognized only in a business combination. Goodwill is an asset representing the
future economic benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized.
C. The company expects a future benefit from the creation of goodwill.
D. The fair market value of the company’s assets exceeds the book value of the company’s assets.
Question: 15Which one of the following statements is correct about the reconciliation of U.S. GAAP and
International Financial Reporting Standards (IFRS)?
A. The costs of development generally are expensed under U.S. GAAP, but are capitalized under IFRS if
they meet specific criteria.
Answer (A) is correct.
Under IFRS, (1) costs incurred during the research phase of an internal project are expensed as
incurred since the company cannot demonstrate that an intangible asset exists that will generate
probable future economic benefits; and (2) costs incurred during the development phase of an internal
project can be capitalized and recognized as an intangible asset if, and only if, the company can
demonstrate all of the following:
1.
The technical feasibility to complete the intangible asset
2.
Its intention to complete and use or sell the intangible asset
3.
Its ability to sell or use the intangible asset
4.
Availability of resources to complete and use or sell the intangible asset
5.
The way in which the asset will generate probable future economic benefits
6.
Its ability to reliably measure expenditures attributable to the asset
B. The costs of research must be expensed under U.S. GAAP, but are capitalized under IFRS if they meet
specific criteria.
C. All costs of research and development must be expensed under both U.S. GAAP and IFRS.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Internally generated goodwill may not be capitalized under U.S. GAAP, but it may be capitalized under
IFRS.
Question: 16How does IFRS differ from U.S. GAAP with respect to accounting for development costs?
A. U.S. GAAP does not allow capitalization of development costs, even after technically feasible, whereas
IFRS does.
Answer (A) is correct.
Under U.S. GAAP, development costs must be expensed as incurred and are thus never capitalized.
Under IFRS, development costs may result in recognition of an intangible asset if the entity can
demonstrate the (1) technical feasibility of completion of the asset, (2) intent to complete, (3) ability to
use or sell the asset, (4) way in which it will generate probable future economic benefits, (5)
availability of resources to complete and use or sell the asset, and (6) ability to measure reliably
expenditures attributable to the asset.
B. U.S. GAAP requires capitalization of development costs, whereas IFRS makes capitalization of these
costs optional.
C. U.S. GAAP treats development costs as part of goodwill, whereas IFRS treats these costs as an intangible
asset.
D. U.S. GAAP requires expensing of all development costs and IFRS requires capitalizing all development
costs.
Question: 17Which one of the following statements correctly describes the accounting treatment of research and
development costs (R&D) under U.S. GAAP and IFRS?
A. Both U.S. GAAP and IFRS allow for costs of R&D to be capitalized.
B. Neither U.S. GAAP nor IFRS allow for costs of R&D to be capitalized.
C. U.S. GAAP allow for the capitalization of the costs of R&D, and IFRS require R&D costs to be
expensed.
D. U.S. GAAP require R&D to be expensed, and IFRS require research costs to be expensed but allow for
the capitalization of the development costs.
Answer (D) is correct.
U.S. GAAP require that R&D costs be expensed as incurred, while IFRS separate research costs from
development costs. Under IFRS, research costs are to be expensed, while development costs can be
capitalized.
Subunit 4: Leases
Question: 1If the lease term is less than 12 months, when may a lessee elect not to recognize the right-of-use
asset and lease liability?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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A. The lease transfers ownership of the leased asset to the lessee by the end of the lease term.
B. The present value of the sum of (1) the lease payments and (2) any residual value guaranteed by the
lessee is 90% or more of the fair value of the leased asset.
C. The lease does not include a purchase option that the lessee is reasonably certain to exercise.
Answer (C) is correct.
As an accounting policy for short-term leases, a lessee may elect not to recognize the right-of-use asset
and lease liability if, at the commencement date, the lease (1) has a term of 12 months or less and (2)
does not include a purchase option that the lessee is reasonably certain to exercise.
D. The term of the lease is for the major part of the remaining economic life of the leased asset.
Question: 2On January 1, Year 1, Lessee entered into a 4-year lease that does not transfer ownership at the end
of the lease term. It also includes a purchase option not reasonably expected to be exercised. The leased asset has
(1) a 6-year economic life, (2) no residual value, and (3) a present value of the annual lease payments equal to 75%
of the leased asset’s fair value. If the leased asset has no alternative use to the lessor at the end of the lease term,
how should Lessee classify the lease?
A. Operating.
B. Sales-type.
C. Short-term.
D. Finance.
Answer (D) is correct.
A lessee classifies a lease as a finance lease or an operating lease. A finance lease meets at least one of
five classification criteria. The lease does not (1) transfer ownership of the leased asset to the lessee or
(2) contain a purchase option the lessee is reasonably certain to exercise. (3) The lease term also is for
67% (4 years ÷ 6 years) of the leased asset’s remaining economic life, not a major part (at least 75%).
(4) Furthermore, the present value of the sum of the lease payments is 75% of the leased asset’s fair
value, not substantially all (at least 90%). However, (5) the leased asset is so specialized that it is
expected to have no alternative use to the lessor at the end of the lease term. Consequently, a criterion
for classification of the lease as a finance lease is met.
Question: 3The amount recorded initially by the lessee as a lease liability should normally
A. Exceed the total of the lease payments.
B. Exceed the present value of the lease payments at the beginning of the lease.
C. Equal the total of the lease payments.
D. Equal the present value of the lease payments at the beginning of the lease.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Answer (D) is correct.
The lessee records a lease as an asset and a liability at the present value of the lease payments. The
discount rate is the lessor’s implicit interest rate (if known) or the lessee’s incremental borrowing rate
of interest. Lease payments include the rental payments required during the lease term and the amount
of a purchase option if the lessee is reasonably certain to exercise it. If no such option exists, the lease
payments equal the sum of (1) the rental payments, (2) the amount of residual value guaranteed by the
lessee, and (3) any nonrenewal penalty imposed.
Question: 4In a lease that is recorded as a sales-type lease by the lessor, interest revenue
A. Should be recognized in full as revenue at the lease’s inception.
B. Should be recognized over the period of the lease using the straight-line method.
C. Should be recognized over the period of the lease using the effective-interest method.
Answer (C) is correct.
In a sales-type lease, each periodic lease payment received has two components: interest income and
the reduction of the net investment in the lease. Interest income is calculated using the effective
interest method. It equals the carrying amount of the net investment in the lease at the beginning of the
period times the discount rate implicit in the lease.
D. Does not arise.
Question: 5Glade Co. leases computer equipment to customers under sales-type leases. The equipment has no
residual value at the end of the lease, and the leases do not contain purchase options. At lease inception, the fair
value of the leased computer equipment equals its carrying amount. Glade wishes to earn 8% interest on a 5-year
lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for 5 years is
4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?
A. $51,600
Answer (A) is correct.
To earn 8% interest over the lease term, the annual payment must be $75,000 ($323,400 fair value at
the inception of the lease ÷ 4.312 annuity factor). Given no residual value and no purchase option, total
lease payments over the lease term will be $375,000 ($75,000 payment × 5 years). The entire
difference between the gross lease payments received ($375,000) and their present value ($323,400 net
investment in the lease) is the interest revenue recognized over the entire lease term ($375,000 –
$323,400 = $51,600).
B. $75,000
C. $129,360
D. $139,450
Question: 6Wall Co. leased office premises to Fox, Inc., for a 5-year term beginning January 2, Year 4. Under
the terms of the operating lease, rent for the first year is $8,000 and rent for Years 2 through 5 is $12,500 per annum.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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However, as an inducement to enter the lease, Wall granted Fox the first 6 months of the lease rent-free. In its
December 31, Year 4, income statement, what amount should Wall report as rental income?
A. $12,000
B. $11,600
C. $10,800
Answer (C) is correct.
For an operating lease, lease payments are recognized as rental income by the lessor. If rental
payments vary from a straight-line basis, rental income should be recognized over the full lease term
on a straight-line basis. Thus, an equal amount of rental income is recognized each period over the
lease term. Wall therefore should report rental revenue of $10,800 {[$8,000 – ($8,000 × .5) + ($12,500
× 4)] ÷ 5 years}.
D. $8,000
Question: 7On January 1, Year 1, Frost Co. entered into a 2-year lease agreement with Ananz Co. to lease a new
computer. The lease term begins on January 1, Year 1, and ends on December 31, Year 2. The lease agreement
requires Frost to pay Ananz two annual lease payments of $8,000. The present value of the minimum lease
payments is $13,000. Which of the following circumstances would require Frost to classify and account for the
arrangement as a finance lease?
A. The economic life of the computer is 3 years.
B. The fair value of the computer on January 1, Year 1, is $14,000.
Answer (B) is correct.
A lease is classified as a finance lease by the lessee if, at lease commencement date, any one of five
criteria is satisfied. One criterion is that the present value of the sum of the lease payments and any
residual value guaranteed by the lessee equals or exceeds substantially all (generally considered to be
at least 90%) of the fair value of the leased asset. Consequently, if the fair value of the computer on
January 1, Year 1, is $14,000, the lease is a finance lease because the present value of the lease
payments is 93% ($13,000 ÷ $14,000) of the fair value of the computer.
C. Frost does not have the option of purchasing the computer at the end of the lease term.
D. Ownership of the computer remains with Ananz throughout the lease term and after the lease ends.
Question: 8Star Company has entered into a 3-year lease agreement with Bell Corp. (lessor) for the use of 10
new commercial copy machines. The present value (PV) of the sum of the lease payments is $72,000. The total fair
value of the machines on the lease commencement date is $120,000. An option to purchase the machines is not part
of the lease agreement, and the copy machines will be returned to Bell at the end of the lease period. The machines
are not specialized, and Bell will be able to lease or sell the leased machines after they are returned. The estimated
useful life is 7 years. The residual value of $6,500 per machine is not guaranteed by Star or by a third party. It is
probable that all lease payments will be collected. How should the lease be classified by the lessor?
A. Operating lease.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
A lease is classified as a sales-type lease by the lessor and as a finance lease by the lessee if, at lease
commencement, at least one of five criteria is met: (1) the lease transfers ownership of the leased asset
to the lessee by the end of the lease term, (2) the lease includes an option to purchase the leased asset
that the lessee is reasonably certain to exercise, (3) the lease term is for the major part of the remaining
economic life of the leased asset (generally considered to be 75% or more), (4) the PV of the sum of
(a) the lease payments and (b) any residual value guaranteed by the lessee equals or exceeds
substantially all of the fair value of the leased asset (generally considered to be 90% or more), and (5)
the leased asset is so specialized that it is expected to have no alternative use to the lessor at the end of
the lease term. The lease therefore must be classified as an operating lease or a direct financing lease
by the lessor because, at lease commencement, none of the five criteria are met. The lease also does not
meet the fair value criterion classification for a direct financing lease. Accordingly, the lease is
classified as an operating lease.
B. Sales-type lease.
C. Finance lease.
D. Direct financing lease.
Question: 9On January 1, Emerald Co. entered into a 10-year noncancelable lease requiring year-end payments
of $90,000. Emerald’s incremental borrowing rate is 12%, while the lessor’s implicit interest rate, known to
Emerald, is 10%. Present value factors for an ordinary annuity for 10 periods are 6.145 at 10% and 5.650 at 12%.
Ownership of the property remains with the lessor at expiration of the lease. There is no option to purchase the
leased property. The leased property has an estimated economic life of 15 years. The fair value of the leased
property is $1.2 million. What amount should Emerald recognize for the right-of-use asset on January 1?
A. $900,000
B. $553,050
Answer (B) is correct.
Under both finance and operating leases, at the lease commencement date, a lessee must recognize a
lease liability and a right-of-use asset. At the lease commencement date, a right-of-use asset is
measured at the amount at which the lease liability was recognized (i.e., the present value of the lease
payments to be made over the lease term) plus initial direct costs incurred by the lessee. The rate
implicit in the lease, if it is known to the lessee, of 10% is the discount rate for the lease. Thus, on
January 1, the right-of-use asset recognized by Emerald is $553,050 ($90,000 × 6.145).
C. $508,500
D. $0
Question: 10Cott, Inc., prepared an interest amortization table for a 5-year lease payable with a purchase option
having an exercise price of $2,000, effective at the end of the lease. At the end of the 5 years, the balance in the
leases payable column of the spreadsheet was zero. Cott has asked Grant, CPA, to review the spreadsheet to
determine the error. Only one error was made on the spreadsheet. Which of the following statements represents the
best explanation for this error?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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A. The beginning present value of the lease did not include the present value of the payment called for by
the purchase option.
Answer (A) is correct.
Cott (the lessee) initially must record a finance lease by debiting a right-of-use asset and crediting a
lease liability equal to the present value of the lease payments, which consist of (1) the rental payments
and (2) the amount of the exercise price of the option to purchase the leased asset that the lessee is
reasonably certain to exercise. The effect of including the present value of the purchase option is that,
at the end of the 5-year amortization period, the lease liability should equal that amount.
B. Cott subtracted the annual interest amount from the lease payable balance instead of adding it.
C. The present value of the payment called for by the purchase option was subtracted from the present value
of the annual payments.
D. Cott discounted the annual payments as an ordinary annuity, when the payments actually occurred at the
beginning of each period.
Question: 11On December 29, Year 1, Action Corp. signed a 7-year lease for an airplane to transport its
professional sports team around the country. The airplane’s fair value was $841,500. Action made the first annual
lease payment of $153,000 on December 31, Year 1. Action’s incremental borrowing rate was 12%, and the interest
rate implicit in the lease, which was known by Action, was 9%. The following are the rounded present value factors
for an annuity due:
9% for 7 years 5.5
12% for 7 years 5.1
What amount should Action report as a lease liability in its December 31, Year 1, balance sheet?
A. $841,500
B. $780,300
C. $688,500
Answer (C) is correct.
The lease liability is recorded at the present value of the lease payments. The lease should be recorded
at the present value of lease payments discounted at the implicit rate of 9% because this rate is known
by the lessee. The amount is $841,500 ($153,000 × 5.5), which then must be reduced by the payment
made at the inception of the lease of $153,000. The lease liability therefore should be $688,500
($841,500 – $153,000) in the December 31, Year 1, balance sheet.
D. $627,300
Question: 12Quick Company’s lease payments are made at the end of each period. Quick’s liability for a finance
lease will be reduced periodically by the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Lease payment minus the portion of the lease payment allocable to interest.
Answer (A) is correct.
The lease liability consists of the present value of the lease payments. The lease liability is reduced by
the portion of the lease payment attributable to the lease liability. This amount is the lease payment
minus the interest component of the payment. Thus, the liability is decreased by the lease payment
each period minus the portion of the payment allocable to interest.
B. Lease payment plus the amortization of the related asset.
C. Lease payment minus the amortization of the related asset.
D. Lease payment.
Question: 13On January 1, Year 4, Babson, Inc., leased two automobiles for executive use. The lease requires
Babson to make 5 annual payments of $13,000 beginning January 1, Year 4. At the end of the lease term, December
31, Year 8, Babson guarantees the residual value of the automobiles will total $30,000. Babson estimates that it will
probably owe only $10,000 at the end of the lease term under the residual value guarantee. The interest rate implicit
in the lease is 9%. Present value factors for the 9% rate implicit in the lease are as follows:
For an annuity due with 5 payments
4.240
For an ordinary annuity with 5 payments 3.890
Present value of $1 for 5 periods
0.650
Babson’s recorded lease liability immediately after the first required payment should be
A. $48,620
Answer (A) is correct.
The lessee records a lease as an asset and a liability at the present value of the lease payments. If no
purchase option exists, the lease payments equal the sum of (1) the rental payments, (2) the amount
probable of being owed by the lessee under the residual value guarantee, and (3) any nonrenewal
penalty imposed. Accordingly, the lease liability recorded at the inception of the lease was $61,620
[($13,000 annual payment × 4.240 PV of an annuity due at 9% for 5 periods) + ($10,000 amount
probable of being owed under the residual value guarantee × .650 PV of $1 at 9% for 5 periods)]. The
first required payment reduced this amount to $48,620 ($61,620 - $13,000).
B. $44,070
C. $35,620
D. $61,620
Question: 14On January 2, Cole Co. signed an 8-year noncancelable lease for a new machine, requiring $15,000
annual payments at the beginning of each year. The machine has a useful life of 12 years with no salvage value.
Title passes to Cole at the lease expiration date. Cole uses straight-line amortization for all of its plant assets.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Aggregate lease payments have a present value on January 2 of $108,000, based on an appropriate rate of interest.
For the current year, Cole should record amortization expense for the right-of-use asset at
A. $0
B. $9,000
Answer (B) is correct.
This lease is classified as a finance lease because the leased machine is transferred to Cole at the end of
the lease term. The lease liability and right-of-use (ROU) asset are initially recognized at the present
value of the lease payments of $108,000. The lessee amortizes the ROU on a straight-line basis. When,
at the end of the lease term, the ownership of the leased asset is transferred to the lessee or the lessee is
reasonably certain to exercise the purchase option, the amortization period is the useful life of the
leased asset. Thus, current amortization expense is $9,000 [($108,000 right-of-use asset – $0 salvage
value) ÷ 12-year economic life].
C. $13,500
D. $15,000
Question: 15On January 1, Year 4, Mollat Co. signed a 6-year lease for equipment having a 10-year economic
life. The present value of the monthly equal lease payments equaled 80% of the equipment’s fair value. The lease
agreement provides for neither a transfer of title to Mollat nor a purchase option. In its Year 4 income statement,
Mollat should report
A. Lease expense equal to the Year 4 lease payments.
Answer (A) is correct.
The lease is classified as an operating lease by Mollat. No criterion for classification as a financial
lease is met: (1) The ownership of the leased asset is transferred to the lessee by the end of the lease
term, (2) the lease includes an option to purchase the leased asset that the lessee is reasonably certain
to exercise, (3) the lease term is for the major part (generally considered as 75%) of the remaining
economic life of the leased asset, (4) the present value of the sum of the lease payments and any
residual value guaranteed by the lessee equals or exceeds substantially all of the fair value (generally
considered as 90%) of the leased asset, and (5) the leased asset is so specialized that it is expected to
have no alternative use to the lessor at the end of the lease term. In an operating lease, a lessee
recognizes for each period a single lease expense. It is calculated so that the total undiscounted lease
payments are allocated over the lease term on a straight-line basis. Because Mollat makes equal
monthly lease payments throughout the entire lease term, annual lease expense equals the annual lease
payments.
B. Lease expense equal to the Year 4 lease payments less interest expense.
C. Amortization expense equal to one-tenth of the equipment’s fair value.
D. Amortization expense equal to one-seventh of 80% of the equipment’s fair value.
Question: 16Manning Co. (lessee) has the following current lease liabilities at the end of Year 7:
Lease A – finance lease, 5 years, lease liability $125,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Lease B – operating lease, 3 years, lease liability $65,000
How should Manning present the lease liabilities on its balance sheet?
A. Finance and operating lease liabilities may be presented together in the same line item on the balance
sheet.
B. Finance and operating lease liabilities may be presented with other liabilities on the balance sheet.
C. Finance and operating lease liabilities must be presented separately from each other and other liabilities
on the balance sheet.
Answer (C) is correct.
In the balance sheet, a lessee must not present (1) finance lease right-of-use assets in the same line item
as operating lease right-of-use assets or (2) finance lease liabilities in the same line item as operating
lease liabilities. Moreover, they must be presented separately from other assets or liabilities,
respectively.
D. The finance lease liability, not the operating lease liability, must be presented separately from other
liabilities on the balance sheet.
Question: 17On January 1, Year 1, JCK Co. signed a contract for an 8-year lease of its equipment with a 10-year
life. The present value of the 16 equal semiannual payments in advance equaled 85% of the equipment’s fair value.
The contract had no provision for JCK, the lessor, to give up legal ownership of the equipment. Should JCK
recognize rent or interest revenue in Year 3, and should the revenue recognized in Year 3 be the same or smaller
than the revenue recognized in Year 2?
Year 3 Revenues Year 3 Amount Recognized
Recognized
Compared with Year 2
A. Rent The same
B. Rent Smaller
C. Interest The same
D. Interest Smaller
Answer (D) is correct.
JCK classifies the lease as a sales-type lease because the lease term is for the major part (80% = 8
years ÷ 10 years) of the remaining economic life of the leased equipment. A lease term of 75% or more
of the remaining economic life of the leased asset generally is considered to be a major part of its
remaining economic life. In a sale-type lease, each periodic lease payment received has two
components: interest income and the reduction of the net investment in the lease. Interest income is
calculated using the effective interest method. It equals the carrying amount of the net investment in
the lease at the beginning of the period times the discount rate implicit in the lease. The amount of
interest income declines over the lease term. As the carrying amount of the investment in the lease
decreases, the interest component of the periodic lease payment also decreases.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 18Able Co. leased equipment to Baker under a noncancelable lease with a transfer of title. After
recognition of the lease, will Able record any depreciation expense on the leased asset and interest revenue related to
the lease?
Depreciation
Interest
Expense
Revenue
A. Yes Yes
B. Yes No
C. No No
D. No Yes
Answer (D) is correct.
The lease transfers ownership. Accordingly, the lease is recognized as a sales-type lease by the lessor.
The leased equipment is derecognized at the lease commencement date. Thus, no depreciation expense
on the leased equipment is recognized by Able. In a sales-type lease, subsequent to the lease
commencement date, each periodic lease payment received by the lessor includes both interest income
and a reduction of the net investment in the lease.
Question: 19On the first day of its fiscal year, Lessor, Inc., leased certain property at an annual rental of
$100,000 receivable at the beginning of each year for 10 years. The first payment was received immediately. The
leased property is new, had cost $650,000, and has an estimated useful life of 13 years with no salvage value. The
rate implicit in the lease is 8%. The present value of an annuity of $1 payable at the beginning of the period at 8%
for 10 years is 7.247. Lessor had no other costs associated with this lease. Lessor should have accounted for this
lease as a sales-type lease but mistakenly treated the lease as an operating lease. Lessor depreciates all of its
properties using the straight-line depreciation method. Ignoring tax effects, what was the effect on net earnings
during the first year of treating this lease as an operating lease rather than as a sale?
A. Overstatement of $25,300.
B. Understatement of $74,676.
Answer (B) is correct.
Accounting for the lease as an operating lease during the first year generated $50,000 of income, the
$100,000 lease payment minus $50,000 of depreciation ($650,000 ÷ 13). In a sales-type lease, the
lessor recognizes two income components: profit on the sale and interest income. Total income from
accounting for the lease as a sale would have been $124,676 ($74,700 + $49,976). The effect of the
error on net earnings was therefore an understatement of $74,676 ($124,676 – $50,000).
Net investment ($100,000 × 7.247) $724,700 Net investment ($100,000 × 7.247) $724,700
Carrying amount
(650,000) First lease payment
(100,000)
Profit on sale
$ 74,700
Lease balance
Interest rate
$624,700
×
.08
Interest income
$ 49,976
C. Understatement of $24,676.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Understatement of $24,700.
Question: 20Rent should be reported by the lessor as revenue over the lease term as it becomes receivable
according to the provisions of the lease for a(n)
Direct-Financing
Operating Sales-Type
Lease
Lease
Lease
A. Yes Yes Yes
B. Yes No No
C. No Yes No
Answer (C) is correct.
In sales-type and direct financing leases, subsequent to the lease commencement date, each periodic
cash payment received by the lessor includes both interest income and a reduction of the net
investment in the lease. In an operating lease, lease payments are recognized as lease (rental) income
by the lessor. If rental payments vary from a straight-line basis, rental income should be recognized
over the full lease term on the straight-line basis. In a sales-type lease, selling profit or loss on the lease
is calculated on the lease commencement date. In a direct-financing lease, no selling profit is
recognized on the lease commencement date. Any selling profit is deferred and reduces the initial
amount of the net investment in the lease.
D. No No Yes
Fact Pattern: Neary Company has entered into a contract to lease computers from Baldwin
Company starting on January 1, Year 1. Relevant information pertaining to the lease is
provided below.
Lease term
4 Years
Useful life of computers
5 Years
Present value of future lease payments
$100,000
Fair value of leased asset on date of lease 105,000
Baldwin’s implicit rate (known to Neary)
10%
At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has
properly classified this lease as a capital lease on its financial statements and uses straight-line
depreciation on comparable assets. Question: 21At January 1, Year 1, the lease would be reported on
Neary’s books as a(n)
A. Asset only.
B. Asset and a liability.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
The lease is classified as a finance lease by the lessee because the ownership of the leased asset is
transferred to the lessee at the end of the lease term. The lessee must record a finance lease by debiting
a right-of-use asset and crediting a lease liability.
C. Liability only.
D. Expense and a liability.
Fact Pattern: Neary Company has entered into a contract to lease computers from Baldwin
Company starting on January 1, Year 1. Relevant information pertaining to the lease is
provided below.
Lease term
4 Years
Useful life of computers
5 Years
Present value of future lease payments
$100,000
Fair value of leased asset on date of lease 105,000
Baldwin’s implicit rate (known to Neary)
10%
At the end of the lease term, ownership of the asset transfers from Baldwin to Neary. Neary has
properly classified this lease as a capital lease on its financial statements and uses straight-line
depreciation on comparable assets. Question: 22What is the annual amortization expense that Neary will
record on the leased computers?
A. $20,000
Answer (A) is correct.
Under a finance lease, the lessee recognizes a right-of-use asset and lease liability at an amount equal
to the present value of the lease payments ($100,000) given no initial direct costs. Because the lease
provides for the transfer of ownership, the lease is a finance lease, and the lessee should amortize the
right-of-use asset using the straight-line method over the estimated useful life (5 years). Annual
expense is $20,000 ($100,000 ÷ 5 years).
B. $21,000
C. $25,000
D. $26,250
Question: 23If a lessee uses off-balance-sheet financing, assets have been acquired
A. For cash.
B. With short-term leases.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
A short-term lease has a term of 12 or fewer months and does not include a purchase option reasonably
expected to be exercised. For this type of lease, the lessee may elect not to recognize the right-of-use
asset and lease liability.
C. With finance leases.
D. With a line of credit.
Question: 24Which of the following meets a criterion for a lessee to account for a lease as a finance lease?
A. The lease is for unspecialized equipment.
B. A third party has guaranteed the residual value of the leased asset.
C. The present value of the lease payments is 75% of the fair value of the leased asset.
D. The lessee is reasonably certain to exercise the option to purchase the leased asset.
Answer (D) is correct.
A lease is classified as a sales-type lease by the lessor and as a finance lease by the lessee if, at lease
commencement, the lease includes an option to purchase the leased asset that the lessee is reasonably
certain to exercise.
Question: 25Which of the following is a criterion for a lease to be classified as a finance lease in the books of a
lessee?
A. The lease contains a purchase option that the lessee is reasonably certain to exercise.
Answer (A) is correct.
A lease is classified as a finance lease by the lessee if, at lease commencement date, any of the
following five criteria is satisfied: (1) the lease transfers ownership of the leased asset to the lessee by
the end of the lease term, (2) the lease includes an option to purchase the leased asset that the lessee is
reasonably certain to exercise, (3) the lease term is for the major part (generally is considered to be at
least 75%) of the remaining economic life of the leased asset, (4) the present value of the sum of the
lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all
(generally is considered to be at least 90%) of the fair value of the leased asset, or (5) the leased asset
is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of
the lease term.
B. The lease does not transfer ownership of the property to the lessee.
C. The lease term is equal to 65% or more of the estimated useful life of the leased property.
D. The present value of the minimum lease payments is 70% or more of the fair market value of the leased
property.
Question: 26Which of the following statements about a lease is false if a lease classification criterion is met?
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A. The lessor capitalizes the net investment in the lease.
B. The lessor records a leased asset.
Answer (B) is correct.
If at least one of five classification criteria is met, the lessor recognizes a sales-type lease and
derecognizes the leased asset.
C. The lessee amortizes right-of-use asset.
D. A sales-type lease is a form of financing.
Question: 27A corporation signed a 3-year lease for an automobile on December 1. The automobile had a list
price of $17,000 and an estimated useful life of 8 years. The lease called for payments of $500 per month for 36
months. The present value of the $500 payments was $15,054 at the corporation’s incremental borrowing rate and
$15,496 at the lessor’s implicit rate, which is known to the lessee. Based on the above information, the corporation
should record the lease as a(n)
A. Finance lease.
Answer (A) is correct.
A lessee must report a lease as a finance lease if the present value of the lease payments and any
residual value guaranteed by the lessee is 90% or more of the fair value of the leased asset. If the
lessor’s implicit rate is known to the lessee, that is the appropriate discount rate. Dividing the present
value by the list price of the automobile yields a result > 90% ($15,496 ÷ $17,000 = 91.2%). Thus, this
lease must be classified by the corporation as a finance lease.
B. Operating lease.
C. Sale-leaseback.
D. Sales-type lease.
Subunit 5: Income Taxes
Question: 1Income-tax-basis financial statements differ from those prepared under GAAP because they
A. Do not include nontaxable revenues and nondeductible expenses in determining income.
B. Include detailed information about current and deferred income tax liabilities.
C. Contain no disclosures about capital and operating lease transactions.
D. Recognize certain revenues and expenses in different reporting periods.
Answer (D) is correct.
Financial statements prepared under the income tax basis of accounting and financial statements
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prepared under GAAP differ when the tax basis of an asset or a liability and its reported amount in the
GAAP-based financial statements are not the same. The result will be taxable or deductible amounts in
future years when the reported amount of the asset is recovered or the liability is settled. Thus, certain
revenues and expenses are recognized in different periods. An example is subscriptions revenue
received in advance, which is recognized in taxable income when received and recognized in financial
income when earned in a later period. Another example is a warranty liability, which is recognized as
an expense in financial income when a product is sold and recognized in taxable income when the
expenditures are made in a later period.
Question: 2Temporary differences arise when expenses are deductible for tax purposes
After They Are Before They Are
Recognized in
Recognized in
Financial Income Financial Income
A. No No
B. No Yes
C. Yes Yes
Answer (C) is correct.
A temporary difference exists when (1) the reported amount of an asset or liability in the financial
statements differs from the tax basis of that asset or liability, and (2) the difference will result in
taxable or deductible amounts in future years when the asset is recovered or the liability is settled at its
reported amount. A temporary difference may also exist although it cannot be identified with a specific
asset or liability recognized for financial reporting purposes. Temporary differences most commonly
arise when either expenses or revenues are recognized for tax purposes either earlier or later than in the
determination of financial income.
D. Yes No
Fact Pattern: Lucas Company computed the following deferred tax balances for the 2 most
recent years. Deferred tax assets are considered fully realizable.
Year 1
Deferred tax asset
Year 2
$ 9,000 $17,000
Deferred tax liability 13,000 23,000
Question: 3If Lucas calculates taxable income of $1,000,000 for Year 2 and is taxed at an effective income tax
rate of 40%, how much income tax expense will be reported on Lucas’s income statement for Year 2?
A. $400,000
B. $402,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
Deferred tax expense or benefit is the net change during the year in the entity’s deferred tax liabilities
and assets. It is aggregated with the current tax expense or benefit to determine total income tax
expense for the year. The amount of income taxes payable (current tax expense) is $400,000
($1,000,000 × 40%). The deferred tax assets increased by $8,000 ($17,000 – $9,000) and the deferred
tax liabilities increased by $10,000 ($23,000 – $13,000). Thus, Lucas’s income tax expense for Year 2
is $402,000 ($400,000 current tax expense – $8,000 increase in the deferred tax assets + $10,000
increase in the deferred tax liabilities).
C. $404,000
D. $406,000
Question: 4A liability that represents the accumulated difference between the income tax expense reported on
the firm’s books and the income tax actually paid is
A. Capital gains tax.
B. Deferred taxes.
Answer (B) is correct.
Deferred tax liabilities arise when temporary differences in book and taxable income result in future
taxable amounts. Deferred tax assets arise when temporary differences in book and taxable income
result in future deductible amounts.
C. Taxes payable.
D. Value-added taxes.
Question: 5Which one of the following temporary differences will result in a deferred tax asset?
A. Use of the straight-line depreciation method for financial statement purposes and the Modified
Accelerated Cost Recovery System (MACRS) for income tax purposes.
B. Installment sale profits accounted for on the accrual basis for financial statement purposes and on a cash
basis for income tax purposes.
C. Advance rental receipts accounted for on the accrual basis for financial statement purposes and on a cash
basis for tax purposes.
Answer (C) is correct.
A deferred tax asset records the deferred tax consequences attributable to deductible temporary
differences and carryforwards. Advance rental receipts accounted for on the accrual basis for financial
statement purposes and on a cash basis for tax purposes would give rise to a deferred tax asset. The
financial statements would report no income and no related tax expense because the rental payments
apply to future periods. The tax return, however, would treat the rent as income when the cash was
received, and a tax would be due in the year of receipt. Because the tax is paid prior to recording the
income for financial statement purposes, it represents an asset that will be recognized as an expense
when income is finally recorded.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Investment gains accounted for under the equity method for financial statement purposes and under the
cost method for income tax purposes.
Fact Pattern:
Bearings Manufacturing Company, Inc. purchased a new machine on
January 1, Year 1, for $100,000. The company uses the straight-line
depreciation method with an estimated equipment life of 5 years and a
zero salvage value for financial statement purposes, and uses the 3year, Modified Accelerated Cost Recovery System (MACRS) with an
estimated equipment life of 3 years for income tax reporting purposes.
Bearings is subject to a 35% marginal income tax rate.
Question:
Assume that the deferred tax liability at
the beginning of the year is zero and that
Bearings has a positive earnings tax
position. The MACRS depreciation rates
for 3-year equipment are shown below.
Year Rate
1 33.33%
2 44.45
3 14.81
4
7.41
6What is the deferred tax liability at December 31, Year 1 (rounded to the nearest whole dollar)?
A. $7,000
B. $33,330
C. $11,666
D. $4,666
Answer (D) is correct.
For financial reporting purposes, the reported amount (cost – accumulated depreciation) of the machine
at year-end, assuming straight-line depreciation and no salvage value, will be $80,000 [$100,000 cost –
($100,000 ÷ 5 years)]. The tax basis of this asset will be $66,670 [$100,000 – ($100,000 × 33.33%)]. A
taxable temporary difference has arisen because the excess of the reported amount over the tax basis
will result in a net future taxable amount over the recovery period. A taxable temporary difference
requires recognition of a deferred tax liability. Assuming the 35% rate applies during the asset’s entire
life, the deferred tax liability equals the applicable enacted tax rate times the temporary difference, or
$4,666 [($80,000 – $66,670) × 35%].
Question: 7A corporation entered into a 3-year contract, using the input method for financial income and the
point-in-time method for taxable income. The corporation expected the project to be profitable throughout the
construction period. The effect on the corporation’s financial statements for the third year of this contract would be
a(n)
A. Decrease in the deferred tax asset account.
B. Decrease in the deferred tax liability account.
Answer (B) is correct.
For the first two years of the contract, the corporation reports more revenue for financial reporting
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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purposes than for tax purposes, resulting in a deferred tax liability. Upon completion of the contract,
the corporation reports all the revenue on its tax return, thereby decreasing the deferred tax liability.
C. Increase in the deferred tax asset account.
D. Increase in the deferred tax liability account.
Question: 8A tax rate other than the current tax rate may be used to calculate the deferred income tax amount on
the statement of financial position if a(n)
A. Future tax rate has been enacted into law.
Answer (A) is correct.
A tax rate other than the current tax rate may be used to calculate the deferred income tax amount on
the statement of financial position if a future tax rate has been enacted into law.
B. Future tax rate change is considered more likely than not to occur.
C. Election has been made to apply past tax rates.
D. Net operating loss carryback exists.
Question: 9Selected financial information for the year just ended is shown below.
Pretax income
$5,000,000
Interest received on municipal bonds
600,000
Gain on the sale of land reported this
year but not taxable until next year
Tax rate for all years
1,000,000
40%
Beginning balances:
Income taxes payable
0
Deferred tax liability
$50,000
The total income tax expense reported on the income statement for the year just ended should be
A. $960,000
B. $1,360,000
C. $1,760,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
Taxable income consists of pretax income adjusted for those items that give rise to tax differences.
Taxable income is therefore $3,400,000 ($5,000,000 – $600,000 – $1,000,000), and current tax
expense is $1,360,000 ($3,400,000 × 40%). The interest on municipal bonds is a permanent difference
because it is tax-exempt, i.e., it is recognized in GAAP income but never in taxable income. Permanent
differences have no deferred tax effects. However, the gain on the sale of land is a temporary
difference because it is included in GAAP income this year and is included in taxable income in the
future. This temporary difference gives rise to a future taxable amount, specifically, a $400,000
deferred tax liability ($1,000,000 × 40%). This credit to the deferred tax liability account is balanced
by a debit to income tax expense. Total income tax expense for the year is therefore $1,760,000
($1,360,000 current portion + $400,000 deferred portion).
D. $2,640,000
Question: 10Intraperiod income tax allocation arises because
A. Items included in the determination of taxable income may be presented in different sections of the
financial statements.
Answer (A) is correct.
To provide a fair presentation, GAAP require that income tax expense for the period be allocated
among continuing operations, discontinued operations, other comprehensive income, and items debited
or credited directly to equity.
B. Income taxes must be allocated between current and future periods.
C. Certain revenues and expenses appear in the financial statements either before or after they are included
in taxable income.
D. Certain revenues and expenses appear in the financial statements but are excluded from taxable income.
Question: 11When accounting for income taxes, a temporary difference occurs in which of the following
scenarios?
A. An item is included in the calculation of net income but is neither taxable nor deductible.
B. An item is included in the calculation of net income in one year and in taxable income in a different year.
Answer (B) is correct.
A temporary difference results when the GAAP basis and the tax basis of an asset or liability differ.
The effect is that a taxable or deductible amount will occur in future years when the asset is recovered
or the liability is settled. But some temporary differences are not related to an asset or liability for
financial reporting. Thus, temporary differences occur when revenues or gains, or expenses or losses,
are used to calculate net income under GAAP in a year before or after being used to calculate taxable
income.
C. An item is no longer taxable due to a change in the tax law.
D. The accrual method of accounting is used.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 12The purpose of interperiod income tax allocation is to
A. Reconcile the tax consequences of permanent and temporary differences that appear on the company’s
current financial statements.
B. Recognize a tax asset or liability for the tax consequences of temporary differences that exist at the date
of the balance sheet.
Answer (B) is correct.
Interperiod tax allocation is designed to recognize a tax asset or liability for the tax consequences of
temporary differences that exist between a company’s financial accounting records and its tax records
at the balance sheet date. These temporary differences result when the GAAP basis and the tax basis of
an asset or liability differ.
C. Adjust the income tax expense on the income statement to be consistent with the income tax liability
shown on the balance sheet.
D. Provide proper disclosure of a distribution of earnings to a taxing authority.
Subunit 6: Accounting for Bonds and Noncurrent Notes Payable
Fact Pattern: On January 1, Evangel Company issued 9% bonds in the face amount of
$100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in
a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond
discount. Interest is payable annually on December 31. Question: 1What is the amount of interest
expense that should be reported on Evangel’s income statement for the second year?
A. $8,779
B. $9,000
C. $9,559
D. $9,683
Answer (D) is correct.
An amortization schedule for the first 2 years of Evangel’s bonds can be prepared as follows:
Times:
Effective Rate
Year
Beginning
Carrying
Amount
Equals:
Interest
Expense
Minus:
Cash Paid
Equals:
Discount
Amortized
Ending
Carrying
Amount
1
$96,207
10%
$9,621
$9,000
$621
$96,828
2
96,828
10%
9,683
9,000
683
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97,511
Fact Pattern: On January 1, Evangel Company issued 9% bonds in the face amount of
$100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in
a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond
discount. Interest is payable annually on December 31. Question: 2What is the amount of Evangel’s
unamortized bond discount at the end of the first year?
A. $621
B. $2,452
C. $3,172
Answer (C) is correct.
Total interest expense for the year equals the carrying amount of the bonds times the effective rate
(yield), or $9,621 ($96,207 × 10%). Subtracting the cash interest payment from this leaves the amount
of discount amortized, or $621 ($9,621 – $9,000). Subtracting this amount from the previous
unamortized discount ($3,793) leaves a remaining unamortized discount at the end of Year 1 of
$3,172.
D. $3,793
Fact Pattern: On January 1, Evangel Company issued 9% bonds in the face amount of
$100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in
a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond
discount. Interest is payable annually on December 31. Question: 3The net carrying amount of
Evangel’s bonds payable at the end of the first year is
A. $94,866
B. $95,586
C. $96,828
Answer (C) is correct.
Total interest expense for the year equals the carrying amount of the bonds times the effective rate
(yield), or $9,621 ($96,207 × 10%). Subtracting the cash interest payment from this leaves the amount
of discount amortized ($9,621 – $9,000 = $621). Subtracting this amount from the previous
unamortized discount ($3,793) leaves a remaining unamortized discount at the end of Year 1 of
$3,172. Subtracting this amount from the face amount of the bonds ($100,000) provides a carrying
amount of $96,828.
D. $97,548
Fact Pattern: On January 1, Evangel Company issued 9% bonds in the face amount of
$100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in
a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond
discount. Interest is payable annually on December 31. Question: 4What is the amount of interest
expense that should be reported on Evangel’s income statement at the end of the first year?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $8,659
B. $9,000
C. $9,621
Answer (C) is correct.
Total interest expense for the year equals the carrying amount of the bonds times the effective rate
(yield), or $9,621 ($96,207 × 10%).
D. $10,000
Question: 5The best advantage of a zero-coupon bond to the issuer is that the
A. Bond requires a low issuance cost.
B. Bond requires no interest income calculation to the holder or issuer until maturity.
C. Interest can be amortized annually by the APR method and need not be shown as an interest expense to
the issuer.
D. Interest can be amortized annually on a straight-line basis but is a noncash outlay.
Answer (D) is correct.
Zero-coupon bonds do not pay periodic interest. The bonds are sold at a discount from their face value,
and the investors do not receive interest until the bonds mature. The issuer does not have to make
annual cash outlays for interest. However, the discount must be amortized annually and reported as
interest expense.
Fact Pattern: On January 1, Evangel Company issued 9% bonds in the face amount of
$100,000, which mature in 5 years. The bonds were issued for $96,207 to yield 10%, resulting in
a bond discount of $3,793. Evangel uses the effective interest method of amortizing bond
discount. Interest is payable annually on December 31. Question: 6What is the amount of interest
Evangel will pay at the end of the first year?
A. $8,659
B. $9,000
Answer (B) is correct.
The annual cash payment is the face amount of the bonds times the stated rate ($100,000 × 9% =
$9,000).
C. $9,621
D. $10,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 7A premium on bonds payable arises when
A. The semiannual bond interest becomes due.
B. The prevailing interest rate after the bond issuance falls below the nominal rate of the bonds.
C. The amount received from sale of the bonds at issuance exceeds the face value of the bonds.
Answer (C) is correct.
A premium on bonds payable arises when the amount received from sale of the bonds at issuance
exceeds the face value of the bonds. This situation occurs if, at the time the bonds are sold, their stated
rate is greater than the current market rate.
D. The cost of issuing the bonds is capitalized.
Question: 8On January 1, bonds with a face amount of $200,000, an 8% annual effective yield, and a 7% annual
coupon rate were sold by Thomas Dynamics, Inc., for $180,000. The bonds pay interest on January 1 and July 1.
Using the effective interest method, the company’s interest expense for the first 6 months ended July 1 will be
A. $7,000
B. $7,200
Answer (B) is correct.
Total interest expense for the year equals the carrying amount of the bonds times the effective rate
(yield), or $14,400 ($180,000 × 8%). Half of this amount is $7,200.
C. $14,000
D. $14,400
Question: 9Debentures are
A. Income bonds that require interest payments only when earnings permit.
B. Subordinated debt and rank behind convertible bonds.
C. Bonds secured by the full faith and credit of the issuing firm.
Answer (C) is correct.
Debentures are unsecured bonds. Although no assets are mortgaged as security for the bonds,
debentures are secured by the full faith and credit of the issuing firm. Debentures are a general
obligation of the borrower. Only companies with the best credit ratings can issue debentures because
only the company’s credit rating and reputation secure the bonds.
D. A form of lease financing similar to equipment trust certificates.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 10Which one of the following characteristics distinguishes income bonds from other bonds?
A. The bondholder is guaranteed an income over the life of the security.
B. By promising a return to the bondholder, an income bond is junior to preferred and common stock.
C. Income bonds are junior to subordinated debt but senior to preferred and common stock.
D. Income bonds pay interest only if the issuing company has earned the interest.
Answer (D) is correct.
An income bond is one that pays interest only if the issuing company has earned the interest, although
the principal must still be paid on the due date. Such bonds are riskier than normal bonds.
Question: 11Serial bonds are attractive to investors because
A. All bonds in the issue mature on the same date.
B. The yield to maturity is the same for all bonds in the issue.
C. Investors can choose the maturity that suits their financial needs.
Answer (C) is correct.
Serial bonds have staggered maturities; that is, they mature over a period (series) of years. Thus,
investors can choose the maturity date that meets their investment needs. For example, an investor who
will have a child starting college in 16 years can choose bonds that mature in 16 years.
D. The coupon rate on these bonds is adjusted to the maturity date.
Question: 12The measurement basis most often used to report a long-term payable representing a commitment
to pay money at a determinable future date is
A. Historical cost.
B. Current cost.
C. Net realizable value.
D. Present value of future cash flows.
Answer (D) is correct.
The measurement basis most commonly adopted by entities in preparing their financial statements is
historical cost. However, it is usually combined with other measurement bases (attributes). The
attribute used to measure a long-term payable is the present or discounted value of its future cash
flows.
Question: 13When using fair value accounting, it would be to a firm’s benefit to report the liability at fair value
when it has
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $32 million in outstanding bonds trading at 101.
B. $50 million in variable-rate preferred shares outstanding.
C. $28 million in outstanding bonds trading at 98.
Answer (C) is correct.
A firm would want to report a liability at fair value when its fair value is less than its carrying amount.
The fair value of this bond ($27,440,000 = $28,000,000 × .98) is less than its carrying amount of
$28,000,000. This would decrease the liabilities section of the balance sheet, which a company would
prefer to do.
D. $25 million in put-able bonds trading at 102.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Study Unit 4: Integrated Reporting
Subunit 1: Integrated Reporting, Integrated Thinking, and the
Integrated Report
Question: 1The primary purpose of integrated reporting (IR) is to
A. Explain to providers of financial capital how value is created by the company over time.
Answer (A) is correct.
IR is defined as “a process founded on integrated thinking, which results in a periodic integrated report
by an organization about value creation and preservation in the short, medium, and long term.” It is
primarily focused on giving holistic information to the providers of financial capital about how the
entity creates value over time.
B. Give customers holistic information about the company and its values.
C. Report about nonfinancial aspects of the company.
D. Meet the requirements of regulators.
Question: 2The primary purpose of integrated reporting is to
A. Be able to tell customers holistically about the organization and its values.
B. Report about mainly nonfinancial aspects of the organization.
C. Explain to providers of financial capital how value is created by the organization over time.
Answer (C) is correct.
Integrated reporting <IR> primarily focuses on giving holistic information to the providers of financial
capital, including the organization’s value-creation process in the short, medium, and long term.
D. Fulfill the requirements of regulatory institutions.
Question: 3Integrated thinking is not
A. The final step in the integrated reporting process.
Answer (A) is correct.
The integrated report and the integrated reporting process are based on integrated thinking. However,
these processes are not static and will always influence each other.
B. The basis for integrated reporting and the integrated report.
C. A means of providing insight into the interdependencies between financial and nonfinancial aspects of the
organization.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. A process of decision making, management, and reporting.
Question: 4Integrated reporting is best defined as
A. A concise communication about how strategy, governance, performance, and prospects lead to value
creation over time.
B. The process of defining and measuring nonfinancial aspects of a company.
C. Combining the annual report with the sustainability or corporate sustainability reports from a company.
D. A process founded on integrated thinking, resulting in a periodic integrated report by an organization
about value creation and preservation.
Answer (D) is correct.
As defined by the International Integrated Reporting Council (IIRC), IR is “a process founded on
integrated thinking, which results in a periodic integrated report by an organization about value
creation and preservation in the short, medium, and long term.”
Question: 5Integrated reports
A. Must be prepared in conformity with accounting principles that are generally accepted in the United
States (U.S. GAAP).
B. Are the foundation for integrated thinking.
C. Depict how costs and customer value accumulate along a chain of activities that lead to a product or
service.
D. Include financial and nonfinancial information.
Answer (D) is correct.
An integrated report is designed to provide a holistic view of a company by connecting financial and
nonfinancial information with the long-term value-creation possibilities of the organization.
Question: 6Integrated thinking is
A. The final step in the integrated reporting process.
B. The basis for integrated reporting and the integrated report.
Answer (B) is correct.
Integrated thinking is a prerequisite to integrated reporting. Understanding the mutual influences of
financial and nonfinancial factors is necessary for integrated reporting about the performance of a
company and for making well-informed decisions to create value in the long term. Through integrated
thinking, a company gains insight into how interdependencies between financial and nonfinancial
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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factors interact and affect value creation. Thus, integrated thinking is the basis for the externally
communicated integrated report.
C. Most often undertaken by a specialized department.
D. Primarily a management and governance process.
Question: 7Which statement about integrated reporting is true?
A. Integrated reporting communicates a company’s strategy throughout the organization and connects
critical success factors with performance measures.
B. A principles-based framework for integrated reporting has been issued by the International Integrated
Reporting Council (IIRC).
Answer (B) is correct.
Integrated reporting is a relatively new concept. The IIRC, which was established in 2010, issued a
principles-based framework for integrated reporting in 2013. This framework guides companies
preparing an integrated report. The objective is to align capital allocation and corporate activity to
create financial well being and sustainable expansion through integrated thinking and integrated
reporting.
C. The ultimate goal of the proponents of integrated reporting is for it to become the reporting standard for
public companies in the U.S.
D. Integrated reporting is the basis for the externally communicated integrated report.
Question: 8Integrated reporting is a process founded on <List A>, which results in <List B> about value creation
and preservation in the <List C>.
List A List B List C
A. Integrated reports Integrated thinking Long term
B. Integrated thinking Integrated reports Short, medium, and long term
Answer (B) is correct.
As defined by the IIRC, integrated reporting is a process founded on integrated thinking, which results
in a periodic integrated report by an organization about value creation and preservation in the short,
medium, and long term.
C. Corporate social responsibility Integrated reports Short, medium, and long term
D. Integrated thinking Integrated reports Short term
Question: 9The most important factor in the introduction of integrated reporting is
A. Issuance by regulators of new standards requiring companies to report more nonfinancial information.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. The loss of trust in financial reporting after the 2008 financial crisis.
C. The increased recognition of intangible assets in corporate balance sheets.
Answer (C) is correct.
With more and more companies’ balance sheets dominated by intangibles, traditional reporting
methods often are inadequate to cope with the changes in the reporting environment. Integrated
reporting tries to fill this gap by focusing not only on traditional financial reporting but also on the
nonfinancial factors influencing value creation over time.
D. The dissatisfaction of stakeholders with the content of the traditional sustainability reports, requiring an
update on the nonfinancial reporting parts.
Question: 10Integrated reporting, integrated thinking, and the integrated report are
A. Sequential phases of the <IR> Framework.
B. Used interchangeably.
C. Distinct but interconnected.
Answer (C) is correct.
Integrated reporting, integrated thinking, and the integrated report are three distinct concepts.
Integrated reporting is a process founded on integrated thinking, which results in a periodic integrated
report by an organization about value creation and preservation. Integrated thinking is a process of
decision making, management, and reporting. Integrated reports concisely communicate how strategy,
governance, performance, and prospects lead to value creation over time.
D. Distinct and static.
Question: 11Which of the following is the main goal of the integrated report?
A. Compliance with the framework issued by the International Integrated Reporting Council.
B. Communication to customers of the financial and nonfinancial aspects of the company.
C. Disclosure of more information about how the entity creates value over time to providers of financial
capital.
Answer (C) is correct.
The integrated report primarily gives holistic information to the providers of financial capital about the
value-creation process of the company in the short, medium and long term.
D. Full disclosure of information about financial matters in the interests of improving transparency and
accountability.
Question: 12Integrated thinking is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. The final step in the integrated reporting process.
B. A process that communicates how various factors lead to value creation.
C. Focused on determining how an annual report is combined with a sustainability report.
D. A process of decision making, management, and reporting.
Answer (D) is correct.
Integrated thinking is a process of decision making, management, and reporting. It is based on the
connectivity and interdependencies among several company-specific factors that affect an
organization’s ability to create value over time.
Question: 13Integrated thinking is
A. Done in stand-alone departments.
B. A prerequisite to integrated reporting about performance.
Answer (B) is correct.
Integrated thinking is a prerequisite to IR. Understanding the influences of financial and nonfinancial
factors on each other is necessary to (1) report in an integrated manner about performance and (2)
make well-informed decisions for long-term value creation.
C. The basis for financial statements and separately published corporate social responsibility reports.
D. A concise communication about how strategy, governance, performance, and prospects lead to value
creation.
Question: 14Through integrated reporting, a company
A. May disclose the effects of externalities on capitals owned by the company.
B. Is limited to including only material value created for itself.
C. Communicates implementation of strategies, corporate governance, performance, and prospects leading
to value creation.
Answer (C) is correct.
Through IR, a company communicates implementation of strategies, corporate governance, employee
and management performance, and prospects that lead to value creation over time. In the context of the
entity’s external environment, IR communicates how value is created by providing a combination of
financial and nonfinancial information. Thus, IR enables a company to tell its own unique story of
value creation.
D. Combines the sustainability report with the corporate social responsibility report.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 15Integrated reporting is a new reporting concept. Integrated reporting was introduced because
A. Traditional financial reporting increasingly did not provide adequate nonfinancial information about
value creation.
Answer (A) is correct.
As the proportion of total assets consisting of intangible assets has increased, corporate reporting of
this true value has begun to change. Accordingly, integrated thinking and reporting have emerged to
give providers of financial capital integrated financial and nonfinancial information about how an
entity creates value over a period of time. Such reporting also benefits other stakeholders (interested
parties), e.g., employees, customers, suppliers, and regulators.
B. Regulators issued new standards that required reporting of nonfinancial as well as financial information.
C. The financial crisis of 2008 resulted in a lack of trust in companies.
D. Stakeholders were critical of traditional sustainability reports.
Question: 16Which of the following statements about the background of the Integrated Reporting Framework
is true?
A. The objective is to achieve financial well being and sustainable expansion through integrated thinking.
Answer (A) is correct.
The International Integrated Reporting Council (IIRC) was established in 2010 after the peak of the
financial crisis. It issued the <IR> Framework in 2013. This principles-based framework guides
companies preparing an integrated report. The objective is to align capital allocation and corporate
activity to create financial well being and sustainable expansion through integrated thinking and
integrated reporting. Although the IIRC primarily focuses on providers of financial capital in the
private sector, its mission is for IR to become the corporate reporting standard worldwide for private
and public companies.
B. The Institute of Management Accountants (IMA) issued the <IR> Framework in 2013.
C. Integrated reporting primarily is intended to guide disclosures by public companies.
D. Integrated reporting includes financial information in the same document as the sustainability or
corporate social responsibility report.
Question: 17The integrated report
A. Must be prepared in conformity with accounting principles generally accepted in the United States
(GAAP).
B. Is a sustainability report for certain stakeholders.
C. Benefits parties, including employees, customers, suppliers, and regulators, interested in value creation.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
An integrated report gives providers of financial capital more information about how the entity creates
value over time. An integrated report also benefits other stakeholders who are interested in the entity’s
effectiveness in creating value. They include employees, customers, suppliers, communities in which
the entity is located, and regulators.
D. Is issued only by private companies in the U.S.
Question: 18How are integrated reporting, integrated thinking, and the integrated report most likely related?
A. Integrated reporting is a process that continuously improves integrated thinking.
Answer (A) is correct.
Integrated reporting is a process that continuously improves reporting, internal decision making, and
integrated thinking.
B. Integrated reporting is a prerequisite to integrated thinking.
C. Integrated reporting and thinking emphasize how performance leads to value creation.
D. Integrated reporting is necessarily static because it must comply with the <IR> Framework.
Question: 19The framework promulgated by the International Integrated Reporting Council
A. Must be adopted by private companies.
B. Is principles-based.
Answer (B) is correct.
The framework is principles-based. The integrated report must be adaptable by different companies in
different situations. Accordingly, the framework contains Guiding Principles that are guidelines and
cannot always be strictly applied. Moreover, the Content Elements are in question form.
C. Primarily addresses the needs of providers of financial capital in the public sector.
D. May be used as guidance for external reporting of financial statements.
Question: 20Which of the following is a true statement about value creation for integrated reporting (IR)
purposes?
A. Value creation is a process based on integrated thinking resulting in an integrated report.
B. Understanding how financial and nonfinancial factors interact affects decisions about value creation.
Answer (B) is correct.
Integrated thinking is a prerequisite to IR. Understanding the influences of financial and nonfinancial
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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factors on each other is necessary to (1) report in an integrated manner about performance and (2)
make well-informed decisions for long-term value creation.
C. An integrated report explains how the interdependent financial aspects of a company interact in the valuecreation process.
D. The main goal of IR is to disclose financial information to improve accountability.
Subunit 2: Fundamental Concepts of Integrated Reporting
Question: 1The fundamental concepts defined by the International Integrated Reporting Council (IIRC) are
A. Value creation, the value-creation process, and the six capitals.
Answer (A) is correct.
The value-creation process is the core of the integrated report. It shows how companies create financial
and nonfinancial value over time. This value is created not only for the company itself but also for
others. It is influenced by the external environment, relations with stakeholders, and various resources
(e.g., the six capitals).
B. Business activities, the value-creation process, and materiality.
C. The six capitals, the business model, and the external environment.
D. External environment, the business model, and materiality.
Question: 2The fundamental concepts of integrated reporting, as defined by the IIRC, are
A. The six capitals, the value-creation process, and materiality.
B. Value creation, the value-creation process, and the six capitals.
Answer (B) is correct.
The value-creation process is the core of the integrated report, showing how organizations create both
financial and nonfinancial value over time. This value is created not only for the organization itself, but
also for others, and is influenced by the capitals used and affected by the organization.
C. The six capitals, the value-creation process, and the business model.
D. External environment, the business model, and materiality.
Question: 3Which statement about value creation is false?
A. Value creation is one of the three fundamental concepts of integrated reporting.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Because externalities of value creation do not affect the organization, they should not be included in the
integrated report.
Answer (B) is correct.
Value is created for the organization and for others. Externalities, which are effects on the capitals not
owned by the organization, may occur when value is created. However, externalities influence
nonfinancial value created by the organization and should therefore be included in the integrated
report.
C. Value created for others that is considered material should be included in the integrated report.
D. Value is created both for the organization as well as for its external environment.
Question: 4What is not one of the six capitals defined in the <IR> Framework?
A. Environmental capital.
Answer (A) is correct.
Environmental capital is not defined in the <IR> Framework. The correct terminology is natural
capital.
B. Manufactured capital.
C. Social and relationship capital.
D. Intellectual capital.
Question: 5Which statement about the capitals is false?
A. The capitals can decrease, increase, or be transformed due to the regular course of business.
B. Value can be created in any of the six capitals and is not necessarily measured in financial capital.
C. An integrated report does not have to be structured along the six capitals.
D. Every organization should address the six capitals in its integrated report.
Answer (D) is correct.
Not all capitals are equally important for every organization. Some may be irrelevant to a given
company. Moreover, the names of capitals are not standardized, and the integrated report need not be
structured based on the capitals.
Question: 5Which statement about the capitals is false?
A. The capitals can decrease, increase, or be transformed due to the regular course of business.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Value can be created in any of the six capitals and is not necessarily measured in financial capital.
C. An integrated report does not have to be structured along the six capitals.
D. Every organization should address the six capitals in its integrated report.
Answer (D) is correct.
Not all capitals are equally important for every organization. Some may be irrelevant to a given
company. Moreover, the names of capitals are not standardized, and the integrated report need not be
structured based on the capitals.
Question: 7A company’s social license to operate is the result of the
A. Outcome of interactions with customers.
Answer (A) is correct.
When interacting with customers, a company is operating within a social environment. The
relationship of the company with this environment includes the company’s social license to operate.
The outcomes of the interactions with customers are the effects of outputs (e.g., products and services)
on social and relationship capital and other capitals.
B. Financial returns to the providers.
C. Six elements of capital.
D. Company’s outlook.
Question: 8Which of the following is included in the integrated report?
A. Social and relationship capital but not negative externalities.
B. Only financial, manufactured, and intellectual capital.
C. Material value created for others and externalities.
Answer (C) is correct.
The forms of value created (for the company and for others) are closely related. For example, sale of a
product results in revenue for the company and some form of value for the customer, depending on the
nature of what was sold. The sale affects not only financial capital but also social and relationship
capital. Externalities, whether positive or negative, also should be addressed. They are effects on the
capitals not owned by the company. Accordingly, if the value created is material, it should be included
in the integrated report, regardless of whether it has been created for the company itself or for others.
D. Value created for the company but not for the external environment.
Question: 9The six capitals defined in the <IR> Framework include
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Environmental capital and political capital.
B. Manufactured capital and environmental capital.
C. Financial capital and nonfinancial capital.
D. Intellectual capital and human capital.
Answer (D) is correct.
Intellectual capital is one of the capitals as defined in the <IR> Framework. It is the intangible
knowledge of the company, e.g., intellectual property, licenses, software, and organizational structure.
Human capital also is defined. It consists of employees’ capacities and mindsets, e.g., training and
loyalty to the company.
Question: 10According to the <IR> Framework, value creation depends on sources known as capitals. Which of
the following is a true statement about the capitals?
A. Every company should address the six capitals in its integrated report.
B. The capitals are affected by the regular course of business.
Answer (B) is correct.
The value of the capitals may change in form, increase, or decrease as a result of the activities and
outputs of the company in the regular course of business. For example, one capital may need to
decrease for another to increase. Furthermore, value may be created over different capitals and is not
necessarily measured in financial terms. Also, value creation is viewed not only as an increase in the
total of the capitals but also as preservation of their aggregate value.
C. Value is necessarily measured in financial capital.
D. Value creation occurs only when the total of the capitals increases.
Question: 11According to the International Integrated Reporting Council (IIRC), manufactured capital is a
source of value creation for a company. Manufactured capital
A. Consists of the environmental resources used.
B. Is obtained through financing.
C. Need not be owned.
Answer (C) is correct.
Manufactured capital is every tangible object possessed by (available to) a company, whether or not
owned. Examples are roads and ports.
D. Must be presented in an integrated report.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 12An economic condition may affect a company’s ability to create value. It is an example of which
influencing factor?
A. Governance.
B. External environment.
Answer (B) is correct.
The ever-changing external environment in which a company operates includes political conditions,
economic conditions, technological change, societal issues, and environmental challenges.
C. Strategy and resource allocation.
D. Performance.
Question: 13The fundamental concepts defined by the International Integrated Reporting Council (IIRC) include
A. Governance.
B. Value creation.
Answer (B) is correct.
Value may be created for the organization itself. For example, value in this context includes financial
returns to the providers of financial capital. Value also may be created for others. For example, value
for others includes goods or services provided to individuals. The two forms of value creation are
closely related. When a company sells a product, it creates value for itself in the form of revenues and
indirectly for the customer. (The form of value for the customer depends on the nature of the good or
service sold.) This process affects not only the financial aspect of the company but also its reputation
and its relationship with its stakeholders.
C. Guiding principles.
D. Content elements.
Question: 14Value creation
A. Is unaffected by externalities because they are not included in the integrated report.
B. Is always measured in financial terms.
C. For others is not included in the integrated report.
D. Depends on sources affected by the regular course of business.
Answer (D) is correct.
Value creation depends on different sources. They are defined by the IIRC as the six capitals: financial,
manufactured, intellectual, human, social and relationship, and natural. These sources of capital are
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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affected by the regular course of business. They are increased, decreased, or transformed by the
entity’s activities and outputs.
Question: 15One of the six capitals defined in the Integrated Reporting Framework is
A. Product capital.
B. Natural capital.
Answer (B) is correct.
Natural capital is defined in the IIRC Framework. Natural capital includes the renewable and
nonrenewable environmental resources and processes that are used, produced, or affected by the
company. These include land, water, air, minerals, flora, fauna, biodiversity, and ecosystem health.
C. Owned capital.
D. Equity capital.
Question: 16Which statement about the capitals in an integrated report is true?
A. The change in value of the capitals must be disclosed in a supplement to the integrated report.
B. The capitals are not affected by the regular course of business.
C. Value can be created in any of the six capitals and is always measured in dollars.
D. An integrated report does not have to be structured based on the six capitals.
Answer (D) is correct.
The six capitals provide guidance and exist to assure consideration of the different forms of capital
affected by operations. Furthermore, all six capitals need not be present in every integrated report,
capitals need not be identified by the same names in every integrated report, and an integrated report
need not be structured based on the six capitals.
Question: 17Outcomes are an element of the value-creation process. They are
A. The results of business activities.
B. Controlled by the organization.
C. The effects of outputs on the six capitals.
Answer (C) is correct.
The elements of the value-creation process are (1) inputs, (2) the business model, (3) business
activities, (4) outputs, and (5) outcomes. Outcomes are the effects of outputs on the six capitals. The
outcomes determine the state for the new inputs. In this sense, the value-creation process is circular.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Products or services.
Question: 18According to the Integrated Reporting Framework, the six capitals are affected by the
A. Outcomes of interactions with customers.
B. Financial returns to the providers.
C. Regular course of business.
Answer (C) is correct.
The six capitals are affected by the regular course of business. They are increased, decreased, or
transformed by the activities and outputs of the organization.
D. Relations with stakeholders.
Question: 19According to the IIRC, natural capital is a source of value creation. Natural capital
A. Is nonrenewable.
B. Is obtained through financing.
C. Consists of the environmental resources used.
Answer (C) is correct.
Natural capital consists of the renewable and nonrenewable environmental resources and processes that
are used, produced, or affected by the company. These resources include land, air, water, minerals,
flora, fauna, biodiversity, and ecosystem health.
D. Must be present in an integrated report.
Question: 20A proper oversight structure may affect a company’s ability to create value. Which of the following
is the relevant Content Element?
A. External environment.
B. Governance.
Answer (B) is correct.
A company should create a proper oversight structure to ensure the ability of the company to create
value. Important aspects are leadership structure, diversity, strategic decision making processes,
values, ethics, and linkage between remuneration and value creation.
C. Strategy and resource allocation.
D. Performance.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 21A leading manufacturer of electric vehicles has accumulated customer driving interaction data
through its unique pilot driver-assist program. This data will be used to further develop more advanced autonomous
features that the company plans to implement in the near future on its most popular model. In integrated reporting,
the system used to accumulate and analyze the driving data is best categorized as
A. Human capital.
B. Intellectual capital.
Answer (B) is correct.
Intellectual capital is the intangible knowledge of the organization. It includes intellectual property
(e.g., patents, copyrights, and software) and organizational capital (e.g., systems, procedures, and
protocols).
C. Natural capital.
D. Manufactured capital.
Subunit 3: Guiding Principles and Content Elements of the Integrated
Report
Question: 1Which of the following is not an element of the value-creation process?
A. Governance.
B. The integrated report.
Answer (B) is correct.
The integrated report is merely a vehicle to show the value-creation process. Publishing the integrated
report and the document itself are not part of the value-creation process.
C. Strategy and resource allocation.
D. Future outlook.
Question: 2Preparing an integrated report involves certain challenges. What part of the <IR> Framework
provides information on how to present the content of the integrated report?
A. The Content Elements.
B. The capitals.
C. The Guiding Principles.
Answer (C) is correct.
The Guiding Principles provide guidance for preparers of integrated reports on how information should
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be presented. These principles can sometimes conflict (e.g., an integrated report should be both concise
and complete). But the concepts discussed, such as materiality, may help preparers make professional
judgments while preparing the integrated report.
D. The fundamental concepts.
Question: 3Must an organization address all the Content Elements defined in the <IR> Framework?
A. No; the professional judgment of the preparers determines which Content Elements should be addressed
in the integrated report.
B. No, but if a Content Element is excluded, the organization should explain why it did not address that
element.
C. Yes, all Content Elements should be addressed in the integrated report.
Answer (C) is correct.
All Content Elements defined in the <IR> Framework should be addressed in the integrated report.
How these topics are addressed, and in what order, is decided by the preparers of the report.
D. No; the Content Elements are guidelines that can be ignored by the preparers of the integrated report.
Question: 4What issue is most likely to result from strict interpretation of the guiding principle of reliability and
completeness?
A. Reliability and completeness might conflict with the guiding principle of conciseness.
Answer (A) is correct.
The guiding principles may be in conflict. Applying the reliability and completeness principle tends to
result in reporting more information. Applying the conciseness principle tends to exclude information.
Thus, the principles are guidelines that cannot always be strictly applied. The preparers of reports must
use judgment when applying the guidelines.
B. External assurance may be difficult, especially regarding nonfinancial information.
C. Reliability and completeness is not one of the guiding principles.
D. It is impossible to measure the nonfinancial aspects of an integrated report. It can therefore never be
reliable.
Question: 5Connectivity of information
A. Means that the Content Elements should be presented in the fixed order prescribed in the
<IR> Framework.
B. Is connection of all six capitals to each other and a demonstration of how they are related.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Is the principle that the integrated report should present a holistic view of different aspects of the
company.
Answer (C) is correct.
Connectivity of information is the principle that the integrated report should present a holistic view of
different aspects of the company. The information gathered from responses to the questions posed in
the <IR> Framework is never stand-alone. Consequently, the issue is how these interrelated factors
affect the ability of the company to create value over time.
D. Requires companies to provide a digital platform in which its customers can search to find relevant,
interrelated, and linked information.
Question: 6Which of the following is a Guiding Principle for integrated reporting?
A. Stakeholder relationships.
Answer (A) is correct.
An organization should report on the nature and quality of its relationships with key stakeholders.
Reporting should include the extent to which the organization understands, considers, and responds to
the needs and interests of stakeholders.
B. Performance.
C. Strategy and resource allocation.
D. Basis of preparation and presentation.
Question: 7An integrated report must include
A. Nine Content Elements.
Answer (A) is correct.
The interrelated Content Elements and the accompanying questions posed in the <IR> Framework for
eight of the elements must be included in the report. The elements are not a required structure. But the
presentation should indicate the connections among the elements.
B. Seven Guiding Principles.
C. Six capitals.
D. Three fundamental concepts.
Question: 8The question posed for the Content Element, Basis of Preparation and Presentation, in the <IR>
Framework is
A. To what extent has the organization achieved its strategic objectives for the period, and what are its
outcomes in terms of effects on the capitals?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Where does the organization want to go, and how does it intend to get there?
C. What does the organization do, and what are the circumstances under which it operates?
D. How does the organization determine what matters to include in the integrated report, and how are such
matters quantified or evaluated?
Answer (D) is correct.
The question posed about the Content Element of Basis of Preparation and Presentation is, “How does
the organization determine what matters to include in the integrated report, and how are such matters
quantified or evaluated?” The organization should determine what to include in the report and the
means of measurement or evaluation. The report should summarize (1) the materiality definition
process and (2) significant frameworks and methods used for quantification and evaluation. It also
should describe the boundary within which matters are relevant for inclusion. This boundary is
twofold: (1) the financial reporting entity and (2) risks, opportunities, and outcomes associated with
other entities or stakeholders that significantly affect value creation by the entity.
Question: 9When applying the Guiding Principles for an integrated report,
A. Tension may exist between principles.
Answer (A) is correct.
The Guiding Principles may be in tension with each other. For example, the reliability and
completeness principle has an inherent bias toward the inclusion of more information. But the
conciseness principle tends toward exclusion. Application of these Guiding Principles therefore always
requires professional judgment.
B. Judgment is not needed.
C. The guidelines must be strictly applied.
D. Challenges should not be encountered.
Question: 10Questions that should be answered in the integrated report are posed in the
A. Content Elements.
Answer (A) is correct.
Each integrated report should contain the nine Content Elements defined by the <IR> Framework.
Each Content Element (except general reporting guidance) includes one question that should be
answered in the integrated report.
B. Capitals as defined by the IIRC.
C. External environment of integrated reporting.
D. Stakeholder needs and interest as part of the IIRC Guiding Principles.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 11According to the <IR> Framework, “An integrated report must include all material matters . . . ”
The relevant Guiding Principle is
A. Consistency and comparability.
B. Reliability and completeness.
Answer (B) is correct.
The Guiding Principle of reliability and completeness states, “An integrated report should include all
material matters, both positive and negative, in a balanced way and without material error.”
C. Materiality.
D. Conciseness.
Question: 12Of the Content Element questions posed in the <IR> Framework, which relates to Outlook?
A. Where does the organization want to go and how does it intend to get there?
B. What challenges and uncertainties is the organization likely to encounter in pursuing its strategy?
Answer (B) is correct.
The following is the question posed for the Outlook element: “What challenges and uncertainties is the
organization likely to encounter in pursuing its strategy, and what are the potential implications for its
business model and future performance?”
C. To what extent has the organization achieved its strategic objectives for the period?
D. How does the organization determine what matters to include in the integrated report?
Question: 13The <IR> Framework includes Content Elements. The organization’s business model is one such
element. A description of the business model in the integrated report includes
A. Identification of dependencies.
Answer (A) is correct.
The integrated report describes the key inputs, business activities, outputs, and outcomes of the
business model. Other matters described usually include (1) a diagram or flowchart that emphasizes
and explains key elements, (2) a logical narrative of the circumstances of the organization, and (3)
identification of stakeholder and other (e.g., materials) dependencies and factors in the external
environment.
B. Outputs such as brand loyalty.
C. Sources of specific risks.
D. Measurement of achievements.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 14Which of the following is a Content Element defined in the Integrated Reporting Framework?
A. The integrated report.
B. Governance.
Answer (B) is correct.
Certain aspects of governance connect with the organization’s ability to create value: (1) leadership
structure, including skills and diversity of individuals; (2) specific strategic decision-making processes;
(3) effects of culture, ethics, and value on the capitals; and (4) the linkage of compensation, including
incentives, with value creation.
C. The six capitals.
D. Integrated thinking.
Question: 15Preparing an integrated report presents challenges. What part of the Integrated Reporting
Framework addresses presentation of information in the integrated report?
A. Guiding Principles.
Answer (A) is correct.
The Guiding Principles help preparers of integrated reports to present information. These principles
sometimes are conflicting. For example, an integrated report should be both concise and complete. The
principles cannot always be applied strictly, and judgment is needed in their application.
B. Content Elements.
C. Capitals.
D. Fundamental concepts.
Question: 16Is a company required to address all the Content Elements defined in the <IR> Framework?
A. Preparers are expected to use professional judgment to decide which elements should be addressed in the
integrated report.
B. A Content Element may be omitted if the company explains the omission.
C. Content Elements are guidelines that cannot always be applied strictly.
D. All Content Elements should be addressed in the integrated report.
Answer (D) is correct.
The reports should contain all nine elements. However, the presentation varies with the reporting
company’s circumstances. Each element contains a question to be answered in the report. This form
makes the elements adaptable. The information gathered from answering the questions in the <IR>
Framework should be presented in a logical way. This order is not necessarily the order in which the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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elements appear in the framework. Connections among the elements are essential for an integrated
report.
Question: 17“Changes and improvements can be made but should be explained.” This Guiding Principle is
A. Materiality.
B. Conciseness.
C. Consistency and comparability.
Answer (C) is correct.
Consistency and comparability guidelines state that (1) the material information in an integrated report
should be consistent through time; (2) changes and improvements can be made but should be
explained; (3) comparability among companies is difficult due to the refined application of the
framework for the specific situation of the organization; and (4) comparability can be enhanced by
using industry standards, benchmarks, ratios, and the specific Content Elements defined in the <IR>
Framework.
D. Reliability and completeness.
Question: 18Which question posed in the <IR> Framework relates to strategy and resource allocation?
A. What challenges and uncertainties is the organization likely to encounter in pursuing its strategy?
B. To what extent has the organization achieved its strategic objectives for the period?
C. How does the organization determine what matters to include in the integrated report?
D. Where does the organization want to go and how does it intend to get there?
Answer (D) is correct.
An integrated report should answer the question about the strategy and resource allocation Content
Element as follows: “Where does the organization want to go and how does it intend to get there?”
Question: 19One of the questions posed in the Integrated Reporting Framework is, “What does the organization
do, and what are the circumstances under which it operates?” An aspect of the related Content Element includes
A. Leadership structure.
B. Mission and vision.
Answer (B) is correct.
The aspects of the Content Element of organizational overview and external environment include (1)
the market in which the company operates, (2) its mission and vision, (3) its competitive landscape, (4)
key quantitative information, (5) needs of stakeholders, (6) changes in the external environment, and
(7) how the company deals with these external changes.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Business model.
D. Risks and opportunities.
Subunit 4: Adoption of Integrated Reporting
Question: 1Which of the following is not a challenge for an organization that adopts integrated reporting (IR)?
A. Materiality definitions.
B. The unwillingness of stakeholders to accept the new reporting form.
Answer (B) is correct.
An integrated report typically is beneficial for stakeholders. It should improve stakeholder relations by
providing a holistic view of the entity that connects nonfinancial and financial information with its
value-creating potential. Thus, stakeholder acceptance is not perceived as a challenge.
C. Support from senior management.
D. Data quality of nonfinancial information.
Question: 2What benefits are attributable to integrated reporting (IR)?
A. Better stakeholder relations, lower reputational risk, and better decision making.
Answer (A) is correct.
Better relations with employees and suppliers and more committed customers, reduced risk to
reputation, and better decision making and resource allocation are benefits of IR.
B. Better stakeholder relations, more providers of financial capital, and better decision making.
C. Better stakeholder relations, more providers of financial capital, and higher assurance for the integrated
report.
D. Lower reputational risk, better decision making, and higher assurance for the integrated report.
Question: 3Which of the following is a potential advantage of integrated reporting (IR)?
A. Reduction of costs by establishing new control systems.
B. Better control systems for financial information.
C. Less emphasis on the materiality of nonfinancial information.
D. Providing assurances on nonfinancial information.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Providing assurance on nonfinancial information, the amount of which is unlimited, is difficult.
However, validating the integrated presentation of financial and nonfinancial information is important.
Assurance on IR enhances the quality of the reports and their comparability among organizations. A
similar benefit results from an auditor’s opinion on financial information.
Question: 4Which of the following is a benefit to an entity that adopts integrated reporting (IR)?
A. Better measurement of financial information.
B. Providing greater assurance on financial information.
C. Breaking down silos within the organization.
Answer (C) is correct.
Silos are organizational groups that rarely interact. IR compels the groups (e.g., departments) to
collaborate to produce the integrated report.
D. Separating financial and nonfinancial information.
Question: 5The challenges of adopting integrated reporting (IR) include
A. Defining materiality when using a multi-capital approach.
Answer (A) is correct.
IR uses a six-capital approach to value creation. Consequently, IR must filter the increased information
available through a properly defined level of materiality. For example, a definition of materiality may
be based on what providers of financial capital need to know.
B. The resulting linkage of financial and nonfinancial information.
C. More employee engagement.
D. Forcing departments to work together.
Question: 6The business case for adoption of integrated reporting (IR) most likely includes
A. Universally accepted standards for value creation.
B. Linkage of financial and nonfinancial information.
Answer (B) is correct.
An integrated report is intended to provide a holistic view of an entity. It connects financial and
nonfinancial information with the long-term value-creation potential of the entity.
C. Use of a single-capital approach.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Less emphasis on the importance of the tone at the top.
Question: 7The greatest challenge for an organization that adopts integrated reporting (IR) is
A. Defining materiality for providers of financial capital.
Answer (A) is correct.
Management needs to decide what information the providers of financial capital and other users want.
Because IR uses a multi-capital approach, a user needs information that has passed through a
materiality filter. This material information should be useful to providers of financial capital and other
users. However, defining materiality for often voluminous nonfinancial information is difficult but still
essential. Thus, each organization needs to develop an effective materiality definition process.
B. The unwillingness of stakeholders to accept the new reporting form.
C. Full involvement of the CEO and the board.
D. Data quality of financial information.
Question: 8The business case for integrated reporting (IR) most likely includes
A. More reliable assurance on decision making and financial and nonfinancial information.
B. Better stakeholder relations, better resource allocation, and greater assurance provided by the integrated
report.
C. More committed customers and more engaged employees.
Answer (C) is correct.
IR is a process of combining the interactive concepts of integrated thinking, integrated reporting, and
value creation. It enables a company to demonstrate implementation of strategies, governance,
employee and management performance, and prospects leading to value creation. Value creation
benefits not only the organization but also improves relations with stakeholders (interested parties),
such as customers, employees, regulators, suppliers, and providers of financial capital. Accordingly,
customers will be more committed and employees more engaged if a company can demonstrate its
effectiveness in creating value.
D. Lower costs, more providers of financial capital, and better decision making.
Question: 9The challenge for adopters of integrated reporting (IR) is
A. Less emphasis on the materiality of nonfinancial information.
B. Enhancing the quality of integrated reports by providing assurance on nonfinancial information.
Answer (B) is correct.
Providing assurance on nonfinancial information, the amount of which is unlimited, is difficult.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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However, validating the integrated presentation of financial and nonfinancial information is important.
Assurance on IR enhances the quality of the reports and their comparability among organizations. A
similar benefit results from an auditor’s opinion on financial information.
C. Reduction of costs by establishing new control systems and data sets.
D. Better control systems for financial information and nonfinancial information.
Question: 10What is the most likely benefit of adopting integrated reporting (IR)?
A. Better measurement of financial and nonfinancial information.
B. Greater departmentation to better define silos in the organization.
C. Disconnecting financial and nonfinancial information.
D. Lower long-term costs.
Answer (D) is correct.
A benefit of IR is lower long-term costs. For example, the value created by IR should reduce costs of
debt (interest charges) and equity.
Question: 11Which of the following is a challenge of adopting integrated reporting (IR)?
A. Connectivity of financial and nonfinancial information.
B. Better resource allocation.
C. Lower reputational risk.
D. Filtering the increased information available to users.
Answer (D) is correct.
IR uses a six-capital approach to value creation. Consequently, IR must filter the increased information
available through a properly defined level of materiality. For example, a definition of materiality may
be based on what providers of financial capital need to know.
Question: 12Which of the following most likely helps to build the business case for adoption of integrated
reporting (IR)?
A. Support from the directors.
Answer (A) is correct.
The most important requirement for the success of IR is the tone at the top. Consequently, the support
of the CEO and the board of directors is necessary.
B. Use of a single-capital approach.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Separation of financial and nonfinancial information.
D. Generally accepted standards for measuring value creation.
Question: 13The most persuasive argument for adoption of integrated reporting (IR) is that
A. Disclosure of accurate but sometimes negative information will have negligible costs.
B. Investments in systems, data collection, and analysis will yield positive long-term results.
Answer (B) is correct.
Although the implementation of IR may incur additional costs in the short term, they ordinarily are
recoverable. Initial investments are made in new systems, data collection, and analysis in the first few
years. However, the benefits of IR should eventually yield net positive results. Once the systems and
metrics are established, a company should benefit for a long time.
C. Worldwide adoption is likely because the percentage of companies using integrated reporting is already
high.
D. A global institute exists that issues universally accepted standards for integrated reporting.
Question: 14Worldwide adoption of integrated reporting (IR) is most likely if
A. Regulators do not become involved in standard setting.
B. Accounting firms defer to other parties for developing metrics.
C. Institutional investors pressure companies to report nonfinancial information.
Answer (C) is correct.
Institutional investors may use their influence to pressure companies to report about nonfinancial
information and value creation. They may be a strong driver for adoption of integrated reporting.
D. Legislators repeal laws requiring reports based only on financial capital.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Study Unit 5: Cost Management Concepts
Subunit 1: Cost Management Terminology
Question: 1Inventoriable costs
A. Include only the prime costs of manufacturing a product.
B. Include only the conversion costs of manufacturing a product.
C. Are expensed when products become part of finished goods inventory.
D. Are regarded as assets before the products are sold.
Answer (D) is correct.
Under an absorption costing system, inventoriable (product) costs include all costs necessary for good
production. These include direct materials and conversion costs (direct labor and overhead). Both fixed
and variable overhead is included in inventory under an absorption costing system. Inventoriable costs
are treated as assets until the products are sold because they represent future economic benefits. These
costs are expensed at the time of sale.
Question: 2Which one of the following best describes direct labor?
A. A prime cost.
B. A period cost.
C. A product cost.
D. Both a product cost and a prime cost.
Answer (D) is correct.
Direct labor is both a product cost and a prime cost. Product costs are incurred to produce units of
output and are deferred to future periods to the extent that output is not sold. Prime costs are defined as
direct materials and direct labor.
Question: 3Which of the following is a period cost rather than a product cost of a manufacturer?
A. Direct materials.
B. Variable overhead.
C. Fixed overhead.
D. Abnormal spoilage.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Materials, labor, and overhead (both fixed and variable) are examples of product costs. Abnormal
spoilage is an example of a period cost. Abnormal spoilage is not inherent in a production process and
should not be categorized as a product cost. Abnormal spoilage should be charged to a loss account in
the period that detection of the spoilage occurs.
Question: 4Cost drivers are
A. Activities that cause costs to increase as the activity increases.
Answer (A) is correct.
A cost driver is “a measure of activity, such as direct labor hours, machine hours, beds occupied,
computer time used, flight hours, miles driven, or contracts, that is a causal factor in the incurrence of
cost to an entity” (IMA). It is a basis used to assign costs to cost objects.
B. Accounting techniques used to control costs.
C. Accounting measurements used to evaluate whether or not performance is proceeding according to plan.
D. A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of
factory, used to assign costs to activities.
Question: 5In cost terminology, conversion costs consist of
A. Direct and indirect labor.
B. Direct labor and direct materials.
C. Direct labor and factory overhead.
Answer (C) is correct.
Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw
materials into a finished product.
D. Indirect labor and variable factory overhead.
Question: 6Conversion costs do not include
A. Depreciation.
B. Direct materials.
Answer (B) is correct.
Conversion costs are necessary to convert raw materials into finished products. They include all
manufacturing costs, for example, direct labor and factory overhead, other than direct materials.
C. Indirect labor.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Indirect materials.
Question: 7Conversion cost pricing
A. Places minimal emphasis on the cost of materials used in manufacturing a product.
B. Could be used when the customer furnishes the material used in manufacturing a product.
Answer (B) is correct.
Conversion costs consist of direct labor and factory overhead, the costs of converting raw materials
into finished goods. Normally, a company does not consider only conversion costs in making pricing
decisions, but if the customer were to furnish the raw materials, conversion cost pricing would be
appropriate.
C. Places heavy emphasis on indirect costs and disregards consideration of direct costs.
D. Places heavy emphasis on direct costs and disregards consideration of indirect costs.
Question: 8The term “prime costs” refers to
A. Manufacturing costs incurred to produce units of output.
B. All costs associated with manufacturing other than direct labor costs and raw material costs.
C. The sum of direct labor costs and all factory overhead costs.
D. The sum of raw material costs and direct labor costs.
Answer (D) is correct.
Prime costs are raw material costs and direct labor costs.
Question: 9The terms direct cost and indirect cost are commonly used in accounting. A particular cost might be
considered a direct cost of a manufacturing department but an indirect cost of the product produced in the
manufacturing department. Classifying a cost as either direct or indirect depends upon
A. The behavior of the cost in response to volume changes.
B. Whether the cost is expensed in the period in which it is incurred.
C. The cost object to which the cost is being related.
Answer (C) is correct.
A direct cost can be specifically associated with a single cost object in an economically feasible way.
An indirect cost cannot be specifically associated with a single cost object. Thus, the specific cost
object influences whether a cost is direct or indirect. For example, a cost might be directly associated
with a single plant. The same cost, however, might not be directly associated with a particular
department in the plant.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken.
Question: 10Costs are allocated to cost objects in many ways and for many reasons. Which one of the following
is a purpose of cost allocation?
A. Evaluating revenue center performance.
B. Measuring income and assets for external reporting.
Answer (B) is correct.
Cost allocation is the process of assigning and reassigning costs to cost objects. It is used for those
costs that cannot be directly associated with a specific cost object. Cost allocation is often used for
purposes of measuring income and assets for external reporting purposes. Cost allocation is less
meaningful for internal purposes because responsibility accounting systems emphasize controllability,
a process often ignored in cost allocation.
C. Budgeting cash and controlling expenditures.
D. Aiding in variable costing for internal reporting.
Question: 11Direct labor costs are wages paid to
Machine
Factory
Corporate
Operators Supervisors Vice-President
A. Yes Yes Yes
B. Yes No No
Answer (B) is correct.
Direct labor costs are wages paid to labor that can be specifically identified with the production of
finished goods. Because the wages of a factory machine operator are identifiable with a finished
product, the wages are a direct labor cost. Because a supervisor’s or vice-president’s salary is not
identifiable with the production of specific finished goods, it is a part of factory overhead and not a
direct labor cost.
C. No Yes Yes
D. No No Yes
Question: 12A firm manufactures light bulbs. The following salaries were included in the firm’s manufacturing
costs for the year:
Machine operators
Factory supervisors
$145,000
60,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Machinery mechanics
25,000
What is the amount of direct labor for the year?
A. $230,000
B. $205,000
C. $170,000
D. $145,000
Answer (D) is correct.
Direct labor costs are wages paid to labor that can feasibly be specifically identified with the
production of finished goods. Because the wages of machine operators are identifiable with the
production of finished goods, their $145,000 of salaries are a direct labor cost. However, because the
salaries and wages of the factory supervisors and machinery mechanics are not identifiable with the
production of finished goods, their $60,000 and $25,000 of salaries are not direct labor costs.
Question: 13Production costs for July are
Direct materials $120,000
Direct labor
108,000
Factory overhead
6,000
What is the amount of costs traceable to specific products?
A. $234,000
B. $228,000
Answer (B) is correct.
Product costs can be associated with a specific product. Product costs include direct materials and
direct labor. Factory overhead cannot be traced to specific products and therefore is allocated to all
products produced. Thus, the amount of costs traceable to specific products in the production process
is $228,000 ($120,000 + $108,000).
C. $120,000
D. $108,000
Question: 14A company used $200,000 of direct materials during June. At June 30, direct materials inventory
was $30,000 more than it was at June 1. What were direct materials purchases during June?
A. $30,000
B. $170,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $200,000
D. $230,000
Answer (D) is correct.
Direct materials costs are the costs of new materials included in finished goods that can be
feasibly traced to those goods. Total purchases can be found based on the beginning and
ending inventory, as well as products used. The following formula describes their relationship:
Purchases = Materials used + Ending inventory – Beginning inventory
The question states that the company used $200,000 of direct materials. Beginning inventory
can be set as x, and since the balance of direct materials at the end of the the month was
$30,000 more than at the beginning of the month, ending inventory can be set as [x +
$30,000]. Thus the formula can be used to solve for purchases as follows:
Purchases = $200,000 + ($x + $30,000) – $x
Purchases = $200,000 + $30,000 + $x – $x
Purchases = $230,000
Question: 15An example of an operating cost at a hotel that is both direct and fixed is
A. Manager salary.
Answer (A) is correct.
Direct costs are ones that can be associated with a particular cost object in an economically feasible
way, that is, they can be traced to that object. Fixed costs are those that remain unchanged in total over
the relevant range of production. A hotel manager’s salary is traceable to the single location (s)he
manages, and it remains fixed over a set period of time regardless of the number of guests.
B. Water.
C. Toilet tissue.
D. Advertising for the hotel chain.
Question: 16A company produces 200,000 units of a good that has the following costs:
Direct material costs
$2,000,000
Direct manufacturing labor costs
Indirect manufacturing labor costs
1,000,000
600,000
The company’s per unit prime costs and conversion costs, respectively, are
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $8 and $15.
B. $8 and $18.
C. $10 and $8.
D. $15 and $8.
Answer (D) is correct.
Prime cost consists of direct materials and direct labor. Conversion cost consists of direct labor and
manufacturing overhead. The per unit calculations are as follows:
Direct materials
$2,000,000 Direct labor
Direct labor
$1,000,000
1,000,000 Manufacturing overhead
Total prime costs
$3,000,000 Total conversion costs
Divided by: production level ÷
Per unit prime cost
600,000
$1,600,000
200,000 Divided by: production level ÷
$
15 Per unit conversion cost
200,000
$
8
Question: 17Management accounting differs from financial accounting in that financial accounting is
A. More oriented toward the future.
B. Primarily concerned with external financial reporting.
Answer (B) is correct.
Financial accounting is primarily concerned with historical accounting, i.e., traditional financial
statements, and with external financial reporting to creditors and shareholders. Management
accounting applies primarily to the planning and control of organizational operations, considers
nonquantitative information, and is usually less precise.
C. Primarily concerned with nonquantitative information.
D. Heavily involved with decision analysis and implementation of decisions.
Question: 18Using absorption costing, fixed manufacturing overhead costs are best described as
A. Direct period costs.
B. Indirect period costs.
C. Direct product costs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Indirect product costs.
Answer (D) is correct.
Using absorption costing, fixed manufacturing overhead is included in inventoriable (product) costs.
Fixed manufacturing overhead costs are indirect costs because they cannot be directly traced to
specific units produced.
Question: 19The allocation of costs to particular cost objects allows a firm to analyze all of the following except
A. Whether a particular department should be expanded.
B. Why the sales of a particular product have increased.
Answer (B) is correct.
Cost allocation is an internal matter that does not affect demand (except to the extent it results in a
change in price).
C. Whether a product line should be discontinued.
D. Why a particular product should be purchased rather than manufactured in-house.
Question: 20Many companies recognize three major categories of costs of manufacturing a product. These are
direct materials, direct labor, and overhead. Which of the following is an overhead cost in the production of an
automobile?
A. The cost of small tools used in mounting tires on each automobile.
Answer (A) is correct.
The cost of small tools used in mounting tires cannot be identified solely with the manufacture of a
specific automobile. This cost should be treated as factory overhead because it is identifiable with the
production process.
B. The cost of the tires on each automobile.
C. The cost of the laborers who place tires on each automobile.
D. The delivery costs for the tires on each automobile.
Question: 21A company experienced a machinery breakdown on one of its production lines. As a consequence
of the breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime to return
manufacturing to schedule. Which one of the following methods is the proper way to account for the overtime paid
to the direct laborers?
A. The overtime hours times the sum of the straight-time wages and overtime premium would be charged
entirely to manufacturing overhead.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. The overtime hours times the sum of the straight-time wages and overtime premium would be treated as
direct labor.
C. The overtime hours times the overtime premium would be charged to repair and maintenance expense,
and the overtime hours times the straight-time wages would be treated as direct labor.
D. The overtime hours times the overtime premium would be charged to manufacturing overhead, and the
overtime hours times the straight-time wages would be treated as direct labor.
Answer (D) is correct.
Direct labor costs are wages paid to labor that can feasibly be specifically identified with the
production of finished goods. Factory overhead consists of all costs, other than direct materials and
direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be
treated as direct labor; however, because the overtime premium cost is a cost that should be borne by
all production, the overtime hours times the overtime premium should be charged to manufacturing
overhead.
Question: 22A cost incurred for the benefit of more than one cost objective is
A. A variable cost.
B. A conversion cost.
C. A prime cost.
D. A common cost.
Answer (D) is correct.
A cost incurred for the benefit of more than one cost objective is known as a common cost. Allocation
of common costs is a persistent problem in responsibility accounting. For example, how should the
costs of corporate headquarters be allocated to the segments of a conglomerate? Common cost is also a
synonym for joint cost. In this sense, common costs are incurred in the production of two or more
inseparable products (e.g., costs of refining petroleum into gasoline, diesel fuel, kerosene, lubricating
oils, etc.) up to the point at which the products become separable (the split-off point).
Question: 23A cost that always can be directly traced to a cost object is
A. A variable cost.
B. An indirect cost.
C. A conversion cost.
D. A prime cost.
Answer (D) is correct.
Prime costs are direct materials and direct labor. They are directly identifiable elements of production
costs and are directly traceable to the product.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 24Conversion costs are
A. Manufacturing costs incurred to produce units of output.
B. All costs associated with manufacturing other than direct labor costs and raw material costs.
C. The sum of direct labor costs and all factory overhead costs.
Answer (C) is correct.
Conversion costs are the direct labor, indirect materials, and factory overhead incurred to convert raw
materials and transferred-in goods in a cost center to finished goods.
D. The sum of raw materials costs and direct labor costs.
Question: 25The allocation of general overhead costs to operating departments can be least justified in
determining
A. Income of a product or functional unit.
B. Costs for making management’s decisions.
Answer (B) is correct.
In the short run, management decisions are made in reference to incremental costs without regard to
fixed overhead costs because fixed overhead cannot be changed in the short run. Thus, the emphasis in
the short run should be on controllable costs. For example, service department costs allocated as a part
of overhead may not be controllable in the short run.
C. Costs for the federal government’s cost-plus contracts.
D. Income tax payable.
Question: 26A computer company charges indirect manufacturing costs to a project at a fixed percentage of a
cost pool. This project is covered by a cost-plus government contract. Which of the following is an appropriate
guideline for determining how costs are assigned to the pool?
A. Establish separate pools for variable and fixed costs.
Answer (A) is correct.
Cost pools are accounts in which a variety of similar costs are accumulated prior to allocation to cost
objects. The overhead account is a cost pool into which various types of overhead are accumulated
prior to their allocation. Indirect manufacturing costs are an element of overhead allocated to a cost
pool. Ordinarily, different allocation methods are applied to variable and fixed costs, thus requiring
them to be separated. Establishing separate pools allows the determination of dual overhead rates. As a
result, the assessment of capacity costs, the charging of appropriate rates to user departments, and the
isolation of variances are facilitated.
B. Assign prime costs and variable administrative costs to the same pool.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Establish a separate pool for each assembly line worker to account for wages.
D. Assign all manufacturing costs related to the project to the same pool.
Question: 27In a traditional manufacturing operation, direct costs would normally include
A. Machine repairs in an automobile factory.
B. Electricity in an electronics plant.
C. Wood in a furniture factory.
Answer (C) is correct.
Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw
material (a direct cost) of furniture.
D. Commissions paid to sales personnel.
Question: 28In practice, items such as wood screws and glue used in the production of school desks and chairs
would most likely be classified as
A. Direct labor.
B. Factory overhead.
Answer (B) is correct.
Those tangible inputs to the manufacturing process that cannot practicably be traced to the product,
such as wood screws and glue used in the production of school desks and chairs, are referred to as
indirect costs. Indirect costs are one of the three components of manufacturing overhead, the other two
being indirect labor and factory operating costs.
C. Direct materials.
D. Period costs.
Question: 29A review of accounting records for last year disclosed the following selected information:
Variable costs:
Direct materials used
$ 56,000
Direct labor
179,100
Manufacturing overhead 154,000
Selling costs
108,400
Fixed costs:
Manufacturing overhead 267,000
Selling costs
121,000
Administrative costs
235,900
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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In addition, the company suffered a $27,700 uninsured factory fire loss during the year. Under absorption costing,
what were the product costs and period costs for last year?
Product
Period
A. $235,100 $914,000
B. $497,500 $651,600
C. $656,100 $493,000
Answer (C) is correct.
Product costs, also called inventoriable costs, are capitalized as part of finished goods inventory. They
eventually become a component of cost of goods sold. Period costs are expensed as incurred, i.e., they
are not capitalized in finished goods inventory and are thus excluded from cost of goods sold. The
product and period costs can be calculated as follows:
Product Period
Costs
Costs
Direct materials
$ 56,000
Direct labor
179,100
Variable overhead
154,000
Fixed overhead
267,000
Variable selling costs
$108,400
Fixed selling costs
121,000
Administrative costs
235,900
Uninsured loss
27,700
Totals
$656,100 $493,000
D. $683,800 $465,300
Question: 30Which one of the following items would not be considered a manufacturing cost?
A. Cream for an ice cream maker.
B. Sales commissions for a car manufacturer.
Answer (B) is correct.
Manufacturing costs consist of direct materials, direct labor, and manufacturing overhead. The cream,
plant property taxes, and tires are all integral to the production of the final product and so are properly
classified as manufacturing costs. Sales commissions, however, are not incurred until after the product
has been manufactured. They are properly classified as a selling expense.
C. Plant property taxes for an ice cream maker.
D. Tires for an automobile manufacturer.
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Question: 31A painting contractor maintains a job-order cost system. Job costs are accumulated by tracking the
actual cost of paint and other materials used on each job, as well as the actual cost of wages earned by the painters
on each job. In addition, overhead is applied to each job by using a predetermined rate based on the actual painters’
wages. A painter earned $168 today by working on Job 08-45. In computing prime cost and conversion cost for Job
08-45, how would the wages earned today by the painter be classified?
A. As a component of both prime and conversion cost.
Answer (A) is correct.
Manufacturing costs are often grouped into the following classifications: prime cost, which equals
direct materials plus direct labor (i.e., those costs directly attributable to a product), and conversion
cost, which equals direct labor plus manufacturing overhead (i.e., the costs of converting raw materials
into the finished product). The wages earned by a painter working for a painting contractor are thus
properly classified as both a prime cost and a conversion cost.
B. As a component of prime cost but not as a component of conversion cost.
C. As a component of conversion cost but not as a component of prime cost.
D. As a component of neither prime cost nor conversion cost.
Question: 32All of the following would be considered manufacturing overhead costs by a book publisher except
A. Depreciation on the printing equipment.
B. Wages paid to the production supervisor.
C. Rent on the warehouse containing the finished books inventory.
Answer (C) is correct.
Rent paid on the warehouse containing the finished books inventory is an example of an administrative
expense, which is not part of manufacturing overhead. This is an example of a nonmanufacturing cost
since the warehouse contains the finished books inventory and no manufacturing is occurring in that
warehouse. Administrative expenses are those costs incurred by a company not directly related to
producing or marketing the product.
D. Fire insurance on the printing facilities.
Question: 33Indirect and common costs often make up a significant portion of the cost of a product. All of the
following are reasons for indirect cost allocation to cost objects except to
A. Reduce total costs identified with products.
Answer (A) is correct.
The total costs identified with products are unaffected by the treatment of indirect and common costs.
The ability to identify a cost with a product is determined by traceability.
B. Measure income and assets for external reporting purposes.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Justify costs for reimbursement purposes.
D. Provide information for economic decision making.
Question: 34Fixed manufacturing overhead costs totaled $150,000 and variable selling costs totaled $75,000.
How should these costs be classified under variable costing?
A. $0 period costs; $225,000 product costs.
B. $75,000 period costs; $150,000 product costs.
C. $150,000 period costs; $75,000 product costs.
D. $225,000 period costs; $0 product costs.
Answer (D) is correct.
Product costs are incurred to produce units of output. They are expensed when the product is sold.
Such costs include direct materials and direct labor. Period costs are charged to expense as incurred
because they are not identifiable with a product. Under variable costing, only variable manufacturing
costs are considered product costs; fixed manufacturing costs are considered period costs and are
expensed as incurred. Selling costs are period costs under both variable and absorption costing. Thus,
the entire $225,000 ($150,000 + $75,000) is classified as period costs.
Subunit 2: Cost Behavior and Relevant Range
Question: 1An assembly plant accumulates its variable and fixed manufacturing overhead costs in a single cost
pool, which is then applied to work in process using a single application base. The assembly plant management
wants to estimate the magnitude of the total manufacturing overhead costs for different volume levels of the
application activity base using a flexible budget formula. If there is an increase in the application activity base that is
within the relevant range of activity for the assembly plant, which one of the following relationships regarding
variable and fixed costs is true?
A. The variable cost per unit is constant, and the total fixed costs decrease.
B. The variable cost per unit is constant, and the total fixed costs increase.
C. The variable cost per unit and the total fixed costs remain constant.
Answer (C) is correct.
Total variable cost changes when changes in the activity level occur within the relevant range. The cost
per unit for a variable cost is constant for all activity levels within the relevant range. Thus, if the
activity volume increases within the relevant range, total variable costs will increase. A fixed cost does
not change when volume changes occur in the activity level within the relevant range. If the activity
volume increases within the relevant range, total fixed costs will remain unchanged.
D. The variable cost per unit increases, and the total fixed costs remain constant.
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Question: 2The controller of a company has requested a quick estimate of the manufacturing supplies needed for
the month of July when production is expected to be 470,000 units to meet the ending inventory requirements and
sales of 475,000 units. The company’s budget analyst has the following actual data for the last 3 months:
Production
Manufacturing
Month
in Units
Supplies
March
450,000 $723,060
April
540,000
853,560
May
480,000
766,560
Using these data and the high-low method to develop a cost estimating equation, the estimate of needed
manufacturing supplies for July would be
A. $652,500
B. $681,500
C. $749,180
D. $752,060
Answer (D) is correct.
The fixed and variable portions of mixed costs may be estimated by identifying the highest and the
lowest costs within the relevant range. The difference in cost divided by the difference in activity is the
variable rate. Once the variable rate is found, the fixed portion is determinable. April and March
provide the highest and lowest amounts. The difference in production was 90,000 units (540,000 April
– 450,000 March), and the difference in the cost of supplies was $130,500 ($853,560 – $723,060).
Hence, the unit variable cost was $1.45 ($130,500 ÷ 90,000 units). The total variable costs for March
must have been $652,500 (450,000 units × $1.45 variable cost per unit), and the fixed cost must
therefore have been $70,560 ($723,060 – $652,500). The probable costs for July equal $681,500
(470,000 units × $1.45 variable cost per unit), plus $70,560 of fixed costs, a total of $752,060.
Question: 3Which of the following is the best example of a variable cost?
A. The corporate president’s salary.
B. Cost of raw material.
Answer (B) is correct.
Variable costs vary directly with the level of production. As production increases or decreases,
material cost increases or decreases, usually in a direct relationship.
C. Interest charges.
D. Property taxes.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 4Which one of the following is correct regarding a relevant range?
A. Total variable costs will not change.
B. Total fixed costs will not change.
Answer (B) is correct.
The relevant range is the range of activity over which unit variable costs and total fixed costs are
constant. The incremental cost of one additional unit of production will be equal to the variable cost.
C. Actual fixed costs usually fall outside the relevant range.
D. The relevant range cannot be changed after being established.
Question: 5Which one of the following categories of cost is most likely not considered a component of fixed
factory overhead?
A. Rent.
B. Property taxes.
C. Depreciation.
D. Power.
Answer (D) is correct.
A fixed cost is one that remains unchanged within the relevant range for a given period despite
fluctuations in activity. Such items as rent, property taxes, depreciation, and supervisory salaries are
normally fixed costs because they do not vary with changes in production. Power costs, however, are
at least partially variable because they increase as usage increases.
Question: 6An entity has the following cost components for 100,000 units of product for the year:
Direct materials
$200,000
Direct labor
100,000
Manufacturing overhead
200,000
Selling and administrative expense
150,000
All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative
expenses. The total costs to produce and sell 110,000 units for the year are
A. $650,000
B. $715,000
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C. $695,000
Answer (C) is correct.
Direct materials unit costs are strictly variable at $2 ($200,000 ÷ 100,000 units). Similarly, direct labor
has a variable unit cost of $1 ($100,000 ÷ 100,000 units). The $200,000 of manufacturing overhead for
100,000 units is 50% variable. The variable unit cost is $1. Selling costs are $100,000 fixed and
$50,000 variable for production of 100,000 units, and the variable unit selling expenses is $.50
($50,000 ÷ 100,000 units). The total unit variable cost is therefore $4.50 ($2 + $1 + $1 + $.50). Fixed
costs are $200,000. At a production level of 110,000 units, variable costs are $495,000 (110,000 units
× $4.50). Hence, total costs are $695,000 ($495,000 + $200,000).
D. $540,000
Fact Pattern: A company wants to determine its marketing costs for budgeting purposes.
Activity measures and costs incurred for 4 months of the current year are presented in the table
below. Advertising is considered to be a discretionary cost. Salespersons are paid monthly
salaries plus commissions. The sales force was increased from 20 to 21 individuals during the
month of May.
March
April
May
June
Activity measures:
Sales orders
Units sold
2,000
1,800
2,400
2,300
55,000
60,000
70,000
65,000
Dollar sales
Marketing costs:
Advertising
Sales salaries
Commissions
Shipping costs
$1,150,000 $1,200,000 $1,330,000 $1,275,000
Total costs
$ 326,000 $ 344,000 $ 351,600 $ 343,500
$ 190,000 $ 200,000 $ 190,000 $ 190,000
20,000
20,000
21,000
21,000
23,000
24,000
26,600
25,500
93,000
100,000
114,000
107,000
Question: 7Which of the following most appropriately describes the classification and behavior of shipping
costs?
Classification
Behavior
A. Variable cost $1.66 per unit sold
B. Mixed cost $16,000 per month plus $1.40 per unit sold
Answer (B) is correct.
Using the high-low method, the variable and fixed costs for shipping can be calculated. The difference
in cost levels divided by the difference in unit volume equals the variable cost per unit of $1.40
[($114,000 – $93,000) ÷ (70,000 – 55,000)]. The variable cost for 70,000 units is $98,000 (70,000 ×
$1.40). Subtracting the variable cost from total shipping cost results in the fixed cost of $16,000
($114,000 – $98,000).
C. Mixed cost $30,000 per month plus $35.00 per sales order
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Mixed cost $58,000 per month plus $23.33 per sales order
Fact Pattern: A company wants to determine its marketing costs for budgeting purposes.
Activity measures and costs incurred for 4 months of the current year are presented in the table
below. Advertising is considered to be a discretionary cost. Salespersons are paid monthly
salaries plus commissions. The sales force was increased from 20 to 21 individuals during the
month of May.
March
April
May
June
Activity measures:
Sales orders
Units sold
2,000
1,800
2,400
2,300
55,000
60,000
70,000
65,000
Dollar sales
Marketing costs:
Advertising
Sales salaries
Commissions
Shipping costs
$1,150,000 $1,200,000 $1,330,000 $1,275,000
Total costs
$ 326,000 $ 344,000 $ 351,600 $ 343,500
$ 190,000 $ 200,000 $ 190,000 $ 190,000
20,000
20,000
21,000
21,000
23,000
24,000
26,600
25,500
93,000
100,000
114,000
107,000
Question: 8In relation to the dollar amount of sales, which of the following cost classifications is appropriate for
advertising and sales salaries costs?
Advertising Sales Salaries
A. Variable cost Fixed cost
B. Fixed cost Variable cost
C. Mixed cost Mixed cost
D. Fixed cost Fixed cost
Answer (D) is correct.
Both advertising and sales salaries should be classified as fixed costs. The advertising was constant for
3 of the 4 months and would be considered fixed in terms of dollar sales. Sales salaries also did not
vary with dollar sales.
Question: 9The difference between variable costs and fixed costs is
A. Variable costs per unit fluctuate and fixed costs per unit remain constant.
B. Variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
Answer (B) is correct.
Fixed costs remain unchanged within the relevant range for a given period despite fluctuations in
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activity, but per unit fixed costs do change as the level of activity changes. Thus, fixed costs are fixed
in total but vary per unit as activity changes. Total variable costs vary directly with activity. They are
fixed per unit, but vary in total.
C. Total variable costs are variable over the relevant range and fixed in the long term, while fixed costs
never change.
D. Variable costs per unit change in varying increments, while fixed costs per unit change in equal
increments.
Question: 10A corporation has the following information for the first quarter of its year:
Machine Hours
Cleaning Expense
January
2,100
$ 900
February
2,600
1,200
March
1,600
800
April
2,000
1,000
Using the high-low method, what is the corporation’s fixed cost?
A. $160
Answer (A) is correct.
Once the variable portion of a mixed cost has been determined using the high-low method (in this case,
$400 cost difference ÷ 1,000 machine hours difference = $.40 per machine hour), it can be substituted
in the total cost formula for one of the months to isolate the fixed portion.
Variable costs + Fixed costs = Total cost
(2,600 × $.40) + Fixed costs = $1,200
Fixed costs = $1,200 – $1,040
Fixed costs = $160
B. $320
C. $640
D. $1,040
Question: 11A company has the following budget formula for annual electricity expense in its shop:
Expense = $7,200 + (Units produced × $0.60)
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If management expects to produce 20,000 units during February, for the purpose of performance evaluation,
what amount of expenses should the company expect to incur in February?
A. $7,200
B. $12,000
C. $12,600
Answer (C) is correct.
The formula is for an annual period. Thus, the first step is to divide the $7,200 of fixed costs by 12
months to arrive at monthly fixed costs of $600. Variable costs will be $.60 per unit, or $12,000 for
20,000 units. The total expected expenses are therefore $12,600 ($600 + $12,000).
D. $19,200
Question: 12The sum of the costs necessary to effect a one-unit increase in the activity level is a(n)
A. Differential cost.
B. Opportunity cost.
C. Marginal cost.
Answer (C) is correct.
A marginal cost is the sum of the costs necessary to effect a one-unit increase in the activity level.
D. Incremental cost.
Question: 13A company uses the following formula for annual maintenance costs:
Total cost = $6,000 + $0.70 per machine hour
The current month’s budget is based on planned machine time of 30,000 hours. Monthly maintenance cost included
in this budget is
A. $20,500
B. $21,000
C. $21,500
Answer (C) is correct.
The maintenance cost is a mixed cost containing both fixed and variable elements. To calculate the
monthly total fixed costs, divide the annual amount by 12.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Monthly fixed maintenance costs:
$6,000 ÷ 12 = $
Variable maintenance costs: 30,000 × $0.70/hour =
Total maintenance costs
500
21,000
$21,500
D. $27,000
Question: 14A corporation wishes to determine the fixed portion of its maintenance expense (a semivariable
expense), as measured against direct labor hours, for the first 3 months of the year. The inspection costs are fixed;
the adjustments necessitated by errors found during inspection account for the variable portion of the maintenance
costs. Information for the first quarter is as follows:
Direct Labor Hours
Maintenance Expense
January
34,000
$610
February
31,000
$585
March
34,000
$610
What is the fixed portion of maintenance expense, rounded to the nearest dollar?
A. $283
B. $327
Answer (B) is correct.
The high-low method can be used to determine the fixed and variable cost components of a mixed cost.
The variable cost is found by dividing the change in total cost (TC) by the change in activity, e.g.,
DLH. The fixed cost is found by substituting the variable cost into either of the activity/cost functions.
Alternatively, the fixed cost is the cost given a zero level of activity.
Variable portion = Change in TC ÷ Change in DLH = $25 ÷ 3,000 = $.00833
Fixed portion = Total cost – Variable portion
Fixed portion = $585 – (31,000 × $.00833) = $327
Fixed portion = $610 – (34,000 × $.00833) = $327
C. $258
D. $541
Question: 15Management has prepared a graph showing the total costs of operating branch warehouses
throughout the country. The cost line crosses the vertical axis at $200,000. The total cost of operating one branch is
$350,000. The total cost of operating ten branches is $1,700,000. For purposes of preparing a flexible budget based
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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on the number of branch warehouses in operation, what formula should be used to determine budgeted costs at
various levels of activity?
A. Y = $200,000 + $150,000X
Answer (A) is correct.
Fixed cost (FC) is $200,000, the amount at which the total cost (TC) line crosses the y-axis (when no
warehouses are in operation). The total variable cost (VC) of operating 10 warehouses is $1,500,000
($1,700,000 TC - $200,000 FC), so the variable cost per warehouse is $150,000 ($1,500,000 ÷ 10). Y
(TC) is therefore equal to $200,000 (FC) plus $150,000X (VC).
B. Y = $200,000 + $170,000X
C. Y = $350,000 + $200,000X
D. Y = $350,000 + $150,000X
Question: 16A company pays each member of its sales staff a salary as well as a commission on each unit sold.
For the coming year, the company plans to increase all salaries by 5% and to keep unchanged the commission paid
on each unit sold. Because of increased demand, the company expects the volume of sales to increase by 10%. How
will the total cost of sales salaries and commissions change for the coming year?
A. Increase by 5% or less.
B. Increase by more than 5% but less than 10%.
Answer (B) is correct.
Sales salaries will increase by exactly 5%. The per-unit commission amount will remain constant, but
sales commissions in total are expected to increase by 10%. Thus, total sales salaries and commissions
will increase somewhere between 5% and 10%.
C. Increase by 10%.
D. Increase by more than 10%.
Question: 17An entity estimates its total materials handling costs at two production levels as follows:
Cost
Gallons
$160,000 80,000
$132,000 60,000
What is the estimated total cost for handling 75,000 gallons?
A. $146,000
B. $150,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $153,000
Answer (C) is correct.
The high-low method can be applied to calculate the two portions of a mixed cost. The numerator is
the difference between the cost at the highest level of activity and the cost at the lowest level
($160,000 – $132,000 = $28,000). The denominator is the difference between the highest level of
activity from the lowest level (80,000 – 60,000 = 20,000). The variable portion of the total mixed cost
is derived by dividing these two figures ($28,000 ÷ 20,000 = $1.40 per gallon). The fixed portion can
be calculated by inserting the appropriate values for either the high or low level as follows:
Fixed portion = Total cost – Variable portion
= $160,000 – (80,000 × $1.40)
= $160,000 – $112,000
= $48,000
The total handling cost for a production level of 75,000 can now be determined: $48,000 + (75,000 ×
$1.40) = $153,000.
D. $165,000
Question: 18Production levels are expected to increase within the relevant range. What are the anticipated
effects on the following?
Fixed Costs Variable Costs
per Unit
per Unit
A. Increase Increase
B. Increase No change
C. Decrease Decrease
D. Decrease No change
Answer (D) is correct.
Fixed costs per unit decrease within the relevant range of activity as production increases because
more units are available to absorb the constant amount of total fixed costs. Unit variable costs are
assumed to remain the same per unit over the relevant range.
Question: 19A fixed cost that would be considered a direct cost is
A. A cost accountant’s salary when the cost objective is a unit of product.
B. The rental cost of a warehouse to store inventory when the cost objective is the Purchasing Department.
C. A production supervisor’s salary when the cost objective is the Production Department.
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Answer (C) is correct.
A direct cost is one that can be specifically associated with a single cost objective in an economically
feasible way. Thus, a production supervisor’s salary can be directly associated with the department
(s)he supervises.
D. Board of directors’ fees when the cost objective is the Marketing Department.
Question: 20A company is determining the cost behavior of several items in order to budget for the upcoming
year. Past trends have indicated the following dollars were spent at three different levels of output:
Unit Levels
10,000
12,000
15,000
Cost A $25,000
$29,000
$35,000
Cost B
10,000
15,000
15,000
Cost C
15,000
18,000
22,500
In establishing a budget for 14,000 units, the company should treat Costs A, B, and C, respectively, as
A. Semivariable, fixed, and variable.
Answer (A) is correct.
To properly understand the nature of a cost, its behavior in total and on a per-unit basis can be
examined. Dividing the total costs incurred by the activity levels yields the following per-unit results:
10,000 12,000 15,000
Cost A
$2.50
$2.42
$2.33
Cost B
1.00
1.25
1.00
Cost C
1.50
1.50
1.50
Cost A increases disproportionately across the relevant range in total and decreases proportionately on
a per-unit basis; A is thus a semivariable cost. Cost B is neither variable or semi-variable, since the
total cost does not increase with respect to the units sold. Therefore, it must be considered as fixed for
purposes of this question. Cost C increases steadily across the relevant range in total but remains
constant on a per-unit basis; C is thus a variable cost.
B. Variable, fixed, and variable.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Semivariable, semivariable, and semivariable.
D. Variable, semivariable, and semivariable.
Question: 21Which one of the following refers to a cost that remains the same as the volume of activity
decreases within the relevant range?
A. Average cost per unit.
B. Variable cost per unit.
Answer (B) is correct.
Variable cost per unit remains constant in the short run regardless of the level of production. This is in
contrast with variable costs in total, which vary directly and proportionally with changes in volume.
C. Unit fixed cost.
D. Total variable cost.
Question: 22An entity provides the following summary of its total budgeted production costs at three production
levels:
Volume in Units
1,000
1,500
2,000
Cost A $1,420
$2,130
$2,840
Cost B 1,550
2,200
2,900
Cost C 1,000
1,000
1,000
Cost D 1,630
2,445
3,260
The cost behavior of each of the Costs A through D, respectively, is
A. Semivariable, variable, fixed, and variable.
B. Variable, semivariable, fixed, and semivariable.
C. Variable, fixed, fixed, and variable.
D. Variable, semivariable, fixed, and variable.
Answer (D) is correct.
To properly understand the nature of a cost, its behavior in total and on a per-unit basis can be
examined. Dividing the total costs incurred by the activity levels yields the following per-unit results:
1,000
1,500
2,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Cost A
$1.42
$1.42
$1.42
Cost B
1.55
1.47
1.45
Cost C
1.00
0.67
0.50
Cost D
1.63
1.63
1.63
Costs A and D increase steadily across the relevant range in total but remain constant on a per-unit
basis; they are thus variable costs. Cost B increases disproportionately across the relevant range in total
and decreases disproportionately on a per-unit basis; B is thus a semivariable cost.
Question: 23The relevant range refers to the activity levels over which
A. Cost relationships hold constant.
Answer (A) is correct.
The relevant range defines the limits within which per-unit variable costs remain constant and fixed
costs are not changeable. It is synonymous with the short run. The relevant range is established by the
efficiency of a company’s current manufacturing plant, its agreements with labor unions and suppliers,
etc.
B. Costs fluctuate.
C. Production varies.
D. Relevant costs are incurred.
Question: 24A company has discovered that the cost of processing customer invoices is strictly variable within
the relevant range. Which one of the following statements concerning the cost of processing customer invoices
is incorrect?
A. The total cost of processing customer invoices will increase as the volume of customer invoices increases.
B. The cost per unit for processing customer invoices will decline as the volume of customer invoices
increases.
Answer (B) is correct.
Variable cost per unit remains constant in the short run regardless of the level of production.
C. The cost of processing the 100th customer invoice will be the same as the cost of processing the first
customer invoice.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. The average cost per unit for processing a customer invoice will equal the incremental cost of processing
one more customer invoice.
Question: 25When identifying fixed and variable costs, which one of the following is a typical assumption
concerning cost behavior?
A. General and administrative costs are assumed to be variable costs.
B. Cost behavior is assumed to be realistic for all levels of activity from zero to maximum capacity.
C. Total costs are assumed to be linear when plotted on a graph.
Answer (C) is correct.
Total costs, being a mixture of fixed and variable costs, are assumed to be linear.
D. The relevant time period is assumed to be 5 years.
Question: 26A management accountant is about to prepare graphs of total variable cost and per-unit variable
cost for use in a short-term planning model. Dollars will be depicted on the vertical axis; activity will be shown on
the horizontal axis. How will these graphs appear under completion?
Total Variable Cost
Per-Unit Variable Cost
A. Straight line, sloping upward to the right.
Straight line, parallel to the horizontal axis.
Answer (A) is correct.
Variable costs in total vary directly and proportionally with changes in volume. This is depicted as a
straight line sloping upward to the right. Variable cost per unit, however, remains constant in the short
run regardless of the level of production. This is depicted as a horizontal line.
B.
Curvilinear, sloping upward to
the right.
A line that basically parallels the horizontal axis, first decreasing
and then increasing.
C. Straight line, sloping upward to the right.
D. Straight line, parallel to the horizontal axis.
Straight line, sloping upward to the right.
Straight line, sloping upward to the right.
Question: 27A company has found that its total electricity cost has both a fixed component and a variable
component within the relevant range. The variable component seems to vary directly with the number of units
produced. Which one of the following statements concerning electricity cost is incorrect?
A. The total electricity cost will increase as production volume increases.
B. The total electricity cost per unit of production will increase as production volume increases.
Answer (B) is correct.
Because of the fixed portion, the per-unit cost of a mixed, or semivariable, cost will decrease as
production volume increases.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. The variable electricity cost per unit of production will remain constant as production volume increases.
D. The fixed electricity cost per unit of production will decline as production volume increases.
Fact Pattern: Jackson Co. has the following information for the first 4 months of this year:
January
Machine
Cleaning
Hours
Expense
2,100 $ 900
February 2,600
1,200
March
1,600
800
April
2,000
1,000
Question: 28Using the high-low method, what is Jackson’s variable cost of cleaning per machine hour?
A. $.40
Answer (A) is correct.
The high-low method is used to segregate the fixed and variable components of a mixed cost. In this
problem, March had the lowest activity level and February had the highest.
February
March
$1,200 for 2,600 hours
(800) for (1,600) hours
Difference $ 400 for 1,000 hours
The variable portion is thus $.40 per machine hour.
B. $.48
C. $2.00
D. $2.50
Fact Pattern: Jackson Co. has the following information for the first 4 months of this year:
January
Machine
Cleaning
Hours
Expense
2,100 $ 900
February 2,600
March
1,600
1,200
800
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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April
2,000
1,000
Question: 29Jackson’s management expects machine hours for the month of May to be 1,400 hours. Given a
variable portion of $.40 per machine hour and a fixed portion of $160 per month, what is their expected total cost for
the month of May?
A. $560
B. $650
C. $720
Answer (C) is correct.
The expected total cost for any activity level can be found using the following formula:
Expected total cost = Expected fixed cost + Expected variable cost
= $160 + (1,400 hours × $.40 per hour)
= $160 + $560
= $720
D. $760
Fact Pattern:
Hours of Maintenance
In preparing the annual profit plan for the coming year, Wilkens Company
Activity
Costs
wants to determine the cost behavior pattern of the maintenance costs.
Wilkens has decided to use linear regression by employing the equation y = January
480
$ 4,200
a + bx for maintenance costs. The prior year’s data regarding maintenance February
320
3,000
hours and costs, and the results of the regression analysis, are given below March
400
3,600
and in the opposite column.
April
300
2,820
May
500
4,350
Average cost per hour
$9.00
June
310
2,960
a
684.65
July
320
3,030
August
520
4,470
b
7.2884
September 490
4,260
Standard error of a
49.515
October
470
4,050
November 350
3,300
Standard error of b
.12126
December 340
3,160
Standard error of the estimate 34.469
Sum 4,800
$43,200
r2
.99724
Average
400
$ 3,600
Question: 30If Wilkens Company uses the high/low method of analysis, the equation for the relationship between
hours of activity and maintenance cost would be
A. y = 400 + 9.0x
B. y = 570 + 7.5x
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
The first step in applying the high-low method is to determine the difference in total cost and activity
levels between the months with the highest and lowest levels of activity.
Hours Dollars
August
520
April
(300)
Difference 220
$ 4,470
(2,820)
$ 1,650
Variable cost is thus $7.50 per hour ($1,650 ÷ 220), so at 300 hours of activity, the total variable costs
are $2,250 ($7.50 × 300 hours). Since the total cost was $2,820, the $570 above the variable costs must
be fixed costs. Substituting into the standard regression equation of y = a + bx gives y = $570 +
$7.50x.
C. y = 3,600 + 400x
D. y = 570 + 9.0x
Question: 31The least exact method for separating fixed and variable costs is
A. The least squares method.
B. Computer simulation.
C. The high-low method.
Answer (C) is correct.
The fixed and variable portions of mixed costs may be estimated by identifying the highest and the
lowest costs within the relevant range. The difference in cost divided by the difference in activity is the
variable rate. Once the variable rate is found, the fixed portion is determinable. The high-low method
is a simple approximation of the mixed cost formula. The costs of using more sophisticated methods
sometimes outweigh the incremental accuracy achieved. In these cases, the high-low method is
sufficient.
D. Matrix algebra.
Question: 32A company prepares a budget each month for manufacturing costs. Formulas have been developed
for all costs within a relevant range of 5,000 to 15,000 units per month. The budget for electricity (a semivariable
cost) is $19,800 at 9,000 units per month, and $21,000 at 10,000 units per month. How much should be budgeted for
electricity for the coming month if 12,000 units are to be produced?
A. $26,400
B. $25,200
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $23,400
Answer (C) is correct.
The company’s budget consists of a fixed cost component and a variable cost component. The fixed
cost component can be expected to remain constant throughout the budget’s relevant range. The
variable cost component, however, will change at a constant rate within the budget’s range. The
increase in budgeted cost of $1,200 ($21,000 – $19,800) per 1,000 units of production can therefore be
calculated as the variable cost per unit of $1.20 [($21,000 – $19,800) ÷ 1,000] and the total fixed costs
of $9,000 [$21,000 – (10,000 × $1.20)]. These costs can then be used to determine the total cost of
using 12,000 units of electricity [(12,000 × $1.20) variable + $9,000 fixed].
D. $22,200
Question: 33A company budgets its total production costs at $220,000 for 75,000 units of output and $275,000
for 100,000 units of output. Since additional facilities are needed to produce 100,000 units, fixed costs are budgeted
at 20% more than for 75,000 units. What is the budgeted variable cost per unit of output?
A. $1.10
Answer (A) is correct.
First, state the information known about the two production levels mathematically:
Variable costs +
Fixed costs
= Total cost
(75,000 × UVC) +
(1.0 × FC) = $220,000
(100,000 × UVC) +
(1.2 × FC) = $275,000
Next, state one of them in terms of fixed costs:
(75,000 × UVC) +
(1.0 × FC) = $220,000
FC = $220,000 – (75,000 × UVC)
Substitute this relationship into the second equation and solve for the budgeted unit variable cost:
(100,000 × UVC) + 1.2 ($220,000 – 75,000 UVC) = $275,000
(100,000 × UVC) + $264,000 – (90,000 × UVC) = $275,000
(10,000 × UVC) = $11,000
UVC = $1.10
B. $1.20
C. $2.20
D. $2.75
Question: 34A firm operated four sales offices last year. The firm’s costs were $400,000, of which $60,000 were
fixed. The firm’s total costs are significantly influenced by the number of sales offices it operates. Using last year’s
costs as the basis for predicting annual costs, what would the budgeted costs be if the firm operated six sales offices?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $600,000
B. $570,000
Answer (B) is correct.
First, state the known information mathematically and derive the variable portion of the total:
Fixed costs + Variable costs = Total cost
$60,000 + Variable costs = $400,000
Variable costs = $340,000
Next, calculate the unit variable cost of $85,000 per office ($340,000 ÷ 4 offices). Total budgeted cost
for the upcoming year can now be calculated as $570,000 [($85,000 per office × 6 offices) + $60,000].
C. $510,000
D. $485,000
Question: 35Over the past several years, an entity has experienced the following regarding shipping expenses:
Fixed costs
$16,000
Average shipment 15 pounds
Cost per pound
$.50
Shown below are the budget data for the coming year.
Number of units shipped
8,000
Number of sales orders
800
Number of shipments
800
Total sales
$1,200,000
Total pounds shipped
9,600
Expected shipping costs for the coming year are
A. $4,800
B. $16,000
C. $20,000
D. $20,800
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
The entity expects to ship 9,600 pounds of product at a rate of $0.50 per pound for a total of $4,800.
Add this variable cost to the $16,000 of fixed costs to arrive at a total of $20,800 expected shipping
costs for the year.
Question: 36A manufacturing company estimates semi-variable costs by using the high-low method with
machine hours as the cost driver. Recent data are shown below.
Period Semi-Variable Costs Machine Hours
1
€ 100,000
22,000
2
120,000
30,000
3
96,000
23,600
If 29,000 machine hours were budgeted for the next period, estimated semi-variable costs would total
A. €116,250
B. €117,000
C. €117,500
Answer (C) is correct.
The difference in cost between the highest and lowest levels of activity for a group of periods is
divided by the difference in the cost drivers (activity level) at the two levels. The highest level of
activity is 30,000 machine hours, and the lowest level is 22,000 machine hours. Therefore, the variable
rate for the variable portion is calculated as follows: (€120,000 – €100,000) ÷ (30,000 – 22,000) =
€2.50 per machine hour. The fixed portion is then calculated as follows:
€120,000 = Fixed + 30,000 × €2.50
Fixed = €45,000
Now the answer can be calculated as follows:
Total costs = €45,000 + 29,000 × €2.50
= €45,000 + €72,500
= €117,500
D. €121,220
Question: 37A company recorded the following production costs during the previous two-week period:
Week 1
Direct labor costs
Week 2
$17,000 Direct labor costs
$19,500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Other manufacturing costs
Units produced
25,000 Other manufacturing costs
5,000 Units produced
28,000
6,000
Assuming both weeks fall in the same relevant range, what was the total fixed cost during Week 1?
A. $5,500
B. $14,500
Answer (B) is correct.
The fixed and variable portions of mixed costs may be estimated by identifying the highest and lowest
costs within the relevant range. The difference in cost divided by the difference in activity is the
variable rate. Once the variable rate is found, the fixed portion is determinable. The difference in
production is 1,000 units (6,000 Week 2 – 5,000 Week 1), and the difference in the total cost (TC) for
both weeks is $5,500 [($19,500 + $28,000 Week 2) – ($17,000 + $25,000 Week 1)]. Hence, the unit
variable cost (VC) is $5.50 ($5,500 ÷ 1,000 units). The total variable costs for Week 1 must have been
$27,500 (5,000 units × $5.50 VC per unit), and the fixed cost must therefore have been $14,500
($42,000 TC – $27,500 VC).
C. $25,000
D. $26,500
Question: 38A company produces a product that contains 9 ounces of materials in each unit of finished goods.
During the production process, 4% of the materials evaporate. The company pays its suppliers $2 per ounce; the cost
to ship the material to the company averages $0.20 per ounce. The standard dollar amount of raw materials
contained in one unit of finished goods is
A. $18.75
B. $19.80
C. $20.59
D. $20.63
Answer (D) is correct.
First, it is necessary to find the actual amount of materials used in each unit of finished good, including
the evaporated material. Since 4% of the total amount evaporates, an equation can be set up as X oz ×
96% = 9 oz. The variable X is 9.375 oz, which is the amount of raw materials input for one unit of
finished goods. The evaporated material should be counted since it is normal spoilage, which is
spoilage that occurs under normal operating conditions. Normal spoilage conditions are absorbed into
the cost of the finished good.
The cost per ounce of raw materials is $2.20. This contains the cost to ship each ounce of materials.
Any cost necessary to get the material to the production process is included in the cost of direct
materials. The total cost of raw materials contained in one unit of finished goods is $20.63, which is
the product of $2.20 per ounce and 9.375 ounces per unit.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 39A conglomerate outsources the cleaning of its theaters. The cleaning vendor’s charges are based
upon the total hours needed to clean the facilities, and more cleaning time is needed as more people attend the
theater. The conglomerate has accumulated the following historical data.
Month
Cleaning
Cost
Number of Theater Tickets Sold
April $11,000
19,700
May
9,000
17,000
June 15,600
28,000
July
29,000
15,000
The conglomerate anticipates selling 25,000 theater tickets in August. If the conglomerate uses the high-low method
of separating costs into their fixed and variable components, the conglomerate’s budget for August cleaning costs
would be
A. $13,000
Answer (A) is correct.
The high-low method takes the difference in cost between the highest and lowest levels of activity for
a group of periods and divides it by the difference in the cost drivers (activity level) at the two levels,
which yields 0.5 [($15,000 – $9,000) ÷ (29,000 – 17,000)]. The fixed portion can then be calculated by
inserting the appropriate values for either the high or low period in the range: Fixed portion = Total
cost – Variable portion, which yields a fixed portion of 500 [$15,000 – (29,000 × 0.5)]. Total cost for
25,000 theater tickets is $13,000 [$500 fixed cost + (0.5 × 25,000) variable cost].
B. $13,400
C. $13,500
D. $13,800
Question: 40Within the relevant range, fixed cost per unit will
A. Increase as the activity level increases.
B. Decrease as the activity level decreases.
C. Remain the same as the activity level decreases.
D. Decrease as the activity level increases.
Answer (D) is correct.
Fixed costs remain unchanged within the relevant range for a given period but per unit fixed costs do
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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change as the level of activity changes. Fixed cost per unit will decrease as the activity level increases
within the relevant range.
Question: 41A company reported the following cost information for the last fiscal year when it produced
100,000 units.
Direct labor
$200,000
Direct materials
100,000
Manufacturing overhead
200,000
Selling and administrative expenses 150,000
All costs are variable except for $100,000 of manufacturing overhead and $100,000 of selling and administrative
expenses. Using flexible budgeting, what are the total costs associated with producing and selling 110,000 units?
A. $450,000
B. $650,000
C. $695,000
Answer (C) is correct.
Direct materials unit costs are strictly variable at $2 ($200,000 ÷ 100,000 units). Similarly, direct labor
has a variable unit cost of $1 ($100,000 ÷ 100,000 units). The manufacturing overhead costs are
$100,000 fixed and $100,000 variable, and the variable manufacturing cost per unit is $1 ($100,000 ÷
100,000 units). Selling costs are $100,000 fixed and $50,000 variable for production of 100,000 units,
and the variable unit selling expenses is $.50 ($50,000 ÷ 100,000 units). The total unit variable cost is
therefore $4.50 ($2 + $1 + $1 + $.50). Fixed costs are $200,000. At a production level of 110,000
units, variable costs are $495,000 (110,000 units × $4.50). Hence, total costs are $695,000 ($495,000 +
$200,000).
D. $715,000
Question: 42A company’s master budget for the year planned that the company would manufacture and sell
2,000 units for €500,000 in sales, €350,000 in variable expenses, and €45,000 in fixed expenses. If the company
only manufactured and sold 1,750 units during the year, how much is the company’s flexible budget operating
income?
A. €42,500
B. €86,250
Answer (B) is correct.
Selling price per unit is €250 (€500,000 ÷ 2,000 units) and variable cost per unit is €175 (€350,000 ÷
2,000 units). The company sold 1,750 units; thus, the total sales revenue is €437,500 (€250 x 1,750
units) and total variable cost is €306,250 (€175 x 1,750 units). Hence, the operating income is €86,250
(€437,500 revenue – €306,250 variable cost – €45,000 fixed cost).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
C. €91,875
D. €105,000
Question: 43The controller of an online retailer has negotiated a five-year contract with a shipping company to
pay the following amounts annually for the delivery of its goods, regardless of the amount:
Year 1 €1,000,000
Year 2 1,000,000
Year 3 1,500,000
Year 4 1,500,000
Year 5 2,000,000
What type of costs are these shipping expenditures?
A. Mixed.
B. Fixed.
Answer (B) is correct.
A fixed cost remains constant regardless of production. Thus, the shipping costs would be categorized
as fixed costs since they will remain constant regardless of the units shipped in a year.
C. Variable.
D. By-product.
Question: 44A manufacturing company is in the process of preparing its flexible budget for next month’s
manufacturing costs. The company estimates costs within a relevant range of 10,000 to 30,000 units per month.
During the last 2 months, electricity costs (a semivariable cost) were $39,600 for 18,000 units and $42,000 for
20,000 units. How much should be budgeted for electricity costs to produce 24,000 units?
A. $44,400
B. $46,800
Answer (B) is correct.
Using the high-low method, if costs increase by $2,400 ($42,000 – $39,600) when production
increases from 18,000 units to 20,000 units (an increase of 2,000 units), then the unit variable cost
must be $1.20 ($2,400 ÷ 2000 units). Thus, if the cost for 20,000 units is $42,000 and production
increases by 4,000 units, then the extra 4,000 units would cost $4,800 (4,000 × $1.20). Adding $4,800
to the $42,000 for 20,000 units results in a total of $46,800 for 24,000 units.
C. $50,400
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
D. $52,800
Fact Pattern:
Huron Industries has recently developed two new products, a cleaning
unit for video discs and a disc duplicator for reproducing movies taken
with a video camera. However, Huron has only enough plant capacity
to introduce one of these products during the current year. The
company controller has gathered the following data to assist
management in deciding which product should be selected for
production.
Huron’s fixed overhead includes rent and utilities, equipment
depreciation, and supervisory salaries. Selling and administrative
expenses are not allocated to products.
Question:
Disc
Duplicator
Raw materials
Machining at
$12 per hr.
Assembly at
$10 per hr.
Variable
overhead at
$8 per hr.
Fixed overhead
at $4 per hr.
$
Total cost
$ 146.00
$
88.00
$ 169.95
$
99.98
$240,000
$175,000
$500,000
$350,000
Suggested
selling price
Actual research
and
development
costs
Proposed
advertising and
promotion
costs
45The total overhead cost of $27.00 for Huron’s video disc cleaning unit is a
44.00
18.00
Cleaning
Unit
$
36.00
15.00
30.00
10.00
36.00
18.00
18.00
9.00
A. Carrying cost.
B. Discretionary cost.
C. Sunk cost.
D. Mixed cost.
Answer (D) is correct.
A mixed cost is a combination of fixed and variable elements. Consequently, the $27 of total overhead
cost is mixed because it contains both fixed overhead and variable overhead.
Subunit 3: Cost Classification
Question: 1Discretionary costs are costs that
A. Management decides to incur in the current period to enable the company to achieve objectives other than
the filling of orders placed by customers.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Answer (A) is correct.
Discretionary costs are those that are incurred in the current period at the “discretion” of management
and are not required to fill orders by customers.
B. Are likely to respond to the amount of attention devoted to them by a specified manager.
C. Are governed mainly by past decisions that established the present levels of operating and organizational
capacity and that only change slowly in response to small changes in capacity.
D. Will be unaffected by current managerial decisions.
Question: 2An imputed cost is
A. The difference in total costs that results from selecting one alternative instead of another.
B. A cost that cannot be avoided because it has already been incurred.
C. A cost that does not entail any dollar outlay but is relevant to the decision-making process.
Answer (C) is correct.
An imputed cost does not entail any dollar outlay but is relevant to the decision-making process.
D. A cost that continues to be incurred even though there is no activity.
Question: 3The amount of raw materials left over from a production process or production cycle for which there
is no further use is
A. Scrap.
B. Abnormal spoilage.
C. Waste.
Answer (C) is correct.
Waste is the amount of raw materials left over from a production process or production cycle for which
there is no further use. Waste is usually not salable at any price and must be discarded.
D. Normal spoilage.
Question: 4The cost associated with abnormal spoilage ordinarily is charged to
A. Inventory.
B. A material variance account.
C. Manufacturing overhead.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. A special loss account.
Answer (D) is correct.
Abnormal spoilage is usually charged to a special loss account because it is not expected to occur
under normal, efficient operating conditions. Because it is unusual, it should be separately reported as a
period cost.
Question: 5Controllable costs are costs that
A. Management decides to incur in the current period to enable the company to achieve objectives other than
the filling of orders placed by customers.
B. Are likely to respond to the amount of attention devoted to them by a specified manager.
Answer (B) is correct.
Controllable costs can be affected by the efforts of a manager.
C. Fluctuate in total in response to small changes in the rate of utilization of capacity.
D. Will be unaffected by current managerial decisions.
Question: 6Committed costs are
A. Costs that management decides to incur in the current period to enable the company to achieve objectives
other than the filling of orders placed by customers.
B. Costs that are likely to respond to the amount of attention devoted to them by a specified manager.
C. Costs that are governed mainly by past decisions that established the present levels of operating and
organizational capacity and that only change slowly in response to small changes in capacity.
Answer (C) is correct.
Committed costs are those that are required as a result of past decisions.
D. Amortization of costs that were capitalized in previous periods.
Question: 7When compared with normal spoilage, abnormal spoilage
A. Arises more frequently from factors that are inherent in the manufacturing process.
B. Is given the same accounting treatment as normal spoilage.
C. Is generally thought to be more controllable by production management than normal spoilage.
Answer (C) is correct.
Spoiled goods are defective items that cannot be feasibly reworked. Traditional cost accounting
systems distinguish between normal and abnormal spoilage because, in some operations, a degree of
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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spoilage is viewed as inevitable. Normal spoilage occurs under normal, efficient operating conditions.
It is spoilage that is uncontrollable in the short run and therefore should be expressed as a function of
good output (treated as a product cost). Accordingly, normal spoilage is assigned to all good units in
process costing systems, that is, all units that have passed the inspection point at which the spoilage
was detected. If normal spoilage is attributable to a specific job, only the disposal value of the
normally spoiled goods is removed from work-in-process, thereby assigning the cost of normal
spoilage to the good units remaining in the specific job. Abnormal spoilage is not expected to occur
under normal, efficient operating conditions. The cost of abnormal spoilage should be separately
identified and reported. Abnormal spoilage is typically treated as a period cost (a loss) because it is
unusual.
D. Is not typically influenced by the “tightness” of production standards.
Question: 8A controllable expense
A. Is an expected future expense that will be different under various alternatives.
B. Is an expense whose actual amount will not normally differ from the standard (budget) amount.
C. Is one that is directly influenced at a given level of managerial authority within a given time period.
Answer (C) is correct.
Controllable expenses are directly regulated by a manager of a responsibility center at a given level of
production within a given time span.
D. Is an expense that will remain semivariable in total over the relevant range in a given time period.
Question: 9A cost that bears an observable and known relationship to a quantifiable activity base is a(n)
A. Engineered cost.
Answer (A) is correct.
A cost that bears an observable and known relationship to a quantifiable activity base is known as an
engineered cost. Engineered costs have a clear relationship to output. Direct materials would be an
example of an engineered cost.
B. Indirect cost.
C. Sunk cost.
D. Target cost.
Question: 10Committed costs are costs that
A. Were capitalized and amortized in prior periods.
B. Management decides to incur in the current period that do not have a clear cause and effect relationship
between inputs and outputs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
C. Result from a clear measurable relationship between inputs and outputs.
D. Establish the current level of operating capacity and cannot be altered in the short run.
Answer (D) is correct.
Committed costs result when a going concern holds fixed assets such as property, plant, and
equipment. The related committed costs include depreciation, long-term lease payments, and
insurance. Such costs establish the present level of operating capacity and cannot be altered in the short
run.
Question: 11Costs that arise from periodic budgeting decisions that have no strong input-output relationship are
commonly called
A. Committed costs.
B. Discretionary costs.
Answer (B) is correct.
Discretionary costs are characterized by uncertainty about the relationship between input (the costs)
and the value of the related output. Advertising and research are examples. They should be contrasted
with engineered costs, that is, costs having a clear input-output relationship (e.g., the cost of direct
materials).
C. Opportunity costs.
D. Differential costs.
Fact Pattern:
Huron Industries has recently developed two new products, a cleaning
unit for video discs and a disc duplicator for reproducing movies taken
with a video camera. However, Huron has only enough plant capacity
to introduce one of these products during the current year. The
company controller has gathered the following data to assist
management in deciding which product should be selected for
production.
Huron’s fixed overhead includes rent and utilities, equipment
depreciation, and supervisory salaries. Selling and administrative
expenses are not allocated to products.
Disc
Duplicator
44.00
18.00
Raw materials
Machining at
$12 per hr.
Assembly at
$10 per hr.
Variable
overhead at
$8 per hr.
Fixed overhead
at $4 per hr.
$
$
36.00
15.00
Total cost
$ 146.00
$
88.00
Suggested
selling price
Actual research
and
development
costs
$ 169.95
$
99.98
$240,000
$175,000
30.00
10.00
36.00
18.00
18.00
9.00
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
Cleaning
Unit
https://t.me/CMA_part2
Question:
Proposed
advertising and
promotion
$500,000
$350,000
costs
12For Huron’s disc duplicator, the unit costs for raw materials, machining, and assembly represent
A. Conversion costs.
B. Separable costs.
C. Committed costs.
D. Prime costs.
Answer (D) is correct.
Raw materials and direct labor (such as machining and assembly) are a manufacturer’s prime costs.
Fact Pattern:
Huron Industries has recently developed two new products, a cleaning
unit for video discs and a disc duplicator for reproducing movies taken
with a video camera. However, Huron has only enough plant capacity
to introduce one of these products during the current year. The
company controller has gathered the following data to assist
management in deciding which product should be selected for
production.
Huron’s fixed overhead includes rent and utilities, equipment
depreciation, and supervisory salaries. Selling and administrative
expenses are not allocated to products.
Question:
Disc
Duplicator
Raw materials
Machining at
$12 per hr.
Assembly at
$10 per hr.
Variable
overhead at
$8 per hr.
Fixed overhead
at $4 per hr.
$
Total cost
$ 146.00
$
88.00
$ 169.95
$
99.98
$240,000
$175,000
$500,000
$350,000
Suggested
selling price
Actual research
and
development
costs
Proposed
advertising and
promotion
costs
13Research and development costs for Huron’s two new products are
44.00
18.00
$
36.00
15.00
30.00
10.00
36.00
18.00
18.00
9.00
A. Conversion costs.
B. Sunk costs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
Cleaning
Unit
https://t.me/CMA_part2
Answer (B) is correct.
Before they are incurred, R&D costs are often considered to be discretionary. However, Huron’s R&D
costs have already been incurred. Thus, they are sunk costs. A sunk cost is a past cost or a cost that the
entity has irrevocably committed to incur. Because it is unavoidable, it is not relevant to future
decisions.
C. Relevant costs.
D. Avoidable costs.
Fact Pattern:
Huron Industries has recently developed two new products, a cleaning
unit for video discs and a disc duplicator for reproducing movies taken
with a video camera. However, Huron has only enough plant capacity
to introduce one of these products during the current year. The
company controller has gathered the following data to assist
management in deciding which product should be selected for
production.
44.00
18.00
Cleaning
Unit
Raw materials
Machining at
$12 per hr.
Assembly at
$10 per hr.
Variable
overhead at
$8 per hr.
Fixed overhead
at $4 per hr.
$
Total cost
$ 146.00
$
88.00
Suggested
$ 169.95
selling price
Actual research
and
development
$240,000
costs
Proposed
advertising and
promotion
$500,000
costs
14The advertising and promotion costs for the product selected by Huron will be
$
99.98
Huron’s fixed overhead includes rent and utilities, equipment
depreciation, and supervisory salaries. Selling and administrative
expenses are not allocated to products.
Question:
Disc
Duplicator
$
36.00
15.00
30.00
10.00
36.00
18.00
18.00
9.00
$175,000
$350,000
A. Discretionary costs.
Answer (A) is correct.
A discretionary cost (a managed or program cost) results from a periodic decision about the total
amount to be spent. It is also characterized by uncertainty about the relationship between input and the
value of the related output. Examples are advertising and R&D costs.
B. Opportunity costs.
C. Committed costs.
D. Incremental costs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Fact Pattern:
Huron Industries has recently developed two new products, a cleaning
unit for video discs and a disc duplicator for reproducing movies taken
with a video camera. However, Huron has only enough plant capacity
to introduce one of these products during the current year. The
company controller has gathered the following data to assist
management in deciding which product should be selected for
production.
Huron’s fixed overhead includes rent and utilities, equipment
depreciation, and supervisory salaries. Selling and administrative
expenses are not allocated to products.
Disc
Duplicator
44.00
18.00
Cleaning
Unit
Raw materials
Machining at
$12 per hr.
Assembly at
$10 per hr.
Variable
overhead at
$8 per hr.
Fixed overhead
at $4 per hr.
$
$
36.00
15.00
Total cost
$ 146.00
$
88.00
Suggested
selling price
Actual research
and
development
costs
Proposed
advertising and
promotion
costs
$ 169.95
$
99.98
$240,000
$175,000
$500,000
$350,000
30.00
10.00
36.00
18.00
18.00
9.00
Question: 15The costs included in Huron’s fixed overhead are
A. Joint costs.
B. Committed costs.
Answer (B) is correct.
Committed costs are those for which management has made a long-term commitment. They typically
result when a firm holds fixed assets. Examples include long-term lease payments and depreciation.
Committed costs are typically fixed costs.
C. Opportunity costs.
D. Prime costs.
Question: 16A cost that may be eliminated by performing an activity more efficiently is a(n)
A. Opportunity cost.
B. Avoidable cost.
Answer (B) is correct.
Avoidable costs are those that may be eliminated by not engaging in an activity or by performing it
more efficiently.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Cost driver.
D. Indirect cost.
Question: 17Spoilage that is not expected to occur under normal, efficient operating conditions is considered
A. Abnormal spoilage.
Answer (A) is correct.
Abnormal spoilage is spoilage that is not expected to occur under normal, efficient operation
conditions.
B. Actual spoilage.
C. Normal spoilage.
D. Residual spoilage.
Question: 18Products of relatively small total value that are produced simultaneously from a common
manufacturing process with products of greater value and quantity are
A. Scrap.
B. By-products.
Answer (B) is correct.
By-products are products of relatively small total value that are produced simultaneously from a
common manufacturing process with products of greater value and quantity (joint products).
C. Waste.
D. Abnormal spoilage.
Question: 19A company produces stereo speakers for automobile manufacturers. The automobile manufacturers
reject approximately 3% of the stereo speakers received as being of unacceptable quality. The company inspects the
rejected speakers to determine which ones should be reworked and which ones should be discarded. The discarded
speakers are classified as
A. Waste.
B. Scrap.
C. Spoilage.
Answer (C) is correct.
Rejected units that are discarded are classified as spoilage. Spoilage is separated into abnormal or
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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normal spoilage. Normal spoilage is an inherent result of the normal production process. Abnormal
spoilage is spoilage that is not expected to occur under normal, efficient operating conditions.
D. Rework costs.
Question: 20A joint process is a manufacturing operation yielding two or more identifiable products from the
resources employed in the process. The two characteristics that identify a product generated from this type of
process as a joint product are that it
A. Is identifiable as an individual product only upon reaching the split-off point, and it has relatively minor
sales value when compared to the other products.
B. Is identifiable as an individual product before the production process, and it has relatively significant
physical volume when compared with the other products.
C. Is identifiable as an individual product only upon reaching the split-off point, and it has relatively
significant sales value when compared with the other products.
Answer (C) is correct.
Joint products are two or more separate products generated by a common process from a common
input that are not separable prior to the split-off point. Moreover, in contrast to by-products, they have
significant sales values in relation to each other either before or after additional processing.
D. Has relatively significant physical volume when compared with the other products, and it can be sold
immediately without any additional processing.
Question: 21Abnormal spoilage
A. Cannot occur when perfection standards are used.
B. Is not usually controllable by the production supervisor.
C. Results from unrealistic production standards.
D. Is not expected to occur under efficient operating conditions.
Answer (D) is correct.
Abnormal spoilage is spoilage that is not expected to occur under normal, efficient operating
conditions. The cost of abnormal spoilage should be separately identified and reported to management.
Abnormal spoilage is typically treated as a period cost (a loss) because of its unusual nature.
Fact Pattern: Gleason Co. has two products, a frozen dessert and ready-to-bake breakfast rolls,
ready for introduction. However, plant capacity is limited, and only one product can be
introduced at present. Therefore, Gleason has conducted a market study at a cost of $26,000, to
determine which product will be more profitable. The results of the study follow.
Sales of Desserts at
$1.80/unit
Sales of Rolls at
$1.20/unit
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Volume
Probability
Volume
Probability
250,000
.30
200,000
.20
300,000
.40
250,000
.50
350,000
.20
300,000
.20
400,000
.10
350,000
.10
The costs associated with the two products have been estimated by Gleason’s cost accounting
department and are as follows:
Dessert Rolls
Ingredients per unit
$
.40 $
.25
Direct labor per unit
.35
.30
Variable overhead per unit
.40
.20
Production tooling*
48,000 25,000
Advertising
30,000 20,000
*Gleason treats production tooling as a current operating expense rather than capitalizing it as a
fixed asset. Question: 22The advertising expense estimated by Gleason for the introduction of the new products
is an example of a(n)
A. Conversion cost.
B. Discretionary cost.
Answer (B) is correct.
Discretionary costs refer to costs that are not absolutely necessary to operate in the current period. The
level of these costs is subject to a decision made by management each period. A key characteristic of
discretionary costs is that there is no clearly measurable relationship between input (the costs) and
output. Advertising is a good example of a discretionary fixed cost.
C. Committed cost.
D. Opportunity cost.
Question: 23A company is attempting to determine if there is a cause-and-effect relationship between scrap
value and output produced. The following exhibit presents the company’s scrap data for the last fiscal year:
Scrap as a Percent of Standard Dollar
Value of Output Produced
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Month
Standard Dollar
Value of Output
Percent
Scrap (%)
Nov Year 7
$1,500,000
4.5
Dec Year 7
$1,650,000
2.5
Jan Year 8
$1,600,000
3.0
Feb Year 8
$1,550,000
2.5
Mar Year 8
$1,650,000
1.5
Apr Year 8
$1,500,000
4.0
May Year 8
$1,400,000
2.5
Jun Year 8
$1,300,000
3.5
Jul Year 8
$1,650,000
5.5
Aug Year 8
$1,000,000
4.5
Sep Year 8
$1,400,000
3.5
Oct Year 8
$1,600,000
2.5
The company’s scrap value in relation to the standard dollar value of output produced appears to be
A. A variable cost.
B. A fixed cost.
C. A semi-fixed cost.
D. Unrelated to the standard dollar value of output.
Answer (D) is correct.
Standard dollar value of output and the percentage of scrap have no systematic relationship.
Question: 24A firm calculates that its annual cost to hold excess goods in order to avoid any chance of running
out of inventory is $50,000. This $50,000 is an example of a
A. Prime cost.
B. Quality cost.
C. Carrying cost.
Answer (C) is correct.
The costs of holding or storing inventory are carrying costs. Examples include the costs of capital,
insurance, warehousing, breakage, and obsolescence.
D. Stockout cost.
Subunit 4: Costing Techniques
Question: 1Which one of the following alternatives correctly classifies the business application to the
appropriate costing system?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Job
Costing System
Process
Costing System
A. Wallpaper manufacturer Oil refinery
B. Aircraft assembly Public accounting firm
C. Paint manufacturer Retail banking
D. Print shop Beverage manufacturer
Answer (D) is correct.
A job costing system is used when products differ from one customer to the next, that is, when
products are heterogeneous. A process costing system is used when similar products are mass
produced on a continuous basis. A print shop, for example, would use a job costing system because
each job will be unique. Each customer provides the specifications for the product desired. A beverage
manufacturer, however, would use a process costing system because homogeneous units are produced
continuously.
Question: 2Which one of the following is least likely to be involved in establishing standard costs for evaluation
purposes?
A. Budgetary accountants.
B. Industrial engineers.
C. Top management.
Answer (C) is correct.
A standard cost is an estimate of what a cost should be under normal operating conditions based on
studies by accountants and engineers. In addition, line management is usually involved in the setting of
standard costs as are quality control personnel. Top management would not be involved because cost
estimation is a lower level operating activity. Participation by affected employees in all control
systems permits all concerned to understand both performance levels desired and the measurement
criteria being applied.
D. Quality control personnel.
Question: 3In target costing,
A. The market price of the product is taken as a given.
Answer (A) is correct.
Target costing begins with a target price, which is the expected market price given the company’s
knowledge of its customers and competitors. Subtracting the unit target profit margin determines the
long-term target cost. If this cost is lower than the full cost, the company may need to adopt
comprehensive cost-cutting measures. For example, in the furniture industry, certain price points are
popular with buyers: a couch might sell better at $400 than at $200 because consumers question the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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quality of a $200 couch and thus will not buy the lower-priced item. The result is that furniture
manufacturers view $400 as the target price of a couch, and the cost must be lower.
B. Only raw materials, labor, and variable overhead cannot exceed a threshold target.
C. Only raw materials cannot exceed a threshold target.
D. Raw materials are recorded directly to cost of goods sold.
Question: 4Which one of the following considers the impact of fixed overhead costs?
A. Full absorption costing.
Answer (A) is correct.
Full absorption costing treats fixed factory overhead costs as product costs. Thus, inventory and cost of
goods sold include (absorb) fixed factory overhead.
B. Marginal costing.
C. Direct costing.
D. Variable costing.
Question: 5An accounting system that collects financial and operating data on the basis of the underlying nature
and extent of the cost drivers is
A. Direct costing.
B. Activity-based costing.
Answer (B) is correct.
An activity-based costing (ABC) system identifies the causal relationship between the incurrence of
cost and the underlying activities that cause those costs. Under an ABC system, costs are applied to
products on the basis of resources consumed (drivers).
C. Cycle-time costing.
D. Variable costing.
Fact Pattern:
Huron Industries has recently developed two new products, a cleaning
unit for video discs and a disc duplicator for reproducing movies taken
with a video camera. However, Huron has only enough plant capacity Raw materials
Machining at
to introduce one of these products during the current year. The
$12 per hr.
company controller has gathered the following data to assist
Assembly at
$10 per hr.
Disc
Duplicator
$
44.00
18.00
30.00
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Cleaning
Unit
$
36.00
15.00
10.00
management in deciding which product should be selected for
production.
Huron’s fixed overhead includes rent and utilities, equipment
depreciation, and supervisory salaries. Selling and administrative
expenses are not allocated to products.
Variable
overhead at
$8 per hr.
Fixed overhead
at $4 per hr.
Total cost
36.00
18.00
18.00
9.00
$ 146.00
$
88.00
Suggested
$ 169.95
$ 99.98
selling price
Actual research
and
development
$240,000
$175,000
costs
Proposed
advertising and
promotion
$500,000
$350,000
costs
Question: 6The difference between the $99.98 suggested selling price for Huron’s video disc cleaning unit and its
total unit cost of $88.00 represents the unit’s
A. Contribution margin ratio.
B. Gross profit.
Answer (B) is correct.
Gross profit is the difference between sales price and the full absorption cost of goods sold.
C. Contribution.
D. Gross profit margin ratio.
Question: 7A standard costing system is most often used by a firm in conjunction with
A. Management by objectives.
B. Target (hurdle) rates of return.
C. Participative management programs.
D. Flexible budgets.
Answer (D) is correct.
A standard cost is an estimate of what a cost should be under normal operating conditions based on
accounting and engineering studies. Comparing actual and standard costs permits an evaluation of the
effectiveness of managerial performance. Because of the impact of fixed costs in most businesses, a
standard costing system is usually not effective unless the company also has a flexible budgeting
system. Flexible budgeting uses standard costs to prepare budgets for multiple activity levels.
Question: 8Which of the following statements is true for a firm that uses variable costing?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. The cost of a unit of product changes because of changes in number of units manufactured.
B. Profits fluctuate with sales.
Answer (B) is correct.
In a variable costing system, only the variable costs are recorded as product costs. All fixed costs are
expensed in the period incurred. Because changes in the relationship between production levels and
sales levels do not cause changes in the amount of fixed manufacturing cost expensed, profits more
directly follow the trends in sales.
C. An idle facility variation is calculated.
D. Product costs include variable administrative costs.
Question: 9The difference between the sales price and total variable costs is
A. Gross operating profit.
B. Net profit.
C. The breakeven point.
D. The contribution margin.
Answer (D) is correct.
The contribution margin is calculated by subtracting all variable costs from sales revenue. It represents
the portion of sales that is available for covering fixed costs and profit.
Question: 10A difference between standard costs used for cost control and budgeted costs
A. Can exist because standard costs must be determined after the budget is completed.
B. Can exist because standard costs represent what costs should be, whereas budgeted costs represent
expected actual costs.
Answer (B) is correct.
Standard costs are predetermined, attainable unit costs. Standard cost systems isolate deviations
(variances) of actual from expected costs. One advantage of standard costs is that they facilitate
flexible budgeting. Accordingly, standard and budgeted costs should not differ when standards are
currently attainable. However, in practice, budgeted (estimated actual) costs may differ from standard
costs when operating conditions are not expected to reflect those anticipated when the standards were
developed.
C. Can exist because budgeted costs are historical costs, whereas standard costs are based on engineering
studies.
D. Cannot exist because they should be the same amounts.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 11In a product’s life cycle, the first symptom of the decline stage is a decline in the
A. Firm’s inventory levels.
B. Product’s sales.
Answer (B) is correct.
The first symptom of the decline stage of a product’s life cycle triggers such other effects as price
cutting, narrowing of the product line, and reduction in promotion budgets.
C. Product’s production cost.
D. Product’s prices.
Question: 12The term “gross margin” for a manufacturing firm refers to excess of sales over
A. Cost of goods sold, excluding fixed indirect manufacturing costs.
B. All variable costs, including variable selling and administrative expenses.
C. Cost of goods sold, including fixed indirect manufacturing costs.
Answer (C) is correct.
Gross margin or gross profit is the excess of sales over cost of goods sold, calculated on a full
absorption basis. Cost of goods sold would include all manufacturing costs, both fixed and variable.
D. Manufacturing costs, excluding fixed manufacturing costs.
Question: 13Companies characterized by the production of basically homogeneous products will most likely use
which of the following methods for the purpose of averaging costs and providing management with unit-cost data?
A. Job-order costing.
B. Direct costing.
C. Absorption costing.
D. Process costing.
Answer (D) is correct.
Like products that are mass produced should be accounted for using process costing techniques to
assign costs to products. Costs are accumulated by departments or cost centers rather than by jobs,
work-in-process is stated in terms of equivalent units, and unit costs are established on a departmental
basis. Process costing is an averaging process that calculates the average cost of all units.
Question: 14A standard-cost system may be used in
Process
Costing
Job-Order
Costing
Activity-Based
Costing
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Yes Yes Yes
Answer (A) is correct.
A standard-cost system records the product at standard (predetermined) costs and compares expected
with actual cost. This comparison allows deviations (variances) from expected results to be identified
and investigated. A standard-cost system can be used in job-order, process-costing, and activity-based
systems to isolate variances.
B. Yes No Yes
C. No Yes No
D. No No No
Question: 15Consider the following information for Richardson Company for the prior year:
 The company produced 1,000 units and sold 900 units, both as budgeted.
 There were no beginning or ending work-in-process inventories and no beginning finished goods inventory.
 Budgeted and actual fixed costs were equal, all variable manufacturing costs were affected by production
volume only, and all variable selling costs were affected by sales volume only.
 Budgeted per unit revenues and costs were as follows:
Per unit

Sales price
$100
Direct materials
30
Direct labor
20
Other variable manufacturing costs
10
Fixed selling costs
5
Variable selling costs
12
Fixed manufacturing costs ($3,600 total)
4
Fixed administrative costs ($1,800 total)
2
The contribution margin earned by Richardson for the prior year was
A. $25,200
Answer (A) is correct.
Contribution margin equals revenues minus all variable costs. Given no WIP and no beginning
finished goods, the contribution margin was $25,200 [900 units × ($100 – $30 – $20 – $10 – $12)].
The variable costs of producing the units not sold are embedded in ending inventory rather than
expensed as part of cost of goods sold. The fixed costs are thus excluded from computation of the
contribution margin.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $28,000
C. $31,500
D. $35,000
Question: 16Consider the cost of goods sold calculation shown below.
Beginning inventory
$ 100,000
Plus cost of goods manufactured
2,500,000
Less ending inventory
(125,000)
Plus variable overhead efficiency variance
Cost of goods sold
10,000
$2,485,000
This is an example of which cost measurement technique?
A. Normal costing.
B. Standard costing.
C. Either actual costing or normal costing.
D. Either normal costing or standard costing.
Answer (D) is correct.
In both normal and standard costing, immaterial efficiency variances are accounted for as an addition
to cost of goods sold.
Question: 17The budget for a product is as follows.
Sales
$10,000,000
Materials and labor
4,000,000
Fixed manufacturing overhead
1,500,000
Sales commissions
500,000
Advertising (fixed)
200,000
Other marketing costs (fixed)
800,000
Allocated administrative costs
2,000,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Income
$ 1,000,000
The budgeted contribution margin for this product is
A. $5,500,000
Answer (A) is correct.
Contribution margin is the net sales revenue minus all variable costs (both manufacturing and S&A).
Materials and labor and sales commissions are the only variable costs listed in the budget. Thus, the
contribution margin is equal to $5,500,000 ($10,000,000 Sales – 4,000,000 Materials and labor –
500,000 Sales commissions).
B. $5,300,000
C. $4,500,000
D. $3,000,000
Question: 18A company manufactures clocks and sells each clock for $30. Variable manufacturing expense for
each clock is $18. The company plans to sell 400 clocks this month and anticipates incurring $2,600 of fixed
expenses. What will be the company’s total contribution margin this month?
A. $2,200
B. $4,800
Answer (B) is correct.
Contribution margin is the net sales revenue minus all variable costs. Thus, the contribution margin is
equal to $4,800 [($30 Selling price × 400 Clocks) – ($18 Variable manufacturing expense × 400
Clocks)].
C. $7,200
D. $12,000
Question: 19Which one of the following is least likely to be a reason to adopt a standard cost system?
A. Setting standards at an ideal level can motivate employees.
Answer (A) is correct.
Setting standards at an ideal level can motivate employees. However, if the standards are too high,
employees may be discouraged. If the standards are too low, employees may not be competitive.
Setting the correct level of standards is difficult, but it can motivate employees when done correctly.
B. A standard cost system identifies what the level of costs should be and who should be responsible for the
costs.
C. Utilizing standard costs tends to simplify recordkeeping.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Costs of using standard costing are low relative to costs of using actual costing.
Question: 20Consider the following situation for a company for the prior year.
 The company produced 1,000 units and sold 900 units, both as budgeted.
 There were no beginning or ending work-in-process inventories and no beginning finished goods inventory.
 Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected by volume of
production only, and all variable selling costs are affected by sales volume only.
 Budgeted per unit revenues and costs were as follows:

Per Unit
Sales price
$100
Direct materials
30
Direct labor
20
Variable manufacturing costs
10
Fixed manufacturing costs
5
Variable selling costs
12
Fixed selling costs ($3,600 total)
4
Fixed administrative costs ($1,800 total)
2
Assuming that the company uses variable costing, the operating income for the prior year was
A. $13,600
B. $14,200
C. $14,800
Answer (C) is correct.
Operating income based on variable costing is $14,800 calculated as follows:
Sales (900 × $100)
$90,000
COGS [900 × ($30 + $20 + $10)] 54,000
Fixed manufacturing (1,000 × $5)
Variable selling (900 × $12)
Fixed selling
5,000
10,800
3,600
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Fixed administrative
1,800
Operating income
$14,800
D. $15,300
Question: 21A company uses a standard cost accounting system. Data for the last fiscal year are as follows.
Units
Beginning inventory of finished goods 100
Production during the year
700
Sales
750
Ending inventory of finished goods
50
Per Unit
Product selling price
$200
Standard variable manufacturing cost
90
Standard fixed manufacturing cost
20*
Budgeted selling and administrative costs (all fixed) $45,000
*Denominator level of activity is 750 units for the year.
There were no price, efficiency, or spending variances for the year, and actual selling and administrative expenses
equaled the budget amount. Any volume variance is written off to cost of goods sold in the year incurred. There are
no work-in-progress inventories.
The amount of operating income earned for the last fiscal year using variable costing was
A. $21,500
B. $22,500
Answer (B) is correct.
Variable-basis operating income can be calculated as follows:
Sales
$150,000
Beginning inventory
100 units @ $90 = $ 9,000
Variable production costs
700 units @ $90 = 63,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Volume variance write-off
50 units @ $20 =
Goods available for sale
$73,000
Less: ending inventory
50 units @ $90 =
Variable cost of goods sold
Variable S&A expenses
1,000
(4,500)
(68,500)
None
Contribution margin
0
$ 81,500
Fixed production costs
700 units @ $20 =
(14,000)
Fixed S&A expenses
Fixed
(45,000)
Operating income
$ 22,500
Please note that the volume variance is used to find contribution margin in this case because the first
question states, “Any volume variance is written off to cost of goods sold in the year incurred.”
C. $28,000
D. $31,000
Question: 22Using management by exception allows managers to focus their attention on
A. Areas that have deviated most from expectations.
Answer (A) is correct.
Variance analysis enables management by exception, the practice of giving attention primarily to
significant deviations from expectations, whether favorable or unfavorable.
B. Non-administrative costs and revenues.
C. Unfavorable variances.
D. Variable costs and revenues.
Question: 23A steel company manufactures heavy-duty brackets for the shelving industry. The company has
budgeted for the production and sale of 1,000,000 brackets and has no beginning or ending inventory. Relevant
operational, revenue, and cost data is as follows:
Unit selling price of a bracket
$22.50
Direct material required per unit
4 pounds
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Direct labor required per unit
0.15 hours
Cost of material per pound
$1.75
Direct labor cost per hour
$9.00
Total variable selling costs
$2,250,000
Total fixed costs
$1,500,000
Based on the data provided, what is the unit contribution margin per bracket?
A. $14.15
B. $11.90
Answer (B) is correct.
Unit contribution margin is the net of sales revenue per unit minus all variable costs per unit. The
revenues will be $22.50 per unit. Variable material costs will be $7.00 per unit (4 pounds at $1.75 per
pound), and variable direct labor will be $1.35 per unit (.15 hours at $9.00 per hour). In addition,
variable selling costs are $2.25 per unit ($2,250,000 ÷ 1,000,000 units). Therefore, total variable costs
are $10.60 ($7.00 + $1.35 + $2.25). Subtracting the $10.60 of variable costs from the $22.50 of
revenue results in a contribution margin of $11.90 per unit.
C. $10.60
D. $10.40
Question: 24Contribution margin focuses on which one of the following?
A. The amount of revenue available to cover fixed costs.
Answer (A) is correct.
The contribution margin is the difference between revenue and variable costs. Its primary focus is to
determine how much of revenue will be available to cover fixed costs and contribute toward profits.
B. The total variable manufacturing costs.
C. How competitive a company is compared to other companies.
D. The total revenue expected during the year.
Question: 25Operating income under variable costing is contribution margin minus
A. Cost of goods sold and administrative expenses.
B. Fixed manufacturing overhead and fixed selling and administrative expenses.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
In a variable costing system, all variable costs are first deducted from revenues to arrive at the
contribution margin. All fixed costs, including both fixed manufacturing overhead and fixed selling
and administrative costs, are deducted from the contribution margin.
C. Fixed manufacturing overhead and variable manufacturing overhead.
D. Variable selling and administrative expenses and fixed selling and administrative expenses.
Question: 26During the growth stage of a product’s life cycle,
A. The quality of products is poor.
B. New product models and features are introduced.
Answer (B) is correct.
In the growth stage, sales and profits increase rapidly, cost per customer decreases, customers are early
adopters, new competitors enter an expanding market, new product models and features are introduced,
and promotion spending declines or remains stable.
C. There is little difference between competing products.
D. The quality of the products becomes more variable and products are less differentiated.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Study Unit 6: Cost Accumulation Systems
Subunit 1: Job-Order Costing
Question: 1A company manufactures a specialty line of T-shirts using a job-order costing system. During
March, the following costs were incurred in completing job ICU2: direct materials, $13,700; direct labor, $4,800;
administrative, $1,400; and selling, $5,600. Overhead was applied at the rate of $25 per machine hour, and job ICU2
required 800 machine hours. If job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be
A. $6.50
B. $6.30
C. $5.70
D. $5.50
Answer (D) is correct.
Cost of goods sold is based on the manufacturing costs incurred in production but does not include
selling or general and administrative expenses. Manufacturing costs equal $38,500 [$13,700 DM +
$4,800 DL + (800 hours × $25) OH]. Thus, per-unit cost is $5.50 ($38,500 ÷ 7,000 units).
Question: 2What is the journal entry to record the purchase of materials on account?
A.
Raw materials inventory $XXX
Accounts payable
$XXX
Answer (A) is correct.
The correct entry to record a purchase of materials on account is to increase the appropriate asset and
liability accounts. Materials are charged to an inventory; the corresponding liability is accounts
payable. The asset account(s) could be stores control and/or supplies or a number of other accounts.
Also, subsidiary ledgers may be used to account for various individual items (a perpetual inventory
system). The term “control” implies that a subsidiary ledger is being used.
B.
Accounts payable
$XXX
Raw materials inventory
C.
Accounts receivable $XXX
Accounts payable
D.
$XXX
$XXX
Raw materials inventory $XXX
Cash
$XXX
Question: 3A corporation manufactures a specialty line of dresses using a job-order costing system. During
January, the following costs were incurred in completing job J-1:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Direct materials
$27,400
Direct labor
9,600
Administrative costs
2,800
Selling costs
11,200
Factory overhead was applied at the rate of $50 per direct labor hour, and job J-1 required 400 direct labor hours. If
job J-1 resulted in 4,000 good dresses, the cost of goods sold per unit is
A. $9.25
B. $14.25
Answer (B) is correct.
Cost of goods sold is based on the manufacturing costs incurred in production. It does not include
selling or general and administrative expenses. Manufacturing costs consist of direct materials,
$27,400; direct labor, $9,600; and overhead, $20,000 (400 direct labor hours × $50 per hour). The total
of these three cost elements is $57,000. Dividing the $57,000 of total manufacturing costs by the 4,000
units produced results in a per-unit cost of $14.25.
C. $14.95
D. $17.75
Question: 4Job-order costs are most useful for
A. Determining inventory valuation using LIFO.
B. Estimating the overhead costs included in transfer prices.
C. Controlling indirect costs of future production.
D. Determining the cost of a specific project.
Answer (D) is correct.
Job-order costs are used in determining the costs of a specific, clearly identifiable job or project. In
contrast, process costing averages the costs of all production.
Question: 5A metal fabricating company uses a job-order cost system. The company expects to have small
residual pieces of metal cuttings and shavings from all of its jobs. Although the metal pieces and shavings cannot be
reused, they can be sold for scrap. The scrap metal is sold when a ton of scrap has been accumulated. During the
current month, 100,000 pounds of aluminum was requisitioned at $1.50 per pound. Aluminum scrap recovery
totaled 800 pounds. This amount of scrap is within normal allowances for the company’s operations. The market
price for scrap aluminum fluctuates greatly and has ranged from $.25 to $.40 per pound during the last 12 months.
The accumulated scrap aluminum was sold last month for $.35 per pound. The appropriate accounting treatment for
the scrap aluminum recovered during the current month is to
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Debit direct materials quantity variance for $1,200 (800 lbs. at $1.50/lb.) and credit work-in-process
inventory control for $1,200, with postings to each job from which the scrap metal was recovered.
B. Debit scrap inventory for $280 (800 lbs. at $.35/lb.) and credit factory overhead control for $280.
C. For materiality reasons, no entry is made until the scrap metal is sold. At that time, debit cash and credit
factory overhead control for the quantity sold at the current market price.
Answer (C) is correct.
Making a memorandum entry at the time of recovery is appropriate. The value of the scrap is then
recognized at the time of sale. The factory overhead control account is credited because scrap is
inevitable to the company’s production operations and not attributable to a specific job. This
accounting method has the effect of spreading the revenue from scrap sales over all jobs or products.
D. Debit direct materials quantity variance for $1,200 (800 lbs. at $1.50/lb.) and credit factory overhead
control for $1,200 at the time of recovery, and when the scrap is sold, debit cash and credit direct
materials quantity variance for the quantity sold at the current market price.
Question: 6A company uses a job-order cost system in accounting for its manufacturing operations. Because its
processes are labor oriented, it applies manufacturing overhead on the basis of direct labor hours (DLH). Normal
spoilage is defined as 4% of the units passing inspection. The company includes a provision for normal spoilage cost
in its budgeted manufacturing overhead and manufacturing overhead rate. Data regarding a job consisting of 30,000
units are presented below:
Volume Data:
Good units passing inspection
28,500
Units failing inspection (spoiled)
Total units in job
1,500
30,000
Cost Data:
Per Unit
Total Cost
$ 18.00
$ 540,000
Direct labor (2 DLH at $16.00/DLH)
32.00
960,000
Manufacturing overhead (2 DLH at $30.00/DLH)
60.00
1,800,000
$110.00
$3,300,000
Direct materials
Total
The 1,500 units that failed inspection required .25 direct labor hours per unit to rework the units into good units.
What is the proper charge to the loss from abnormal spoilage account?
A. $1,440
B. $4,140
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
Normal spoilage equals 1,140 units (28,500 good units × 4%), so abnormal spoilage equals 360 units
(1,500 total spoiled units – 1,140 units of normal spoilage). Given that .25 DLH is needed to rework a
spoiled unit, the loss from abnormal spoilage is $4,140 {360 units × [($16 × .25) direct labor + ($30 ×
.25) manufacturing overhead]}.
C. $3,450
D. Zero.
Question: 7A company makes lenses for telescopes. Because the company will only sell lenses of the highest
quality, the normal spoilage during a reporting period is 1,000 units. At the beginning of the current reporting
period, the company had 2,200 units in inventory, and during the period, production was started and completed on
4,000 units. Units in inventory at the end of the current reporting period were 1,500, and the units transferred out
were 3,000. During this period, the abnormal spoilage for the company’s lens production was
A. 700 units.
Answer (A) is correct.
The company’s abnormal spoilage for the period can be calculated as follows:
Beginning inventory
2,200
Add: Started and completed
4,000
Less: Transferred out
(3,000)
Less: Ending inventory
(1,500)
Total spoilage for period
Less: Normal spoilage
Abnormal spoilage for period
1,700
(1,000)
700
B. 1,000 units.
C. 1,700 units.
D. 3,200 units.
Question: 8A calendar-year corporation had $17,000 of spoilage during April that production management
characterized as abnormal. The spoilage was incurred on Job No. 532, which was sold 3 months later for $459,000.
Which of the following correctly describes the impact of the spoilage on the corporation’s unit manufacturing cost
for Job No. 532 and on the year’s operating income?
Unit
Manufacturing
Operating
Cost
Income
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Increase No effect
B. Increase Decrease
C. No effect Decrease
Answer (C) is correct.
Under job-order costing, unit manufacturing cost is unaffected by abnormal spoilage. Also, the
difference between the disposal value of the spoiled goods and the value of the goods in work-inprocess control must be recognized as a loss, which will decrease operating income.
D. No effect Not enough information to judge
Question: 9A specialty instrument manufacturer is in the process of establishing a cost system. The company
produces machines that are unique and distinctive. These machines are produced when purchase requests are
received from customers. Although some common parts and sub-assemblies are to be held in inventory, no finished
goods inventory is maintained since each purchase request is for a customized specialty instrument. The type of cost
accumulation system that would be best suited for this type of environment would be
A. Backflush costing.
B. Batch-level costing.
C. Job-order costing.
Answer (C) is correct.
Job-order costing is concerned with accumulating costs by specific job. This method is appropriate
when producing products with individual characteristics or when identifiable groupings are possible.
Units (jobs) should be dissimilar enough to warrant the special recordkeeping required by job-order
costing. Products are usually custom-made for a specific customer.
D. Process costing.
Question: 10During the production of its single product, a company discovers that an unusual overnight power
failure ruined an entire day’s in-process production. How should the cost of these spoiled units be charged?
A. Added to the cost of future good units produced.
B. Written off as a loss.
Answer (B) is correct.
Abnormal spoilage is not expected to occur under normal, efficient operating conditions. The cost of
abnormal spoilage should be separately identified and reported to management. Abnormal spoilage is
typically treated as a period cost and written off as a loss because of its unusual nature.
C. Added to the cost of the next day’s production.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Added to general factory overhead.
Question: 11A company manufactures a single product. During the manufacturing process, a small number of
units do not pass final inspection and are destroyed. What is the appropriate accounting treatment for the cost of
these units? The cost should be
A. Added to the cost of good units produced.
Answer (A) is correct.
Output that does not meet the quality for salability is considered spoilage. The numbers that do not
pass final inspection but that are considered acceptable as a part of efficient production are considered
normal spoilage. The accounting treatment is to include normal spoilage as a product cost.
B. Ignored as immaterial.
C. Expensed as incurred.
D. Added to the cost of warranties.
Question: 12A company uses a job order cost system and applies overhead using a plant-wide rate of $5.75 per
direct labor hour. The company is considering changing to two departmental overhead rates with annual information
shown below.
Machining Department Assembly Department
Allocation base
Machine hours
Departmental overhead costs
Machine hours used
Direct labor hours used
Direct labor hours
$850,000
$300,000
250,000
30,000
75,000
125,000
The company tested its new system by comparing the plant-wide and departmental overhead assigned to two
different jobs. The first job’s allocated overhead using the plant-wide rate totaled $23,000 and was $23,750 using
the two departmental rates. The second job took 5,000 machine hours in the Machining Department and a total of
3,000 labor hours, 1,700 of which were used in the Assembly Department. The company should
A. Change to two departmental overhead rates because of the significant (more than 10%) difference
between methods for the second job.
Answer (A) is correct.
For the second job, allocated overhead using the two departmental rates is $21,080 {[($850,000 ÷
250,000 hours) × 5,000] Machining + [($300,000 ÷ 125,000 hours) × 1,700] Assembly}. Under the
plant-wide rate, the applied overhead is $17,250 ($5.75 × 3,000). The difference of 22.2% [($21,080 –
$17,250) ÷ $17,250] is significant, so the two departmental overhead rates should be used.
B. Change to two departmental overhead rates regardless of the differences between methods for better
cause-and-effect relationships.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Continue to use the plant-wide rate because of the insignificant (less than 10%) difference between
methods for the first job.
D. Search for cost drivers that would present more consistent results when the two methods are compared.
Question: 13A manufacturer produces unique tapestries and bedding for hotel chains and uses a job order
costing system. During the current month, the manufacturer purchased $50,000 of direct materials and incurred
$22,000 in direct labor. Overhead is applied on the basis of direct labor hours at a rate of 60%. Overapplied or
underapplied overhead is closed to cost of goods sold at the end of the period. The actual overhead incurred this
month was $10,000. Balances in the manufacturer’s inventory accounts are presented below.
Beginning
of month
End of
month
Direct materials
$2,000
$3,500
Work-in-process
5,000
9,000
Finished goods
2,500
1,700
What is the cost of goods manufactured this month?
A. $76,500
B. $79,700
Answer (B) is correct.
Before cost of goods manufactured this month can be calculated, direct materials used must be
determined. The direct materials equation is as follows: Beginning inventory + Materials purchased –
Materials used = Ending inventory. The equation can be rearranged to find materials used of $48,500
($2,000 beginning inventory + $50,000 materials purchased – $3,500 ending inventory). The work-inprocess equation is as follows: Beginning inventory + Direct materials used + Direct labor +
Manufacturing overhead applied – Cost of goods manufactured = Ending inventory. This equation can
be rearranged to find cost of goods manufactured of $79,700 [$5,000 beginning inventory +
$48,500 direct materials used + $22,000 direct labor + ($22,000 × 60%) manufacturing overhead
applied – $9,000 ending inventory]. The manufacturing overhead is applied on the basis of direct labor
hours at a rate of 60%.
C. $80,500
D. $83,700
Question: 14A company using job-order costing had the following transactions during a calendar year for Job
101:
Date
January 1
Transaction
Direct materials purchased
Amount
£500
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February 1 Direct materials used
450
March 1
Direct labor incurred
350
June 1
Overhead applied
50
The company’s beginning finished goods inventory on January 1 for Job 101 was £1,500. The company completed
and shipped Job 101 on August 1. If the customer paid the company £5,000 for Job 101 on September 1, how much
should the company report as cost of goods sold for Job 101 for the year?
A. £1,350
B. £2,350
Answer (B) is correct.
Cost of goods sold consists of all costs charged to a job. In this case, £1,500 was charged in the
previous year. To that should be added the £450 of material used, the £350 of direct labor incurred, and
the £50 of overhead applied, for a total of £2,350.
C. £2,400
D. £2,850
Question: 15A manufacturing process normally produces defective units equal to 1% of production. Defective
units are subsequently reworked and sold. The cost of reworking these defective units should be charged to
A. Manufacturing overhead control.
Answer (A) is correct.
Normal rework costs incurred because of factors common to all units produced ordinarily are charged
to manufacturing overhead control to spread the costs over all good units.
B. fWork-in-process control.
C. Finished goods control.
D. Cost of goods sold.
Subunit 2: Process Costing
Fact Pattern:
Levittown Company employs a process cost system for its manufacturing
operations. All direct materials are added at the beginning of the process and
conversion costs are added proportionately. Levittown’s production quantity
schedule for November is reproduced in the next column.
Work-in-process
November 1
(60% complete as to
conversion costs)
1,000
Units started during
November
5,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Total units to account
for
Units completed and
transferred out from
beginning inventory
Units started and
completed during
November
Work-in-process on
November 30
(20% complete as to
conversion costs)
Total units accounted
for
6,000
1,000
3,000
2,000
6,000
Question: 1Using the FIFO method, Levittown’s equivalent units for conversion costs for November are
A. 3,400 units.
B. 3,800 units.
Answer (B) is correct.
Given that BWIP (1,000 units) was already 60% complete, 400 [(100% – 60%) × 1,000 units]
equivalent units were needed for completion. In addition, 3,000 units were started and completed
during the period. The 2,000 units in EWIP equal 400 (20% × 2,000 units) equivalent units since they
are 20% complete. Total equivalent units are 3,800 (400 + 3,000 + 400).
C. 4,000 units.
D. 4,400 units.
Fact Pattern:
Work-in-process
November 1
Levittown Company employs a process cost system for its manufacturing
operations. All direct materials are added at the beginning of the process and
conversion costs are added proportionately. Levittown’s production quantity
schedule for November is reproduced in the next column.
(60% complete as to
conversion costs)
1,000
Units started during
November
5,000
Total units to account
for
6,000
Units completed and
transferred out from
beginning inventory
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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1,000
Units started and
completed during
November
Work-in-process on
November 30
(20% complete as to
conversion costs)
Total units accounted
for
3,000
2,000
6,000
Question: 2Using the FIFO method, Levittown’s equivalent units for direct materials for November are
A. 5,000 units.
Answer (A) is correct.
The computation of equivalent units for a period using the FIFO method of process costing includes
only the conversion costs and material added to the product in that period and excludes any work done
in previous periods. Accordingly, FIFO equivalent units include work and material to complete BWIP,
plus work and material to complete units started this period, minus work and material needed to
complete EWIP. Given that all materials are added at the beginning of the process, only those units
started during November would receive materials in that month. Because 5,000 units were started, the
equivalent units for direct materials equal 5,000.
B. 6,000 units.
C. 4,400 units.
D. 3,800 units.
Fact Pattern:
Work-in-process
November 1
Levittown Company employs a process cost system for its manufacturing
operations. All direct materials are added at the beginning of the process and
conversion costs are added proportionately. Levittown’s production quantity
schedule for November is reproduced in the next column.
(60% complete as to
conversion costs)
1,000
Units started during
November
5,000
Total units to account
for
6,000
Units completed and
transferred out from
beginning inventory
Units started and
completed during
November
Work-in-process on
November 30
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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1,000
3,000
(20% complete as to
conversion costs)
2,000
Total units accounted
for
6,000
Question: 3Using the weighted-average method, Levittown’s equivalent units for direct materials for November
are
A. 3,400 units.
B. 4,400 units.
C. 5,000 units.
D. 6,000 units.
Answer (D) is correct.
Under the weighted-average method, units in the beginning WIP are treated as 100% complete and will
produce EUP in the current period even though materials were added in the previous period. EUP is
calculated as follows:
Beginning WIP
100% × 1,000 units
1,000
Units started and completed 100% × 3,000 units
3,000
Ending WIP
100% × 2,000 units
2,000
EUP =
6,000
Fact Pattern:
Work-in-process
November 1
Levittown Company employs a process cost system for its manufacturing
operations. All direct materials are added at the beginning of the process and
conversion costs are added proportionately. Levittown’s production quantity
schedule for November is reproduced in the next column.
(60% complete as to
conversion costs)
1,000
Units started during
November
5,000
Total units to account
for
6,000
Units completed and
transferred out from
beginning inventory
Units started and
completed during
November
Work-in-process on
November 30
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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1,000
3,000
(20% complete as to
conversion costs)
2,000
Total units accounted
for
6,000
Question: 4Using the weighted-average method, Levittown’s equivalent units for conversion costs for November
are
A. 3,400 units.
B. 3,800 units.
C. 4,000 units.
D. 4,400 units.
Answer (D) is correct.
Under the weighted-average method, units in the beginning WIP are treated as 100% complete and will
produce EUP in the current period even though conversion costs were added in the previous period.
EUP is calculated as follows:
Beginning WIP
100% × 1,000 units
1,000
Units started and completed 100% × 3,000 units
3,000
Ending WIP
20% × 2,000 units
400
EUP =
4,400
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
Question:
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
5Using the weighted-average method, Kimbeth’s equivalent unit cost of materials for May is
A. $4.12
B. $4.50
C. $4.60
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Answer (C) is correct.
Under the weighted-average method, units in beginning WIP are treated as 100% complete and will
produce EUP in the current period even though materials were added in the previous period. Because
92,000 units were completed during the period, 76,000 (92,000 – 16,000 BWIP) must have been
started and completed during the year. Thus, total EUP for May is calculated as follows:
Beginning WIP
100% × 16,000 units
16,000
Units started and completed 100% × 76,000 units
76,000
Ending WIP
90% × 24,000 units
21,600
EUP =
113,600
The total materials costs incurred during the period and accumulated in beginning work-in-process is
$522,560 ($468,000 + $54,560). Thus, weighted-average unit cost is $4.60 ($522,560 ÷ 113,600 EUP).
D. $5.02
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
Question:
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
6Using the FIFO method, Kimbeth’s total cost of units in the ending work-in-process inventory at
May 31 is
A. $153,168
Answer (A) is correct.
Under the FIFO method, EUP for materials equal 104,000 [(16,000 units in BWIP × 40%) + (76,000
units started and completed × 100%) + (24,000 units in EWIP × 90%)]. Consequently, the equivalent
unit cost of materials is $4.50 ($468,000 total materials cost in May ÷ 104,000 EUP). EUP for
materials in ending work-in-process equal 21,600 (24,000 × 90%). Thus, total FIFO materials cost is
$97,200 (21,600 EUP × $4.50). Under the FIFO method, EUP for conversion costs equal 98,400
[(16,000 units in BWIP × 80%) + (76,000 units started and completed × 100%) + (24,000 units in
EWIP × 40%)]. Conversion costs incurred during the current period equal $574,040 ($182,880 DL +
$391,160 FOH). Therefore, the equivalent unit cost for conversion costs is $5.83 ($574,040 ÷ 98,400).
EUP for conversion costs in ending work-in-process equal 9,600 (24,000 × 40%). Total conversion
costs are therefore $55,968 (9,600 EUP × $5.83). Consequently, total work-in-process costs are
$153,168 ($97,200 + $55,968).
B. $154,800
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
C. $155,328
D. $156,960
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
Question:
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
7Using the first-in, first-out (FIFO) method, Kimbeth’s equivalent units of production (EUP) for
materials are
A. 97,600 units.
B. 104,000 units.
Answer (B) is correct.
Under FIFO, EUP are based solely on work performed during the current period. The EUP equals the
sum of the work done on the beginning work-in-process inventory, units started and completed in the
current period, and the ending work-in-process inventory. Because 92,000 units were completed during
the period, 76,000 (92,000 – 16,000 in BWIP) must have been started and completed during the period.
Thus, total EUP for May is calculated as follows:
Beginning WIP
[(100% – 60%) × 16,000 units]
6,400
Units started and completed 100% × 76,000 units
76,000
Ending WIP
21,600
90% × 24,000 units
EUP =
104,000
C. 107,200 units.
D. 108,000 units.
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
Question:
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
8Using the FIFO method, Kimbeth’s equivalent units of production for conversion costs are
A. 85,600 units.
B. 88,800 units.
C. 95,200 units.
D. 98,400 units.
Answer (D) is correct.
Under FIFO, EUP are based solely on work performed during the current period. The EUP equals the
sum of the work done on the beginning work-in-process inventory, units started and completed in the
current period, and the ending work-in-process inventory. Because 92,000 units were completed during
the period, 76,000 (92,000 – 16,000 in BWIP) must have been started and completed during the period.
Thus, total EUP for May is calculated as follows:
Beginning WIP
[(100% – 20%) × 16,000 units] 12,800
Units started and completed 100% × 76,000 units
Ending WIP
40% × 24,000 units
76,000
9,600
EUP = 98,400
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
Question:
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
9Using the FIFO method, Kimbeth’s equivalent unit cost of materials for May is
A. $4.12
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
B. $4.50
Answer (B) is correct.
Under the FIFO method, EUP for materials equal 104,000 [(16,000 units in BWIP × 40%) + (76,000
units started and completed × 100%) + (24,000 units in EWIP × 90%)]. Consequently, the equivalent
unit cost of materials is $4.50 ($468,000 total materials cost in May ÷ 104,000 EUP).
C. $4.60
D. $4.80
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
Units
Beginning work-in-process inventory, May 1 16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
Question:
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
10Using the FIFO method, Kimbeth’s equivalent unit conversion cost for May is
A. $5.65
B. $5.83
Answer (B) is correct.
Under the FIFO method, EUP for conversion costs equal 98,400 [(16,000 units in BWIP × 80%) +
(76,000 units started and completed × 100%) + (24,000 units in EWIP × 40%)]. Conversion costs
incurred during the current period equal $574,040 ($182,880 DL + $391,160 FOH). Hence, the
equivalent unit cost for conversion costs is $5.83 ($574,040 ÷ 98,400).
C. $6.00
D. $6.20
Fact Pattern:
Kimbeth Manufacturing uses a process cost system to
manufacture Dust Density Sensors for the mining
industry. The following information pertains to
operations for the month of May.
Units
Beginning work-in-process inventory, May 1
16,000
The beginning inventory was 60% complete for
materials and 20% complete for conversion costs. The
ending inventory was 90% complete for materials and
40% complete for conversion costs.
Costs pertaining to the month of May are as follows:
• Beginning inventory costs are materials, $54,560;
direct labor, $20,320; and overhead, $15,240.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Started in production during May
Completed production during May
Ending work-in-process inventory, May 31
Question:
100,000
92,000
24,000
• Costs incurred during May are materials used,
$468,000; direct labor, $182,880; and overhead,
$391,160.
11Using the weighted-average method, Kimbeth’s equivalent unit conversion cost for May is
A. $5.65
B. $5.83
C. $6.00
Answer (C) is correct.
Under the weighted-average method, units in beginning WIP are treated as 100% complete and will
produce EUP in the current period even though materials were added in the previous period. Because
92,000 units were completed during the period, 76,000 (92,000 – 16,000 BWIP) must have been
started and completed during the year. Thus, total EUP for May is calculated as follows:
Beginning WIP
100% × 16,000 units
16,000
Units started and completed 100% × 76,000 units
76,000
Ending WIP
40% × 24,000 units
9,600
EUP =
101,600
The sum of the conversion costs accumulated in beginning work-in-process and incurred during the
period is $609,600 ($20,320 + $15,240 + $182,880 + $391,160). Thus, weighted-average unit cost is
$6.00 ($609,600 ÷ 101,600 EUP).
D. $6.20
Fact Pattern:
Goggle-Eyed Old Snapping Turtle, a sporting goods
manufacturer, buys wood as a direct material for baseball
bats. The Forming Department processes the baseball
bats, and the bats are then transferred to the Finishing
Department where a sealant is applied. The Forming
Department began manufacturing 10,000 “Casey
Sluggers” during the month of May. There was no
beginning inventory.
Question:
Costs for the Forming Department for the month of May
were as follows:
Direct materials $33,000
Conversion costs 17,000
Total
$50,000
A total of 8,000 bats were completed and transferred to
the Finishing Department; the remaining 2,000 bats were
still in the forming process at the end of the month. All of
the Forming Department’s direct materials were placed in
process, but, on average, only 25% of the conversion cost
was applied to the ending work-in-process inventory.
12The cost of the units transferred to Snapping Turtle’s Finishing Department is
A. $50,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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B. $40,000
C. $53,000
D. $42,400
Answer (D) is correct.
The total equivalent units for raw materials equals 10,000 because all materials for the ending work-inprocess had already been added to production. Hence, the materials cost per unit was $3.30 ($33,000 ÷
10,000). For conversion costs, the total equivalent units equals 8,500 [8,000 completed + (2,000 in
EWIP × 25%)]. Thus, the conversion cost was $2.00 per unit ($17,000 ÷ 8,500). The total cost
transferred was therefore $42,400 [8,000 units × ($3.30 + $2.00)].
Fact Pattern:
Goggle-Eyed Old Snapping Turtle, a sporting goods
manufacturer, buys wood as a direct material for baseball
bats. The Forming Department processes the baseball
bats, and the bats are then transferred to the Finishing
Department where a sealant is applied. The Forming
Department began manufacturing 10,000 “Casey
Sluggers” during the month of May. There was no
beginning inventory.
Question:
Costs for the Forming Department for the month of May
were as follows:
Direct materials $33,000
Conversion costs 17,000
Total
$50,000
A total of 8,000 bats were completed and transferred to
the Finishing Department; the remaining 2,000 bats were
still in the forming process at the end of the month. All of
the Forming Department’s direct materials were placed in
process, but, on average, only 25% of the conversion cost
was applied to the ending work-in-process inventory.
13The cost of the work-in-process inventory in Snapping Turtle’s Forming Department at the end of
May is
A. $10,000
B. $2,500
C. $20,000
D. $7,600
Answer (D) is correct.
The equivalent units for raw materials would be 10,000 (8,000 + 2,000) since the work-in-process is
100% complete as to materials. Therefore, dividing the $33,000 by 10,000 units results in a unit cost
for materials of $3.30. The equivalent units for conversion costs would be 8,500 units [8,000 + (2,000
units × .25)]. Dividing the $17,000 of conversion costs by 8,500 equivalent units results in a unit cost
of $2 per bat. Therefore, the total cost of goods transferred out would be $5.30, consisting of $3.30 for
materials and $2 for conversion costs. Multiplying $5.30 times the 8,000 bats completed results in a
total transfer of $42,400. Consequently, the cost of the ending work-in-process must have been $7,600
($50,000 total costs incurred – $42,400).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Fact Pattern: Marlan Manufacturing produces a product that passes through two departments.
The units from the molding department are completed in the assembly department. The units are
completed in assembly by adding the remaining direct materials when the units are 60%
complete with respect to conversion costs. Conversion costs are added proportionately in
assembly. The production activity in the assembly department for the current month is presented
as follows. Marlan uses the FIFO (first-in, first-out) inventory method in its process cost system.
Beginning inventory units (25% complete with respect to conversion costs)
8,000
Units transferred in from the molding department during the month
42,000
Units to account for
50,000
Units completed and transferred to finished goods inventory
38,000
Ending inventory units (40% complete with respect to conversion costs)
12,000
Units accounted for
50,000
Question: 14The equivalent units transferred from Marlan’s molding department to the assembly department for
the current month are
A. 30,000 units.
B. 38,000 units.
C. 40,800 units.
D. 42,000 units.
Answer (D) is correct.
This problem seemingly asks a technical question, but in reality was designed to test the candidate’s
alertness. The equivalent units transferred from the molding department are simply the total units
transferred from the molding department (42,000 units).
Fact Pattern: Marlan Manufacturing produces a product that passes through two departments.
The units from the molding department are completed in the assembly department. The units are
completed in assembly by adding the remaining direct materials when the units are 60%
complete with respect to conversion costs. Conversion costs are added proportionately in
assembly. The production activity in the assembly department for the current month is presented
as follows. Marlan uses the FIFO (first-in, first-out) inventory method in its process cost system.
Beginning inventory units (25% complete with respect to conversion costs)
8,000
Units transferred in from the molding department during the month
42,000
Units to account for
50,000
Units completed and transferred to finished goods inventory
38,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Ending inventory units (40% complete with respect to conversion costs)
12,000
Units accounted for
50,000
Question: 15The equivalent units in Marlan’s assembly department for conversion costs for the current month are
A. 34,800 units.
B. 40,800 units.
Answer (B) is correct.
Conversion costs are being added throughout the process. It is important to note both the method used
and the completed percentage. During the period, 30,000 units (42,000 units transferred in – 12,000
ending WIP) were started and completed. EUP is calculated as follows:
Beginning WIP
[(100% – 25%) × 8,000 units]
Units started and completed 100% × 30,000 units
Ending WIP
6,000
30,000
40% × 12,000 units
4,800
EUP =
40,800
C. 42,800 units.
D. 43,200 units.
Fact Pattern: Marlan Manufacturing produces a product that passes through two departments.
The units from the molding department are completed in the assembly department. The units are
completed in assembly by adding the remaining direct materials when the units are 60%
complete with respect to conversion costs. Conversion costs are added proportionately in
assembly. The production activity in the assembly department for the current month is presented
as follows. Marlan uses the FIFO (first-in, first-out) inventory method in its process cost system.
Beginning inventory units (25% complete with respect to conversion costs)
8,000
Units transferred in from the molding department during the month
42,000
Units to account for
50,000
Units completed and transferred to finished goods inventory
38,000
Ending inventory units (40% complete with respect to conversion costs)
12,000
Units accounted for
50,000
Question: 16The equivalent units in Marlan’s assembly department for direct materials for the current month are
A. 30,000 units.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
B. 38,000 units.
Answer (B) is correct.
When materials are added at a specific time during production, whether or not materials are included in
the current period’s calculation of EUP depends on when materials would have been added, and
whether or not that point was reached. In this scenario, direct materials are added when the products
are 60% complete with respect to conversion costs. Thus, 30,000 units (38,000 units transferred out –
8,000 beginning WIP) were started and completed, and EUP is calculated as follows:
Beginning WIP
100% × 8,000 units
8,000
Units started and completed 100% × 30,000 units
Ending WIP
30,000
0% × 12,000 units
0
EUP =
38,000
C. 40,800 units.
D. 42,000 units.
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
Beginning work-in-process
Transferred-in
$16,000
Materials used
88,000
(70% complete)
10,000 units
Goods started in production 80,000 units
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 17Under the weighted-average method, how much conversion cost did A.P. Hill transfer out of
Department Two during February?
A. $69,259
B. $63,750
Answer (B) is correct.
For conversion costs, the equivalent-unit calculation under the weighted-average method is as follows:
Beginning WIP
10,000 units × 100% = 10,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Started and completed
Ending WIP
75,000 units × 100% = 75,000
5,000 units × 60% = 3,000
Weighted-average EUP for conversion
88,000
The amount transferred out will include conversion costs incurred during the current period plus any
amount in beginning inventory. The conversion costs consisted of $16,000 in beginning inventory and
$50,000 incurred during the month, for a total of $66,000. Unit conversion cost is therefore $.75
($66,000 ÷ 88,000 EU). Thus, the total conversion cost transferred was $63,750 [(10,000 units in
BWIP + 80,000 units started – 5,000 units in EWIP) × $.75].
C. $66,000
D. $64,148
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
Beginning work-in-process
Transferred-in
$16,000
Materials used
88,000
(70% complete)
10,000 units
Goods started in production 80,000 units
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 18Under the weighted-average method, how much materials cost did A.P. Hill transfer out of
Department Two during February?
A. $88,000
B. $93,500
C. $111,350
Answer (C) is correct.
For materials, the equivalent-unit calculation under the weighted-average method is
Beginning WIP
10,000 units × 100% = 10,000
Started and completed 75,000 units × 100% = 75,000
Ending WIP
5,000 units × 100% =
5,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Weighted-average EUP for materials
90,000
The amount transferred out will include materials costs incurred during the current period plus any
amount in beginning inventory. The materials costs consisted of $30,000 in beginning inventory and
$88,000 incurred during the month, for a total of $118,000. The equivalent unit cost of materials is
therefore $1.31 ($118,000 ÷ 90,000 EU). Total materials cost transferred is $111,350 (85,000 units
transferred × $1.31).
D. $112,500
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
Beginning work-in-process
Transferred-in
$16,000
Materials used
88,000
(70% complete)
10,000 units
Goods started in production 80,000 units
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 19Under the weighted-average method, what is the total of equivalent units for A.P. Hill’s transferredin costs for the month?
A. 75,000 units.
B. 80,000 units.
C. 81,000 units.
D. 90,000 units.
Answer (D) is correct.
The equivalent units for transferred-in costs are calculated in the same way as those for materials
added at the beginning of the process. The equivalent-unit calculation under the weighted-average
method is
Beginning WIP
10,000 units × 100% = 10,000
Started and completed
75,000 units × 100% = 75,000
Ending WIP
5,000 units × 100% = 5,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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https://t.me/CMA_part2
Weighted-average EUP for transferred-in costs 90,000
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
Beginning work-in-process
Transferred-in
$16,000
Materials used
88,000
(70% complete)
10,000 units
Goods started in production 80,000 units
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 20Assume that the company uses the first-in, first-out (FIFO) method of inventory valuation. Under
FIFO, how much conversion cost did A.P. Hill transfer out of Department Two during February?
A. $63,750
B. $64,148.15
Answer (B) is correct.
For conversion costs, the equivalent-unit calculation under the FIFO method is
Beginning WIP
10,000 units × 30% = 3,000
Started and completed 75,000 units × 100% = 75,000
Ending WIP
5,000 units × 60% = 3,000
FIFO EUP for conversion
81,000
The amount transferred out will include conversion costs incurred during the current period plus any
amount in beginning inventory. The conversion cost includes $16,000 in beginning inventory, all of
which would have been transferred out. The $50,000 incurred during the month is divided by the
81,000 equivalent units to arrive at a unit cost for the current period. Given that 78,000 equivalent units
(3,000 EUP in BWIP + 75,000 EUP started and completed) of current-period production were
completed and transferred, the total conversion cost transferred out was $64,148.15 [$16,000 BWIP +
(78,000 FIFO EU) × ($50,000 ÷ 81,000)].
C. $66,000
D. $74,500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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https://t.me/CMA_part2
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
Beginning work-in-process
Transferred-in
$16,000
Materials used
88,000
(70% complete)
10,000 units
Goods started in production 80,000 units
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 21Assuming the company uses the FIFO method of inventory valuation, conversion costs included in
A.P. Hill’s ending work-in-process inventory equal
A. $1,851.85
Answer (A) is correct.
For conversion costs, the equivalent-unit calculation under the FIFO method is as follows:
Beginning WIP
10,000 units × 30% = 3,000
Started and completed 75,000 units × 100% = 75,000
Ending WIP
5,000 units × 60% = 3,000
FIFO EUP for conversion
81,000
The $50,000 incurred during the month is divided by 81,000 equivalent units to arrive at a unit cost for
the current period. Moreover, ending work-in-process consists of 3,000 equivalent units of conversion
cost (5,000 physical units × 60%). Accordingly, the conversion cost in the ending work-in-process
inventory consists of $1,851.85 [3,000 EU × ($50,000 ÷ 81,000)] of current-period cost. The
conversion cost incurred in the prior period and attached to the beginning work-in-process inventory is
deemed to have been transferred out.
B. $2,250
C. $3,100
D. $5,500
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Beginning work-in-process
(70% complete)
10,000 units
Goods started in production 80,000 units
Transferred-in
$16,000
Materials used
88,000
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 22Assume that the company uses the first-in, first-out (FIFO) method of inventory valuation. Under
FIFO, how much materials cost did A.P. Hill transfer out of Department Two during February?
A. $88,000
B. $111,350
C. $112,500
Answer (C) is correct.
For materials, the equivalent-unit calculation under the FIFO method is
Beginning WIP
10,000 units ×
0% =
0
Started and completed 75,000 units × 100% = 75,000
Ending WIP
5,000 units × 100% = 5,000
FIFO EUP for materials
80,000
The amount transferred out will include material costs incurred during the current period plus any
amount in beginning inventory. The materials cost includes $30,000 in beginning inventory, all of
which would have been transferred out. The $88,000 incurred during the month is divided by the
80,000 equivalent units to arrive at a unit cost for the current period of $1.10. Thus, given that 75,000
equivalent units (85,000 physical units transferred out – 10,000 EU in BWIP completed in the prior
period) of current-period production were completed and transferred, total materials cost transferred
out equals $112,500 [$30,000 BWIP + (75,000 FIFO EU × $1.10)].
D. $114,615
Fact Pattern:
A.P. Hill Corporation uses a process-costing
system. Products are manufactured in a
series of three departments. The following
data relate to Department Two for the month
of February:
The beginning work-in-process was valued at $66,000, consisting
of $20,000 of transferred-in costs, $30,000 of materials costs, and
$16,000 of conversion costs. Materials are added at the beginning
of the process; conversion costs are added evenly throughout the
process. Costs added to production during February were
Beginning work-in-process
Transferred-in
$16,000
Materials used
88,000
(70% complete)
10,000 units
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Goods started in production 80,000 units
Conversion costs 50,000
Ending work-in-process
(60% complete)
5,000 units
Question: 23Assuming the company uses the FIFO method of inventory valuation, what amount of materials cost
is included in A.P. Hill’s ending work-in-process inventory?
A. $1,860
B. $3,300
C. $5,500
Answer (C) is correct.
For materials, the equivalent-unit calculation under the FIFO method is
Beginning WIP
10,000 units ×
0% =
0
Started and completed 75,000 units × 100% = 75,000
Ending WIP
5,000 units × 100% = 5,000
FIFO EUP for materials
80,000
The materials cost includes $30,000 in beginning inventory, all of which would have been transferred
out. The $88,000 incurred during the month is divided by the 80,000 equivalent units to arrive at a unit
cost for the current period of $1.10. Because the 5,000 units in ending work-in-process inventory are
100% complete as to materials, its materials cost consists of $5,500 (5,000 EU × $1.10) of currentperiod costs. Materials costs incurred in the prior period and attached to the beginning work-in-process
inventory are deemed to have been transferred out.
D. $6,450
Question: 24In a process-costing system, the cost of abnormal spoilage should be
A. Prorated between units transferred out and ending inventory.
B. Included in the cost of units transferred out.
C. Treated as a loss in the period incurred.
Answer (C) is correct.
Abnormal spoilage is spoilage that is not expected to occur under normal, efficient operating
conditions. Because of its unusual nature, abnormal spoilage is typically treated as a loss in the period
in which it is incurred.
D. Ignored.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Fact Pattern: Superb Hancock Company uses a process costing system in which all materials
are added at the beginning of the first process. Conversion costs are added evenly throughout the
process. During the past month, 10,000 units were started in production, and 8,000 were
completed and transferred to the next department. There were no beginning inventories.
The ending inventories were 70% complete at the end of the month. The company uses a
weighted-average method for inventory valuation.
Question: 25If Superb Hancock’s materials used in production cost $15,000 and its conversion costs incurred
were $25,000, what amount of inventory (rounded) was transferred to the next department?
A. $32,000
B. $33,280
Answer (B) is correct.
The equivalent units of materials equal 10,000 because all materials are added at the beginning of the
process, and 10,000 units were started. The equivalent units of conversion costs equal 9,400 [8,000
units completed + (2,000 units in ending inventory × 70%)]. The unit cost of materials is $1.50
($15,000 ÷ 10,000 EU). The unit cost of conversion is $2.66 ($25,000 ÷ 9,400 EU). Thus, the cost of
goods transferred was $33,280 [8,000 units × ($1.50 + $2.66)].
C. $36,280
D. $40,000
Fact Pattern: Superb Hancock Company uses a process costing system in which all materials
are added at the beginning of the first process. Conversion costs are added evenly throughout the
process. During the past month, 10,000 units were started in production, and 8,000 were
completed and transferred to the next department. There were no beginning inventories.
The ending inventories were 70% complete at the end of the month. The company uses a
weighted-average method for inventory valuation.
Question: 26If Superb Hancock’s materials used in production cost $15,000 and its conversion costs incurred
were $25,000, what is the value (rounded) of the ending work-in-process inventory in the first processing
department?
A. $6,720
Answer (A) is correct.
The cost transferred out was $33,280. Hence, the ending inventory must equal the production costs for
the month (given no beginning inventories), minus costs transferred out, or $6,720 [($15,000 materials
+ $25,000 conversion cost) – $33,280].
B. $8,000
C. $3,720
D. $0
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Fact Pattern: Superb Hancock Company uses a process costing system in which all materials
are added at the beginning of the first process. Conversion costs are added evenly throughout the
process. During the past month, 10,000 units were started in production, and 8,000 were
completed and transferred to the next department. There were no beginning inventories.
The ending inventories were 70% complete at the end of the month. The company uses a
weighted-average method for inventory valuation.
Question: 27Assume that Superb Hancock uses first-in, first-out (FIFO) for inventory costing instead of the
weighted-average inventory valuation. If materials used in production cost $15,000 and conversion costs incurred
were $25,000, what amount of inventory (rounded) was transferred to the next department under FIFO?
A. $32,000
B. $33,280
Answer (B) is correct.
The only difference between weighted average and FIFO relates to the beginning inventories. Because
there were no beginning inventories in this problem, the two valuation methods produce the same
results. The equivalent units of materials equal 10,000 because all materials are added at the beginning
of the process, and 10,000 units were started. The equivalent units of conversion costs equal 9,400
[8,000 units completed + (2,000 units in ending inventory × 70%)]. The unit cost of materials is $1.50
($15,000 ÷ 10,000 EU). The unit cost of conversion is $2.66 ($25,000 ÷ 9,400 EU). Therefore, the cost
of goods transferred using the FIFO method for inventory costing is $33,280 [8,000 units × ($1.50 +
$2.66)].
C. $36,280
D. $40,000
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
Units
Materials Conversion
materials $54,560 $ 468,000
BWIP on May 1 32,000
60%
20%
Direct
20,320
182,880
Started in
labor
production
200,000
Completed
Factory
production
(184,000)
overhead 15,240
391,160
EWIP on May 31 48,000
90%
40%
$90,120 $1,042,040
Question: 28Under the FIFO method, Albany Mining’s equivalent units of materials are
A. 195,200 units.
B. 208,000 units.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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https://t.me/CMA_part2
Answer (B) is correct.
Under the FIFO method, equivalent units are determined based only on work performed during the
current period. They include work performed to complete BWIP, work on units started and completed
during the period, and work done on EWIP. There were 152,000 (184,000 completed – 32,000) BWIP
started and completed. Thus, total FIFO equivalent units of materials are
BWIP
[32,000 units × (100% – 60%)] = 12,800
Started and completed
(184,000 – 32,000) 152,000 units ×
EWIP
48,000 units ×
Total equivalent units
100% = 152,000
90% = 43,200
208,000
C. 214,400 units.
D. 227,200 units.
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
Units
Materials Conversion
materials $54,560 $ 468,000
BWIP on May 1 32,000
60%
20%
Direct
20,320
182,880
Started in
labor
production
200,000
Completed
production
Factory
(184,000)
EWIP on May 31 48,000
overhead
90%
15,240
391,160
$90,120
$1,042,040
40%
Question: 29Under the FIFO method, Albany Mining’s equivalent units of conversion cost are
A. 171,200 units.
B. 177,600 units.
C. 184,000 units.
D. 196,800 units.
Answer (D) is correct.
Under FIFO, equivalent units are determined based only on work performed during the current period.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
They include work performed to complete BWIP, work on units started and completed during the
period, and work done on EWIP. Thus, total FIFO equivalent units of conversion cost are
BWIP
[32,000 units × (100% – 20%)] = 25,600
Started and completed
(184,000 – 32,000 in BWIP) 152,000 units ×
EWIP
48,000 units ×
Total equivalent units
100% = 152,000
40% = 19,200
196,800
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
Units
Materials Conversion
materials $54,560 $ 468,000
BWIP on May 1 32,000
60%
20%
Direct
20,320
182,880
Started in
labor
production
200,000
Completed
Factory
production
(184,000)
overhead 15,240
391,160
EWIP on May 31 48,000
90%
40%
$90,120 $1,042,040
Question: 30Under the FIFO method, Albany Mining’s equivalent unit cost of materials for May is
A. $2.06
B. $2.25
Answer (B) is correct.
Under the FIFO method, equivalent units are determined based only on work performed during the
current period. They include work performed to complete BWIP, work on units started and completed
during the period, and work done on EWIP. Thus, total FIFO equivalent units of materials are
[32,000 units × (100% – 60%) BWIP + [(184,000 completed units – 32,000 BWIP) × 100%] started
and completed + (48,000 units × 90%) EWIP
12,800 BWIP + 152,000 started and completed + 43,200 EWIP = 208,000 EUP
Accordingly, unit cost of materials under FIFO is $2.25 ($468,000 materials cost in May ÷ 208,000
EU).
C. $2.30
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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D. $2.51
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
Units
Materials Conversion
materials $54,560 $ 468,000
BWIP on May 1 32,000
60%
20%
Direct
20,320
182,880
Started in
labor
production
200,000
Completed
Factory
production
(184,000)
overhead 15,240
391,160
EWIP on May 31 48,000
90%
40%
$90,120 $1,042,040
Question: 31Using the FIFO method, Albany Mining’s equivalent unit conversion cost for May is
A. $2.92
Answer (A) is correct.
Under FIFO, equivalent units are determined based only on work performed during the current period.
They include work performed to complete BWIP, work on units started and completed during the
period, and work done on EWIP. Thus, total FIFO equivalent units of conversion cost are
[32,000 units × (100% – 20%) BWIP + [(184,000 completed units – 32,000 BWIP) × 100%] started
and completed + (48,000 units × 40%) EWIP
25,600 BWIP + 152,000 started and completed + 19,200 EWIP = 196,800 EUP
Conversion cost incurred during May was $574,040 ($182,880 DL + $391,160 FOH). Hence, the
equivalent-unit conversion cost under FIFO is $2.92 ($574,040 ÷ 196,800).
B. $3.00
C. $3.10
D. $3.23
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
Units
Materials Conversion
materials $54,560 $ 468,000
BWIP on May 1 32,000
60%
20%
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Started in
production
Completed
production
200,000
Direct
labor
(184,000)
Factory
EWIP on May 31 48,000
90%
overhead
40%
20,320
182,880
15,240
391,160
$90,120
$1,042,040
Question: 32Under the FIFO method, Albany Mining’s total cost of units in the ending work-in-process
inventory at May 31 is
A. $153,264
Answer (A) is correct.
Under FIFO, the equivalent units of production for materials is calculated as follows:
BWIP:
32,000 × (1.0 – 60%) =
12,800
Units started and completed: (184,000 – 32,000) × 100% = 152,000
EWIP:
48,000 × 90% =
43,200
208,000
Thus, the equivalent-unit materials cost is $2.25 ($468,000 ÷ 208,000). The equivalent-unit conversion
cost is $2.92 [(182,880 + 391,160) ÷ 196,800]. The equivalent units of production for conversion costs
is calculated as follows:
BWIP: 32,000 × (1.0 – 20%) =
Units started and completed:
EWIP:
25,600
(184,000 – 32,000) = 152,000
48,000 × 40% =
19,200
196,800
Consequently, EWIP equals $153,264 [(43,200 × $2.25) + (19,200 × $2.92)].
B. $154,800
C. $155,424
D. $156,960
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Units
Materials
Conversion
BWIP on May 1 32,000
Started in
production
200,000
Completed
production
(184,000)
60%
20%
EWIP on May 31 48,000
90%
materials $54,560
Direct
labor
$ 468,000
20,320
182,880
15,240
391,160
$90,120
$1,042,040
Factory
overhead
40%
Question: 33Using the weighted-average method, Albany Mining’s equivalent unit cost of materials for May is
A. $2.06
B. $2.25
C. $2.30
Answer (C) is correct.
The weighted-average method averages the work done in the prior period with the work done in the
current period. The two layers of units to analyze are those completed during the period and those still
in EWIP. The units completed totaled 184,000. The equivalent units of materials in EWIP equaled
43,200 (48,000 physical units × 90%). Hence, the total equivalent units of materials equaled 227,200
(184,000 + 43,200). The materials cost in BWIP is combined in the weighted-average calculation with
the materials cost incurred during the current period. The equivalent-unit materials cost is therefore
$2.30 [($54,560 BWIP + $468,000 incurred in May) ÷ 227,200 EU].
D. $2.51
Fact Pattern:
Albany Mining Corporation uses a process costing system for its ore
Costs for the month were as follows:
extraction operations. The following information pertains to work-in-process
BWIP Incurred in May
inventories and operations for the month of May:
Completion %
Direct
Units
Materials Conversion
materials $54,560 $ 468,000
BWIP on May 1 32,000
60%
20%
Direct
20,320
182,880
Started in
labor
production
200,000
Completed
Factory
production
(184,000)
overhead 15,240
391,160
EWIP on May 31 48,000
90%
40%
$90,120 $1,042,040
Question: 34Under the weighted-average method, Albany Mining’s equivalent unit conversion cost for May is
A. $2.92
B. $3.00
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Answer (B) is correct.
The weighted-average method averages the work performed in the prior period with the work done in
the current period. The two layers of units to analyze are those completed during the period and those
still in EWIP. The units completed totaled 184,000. The 48,000 units in EWIP are 40% complete as to
conversion cost, the equivalent of 19,200 units. Thus, total equivalent units for conversion cost under
the weighted-average method equaled 203,200. Moreover, the conversion cost in BWIP is combined in
the weighted-average calculation with the conversion cost incurred during the current period. The
equivalent-unit conversion cost is therefore $3.00 [($20,320 DL in BWIP + $15,240 FOH in BWIP +
$182,880 DL in May + $391,160 FOH in May) ÷ 203,200].
C. $3.10
D. $3.31
Fact Pattern:
Ramseur Company employs a process costing system for its two-department manufacturing
operation using the first-in, first-out (FIFO) inventory method. When units are completed in
Department 1, they are transferred to Department 2 for completion. Inspection takes place in
Department 2 immediately before the direct materials are added, when the process is 70%
complete with respect to conversion. The specific identification method is used to account for
lost units.
The number of defective units (that is, those failing inspection) is usually below the normal
tolerance limit of 4% of units inspected. Defective units have minimal value, and the company
sells them without any further processing for whatever it can. Generally, the amount collected
equals, or slightly exceeds, the transportation cost. A summary of the manufacturing activity for
Department 2, in units for the current month, is presented below.
Physical Flow
(output units)
Beginning inventory (60% complete with respect to conversion) 20,000
Units transferred in from Department 1
180,000
Total units to account for
200,000
Units completed in Department 2 during the month
Units found to be defective at inspection
Ending inventory (80% complete with respect to conversion)
Total units accounted for
170,000
5,000
25,000
200,000
Question: 35Ramseur’s equivalent units for direct materials for the current month would be
A. 175,000 units.
B. 181,500 units.
C. 195,000 units.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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https://t.me/CMA_part2
Answer (C) is correct.
Under the FIFO method, only work done in the current period is considered in the calculation. Direct
materials are added when the units are 70% complete. Since beginning inventory is 60% complete with
respect to conversion costs, no direct materials have been added yet. Thus, all materials will be added
in the current period, which means 100% of the 20,000 beginning inventory units will be included in
the calculation.
The units in ending inventory are 80% complete with respect to conversion. Since direct materials are
added at 70%, all 25,000 units in ending inventory have had direct materials added and are 100%
complete with respect to direct materials.
There are two more unit types we must account for: defective units and units that are started and
completed in the current period. Inspection of the units takes place before direct materials are added,
and if units are defective, then no direct materials will be added. Thus, defective units are not included
in the calculation. Lastly, there are 150,000 units started and completed (170,000 units completed –
20,000 beginning inventory). The direct materials were added to these units in the current period, so
they are included in the calculation.
Adding up all the units, we get 195,000 equivalent units for direct materials (20,000 beginning
inventory + 25,000 ending inventory + 150,000 started and completed units).
D. 200,000 units.
Fact Pattern:
Ramseur Company employs a process costing system for its two-department manufacturing
operation using the first-in, first-out (FIFO) inventory method. When units are completed in
Department 1, they are transferred to Department 2 for completion. Inspection takes place in
Department 2 immediately before the direct materials are added, when the process is 70%
complete with respect to conversion. The specific identification method is used to account for
lost units.
The number of defective units (that is, those failing inspection) is usually below the normal
tolerance limit of 4% of units inspected. Defective units have minimal value, and the company
sells them without any further processing for whatever it can. Generally, the amount collected
equals, or slightly exceeds, the transportation cost. A summary of the manufacturing activity for
Department 2, in units for the current month, is presented below.
Physical Flow
(output units)
Beginning inventory (60% complete with respect to conversion) 20,000
Units transferred in from Department 1
180,000
Total units to account for
200,000
Units completed in Department 2 during the month
Units found to be defective at inspection
170,000
5,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Ending inventory (80% complete with respect to conversion)
Total units accounted for
25,000
200,000
Question: 36The units that failed inspection during the current month would be classified by Ramseur as
A. Abnormal spoilage.
B. Normal scrap.
Answer (B) is correct.
The units that failed inspection are classified as normal scrap because they have minimal value and can
be sold without further reworking. The defective units are less than the 4% tolerance limit for normal
spoilage (5,000 defective units ÷ 200,000 total units = 2.5%, < 4% tolerance limit). Scrap can be sold,
disposed of, or reused.
C. Normal reworked units.
D. Normal waste.
Question: 37During the month of May, a company completed 50,000 units costing $600,000, exclusive of
spoilage allocation. Of these completed units, 25,000 were sold during the month. An additional 10,000 units,
costing $80,000, were 50% complete at May 31. All units are inspected between the completion of manufacturing
and transfer to finished goods inventory. Normal spoilage for the month was $20,000, and abnormal spoilage of
$50,000 was also incurred during the month. The portion of total spoilage that should be charged against revenue in
May is
A. $50,000
B. $20,000
C. $70,000
D. $60,000
Answer (D) is correct.
Normal spoilage is an inventoriable cost of production that is charged to cost of goods sold when the
units are sold. Abnormal spoilage is a period cost recognized when incurred. The $50,000 of abnormal
spoilage is therefore expensed during May. In addition, 50% of the normal spoilage is debited to cost
of goods sold because 50% (25,000 ÷ 50,000) of the units completed were sold during the period. No
spoilage is allocated to work-in-process because inspection occurs after completion. Thus, the normal
spoilage expensed during the month is $10,000 ($20,000 × 50%). Total spoilage charged against
revenue is $60,000 ($50,000 + $10,000).
Question: 38FIFO requires separate costing of goods started last period and finished this period and goods
started and completed this period. The weighted-average method does not. Which is the true statement about the
cost of completed goods transferred under FIFO to the next production department or to finished goods inventory?
A. The two amounts are kept separate but are combined by the next department.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. The two amounts are ultimately recorded in separate finished goods accounts.
C. The two amounts are considered combined as the goods are transferred.
Answer (C) is correct.
Under FIFO, goods started last period and completed this period are differentiated from goods started
and completed this period. The goods started last period but completed this period include the costs
from last period as well as this period’s costs to complete, whereas goods started and completed this
period only include current costs. In the weighted-average method, the costs of the prior and current
periods are averaged. When the goods are transferred to the next department or to finished goods under
FIFO, however, they are considered transferred out at one average cost so that a multitude of layers of
inventory is not created. This procedure is consistent with the basic concept of process costing.
D. The goods started and completed this period are transferred prior to those started last period and
completed this period.
Question: 39A major advantage of the first-in, first-out (FIFO) process-costing method over the weightedaverage process-costing method is
A. The simplicity of the FIFO method.
B. That inventories are eliminated from consideration in the FIFO method.
C. That current-period cost per unit is highlighted under the FIFO method.
Answer (C) is correct.
First-in, first-out (FIFO) process costing involves backing out beginning inventory costs when
computing work performed. This has the effect of highlighting the most recent costs.
D. That only ending inventory costs need to be separately computed when using the FIFO method.
Question: 40A firm uses a weighted-average process costing system. Direct materials and conversion costs are
incurred evenly during the production process. During the month of October, the following costs were incurred:
Direct materials $39,700
Conversion costs 70,000
The work-in-process inventory as of October 1 consisted of 5,000 units, valued at $4,300, that were 20% complete.
During October, 27,000 units were transferred out. Inventory as of October 31 consisted of 3,000 units that were
50% complete. The weighted-average inventory cost per unit completed in October was
A. $3.51
B. $3.88
C. $3.99
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $4.00
Answer (D) is correct.
In determining the weighted-average cost per unit, the first step is to calculate the equivalent units of
production (EUP). The same EUP amount can be used for both materials and conversion:
Transferred out (27,000 units × 100%)
27,000
Ending work-in-process (3,000 units × 50%) 1,500
Total
28,500
Total costs to be distributed are calculated as follows:
Embedded in beginning work-in-process $
4,300
Current month -- direct materials
39,700
Current month -- conversion costs
70,000
Total
$114,000
The total cost per unit is thus $4.00 ($114,000 ÷ 28,500).
Fact Pattern: During December, Krause Chemical Company had the following selected data
concerning the manufacture of Xyzine, an industrial cleaner:
Production Flow
Completed and transferred to the next department
Add: Ending work-in-process inventory
Total units to account for
Less: Beginning work-in-process inventory
Units started during December
Physical Units
100
10 (40% complete as to conversion)
110
(20) (60% complete as to conversion)
90
All material is added at the beginning of processing in this department, and conversion costs are
added uniformly during the process. The beginning work-in-process inventory had $120 of raw
material and $180 of conversion costs incurred. Material added during December was $540 and
conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing
method.
Question: 41Under the weighted-average method, Krause’s total raw material costs in the ending work-inprocess inventory for December is
A. $120
B. $72
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $60
Answer (C) is correct.
Under the weighted average method, units in beginning work-in-process are treated as if they were
100% complete and produce EUP in the current period. During the period, 80 units (100 units
completed – 20 units beginning WIP) were started and completed. Additionally, since material is
added at the beginning of the process, all units in ending work-in-process are 100% complete with
respect to materials. Thus, equivalent units is calculated as follows:
Beginning WIP
100% × 20 units 20
Units started and completed 100% × 80 units 80
Ending WIP
100% × 10 units 10
EUP = 110
Total raw material costs, including the raw materials from beginning work-in-process, equal $660
($120 + $540), and the per unit cost is therefore $6 ($660 ÷ 110 units). Since there are 10 units in
ending work-in-process, the raw material costs in ending work-in-process is $60 ($6 × 10 units).
D. $36
Fact Pattern: During December, Krause Chemical Company had the following selected data
concerning the manufacture of Xyzine, an industrial cleaner:
Production Flow
Completed and transferred to the next department
Add: Ending work-in-process inventory
Total units to account for
Less: Beginning work-in-process inventory
Units started during December
Physical Units
100
10 (40% complete as to conversion)
110
(20) (60% complete as to conversion)
90
All material is added at the beginning of processing in this department, and conversion costs are
added uniformly during the process. The beginning work-in-process inventory had $120 of raw
material and $180 of conversion costs incurred. Material added during December was $540 and
conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing
method.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 42Under the weighted-average method, Krause’s total conversion cost assigned to units transferred to
the next department in December was
A. $1,664
B. $1,600
Answer (B) is correct.
To calculate conversion cost per unit, EUP must be calculated. Units transferred out of a department
are by definition 100% complete for purposes of conversion costs for that department. Under the
weighted-average method, units in beginning WIP are treated at 100% complete and produce EUP in
the current period. During the period, 80 units (100 units completed – 20 beginning WIP) were started
and completed. EUP is calculated as follows:
Beginning WIP
100% × 20 units 20
Units started and completed 100% × 80 units 80
Ending WIP
40% × 10 units
4
EUP = 104
Under the weighted-average method, the numerator of the per-unit cost calculation must contain both
costs embedded in beginning work-in-process ($180) and those added during the month ($1,484), for a
total of $1,664. The weighted-average per-unit cost is therefore $16.00 ($1,664 ÷ 104).
The 100 EUP transferred out times the $16.00 unit cost equals $1,600 total under the weighted-average
method.
C. $1,513
D. $1,484
Fact Pattern: During December, Krause Chemical Company had the following selected data
concerning the manufacture of Xyzine, an industrial cleaner:
Production Flow
Completed and transferred to the next department
Add: Ending work-in-process inventory
Physical Units
100
10 (40% complete as to conversion)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Total units to account for
110
Less: Beginning work-in-process inventory
Units started during December
(20) (60% complete as to conversion)
90
All material is added at the beginning of processing in this department, and conversion costs are
added uniformly during the process. The beginning work-in-process inventory had $120 of raw
material and $180 of conversion costs incurred. Material added during December was $540 and
conversion costs of $1,484 were incurred. Krause uses the weighted-average process-costing
method.
Question: 43Under the first-in, first-out (FIFO) method, Krause’s equivalent units of production used to calculate
conversion costs for December was
A. 110 units.
B. 104 units.
C. 100 units.
D. 92 units.
Answer (D) is correct.
EUP must be calculated for three populations of units, beginning WIP, units started and completed,
and ending WIP. Under the FIFO method, we are looking for the amounts completed in the current
period. During the period, 80 units (100 units completed – 20 units beginning WIP) were completed.
EUP under the FIFO method is calculated as follows:
Beginning WIP
[(100% – 60%) × 20 units] 8
Units started and completed 100% × 80 units
Ending WIP
40% × 10 units
80
4
EUP = 92
Question: 44A company that uses a process costing system inspects its goods at the 60% stage of completion. If
the firm’s ending work-in-process inventory is 80% complete, how would the firm account for its normal and
abnormal spoilage?
A. Both normal and abnormal spoilage costs would be added to the cost of the good units completed during
the period.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Both normal and abnormal spoilage costs would be written off as an expense of the period.
C. Normal spoilage costs would be added to the cost of the good units completed during the period; in
contrast, abnormal spoilage costs would be written off as a loss.
D. Normal spoilage costs would be allocated between the cost of good units completed during the period and
the ending work-in-process inventory. In contrast, abnormal spoilage costs would be written off as a loss.
Answer (D) is correct.
Under process costing, as with job-order costing, the cost of a normal level of spoilage is left in cost of
goods sold. Thus, the cost of the period’s normal spoilage must be allocated among all the units
worked on during the period, both those finished and those remaining in work-in-process. Abnormal
spoilage is recognized separately as a loss.
Question: 45When considering normal and abnormal spoilage, which one of the following is theoretically
the best accounting method for spoilage in a process-costing system?
A. Both normal and abnormal spoilage cost should be charged to a separate expense account.
B. Normal spoilage cost should be charged to good units and abnormal spoilage cost should be charged to a
separate expense account.
Answer (B) is correct.
Under process costing, as with job-order costing, the cost of a normal level of spoilage is left in cost of
goods sold; abnormal spoilage is recognized separately as a loss.
C. Both normal and abnormal spoilage costs should be charged to good units.
D. Normal spoilage costs should be charged to a separate expense account and abnormal spoilage cost
should be charged to good units.
Question: 46A firm uses a process-costing system and inspects its goods at the end of manufacturing. The
inspection as of June 30 revealed the following information for the month of June:
Good units completed
16,000
Normal spoilage (units)
300
Abnormal spoilage (units)
100
Unit costs were: materials, $3.50 and conversion costs, $6.00. The number of units that the firm would transfer to its
finished goods inventory and the related cost of these units are
Units Transferred Cost
A. 16,000 $152,000
B. 16,000 $154,850
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
Only salable goods (16,000) are transferred to finished goods inventory. Under process costing, the full
cost of normal spoilage is borne by good units. Thus, the total dollar amount transferred to finished
goods was $154,850 [(16,000 + 300) × $9.50].
C. 16,000 $155,800
D. 16,300 $154,850
Question: 47A first-in, first-out (FIFO) process cost system is used to account for the cost of producing a
chemical compound. As part of production, Material B is added when the goods are 80% complete. Beginning
work-in-process inventory for the current month was 20,000 units, 90% complete. During the month, 70,000 units
were started in process, and 65,000 of these units were completed. There were no lost or spoiled units. If the ending
inventory was 60% complete, the total equivalent units for Material B for the month was
A. 65,000 units.
Answer (A) is correct.
Beginning work-in-process, being 90% complete, already had Material B added in the previous month,
so it did not produce EUP for this month. By the same token, ending work-in-process, being only 60%
complete, did not have Material B added this month so it did not produce EUP for this month. The
EUP for Material B is therefore only the 65,000 units started and completed during the month.
B. 70,000 units.
C. 85,000 units.
D. 90,000 units.
Question: 48A manufacturer uses a weighted-average process costing system and has the following costs and
activity during October:
Materials
$40,000
Conversion cost
32,500
Total beginning work-in-process inventory
Materials
$72,500
$ 700,000
Conversion cost
617,500
Total production costs -- October
Production completed
$1,317,500
60,000 units
Work-in-process, October 31 20,000 units
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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All materials are introduced at the start of the manufacturing process, and conversion cost is incurred uniformly
throughout production. Conversations with plant personnel reveal that, on average, month-end in-process inventory
is 25% complete. Assuming no spoilage, how should October manufacturing cost be assigned?
Production Completed
Work-in-Process
A. $1,042,500 $347,500
B. $1,095,000 $222,500
C. $1,155,000 $235,000
Answer (C) is correct.
When determining unit costs under weighted-average, the numerator consists both of costs that were
added in prior periods and those added during the current period. Likewise, the denominator consists
both of units completed during the period and the equivalent units of production (EUP) of those
remaining in ending work-in-process. Since materials are added at the beginning of the process, both
production populations are 100% complete with respect to materials costs:
EUP calculations for material costs:
Production completed
60,000 × 100% = 60,000
Work-in-process
20,000 × 100% = 20,000
EUP for conversion costs is calculated as follows:
EUP calculations for conversion costs:
Production completed
60,000 × 100% = 60,000
Work-in-process
20,000 × 25% = 5,000
For October, therefore, unit cost calculations are as follows:
Unit cost calculations for materials:
$40,000 + $700,000
60,000 + 20,000
= $9.25 per EU
Unit cost calculations for conversion:
$32,500 + $617,500
60,000 + 5,000
= $10.00 per EU
The value of production completed in October is therefore $1,155,000 [(60,000 units × $9.25) +
(60,000 units × $10.00)], and the value of ending work-in-process is $235,000 [(20,000 units × $9.25)
+ (5,000 units × $10.00)].
D. $1,283,077 $106,923
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 49A company uses a weighted-average process costing system. All materials are introduced at the
start of manufacturing, and conversion cost is incurred evenly throughout production. The company started 70,000
units during May and had the following work-in-process inventories at the beginning and end of the month:
May 1 30,000 units, 40% complete
May 31 24,000 units, 25% complete
Assuming no spoilage or defective units, the total equivalent units used to assign costs for May are
Materials Conversion Cost
A. 70,000 70,000
B. 82,000 82,000
C. 100,000 70,000
D. 100,000 82,000
Answer (D) is correct.
The company had 30,000 units in beginning work-in-process inventory and started 70,000 during the
month, for a total of 100,000 units to be accounted for. Since all materials are introduced at the start of
manufacturing, all 100,000 units are 100% complete with respect to materials costs. Equivalent units
of production for conversion costs can be determined as follows:
Beginning WIP
30,000
units × 100% =
30,000
Started and completed 46,000
units × 100% =
46,000
Ending WIP
units × 25% =
6,000
Totals
24,000
100,000
units
82,000
Question: 50A corporation uses a first-in, first-out (FIFO) process costing system and has the following unit
information for the month of August:
Units
Beginning work-in-process inventory:
100% complete for materials,
75% complete for conversion cost
10,000
Units complete and transferred out
90,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Ending work-in-process inventory:
100% complete for materials,
60% complete for conversion costs
8,000
The number of equivalent units of production for conversion costs for the month of August is
A. 87,300
Answer (A) is correct.
The corporation had 8,000 units in ending work-in-process inventory and transferred out 90,000 during
the month, for a total of 98,000 units to be accounted for. Since the corporation completed 90,000 units
during the month and had 10,000 in beginning work-in-process, 80,000 of those completed were
started during the month. Under a FIFO system, only the work necessary to complete units in
beginning inventory is counted toward equivalent units of production (EUP). EUP can be determined
as follows:
Beginning WIP
10,000
units × 25% =
2,500
Started and completed 80,000
units × 100% = 80,000
Ending WIP
units × 60% =
Totals
8,000
98,000
units
4,800
87,300
B. 88,000
C. 92,300
D. 92,700
Question: 51A firm uses a weighted-average process-costing system. Material B is added at two different points
in the production of shirms, 40% is added when the units are 20% completed, and the remaining 60% of Material B
is added when the units are 80% completed. At the end of the quarter, there are 22,000 shirms in process, all of
which are 50% completed. With respect to Material B, the ending shirms in process represent how many equivalent
units?
A. 4,400
B. 8,800
Answer (B) is correct.
All 22,000 units in ending work-in-process have had 40% of Material B added, since they have all
passed the 20% completion point and none have reached the 80% completion point. Equivalent units of
production for Material B are thus 8,800 (22,000 × 40%).
C. 11,000
D. 22,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 52A company uses a process cost system in accounting for its single product. The cost of units failing
final inspection, termed normal spoilage, is added to the inventory cost of the good units produced. Units spoiled
during production are termed abnormal spoilage, and their cost is immediately written off to cost of goods sold.
During the previous month, the entire inventory of spoiled units (both normal and abnormal spoilage) was sold at a
price lower than it had cost to produce them. How would this sale affect the reported net income of the company?
A. Increase net income from the sale of the abnormal spoilage and increase net income from the sale of the
normal spoilage.
Answer (A) is correct.
Since the entire inventory of spoiled units was sold and the costs of those spoiled units were already
included in the inventory cost of good units produced and written off to cost of goods sold, the sale of
these spoiled units would increase net income from the sale of the abnormal spoilage and increase the
net income from the sale of the normal spoilage. In other words, the spoiled units have already been
expensed and are valued for book purposes at zero, so any money received will increase profits.
B. Increase net income from the sale of the abnormal spoilage and decrease net income from the sale of the
normal spoilage.
C. Decrease net income from the sale of the abnormal spoilage and increase net income from the sale of the
normal spoilage.
D. Decrease net income from the sale of the abnormal spoilage and decrease net income from the sale of the
normal spoilage.
Question: 53The fabrication process includes three steps: cutting, bending, and assembly. Cutting and bending
processes are completed together, and then units are sent to the assembly department for completion. Direct
materials and conversion costs are added proportionately throughout the process. Units are 50% complete for both
direct materials and conversion costs when the units are transferred from the cutting and bending process to
assembly. The fabricator uses the FIFO (first in, first out) inventory method. The activity report for the assembly
department for the current month is shown below.
Beginning inventory (60% complete)
240 units
Transferred in from cutting-bending department 680 units
Units completed and transferred out
Ending inventory (75% complete)
800 units
------
What is the assembly department’s equivalent units produced for the current month?
A. 734 units.
B. 746 units.
Answer (B) is correct.
Total units to account for include beginning inventory and units transferred in from the cutting-bending
department. To account for these units, they are either completed and transferred out or in ending
inventory, so ending inventory is calculated by subtracting the units transferred out from the units to
account for. The number of units started and completed this period is calculated by subtracting
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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beginning inventory and ending inventory from the units to account for. Under FIFO, only the
percentage of beginning inventory that was completed this period is included in equivalent units. The
number of units started and completed are always completely included, and ending inventory is
included to the extent of its completion. Total units to account for include beginning inventory and
units transferred in from the cutting-bending department, which yields 920 units (240 + 680). To
account for these units, they are either completed and transferred out or in ending inventory, so ending
inventory has 120 units (920 to account for – 800 completed and transferred out). The number of units
started and completed this period are 560 (920 to account for – 240 beginning inventory – 120 ending
inventory). Under FIFO, only the percentage of beginning inventory that was completed this period is
included in equivalent units, which is 96 [240 units × (1 – 60%)]. The number of units started and
completed are always completely included, and ending inventory is included to the extent of its
completion, which is 90 (120 × 75%). Total equivalent units are 746 (96 beginning inventory +
560 started and completed + 90 ending inventory).
C. 824 units.
D. 890 units.
Question: 54A company began the month with 10,000 units in work-in-process inventory that were 60%
complete. During the month, the company transferred 120,000 units to finished goods. At the end of the month,
20,000 units were in work-in-process inventory that were 20% complete. If the FIFO method is used, the equivalent
units of production during the month equal
A. 130,000
B. 128,000
C. 122,000
D. 118,000
Answer (D) is correct.
Under FIFO, EUP are based solely on work performed during the current period. The EUP equals the
sum of the work done on the beginning work-in-process inventory, units started and completed in the
current period, and the ending work-in-process inventory. Because 120,000 units were completed
during the period, 110,000 (120,000 – 10,000 in BWIP) must have been started and completed during
the period. The total EUP for the month is calculated as follows:
Beginning WIP: (100% – 60%) × 10,000 units = 4,000
Units started and completed: 100% × 110,000 units = 110,000
Ending WIP: 20% × 20,000 units = 4,000
Therefore, the equivalent units of production during the month equals 118,000 (4,000 + 110,000 +
4,000).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 55During the month of February, a company purchased 260,000 pounds of raw material for $5 per
pound and used 250,000 of these pounds in production. This raw material is applied at the beginning of the process.
On February 1, the company had 10,000 units in work-in-process inventory that were 10% complete and valued at
$25,000 for materials. At the end of the month, there were 40,000 units in work-in-process inventory that were 40%
complete. Assuming FIFO is used, if the company transferred out 500,000 units to finished goods during February,
the direct material cost per unit that should be used to value ending work-in-process inventory is
A. $2.36
Answer (A) is correct.
The amount that would have been charged to work-in-process for materials would have been
$1,250,000 (250,000 pounds at $5 per pound). The company began the month with 10,000 units in
process and then transferred out 500,000 units. This 500,000 would have been composed of the 10,000
units from beginning inventory, plus 490,000 started during the current month. There were 40,000
units in ending inventory (which had all of their raw materials introduced at the start of production).
Thus, the current month’s production would have consisted of 530,000 units (490,000 units transferred
out + 40,000 in ending inventory). Dividing the $1,250,000 of costs charged to the department during
the month by the 530,000 units worked on results in a unit cost of $2.36.
B. $2.47
C. $2.50
D. $2.52
Question: 56Costs are accumulated by a responsibility center for control purposes when using
Job-Order Costing Process Costing
A. Yes Yes
Answer (A) is correct.
A responsibility center is a subunit (part or segment) of an organization whose manager is accountable
for a specified set of activities. Both job-order costing and process costing may accumulate their costs
by responsibility centers.
B. Yes No
C. No No
D. No Yes
Question: 57The completion of goods is recorded as a decrease in work-in-process control when using
Job-Order Costing Process Costing
A. Yes No
B. Yes Yes
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Answer (B) is correct.
The cost flow among accounts in process costing is similar to that for job-order costing. Both use the
basic general ledger accounts, for example, materials control, work-in-process control, manufacturing
overhead control, finished goods control, and cost of goods sold. Consequently, each system credits
(decreases) work-in-process control and debits (increases) finished goods control when goods are
completed.
C. No Yes
D. No No
Question: 58A company uses a process costing system to record inventory costs. Data at the end of the month
are as follows:
Units Direct materials (% complete) Conversion cost (% complete)
Work-in-process inventory
100
100%
80%
Finished goods inventory
900
100%
100%
The company uses the weighted-average method to compute the costs. Its total costs for the month are $10,000 for
direct materials and $19,600 for conversion costs. What is the total conversion cost per equivalent unit?
A. $19.60
B. $20.00
Answer (B) is correct.
Under the weighted-average method, units in beginning work-in-process (WIP) are treated the same as
units started and completed during the current period. However, in this question, the company has no
beginning WIP. EUP are calculated by the sum of total units completed and transferred out in the
current period plus the proportion of completed ending WIP (ending WIP × percent completed). Thus,
EUP of conversion costs is 980 [900 + (100 × 80%)]. The cost per EUP under the weighted-average
method is calculated as beginning WIP costs plus current-period costs divided by EUP. Because
conversion costs totaled $19,600 for the month, and no beginning WIP existed, conversion costs per
EUP is $20 ($19,600 current period costs ÷ 980 EUP).
C. $24.50
D. $30.00
Question: 59The Cutting Department is the first stage of Mark Company’s production cycle. BWIP for this
department was 80% complete as to conversion costs. EWIP was 50% complete. Conversion costs in the Cutting
Department for the month just ended were as follows:
Units
Beginning WIP
CC
25,000 $ 22,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Units started and costs incurred during the month
135,000 143,000
Units completed and transferred to next department during the month 100,000
Using the FIFO method, what was the conversion cost of ending WIP in the Cutting Department?
A. $22,000
B. $33,000
C. $39,000
Answer (C) is correct.
Under the FIFO method, EUP for a period include only the work done that period and exclude any
work done in a prior period. EWIP is 60,000 units (25,000 units BWIP + 135,000 units started –
100,000 units completed). Units started and completed equal 75,000 (100,000 completed units –
25,000 units BWIP). The total of conversion cost EUP for the period is calculated below.
Work Done
in Current
Units
Period
25,000
20%
5,000
Started & completed 75,000
100%
75,000
50%
30,000
BWIP
EWIP
60,000
Total EUP
CC (EUP)
110,000
The total of the conversion costs for the period is given as $143,000. Dividing by total EUP of 110,000
gives a unit cost of $1.30. Thus, the conversion cost of the EWIP inventory is $39,000 (30,000 EUP in
EWIP × $1.30).
D. $78,000
Question: 60In a process cost system, the application of factory overhead usually is recorded as an increase in
A. Cost of goods sold.
B. Work-in-process inventory control.
Answer (B) is correct.
The principal distinction between process costing and job-order costing systems is that the latter use
subsidiary WIP and finished goods ledgers to account for separate jobs. However, the same general
ledger accounts are used in both systems, and cost flow among accounts is also the same. Both systems
increase work-in-process control to record applied overhead.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Factory overhead control.
D. Finished goods inventory control.
Subunit 3: Activity-Based Costing
Question: 1The use of activity-based costing (ABC) normally results in
A. Substantially greater unit costs for low-volume products than is reported by traditional product costing.
Answer (A) is correct.
ABC differs from traditional product costing because it uses multiple allocation bases and therefore
allocates overhead more accurately. The result is that ABC often charges low-volume products with
more overhead than a traditional system. For example, the cost of machine setup may be the same for
production runs of widely varying sizes. This relationship is reflected in an ABC system that allocates
setup costs on the basis of the number of setups. However, a traditional system using an allocation base
such as machine hours may underallocate setup costs to low-volume products. Many companies
adopting ABC have found that they have been losing money on low-volume products because costs
were actually higher than originally thought.
B. Substantially lower unit costs for low-volume products than is reported by traditional product costing.
C. Decreased setup costs being charged to low-volume products.
D. Equalizing setup costs for all product lines.
Fact Pattern:
Wall
Specialty
Zeta Company is preparing its annual profit plan. As part
Mirrors
Windows
of its analysis of the profitability of individual products,
the controller estimates the amount of overhead that
Units produced
25
25
should be allocated to the individual product lines from Material moves per product line
5
15
the information given in the next column:
Direct labor hours per unit
200
200
Budgeted materials handling costs
$50,000
Question: 2Under a costing system that allocates overhead on the basis of direct labor hours, Zeta’s materials
handling costs allocated to one unit of wall mirrors would be
A. $1,000
Answer (A) is correct.
If direct labor hours are used as the allocation base, the $50,000 of costs is allocated over 400 hours of
direct labor. Multiplying the 25 units of each product times 200 hours results in 5,000 labor hours for
each product, or a total of 10,000 hours. Dividing $50,000 by 10,000 hours results in a cost of $5 per
direct labor hour. Multiplying 200 hours times $5 results in an allocation of $1,000 of overhead per
unit of product.
B. $500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. $2,000
D. $5,000
Fact Pattern:
Wall
Specialty
Zeta Company is preparing its annual profit plan. As part
Mirrors
Windows
of its analysis of the profitability of individual products,
the controller estimates the amount of overhead that
Units produced
25
25
should be allocated to the individual product lines from Material moves per product line
5
15
the information given in the next column:
Direct labor hours per unit
200
200
Budgeted materials handling costs
$50,000
Question: 3Under activity-based costing (ABC), Zeta’s materials handling costs allocated to one unit of wall
mirrors would be
A. $1,000
B. $500
Answer (B) is correct.
An activity-based costing (ABC) system allocates overhead costs on the basis of some causal
relationship between the incurrence of cost and activities. Because the moves for wall mirrors
constitute 25% (5 ÷ 20) of total moves, the mirrors should absorb 25% of the total materials handling
costs. Thus, $12,500 ($50,000 × 25%) is allocated to mirrors. The remaining $37,500 is allocated to
specialty windows. Dividing the $12,500 by 25 units produces a cost of $500 per unit of mirrors.
C. $1,500
D. $2,500
Question: 4Because of changes that are occurring in the basic operations of many firms, all of the following
represent trends in the way indirect costs are allocated except
A. Treating direct labor as an indirect manufacturing cost in an automated factory.
B. Using throughput time as an application base to increase awareness of the costs associated with
lengthened throughput time.
C. Preferring plant-wide application rates that are applied to machine hours rather than incurring the cost of
detailed allocations.
Answer (C) is correct.
With the automation of factories and the corresponding emphasis on activity-based costing (ABC),
companies are finding new ways of allocating indirect factory overhead. One change is that plant-wide
application rates are being used less often because a closer matching of costs with cost drivers provides
better information to management. ABC results in a more accurate application of indirect costs
because it provides more refined data. Instead of a single cost goal for a process, a department, or even
an entire plant, an indirect cost pool is established for each identified activity. The related cost driver,
the factor that changes the cost of the activity, also is identified.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Using several machine cost pools to measure product costs on the basis of time in a machine center.
Question: 5Multiple or departmental overhead rates are considered preferable to a single or plantwide overhead
rate when
A. Manufacturing is limited to a single product flowing through identical departments in a fixed sequence.
B. Various products are manufactured that do not pass through the same departments or use the same
manufacturing techniques.
Answer (B) is correct.
Multiple rates are appropriate when a process differs substantially among departments or when
products do not go through all departments or all processes. The trend in cost accounting is toward
activity-based costing, which divides production into numerous activities and identifies the cost
driver(s) most relevant to each. The result is a more accurate tracing of costs.
C. Cost drivers, such as direct labor, are the same over all processes.
D. Individual cost drivers cannot accurately be determined with respect to cause-and-effect relationships.
Question: 6A cosmetics manufacturer has used a traditional cost accounting system to apply quality control costs
uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for makeup is $27,500. In
an attempt to distribute quality control costs more equitably, the manufacturer is considering activity-based costing.
The monthly data shown in the chart below have been gathered for makeup.
Quantity of
Activity
Cost Driver
Cost Rates
Makeup
Incoming material inspection Type of material $11.50 per type 12 types
In-process inspection
Number of units $0.14 per unit
17,500 units
Product certification
Per order
25 orders
$77 per order
The monthly quality control cost assigned to makeup using activity-based costing (ABC) is
A. $88.64 per order.
B. $525.50 lower than the cost using the traditional system.
C. $8,500.50.
D. $525.50 higher than the cost using the traditional system.
Answer (D) is correct.
ABC identifies the causal relationship between the incurrence of cost and activities, determines the
drivers of the activities, establishes cost pools related to the drivers and activities, and assigns costs to
ultimate cost objects on the basis of the demands (resources or drivers consumed) placed on the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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activities by those cost objects. Hence, ABC assigns overhead costs based on multiple allocation bases
or cost drivers. Under the traditional, single-base system, the amount allocated is $3,987.50 ($27,500 ×
14.5%). Under ABC, the amount allocated is $4,513 [(12 × $11.50) + (17,500 × $.14) + (25 × $77)], or
$525.50 more than under the traditional system.
Question: 7A profitable company with five departments uses plantwide overhead rates for its highly diversified
operation. The firm is studying a change to either allocating overhead by using departmental rates or using activitybased costing (ABC). Which one of these two methods will likely result in the use of a greater number of cost
allocation bases and more accurate costing results?
Greater Number of More Accurate
Allocation Bases Costing Results
A. Departmental Departmental
B. Departmental ABC
C. ABC Departmental
D. ABC ABC
Answer (D) is correct.
Under activity-based costing (ABC), the number of allocation bases increases dramatically over those
of a traditional (volume-based) costing accumulation system. First, every activity must be allocated to
an indirect cost pool using resource drivers (“1st-stage allocations”), and every indirect cost pool must
be allocated to final products using activity drivers (“2nd-stage allocations”). This use of a larger
number of allocation pools and bases leads to more accurate costing results.
Question: 8A company is beginning operations and is considering three alternative ways in which to allocate
manufacturing overhead to individual units produced. The company can use a plantwide rate, departmental rates, or
activity-based costing. The company will produce many types of products in its single plant, and not all products
will be processed through all departments. In which one of the following independent situations would reported net
income for the first year be the same regardless of which overhead allocation method had been selected?
A. All production costs approach those costs that were budgeted.
B. The sales mix does not vary from the mix that was budgeted.
C. All manufacturing overhead is a fixed cost.
D. All ending inventory balances are zero.
Answer (D) is correct.
When there is no beginning finished goods inventory, the only difference in net income arising from
the use of variant costing methods is the treatment of costs that show up on the balance sheet because
they are buried in the various ending inventories. In the company’s case, therefore, an identical net
income figure across the three different costing system options will only occur when there are no
ending inventories.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 9Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are
grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed
to allocate a homogeneous cost pool should
A. Have a cause-and-effect relationship with the cost items in the cost pool.
Answer (A) is correct.
A cost allocation base is the common denominator for systematically correlating indirect costs and a
cost object. The cost driver of the indirect costs is ordinarily the allocation base. In a homogeneous
cost pool, all costs should have the same or a similar cause-and-effect relationship with the cost
allocation base.
B. Assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a
nonuniform way.
C. Be a nonfinancial measure (e.g., number of setups) because a nonfinancial measure is more objective.
D. Have a high correlation with the cost items in the cost pool as the sole criterion for selection.
Question: 10A company with three products classifies its costs as belonging to five functions: design,
production, marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to
the three products. The direct costs of each of the five functions are traced directly to the three products. The indirect
costs of each of the five business functions are collected into five separate cost pools and then assigned to the three
products using appropriate allocation bases. The allocation base that will most likely be the best for allocating the
indirect costs of the distribution function is
A. Number of customer phone calls.
B. Number of shipments.
Answer (B) is correct.
Distribution is the transfer of goods from producers to customers or from distribution centers to
merchandisers. Thus, distribution manages outflows, and purchasing manages inflows. Among the
interrelated issues involved in distribution are (1) selection of distribution channels, (2) inventory
placement, (3) means of transportation, (4) shipment schedules, (5) routes, and (6) carriers.
Accordingly, the number of shipments is the cost driver most highly correlated with the incurrence of
the indirect costs of distribution.
C. Number of sales persons.
D. Dollar sales volume.
Question: 11Activities, their drivers, and their costs may be classified as unit-level, batch-level, product-level,
and facility-level. If activity-based costing (ABC) information is prepared for internal purposes, which costs
are most likely to be treated as period costs?
A. Unit-level.
B. Batch-level.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Product-level.
D. Facility-level.
Answer (D) is correct.
A difficulty in applying ABC is that, although the first three levels of activities pertain to specific
products or services, facility-level activities do not. Thus, facility-level costs are not accurately
assignable to products. The theoretically sound solution may be to treat these costs as period costs.
Nevertheless, organizations that apply ABC ordinarily assign them to products to obtain a full
absorption cost suitable for external financial reporting in accordance with GAAP. However, for
internal purposes, facility-level costs should be treated as period costs to avoid distorting decisions
about cost efficiency, pricing, and profitability.
Question: 12A manufacturer’s cost assignment and product costing procedures follow activity-based costing
principles. Activities have been identified and classified as being either value-adding or nonvalue-adding as to each
product. Which of the following activities used in the production process is nonvalue-adding?
A. Design engineering activity.
B. Heat treatment activity.
C. Drill press activity.
D. Raw materials storage activity.
Answer (D) is correct.
Analysis by activity provides for better cost control because of identification of nonvalue-adding
activities. A value-added activity contributes to customer satisfaction or meets a need of the entity. A
nonvalue-adding activity does not make such a contribution. It can be eliminated, reduced, or
redesigned without impairing the quantity, quality, or responsiveness of the product or service desired
by customers or the entity. For example, raw materials storage may be greatly reduced or eliminated in
a just-in-time (JIT) production system without affecting customer value.
Question: 13A corporation has used a traditional cost accounting system to apply quality control costs uniformly
to all products at a rate of 15% of direct labor cost. Monthly direct labor cost for its main product is $30,000. In an
attempt to distribute quality control costs more equitably, the corporation is considering activity-based costing
(ABC). The monthly data shown below have been gathered for the main product. The three activities are (1)
incoming materials inspection, (2) in-process inspection, and (3) product certification. Costs are to be allocated to
each activity on the basis of cost drivers.
Quantity for
Activity Cost Driver
Cost Rate
(1)
Number of types of materials
(2)
Number of units
$12 per type
Main Product
12 types
$0.14 per unit 17,500 units
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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(3)
Number of orders
$77 per order
30 orders
The monthly quality control cost assigned to the main product using ABC is
A. $150 per order.
B. $404 lower than using the traditional system.
C. $4,500
D. $404 higher than using the traditional system.
Answer (D) is correct.
ABC assigns overhead costs on the basis of multiple cost drivers instead of only one driver. Using the
three cost drivers in the question produces the following calculation:
Number of types
of materials (12 × $12)
$ 144
Number of units (17,500 × $.14) 2,450
Number of orders (30 × $77)
Total
2,310
$4,904
Under the old method of allocation based on direct labor, the allocated amount would have been 4,500
($30,000 × 15%), or $404 lower than under ABC.
Question: 14Which of the following statements about activity-based costing (ABC) is false?
A. Activity-based costing is useful for allocating marketing and distribution costs.
B. Activity-based costing is more likely to result in major differences from traditional costing systems if the
firm manufactures only one product rather than multiple products.
Answer (B) is correct.
ABC determines the activities that will serve as cost objects and then accumulates a cost pool for each
activity using the appropriate activity base (cost driver). It is a system that may be employed with job
order or process costing methods. Thus, when there is only one product, the allocation of costs to the
product is trivial. All of the cost is assigned to the one product; the particular method used to allocate
the costs does not matter.
C. In activity-based costing, cost drivers are what cause costs to be incurred.
D. Activity-based costing differs from traditional costing systems in that products are not cross-subsidized.
Fact Pattern:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Believing that its traditional cost system may be providing misleading information, Farragut
Manufacturing is considering an activity-based costing (ABC) approach. It now employs a
traditional cost system and has been applying its manufacturing overhead on the basis of
machine hours.
Farragut plans on using 50,000 direct labor hours and 30,000 machine hours in the coming
year. The following data show the manufacturing overhead that is budgeted.
Budgeted Budgeted
Activity
Cost Driver
Activity
Material handling No. of parts handled
Setup costs
No. of setups
Machining costs
Quality control
Cost
6,000,000 $ 720,000
750
315,000
Machine hours
30,000
540,000
No. of batches
500
225,000
Total manufacturing overhead cost:
$1,800,000
Cost, sales, and production data for one of Farragut’s products for the coming year are as
follows:
Prime costs:
Direct material cost per unit
$4.40
Direct labor cost per unit
.05 DLH @ $15.00/DLH
Total prime cost
.75
$5.15
Sales and production data:
Expected sales
Batch size
5,000 units
Setups
2 per batch
Total parts per finished unit
Question:
20,000 units
5 parts
Machine hours required
80 MH per batch
15If Farragut uses the traditional cost system, the cost per unit for this product for the coming year
would be
A. $5.39
B. $5.44
C. $6.11
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (C) is correct.
Given that manufacturing overhead is applied on the basis of machine hours, the overhead rate is $60
per hour ($1,800,000 ÷ 30,000) or $.96 per unit [(80 machine hours per batch × $60) ÷ 5,000 units per
batch]. Accordingly, the unit full cost is $6.11 ($5.15 unit prime cost + $.96).
D. $6.95
Fact Pattern:
Believing that its traditional cost system may be providing misleading information, Farragut
Manufacturing is considering an activity-based costing (ABC) approach. It now employs a
traditional cost system and has been applying its manufacturing overhead on the basis of
machine hours.
Farragut plans on using 50,000 direct labor hours and 30,000 machine hours in the coming
year. The following data show the manufacturing overhead that is budgeted.
Budgeted Budgeted
Activity
Cost Driver
Activity
Material handling No. of parts handled
Setup costs
No. of setups
Machining costs
Quality control
Cost
6,000,000 $ 720,000
750
315,000
Machine hours
30,000
540,000
No. of batches
500
225,000
Total manufacturing overhead cost:
$1,800,000
Cost, sales, and production data for one of Farragut’s products for the coming year are as
follows:
Prime costs:
Direct material cost per unit
$4.40
Direct labor cost per unit
.05 DLH @ $15.00/DLH
Total prime cost
.75
$5.15
Sales and production data:
Expected sales
20,000 units
Batch size
5,000 units
Setups
2 per batch
Total parts per finished unit
Machine hours required
5 parts
80 MH per batch
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 16If Farragut employs an activity-based costing system, the cost per unit for the product described for
the coming year would be
A. $6.00
B. $6.08
C. $6.21
D. $6.30
Answer (D) is correct.
Materials handling cost per part is $.12 ($720,000 ÷ 6,000,000), cost per setup is $420 ($315,000 ÷
750), machining cost per hour is $18 ($540,000 ÷ 30,000), and quality cost per batch is $450
($225,000 ÷ 500). Hence, total manufacturing overhead applied is $22,920 [(5 parts per unit × 20,000
units × $.12) + (4 batches × 2 setups per batch × $420) + (4 batches × 80 machine hours per batch ×
$18) + (4 batches × $450)]. The total unit cost is $6.296 [$5.15 prime cost + ($22,920 ÷ 20,000 units)
overhead].
Question: 17Factory Company makes two products, X and Z. X is being introduced this period, and Z has been
in production for 2 years. For the period about to begin, 1,000 units of each product are to be manufactured. Assume
that the only relevant overhead item is the cost of engineering change orders; that X and Z are expected to require
eight and two change orders, respectively; that X and Z are expected to require 2 and 3 machine hours, respectively;
and that the cost of a change order is $600. If Factory applies engineering change order costs on the basis of
machine hours, the cross-subsidy per unit arising from this peanut-butter costing approach is
A. $1.20
B. $2.40
Answer (B) is correct.
The inaccurate averaging or spreading of indirect costs over products or service units that use different
amounts of resources is called peanut-butter costing. Peanut-butter costing results in product-cost
cross-subsidization, the condition in which the miscosting of one product causes the miscosting of
other products. The total change order cost is $6,000 [(8 + 2) × $600], the cost per machine hour is
$1.20 {$6,000 ÷ [(2 hours × 1,000 units) + (3 hours × 1,000 units)]}. The unit costs assigned X and Z
are
X
Z
Unit costs assigned on machine-hour basis
$2.40
$3.60
($1.20 × 2 hours)
($1.20 × 3 hours)
Unit costs assigned directly on charge$4.80
$1.20
order basis
[(8 orders × $600) ÷ 1,000 [(2 orders × $600) ÷ 1,000
units]
units]
Thus, the unit amount by which machine-hour-based assignment overcosts Z and undercosts X (the
cross-subsidy) is $2.40 ($3.60 – $1.20 or $4.80 – $2.40).
C. $3.60
D. $4.80
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 18An assisted-living facility provides services in the form of residential space, meals, and other
occupant assistance (OOA) to its occupants. The facility currently uses a traditional cost accounting system that
charges each occupant a daily rate equal to the facility’s annual cost of providing residential space, meals, and OOA
divided by total occupant days. However, an activity-based costing (ABC) analysis has revealed that occupants’ use
of OOA varies substantially. This analysis determined that occupants could be grouped into three categories (low,
moderate, and high usage of OOA) and that the activity driver of OOA should be nursing hours. The driver of the
residential space and meals is occupant days. The following quantitative information was also provided:
Annual
Annual
Occupant Category
Occupant Days
Nursing Hours
Low usage
36,000
90,000
Medium usage
18,000
90,000
6,000
120,000
60,000
300,000
High usage
The total annual cost of OOA was $7.5 million, and the total annual cost of providing residential space and meals
was $7.2 million. Accordingly, the ABC analysis indicates that the daily costing rate for providing residential space,
meals, and OOA should be
A. $182.50 for occupants in the low-usage category.
Answer (A) is correct.
This service organization produces three “products” (the three occupant categories), and the “units
produced” equal occupant days. According to the ABC analysis, production involves two activities: (1)
provision of residential space and meals and (2) OOA. The drivers of these activities are occupant days
and nursing hours, respectively. Thus, the cost pool rate for the first activity (residential space and
meals) is $120 per occupant day ($7,200,000 ÷ 60,000 days), and the cost pool rate for the second
activity (OOA) is $25 ($7,500,000 ÷ 300,000 hours). The total cost for providing services to occupants
in the low-usage category is $6,570,000 [($120 × 36,000 days) + ($25 × 90,000 hours)]. The daily cost
rate for these occupants is therefore $182.50 ($6,570,000 ÷ 36,000 occupant days).
B. $145.00 for occupants in the medium-usage category.
C. $245.00 for occupants in the high-usage category.
D. $620.00 for all occupants.
Question: 19A corporation utilizes an activity-based costing system for applying costs to its two products, P and
Q. In the assembly department, material handling costs vary directly with the number of parts inserted into the
product. Machinery is recalibrated and oiled each weekend regardless of the number of parts inserted during the
previous week. Both material handling and machinery maintenance costs are charged to the product on the basis of
the number of parts inserted. Due to reengineering of the production process for Product P, the number of insertion
parts per finished unit has been reduced. How will the redesign of the production process for Product P affect the
activity-based cost of Product Q?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Material handling cost per Q will remain unchanged, and machinery maintenance cost per Q unit will
remain unchanged.
B. Material handling cost per Q unit will increase, and machinery maintenance cost per Q unit will remain
unchanged.
C. Material handling cost per Q will remain unchanged, and machinery maintenance cost per Q unit will
increase.
Answer (C) is correct.
Since materials handling costs vary directly with the number of parts inserted, the material handling
cost (a variable cost) for both products remains unchanged on a per-unit basis. However, the newly
gained efficiency in the production of Product P means the machinery maintenance cost (a fixed cost)
of the assembly department is being spread over fewer units of input, so per-unit fixed costs (for both
products) will increase.
D. Material handling cost per Q unit will increase, and machinery maintenance cost per Q unit will increase.
Question: 20When using activity-based costing techniques, which one of the following departmental activities
would be expected to use machine hours as a cost driver to allocate overhead costs to production?
A. Plant cafeteria.
B. Machine setups.
C. Material handling.
D. Robotics painting.
Answer (D) is correct.
Machine hours are a direct measure of the level of use of a robotic painting operation.
Question: 21A company is considering the implementation of an activity-based costing and management
program. The company
A. Should focus on manufacturing activities and avoid implementation with service-type functions.
B. Would probably find a lack of software in the marketplace to assist with the related recordkeeping.
C. Would normally gain added insights into causes of cost.
Answer (C) is correct.
One of the benefits of activity-based costing is the discovery of cost relationships that went unnoticed
under traditional accounting methods.
D. Would likely use fewer cost pools than it did under more traditional accounting methods.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 22All of the following are likely to be used as a cost allocation base in activity-based
costing except the
A. Number of different materials used to manufacture the product.
B. Units of materials used to manufacture the product.
C. Number of vendors supplying the materials used to manufacture the product.
D. Cost of materials used to manufacture the product.
Answer (D) is correct.
Activity-based costing is founded on the idea that drivers for indirect cost assignment should be based
on some level of activity. Cost of materials does not directly reflect a level of a given activity.
Question: 23A manufacturer manufactures two types of engineering diagnostic equipment used in construction.
The two products are based on different technologies, x-ray and ultrasound, but are manufactured in the same
factory. The manufacturer has computed the manufacturing cost of the x-ray and ultrasound products by adding
together direct materials, direct labor, and overhead cost applied based on the number of direct labor hours. The
factory has three overhead departments that support the single production line that makes both products. Budgeted
overhead spending for the departments is as follows:
Department
Engineering
design
Material
handling
Setup
Total
$6,000
$5,000
$3,000
$14,000
Budgeted manufacturing activities and costs for the period are as follows:
Activity
Product
X-Ray
Units produced and sold
Ultrasound
50
100
$5,000
$8,000
100
300
$4,000
$12,000
400
600
Number of engineering changes
2
1
Number of product setups
8
7
Direct materials used
Direct labor hours used
Direct labor cost
Number of parts used
The budgeted cost to manufacture one ultrasound machine using the activity-based costing method is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $225
B. $264
Answer (B) is correct.
Charges for direct materials and direct labor are traceable to each type of machine ($8,000 and $12,000
respectively for the ultrasound). The departmental costs must be allocated based on each machine’s
proportional driver level. Engineering design costs can be allocated to the ultrasound machine at a rate
of 33.3% [1 ÷ (1 + 2)], material handling at a rate of 60% [600 ÷ (600 + 400)], and setup at a rate of
46.7% [7 ÷ (7 + 8)]. The cost for a single ultrasound machine can thus be calculated as follows:
Direct materials ($8,000 ÷ 100 units)
$ 80
Direct labor ($12,000 ÷ 100 units)
120
Engineering changes {$6,000 × [1 engineering change ÷ (1 + 2)] ÷ 100 units}
20
Material handling {$5,000 × [600 parts used ÷ (600 + 400)] ÷ 100 units}
30
Setup {$3,000 × [7 product setups ÷ (7 + 8)] ÷ 100 units}
14
Total
$264
C. $293
D. $305
Question: 24A firm that specializes in chocolate baked goods has long assessed the profitability of a product line
by comparing revenues to the cost of goods sold. However, the firm’s new accountant wants to use an activity-based
costing system that takes into consideration the cost of the delivery person. Listed below are activity and cost
information relating to two of the firm’s major products.
Muffins
Revenue
Cost of goods sold
Cheesecake
$53,000 $46,000
26,000 21,000
Delivery Activity:
Number of deliveries
150
85
Average length of delivery 10 minutes 15 minutes
Cost per hour for delivery $20.00
$20.00
Using activity-based costing, which one of the following statements is correct?
A. The muffins are $2,000 more profitable.
B. The cheesecakes are $75 more profitable.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. The muffins are $1,925 more profitable.
Answer (C) is correct.
The firm’s first step is to calculate the gross margin on the two products:
Muffins
Revenues
Cheesecake
$53,000
$46,000
Cost of goods sold (26,000)
Gross margin
$27,000
(21,000)
$25,000
The next step is to calculate total delivery cost for each product:
Muffins
Number of deliveries
Cheesecake
150
85
× 10
× 15
1,500
1,275
Divided by: minutes per hour ÷ 60
÷ 60
Times: minutes per delivery
Total delivery minutes
Total delivery hours
25.00
21.25
Times: delivery cost per hour × $20
× $20
Total delivery cost
$500
$425
The operating profits on these two products, and the difference between them, can now be determined:
Muffins:
$27,000 – $500 = $26,500
Cheesecake: $25,000 – $425 = $24,575
Excess
$ 1,925
D. The muffins have a higher profitability as a percentage of sales and therefore are more advantageous.
Fact Pattern: Atmel, Inc. manufactures and sells two products. Data with regard to these
products are given below.
Product A Product B
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Units produced and sold
30,000
12,000
Machine hours required per unit
2
3
Receiving orders per product line
50
150
Production orders per product line
12
18
8
12
20
30
Production runs
Inspections
Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below.
Receiving costs
Engineering costs
Machine setup costs
Inspection costs
$450,000
300,000
25,000
200,000
Total budgeted overhead costs $975,000
Question: 25Using activity-based costing, Atmel’s per unit overhead cost allocation of receiving costs for
Product A is
A. $3.75
Answer (A) is correct.
The first step in performing an activity-based costing assignment is to divide the dollar amount of the
indirect cost activity in question by the number of units of the appropriate allocation base. Total
receiving costs for both products amounted to $450,000. Between them, Products A and B had 200 (50
+ 150) receiving orders. Thus, the allocation rate is $2,250 per order ($450,000 ÷ 200 orders). The
amount allocated to Product A is $112,500 (50 orders × $2,250). Dividing this amount by the number
of units of Product A (30,000) results in a per-unit receiving cost of $3.75.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $10.75
C. $19.50
D. $28.13
Fact Pattern: Atmel, Inc. manufactures and sells two products. Data with regard to these
products are given below.
Product A Product B
Units produced and sold
30,000
12,000
Machine hours required per unit
2
3
Receiving orders per product line
50
150
Production orders per product line
12
18
8
12
20
30
Production runs
Inspections
Total budgeted machine hours are 100,000. The budgeted overhead costs are shown below.
Receiving costs
Engineering costs
Machine setup costs
Inspection costs
$450,000
300,000
25,000
200,000
Total budgeted overhead costs $975,000
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Question: 26Atmel’s cost driver for engineering costs is the number of production orders per product line. Using
activity-based costing, the engineering cost per unit for Product B is
A. $4.00
B. $10.00
C. $15.00
Answer (C) is correct.
The first step in performing an activity-based costing assignment is to divide the dollar amount of the
indirect cost activity in question by the number of units of the appropriate allocation base. Total
engineering costs for both products amounted to $300,000. Between them, Products A and B had
30 (12 + 18) production orders. Thus, the allocation rate is $10,000 per order ($300,000 ÷ 30 orders).
The amount allocated to Product B is $180,000 (18 orders × $10,000). Dividing this amount by the
number of units of Product B (12,000) results in a per-unit engineering cost of $15.00.
D. $29.25
Question: 27A primary reason for a company to change from traditional costing to activity-based costing (ABC)
is that ABC
A. Is a simpler costing method to use.
B. Reduces product undercosting or overcosting.
Answer (B) is correct.
A primary advantage of ABC is that product costing is improved, allowing for better decision making.
The result is not only more accurate cost assignments but also better cost control and more efficient
operations.
C. Eliminates indirect cost application to products.
D. Identifies the nonvalue-added costs of production.
Question: 28A plant has two departments, Machining and Assembly. This year’s budget for the plant contained
the following information.
Machining
Manufacturing overhead
Direct labor hours
Machine hours
Assembly
$4,000,000 $2,000,000
100,000
200,000
40,000
40,000
If the plant allocates manufacturing overhead based on machine hours, which of the following represents the
allocation rates?
Machining Assembly
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A. $40/hr. $10/hr.
B. $10/hr. $40/hr.
C. $100/hr. $50/hr.
Answer (C) is correct.
The allocation rate is simply equal to the budgeted manufacturing overhead divided by machine hours.
Therefore, the answer for Machining is $100/hr. [$4,000,000 ÷ 40,000 hours]. The rate for Assembly is
$50/hr. [$2,000,000 ÷ 40,000 hours].
D. $50/hr. $100/hr.
Question: 29Which one of the following is least likely to be an objective of a cost accounting system?
A. Product costing.
B. Department efficiency.
C. Inventory valuation.
D. Sales commission determination.
Answer (D) is correct.
A cost accounting system has numerous objectives, including product costing, assessing departmental
efficiency, inventory valuation, income determination, and planning, evaluating, and controlling
operations. Determining sales commissions is not an objective of a cost accounting system because
such commissions are based on sales, not costs.
Question: 30In a broad sense, cost accounting can best be defined within the accounting system as
A. Internal and external reporting that may be used in making nonroutine decisions and in developing plans
and policies.
B. External reporting to government, various outside parties, and shareholders.
C. Internal reporting for use in management planning and control, and external reporting to the extent its
product-costing function satisfies external reporting requirements.
Answer (C) is correct.
Cost accounting is a combination of (1) management accounting in the sense that its purpose can be to
provide internal reports for use in planning and control and in making nonroutine decisions, and
(2) financial accounting because its product-costing function satisfies external reporting requirements
for reporting to shareholders, government, and various outside parties.
D. Internal reporting for use in planning and controlling routine operations.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 31A manufacturing firm produces multiple families of products requiring various combinations of
different types of parts. The manufacturer has identified various cost pools, one of which consists of materials
handling costs. This cost pool includes the wages and employee benefits of the workers involved in receiving
materials, inspecting materials, storing materials in inventory, and moving materials to the workstations;
depreciation and maintenance of materials handling equipment (e.g., forklift trucks); and costs of supplies used as
well as other related costs. Of the following, the most appropriate cost driver for assigning materials handling costs
to the various products most likely is
A. Direct labor hours.
B. Number of units produced.
C. Number of vendors involved.
D. Number of parts used.
Answer (D) is correct.
Cost drivers should be related to the costs accumulated in cost pools. The number of parts used has a
direct cause-and-effect relationship with materials handling costs. The more parts used, the more
handling is involved.
Question: 32Which one of the following is the focus of activity-based management?
A. To improve allocation of indirect production costs.
B. To reduce the number of cost pools.
C. To increase the number of volume-related allocation bases.
D. To improve the effectiveness of activities.
Answer (D) is correct.
The process value analysis performed as part of ABC provides information for eliminating or reducing
nonvalue-adding activities. The result is therefore not only more accurate cost assignments, especially
of overhead, but also better cost control and more efficient operations.
Question: 33A plant has two departments, Machining and Assembly. This year’s budget for the plant contained
the following information.
Machining
Assembly
Manufacturing overhead $4,000,000 $2,000,000
Direct labor hours
100,000
200,000
Machine hours
410,000
40,000
If the plant uses a plantwide overhead rate based on direct labor hours, what would the rate be?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $10 per hour.
B. $20 per hour.
Answer (B) is correct.
The total manufacturing overhead is $6,000,000 ($4,000,000 + $2,000,000), and the total direct labor
hours are 300,000 (100,000 + 200,000). Since the plant uses a plantwide overhead rate based on direct
labor hours, the rate will be $20 per hour ($6,000,000 ÷ 300,000).
C. $40 per hour.
D. $75 per hour.
Question: 34A plant has two departments, Machining and Assembly. This year’s budget for the plant contained
the following information.
Machining
Assembly
Manufacturing overhead $4,000,000 $2,000,000
Direct labor hours
Machine hours
100,000
200,000
40,000
40,000
Assume the plant uses machine hours as the overhead base in machining and direct labor in Assembly. If Job 2420
uses 20 direct labor hours in each department, 10 machine hours in Machining and 5 machine hours in Assembly,
how much overhead would be assigned to the job?
A. $1,100
B. $1,200
Answer (B) is correct.
The machining department uses machine hours as its allocation base. Thus, the machining allocation
rate is equal to $100 per machine hour ($4,000,000 ÷ 40,000). The assembly department uses direct
labor hours as its allocation base. Thus, the assembly allocation rate is equal to $10 per direct labor
hour ($2,000,000 ÷ 200,000).
Job 2420 uses 20 direct labor hours in assembly and 10 machine hours in machining (the 5 machine
hours used in assembly are distractors). This job will be assigned $200 overhead from assembly
($10 rate × 20 direct labor hours) and $1,000 overhead from machining ($100 rate × 10 machine hours)
for a total overhead of $1,200 ($1,000 + $200).
C. $2,100
D. $2,200
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 35Which one of the following is not a benefit of activity-based management?
A. Improved competitive advantage by using continuous improvement methods.
B. Improving the value the customer receives.
Answer (B) is correct.
By more accurately allocating costs to the products using activity-based costing’s multiple allocation
pools, the company benefits by being able to make better decisions, but the customer is not provided
any additional value.
C. Better allocation of resources to key value-added activities.
D. Better costing information.
Question: 36A company manufactures diamond earrings and pendants. The company uses activity-based
budgeting and has established diamond inspection as one of its cost pools with number of diamonds used as its cost
driver. Inspection supplies for each diamond inspected are $0.35. For the upcoming year, the company originally
believed it would produce and sell 10,000 pendants containing one diamond and 5,000 sets of earrings containing
two diamonds, resulting in the following inspection cost per diamond.
Salary of inspector $60,000
Equipment costs
3,000
Inspection supplies
7,000
Total
$70,000
Cost per diamond $
3.50
If the company now believes it will only be able to produce and sell 8,000 pendants (in addition to the earrings), the
inspection cost per set of earrings would be
A. $6.30
B. $7.00
C. $7.70
Answer (C) is correct.
The original per-unit cost of inspection supplies was $0.35 {$7,000 total inspection costs ÷
[10,000 diamonds for pendants + (2 diamonds per set of earrings × 5,000 earring sets)]}. The new perdiamond cost of inspection is $3.85 [($60,000 + $3,000) ÷ (8,000 + 5,000 × 2) + $0.35]. Since a set of
earrings requires two diamonds, the inspection cost per set of earrings is $7.70 ($3.85 × 2).
D. $7.78
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Question: 37A company manufactures a line of products that vary with complexity: a basic model, a standard
model, and a deluxe model. The company uses 25 different activity cost drivers to assign overhead costs to its
products. The deluxe model typically uses more cost drivers than the simpler models. The company encourages
managers to focus on activities performed for each product and to control the cost of those activities. Which budget
methodology would best meet this company’s needs?
A. Traditional budgeting.
B. Zero-based budgeting.
C. Activity-based budgeting.
Answer (C) is correct.
Activity-based budgeting uses several cost drivers to assign overhead costs to its products.
D. Flexible budgeting.
Question: 38A company manufactures an increasing variety of consumer communications devices. The
company has always used a traditional cost allocation system, but now the accounting staff has proposed a change to
an activity-based costing system. The vice president of operations argues, “Costs are costs, rearranging them won’t
save any money and those systems are complicated and expensive.” The most logical response to this argument is
that activity-based costing systems
A. Provide more accurate reporting of each product’s cost so that management can make more informed
pricing decisions.
Answer (A) is correct.
A traditional cost allocation system puts all the overhead costs into a single pool and allocates them to
the end products. Activity-based costing is more accurate because indirect costs are attached to
activities that are then rationally allocated to end products. Therefore, activity-based costing provides a
more accurate report of each product’s cost so that management can make more informed pricing
decisions.
B. Are less expensive to use than traditional cost systems.
C. Eliminate the use of arbitrary cost allocations that are used in traditional cost systems.
D. Focus on manufacturing activities and eliminate engineering, marketing, and other non-traceable
activities from costing considerations.
Question: 39A manufacturing company has two departments, Machining and Assembly, at its Shanghai plant.
This year’s budget for the plant contained the following information.
Machining Assembly
Manufacturing overhead $4,000,000 $2,000,000
Direct labor hours
100,000
200,000
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Machine hours
40,000
40,000
If the Shanghai plant uses departmental allocation based on machine hours for the Machining Department and direct
labor hours for the Assembly Department, what would the rates be when allocating overhead to the individual
products?
Machining Assembly
A. $40/hr. $10/hr.
B. $75/hr. $30/hr.
C. $100/hr. $10/hr.
Answer (C) is correct.
The Machining Department allocates manufacturing overhead based on machine hours; thus, the
overhead rate is $100/hr. ($4,000,000 ÷ 40,000). The Assembly Department allocates manufacturing
overhead based on direct labor hours; thus, the overhead rate is $10/hr. ($2,000,000 ÷ 200,000).
D. $100/hr. $50/hr.
Question: 40A company is implementing an activity-based budgeting system. Set-up overhead is allocated based
on set-up hours and manufacturing overhead is allocated based on direct manufacturing labor hours. Budget
information is listed in the table below.
Cost driver information
Numbers of units per batch
Set-up time per batch
Product A Product B
50
25
1.75 hours 1.25 hours
Direct manufacturing labor time per batch 1.00 hours 0.75 hours
The company plans to produce 1,000 units of Product A and 750 units of Product B. The activity rates are $100 per
set-up hour and $150 per direct manufacturing labor hour. What is the total budgeted overhead?
A. $10,063
B. $13,625
Answer (B) is correct.
Because every batch of Product A contains 50 units and every batch of Product B contains 25 units, the
company will produce 20 (1,000 ÷ 50) batches of Product A and 30 (750 ÷ 25) batches of Product B.
Thus, the budgeted overhead is calculated as follows:
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Product A: (20 batches × 1.75 hours × $100) + (20 batches × 1.00 hours × $150) = $6,500
Product B: (30 batches × 1.25 hours × $100) + (30 batches × 0.75 hours × $150) = $7,125
Therefore, total budgeted overhead is $13,625.
C. $15,125
D. $22,188
Question: 41The costing method that determines product cost by identifying the costs of individual tasks and
then assigning these costs to products on the basis of the tasks needed to produce each product is known as
A. Activity-based costing.
Answer (A) is correct.
Activity-based costing involves defining the activities that drive indirect costs. A cost pool is
established for each activity, and a cost driver is identified for each pool. Drivers can include labor
hours, machine hours, or other variables.
B. Job-order costing.
C. Process costing.
D. Operations costing.
Subunit 4: Life-Cycle Costing
Question: 1Target pricing
A. Is more effective when applied to mature, long-established products.
B. Considers short-term variable costs and excludes fixed costs.
C. Is often used when costs are difficult to control.
D. Is a pricing strategy used to create competitive advantage.
Answer (D) is correct.
Target pricing and costing may result in a competitive advantage because it is a customer-oriented
approach that focuses on what products can be sold at what prices. It is also advantageous because it
emphasizes control of costs prior to their being locked in during the early links in the value chain. The
company sets a target price for a potential product reflecting what it believes consumers will pay and
competitors will do. After subtracting the desired profit margin, the long-run target cost is known. If
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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current costs are too high to allow an acceptable profit, cost-cutting measures are implemented or the
product is abandoned. The assumption is that the target price is a constraint.
Question: 2Life-cycle costing
A. Is sometimes used as a basis for cost planning and product pricing.
Answer (A) is correct.
Life-cycle costing estimates a product’s revenues and expenses over its expected life cycle. This
approach is especially useful when revenues and related costs do not occur in the same periods. It
emphasizes the need to price products to cover all costs, not just those for production. Hence, costs are
determined for all value-chain categories: upstream (R&D, design), manufacturing, and downstream
(marketing, distribution, and customer service). The result is to highlight upstream and downstream
costs in the cost planning process that often receive insufficient attention.
B. Includes only manufacturing costs incurred over the life of the product.
C. Includes only manufacturing cost, selling expense, and distribution expense.
D. Emphasizes cost savings opportunities during the manufacturing cycle.
Question: 3A company has been asked to evaluate the profitability of a product that it manufactured and sold
from Year 7 through Year 10. The product had a one-year warranty from date of sale. The following information
appears in the financial records:
Research, development, and design cost Manufacturing and distribution costs Warranty costs Warranty cost
Yr 5 & Yr 6
Yr 7 - Yr 10
Yr 7 - Yr 10
Yr 11
$5,000,000
$7,000,000
$200,000
$100,000
The life-cycle cost for this product is
A. $10,000,000
B. $12,000,000
C. $12,200,000
D. $12,300,000
Answer (D) is correct.
Life-cycle costing takes into account costs incurred at all stages of the value-chain, not just
manufacturing. The life-cycle cost for this product is thus $12,300,000 ($5,000,000 + $7,000,000 +
$200,000 + $100,000).
Question: 4The series of activities in which customer usefulness is added to the product is the definition of
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. A value chain.
Answer (A) is correct.
Value-chain analysis for assessing competitive advantage is an integral part of the strategic planning
process. Value-chain analysis is a continuous process of gathering, evaluating, and communicating
information for business decision making. A value chain depicts how customer value accumulates
along a chain of activities that lead to an end product or service. A value chain consists of the activities
required to research and develop, design, produce, market, deliver, and support its product. Extended
value-chain analysis expands the view of the parties involved to include those upstream (e.g.,
suppliers) and downstream (e.g., customers).
B. Process value analysis.
C. Integrated manufacturing.
D. Activity-based costing.
Question: 5A company’s product has an expected 4-year life cycle from research, development, and design
through its withdrawal from the market. Budgeted costs are
Upstream costs (R&D, design) $2,000,000
Manufacturing costs
3,000,000
Downstream costs (marketing,
distribution, customer service) 1,200,000
After-purchase costs
1,000,000
The company plans to produce 200,000 units and price the product at 125% of the whole-life unit cost. Thus, the
budgeted unit selling price is
A. $15
B. $31
C. $36
D. $45
Answer (D) is correct.
Whole-life costs include after-purchase costs (operating, support, repair, and disposal) incurred by
customers as well as life-cycle costs (R&D, design, manufacturing, marketing, distribution, and
research). Hence, the budgeted unit whole-life cost is $36 [($2,000,000 + $3,000,000 + $1,200,000 +
$1,000,000) ÷ 200,000 units], and the budgeted unit selling price is $45 ($36 × 125%).
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Fact Pattern: Dixon Porter Co., which uses life cycle costing, is considering the manufacture
of a product with a 5-year life cycle that will require spending $1,000,000 for R&D and
$2,000,000 for design and testing. Annual fixed and unit variable costs for the product and
projected average annual unit sales at three selling prices are given below:
Sales Price
Fixed
Production costs
Variable $ 750
$1,500,000
$100
Marketing and distribution costs 1,500,000
100
Customer service costs
180,000
Unit average annual sales
$ 900
$1,125
6,000
4,800
40
8,000
At the highest price, R&D costs will increase by $500,000 and design and testing costs by
$1,000,000. Additionally, at the highest price, fixed customer service costs will rise by $30,000
per year, and variable customer service costs will rise by $25 per unit. At the lowest price, fixed
marketing and distribution costs will decrease by $30,000 per year. Question: 6At a unit price of
$750, Dixon Porter’s life cycle costs are
A. $7,620,000
B. $8,070,000
C. $27,000,000
D. $28,350,000
Answer (D) is correct.
The question states that “at the ‘highest price,’ R&D costs will increase by $500,000 and design and
testing costs by $1,000,000. Additionally, at the highest price, fixed customer service costs will rise by
$30,000 per year, and variable customer service costs will rise by $25 per unit.” Since the question
asks for life cycle costs at a unit price of $750 (the lowest sales price), $30,000 must be subtracted
from the fixed marketing and distribution costs. Fixed customer service costs will rise by $30,000 per
year, and variable customer service costs will rise by $25 per unit only at the ‘highest price.’
At a unit price of $750, upstream costs equal $3,000,000 ($1,000,000 + $2,000,000). Fixed costs of
production and the fixed downstream costs equal $15,750,000 [($1,500,000 + $1,500,000 + $180,000 –
$30,000) × 5 years], and variable costs of production and variable downstream costs equal $9,600,000
[8,000 units × ($100 + $100 + $40) × 5 years]. Accordingly, the life cycle costs at a price of $750
equal $28,350,000 ($3,000,000 + $15,750,000 + $9,600,000).
Fact Pattern: Dixon Porter Co., which uses life cycle costing, is considering the manufacture
of a product with a 5-year life cycle that will require spending $1,000,000 for R&D and
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$2,000,000 for design and testing. Annual fixed and unit variable costs for the product and
projected average annual unit sales at three selling prices are given below:
Sales Price
Fixed
Production costs
Variable $ 750
$1,500,000
$100
Marketing and distribution costs 1,500,000
100
Customer service costs
180,000
$ 900
$1,125
6,000
4,800
40
Unit average annual sales
8,000
At the highest price, R&D costs will increase by $500,000 and design and testing costs by
$1,000,000. Additionally, at the highest price, fixed customer service costs will rise by $30,000
per year, and variable customer service costs will rise by $25 per unit. At the lowest price, fixed
marketing and distribution costs will decrease by $30,000 per year. Question: 7At a unit price of
$900, Dixon Porter’s life cycle costs are
A. $18,900,000
B. $26,100,000
Answer (B) is correct.
The question states that “At the ‘highest price,’ R&D costs will increase by $500,000 and design and
testing costs by $1,000,000. Additionally, at the highest price, fixed customer service costs will rise by
$30,000 per year, and variable customer service costs will rise by $25 per unit.” Fixed customer
service costs will rise by $30,000 per year, and variable customer service costs will rise by $25 per unit
only at the ‘highest price.’ At a unit price of $900, upstream costs equal $3,000,000 ($1,000,000 +
$2,000,000). Fixed costs of production and the fixed downstream costs equal $15,900,000
[($1,500,000 + $1,500,000 + $180,000) × 5 years], and variable costs of production and the variable
downstream costs equal $7,200,000 [6,000 units × ($100 + $100 + $40) × 5 years]. Thus, the life cycle
costs at a price of $900 equal $26,100,000 ($3,000,000 + $15,900,000 + $7,200,000).
C. $26,910,000
D. $28,350,000
Fact Pattern: Dixon Porter Co., which uses life cycle costing, is considering the manufacture
of a product with a 5-year life cycle that will require spending $1,000,000 for R&D and
$2,000,000 for design and testing. Annual fixed and unit variable costs for the product and
projected average annual unit sales at three selling prices are given below:
Sales Price
Fixed
Production costs
$1,500,000
Variable $ 750
$ 900
$1,125
$100
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Marketing and distribution costs 1,500,000
Customer service costs
100
180,000
40
Unit average annual sales
8,000
6,000
4,800
At the highest price, R&D costs will increase by $500,000 and design and testing costs by
$1,000,000. Additionally, at the highest price, fixed customer service costs will rise by $30,000
per year, and variable customer service costs will rise by $25 per unit. At the lowest price, fixed
marketing and distribution costs will decrease by $30,000 per year. Question: 8Which unit sales
price should Dixon Porter select to obtain the maximum profit over the product’s 5-year life cycle?
A. $750
Answer (A) is correct.
Life cycle costs include upstream (R&D and design and testing) and downstream (marketing and
distribution and customer service) costs over the product’s 5-year life cycle. At a unit price of $750,
upstream costs equal $3,000,000 ($1,000,000 + $2,000,000). Fixed costs of production and the fixed
downstream costs equal $15,750,000 [($1,500,000 + $1,500,000 + $180,000 – $30,000) × 5 years], and
variable costs of production and variable downstream costs equal $9,600,000 [8,000 units × ($100 +
$100 + $40) × 5 years]. Accordingly, the life cycle costs at a price of $750 equal $28,350,000
($3,000,000 + $15,750,000 + $9,600,000). Sales revenue at this price is $30,000,000 (8,000 units ×
$750 × 5 years). Hence, profit at a price of $750 is $1,650,000 ($30,000,000 – $28,350,000).
B. $900
C. $1,125
D. No profit can be earned.
Question: 9A company will introduce a new product in Year 1 that is expected to have a 3-year life. The
company expects to sell 100,000 units each year. Estimated costs are shown below.
Year 0
Year 1
Research/design $260,000 $
Year 2
0 $
Year 3
0 $
0
Production
0
900,000
900,000
900,000
Marketing
10,000
300,000
100,000
50,000
0
40,000
60,000
80,000
Customer service
If the company uses life-cycle costing to price its new product and desires a 10% mark-up over cost, the selling price
for Year 3 would be
A. $13.20
Answer (A) is correct.
Total life-cycle cost is equal to $3,600,000 [($260,000 + $10,000) + ($900,000 + $300,000 + $40,000)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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+ ($900,000 + $100,000 + $60,000) + ($900,000 + $50,000 + $80,000)]. This amount must be
recovered over 3 years, with 100,000 units per year. Therefore, $1,200,000 of costs must be recovered
in Year 3, with a per-unit cost of $12. At a 10% mark-up, the total price per unit is $13.20 (110% ×
$12).
B. $12.21
C. $11.66
D. $9.90
Question: 10In the <List A> stage of the product life cycle, <List B> tend to be highest.
List A
List B
A. Introduction Sales
B. Growth Profits
C. Maturity Profits
Answer (C) is correct.
The product life cycle has five stages: product development, introduction, growth, maturity, and
decline. In the maturity stage, profits level off or begin to decline.
D. Decline Cash flows
Question: 11At the introduction stage of an innovative product, the profit growth is normally slow due to
A. Expensive sales promotion.
Answer (A) is correct.
The introduction stage is characterized by slow sales growth and lack of profits because of the high
expenses of promotion and selective distribution to generate awareness of the product and encourage
customers to try it.
B. High competition.
C. A mass market.
D. Available alternatives.
Question: 12While auditing a marketing department, the internal auditor discovered that the product life cycle
model was used to structure the marketing mix. Under such a philosophy, the opportunity for cost reductions would
be greatest in which stage of the life cycle?
A. Introduction stage.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Growth stage.
Answer (B) is correct.
During the growth stage, the opportunity for cost reductions is at its maximum because production
volume is increasing at a high rate. Thus, fixed costs are being spread over more units of production,
and the benefits of the learning curve are being realized.
C. Maturity stage.
D. Decline stage.
Question: 13The number of competing firms is highest at which stage in the product life cycle?
A. Introduction.
B. Growth.
C. Maturity.
Answer (C) is correct.
The product life cycle has five stages: product development, introduction, growth, maturity, and
decline. In the maturity stage, sales growth declines and competitors are most numerous.
D. Decline.
Question: 14An entity produced two new products last year. Sales and cost data for the two products are
summarized below.
BM2
SM4
Sales price per unit
$100
$120
Quantity sold
1,500
970
Costs:
R&D
$20,000 $28,000
Marketing
7,000
10,000
Direct materials
46,000
42,000
Direct labor
35,500
25,000
Manufacturing overhead
12,000
9,500
4,000
5,500
Warranties
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Manager A measures product performance using traditional absorption costing. Manager B uses life-cycle costing
for performance measurement. Which one of the following correctly describes how the managers will evaluate the
new products?
A. Manager B finds SM4 is not profitable.
Answer (A) is correct.
Under traditional absorption costing and life-cycle costing, revenue for the products would be the same
($150,000 for BM2 and $116,400 for SM4). Traditional absorption costing treats all manufacturing
costs as product costs, but life-cycle costing takes all costs incurred over the lifespan of a product as
product costs. Thus, under traditional absorption costing, the manufacturing cost for BM2 is $93,500
($46,000 + $35,500 + $12,000), and the manufacturing cost for SM4 is $76,500 ($42,000 + $25,000 +
$9,500). Both products are profitable in traditional absorption costing. Under life-cycle costing, the
manufacturing cost for BM2 is $124,500 ($20,000 + $7,000 + $46,000 + $35,500 + $12,000 + $4,000),
and the manufacturing cost for SM4 is $120,000 ($28,000 + $10,000 + $42,000 + $25,000 + $9,500 +
$5,500). After comparing revenue with manufacturing costs, BM2 is found to be profitable, but SM4 is
found to be unprofitable under life-cycle costing.
B. Manager A finds SM4 to be more profitable than BM2.
C. Both managers conclude that BM2 and SM4 are profitable products.
D. Manager B finds both BM2 and SM4 to be unprofitable products.
Question: 15The life-cycle costing method is
A. The process for examining the various aspects of a product to identify cost efficiencies.
B. The process for managing all costs identified in the value chain.
Answer (B) is correct.
The life-cycle costing approach to budgeting estimates a product’s revenues and expenses over its
entire life cycle or value chain. Costs incurred before production, such as R&D costs, are referred to as
upstream costs. Costs incurred after production, such as marketing and customer service, are referred
to as downstream costs.
C. A method of costing that minimizes the selling expenses associated with a product.
D. A method of costing that focuses on the customer.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Study Unit 7: Cost Allocation Techniques
Subunit 1: Absorption and Variable Costing – Theory
Question: 1Which method of inventory costing treats direct manufacturing costs and manufacturing overhead
costs, both variable and fixed, as inventoriable costs?
A. Direct costing.
B. Variable costing.
C. Absorption costing.
Answer (C) is correct.
Absorption (full) costing considers all manufacturing costs to be inventoriable as product costs. These
costs include variable and fixed manufacturing costs, whether direct or indirect. The alternative to
absorption is known as variable (direct) costing.
D. Conversion costing.
Question: 2Which one of the following statements is true regarding absorption costing and variable costing?
A. Overhead costs are treated in the same manner under both costing methods.
B. If finished goods inventory increases, absorption costing results in higher income.
Answer (B) is correct.
Under variable costing, inventories are charged only with the variable costs of production. Fixed
manufacturing costs are expensed as period costs. Absorption costing charges to inventory all costs of
production. If finished goods inventory increases, absorption costing results in higher income because
it capitalizes some fixed costs that would have been expensed under variable costing. When inventory
declines, variable costing results in higher income because some fixed costs capitalized under the
absorption method in prior periods are expensed in the current period.
C. Variable manufacturing costs are lower under variable costing.
D. Gross margins are the same under both costing methods.
Question: 3Absorption costing and variable costing are two different methods of assigning costs to units
produced. Of the four cost items listed below, identify the one that is not correctly accounted for as a product cost.
Part of Product Cost Under
Absorption
Costing
Variable
Costing
A. Manufacturing supplies Yes Yes
B. Insurance on factory Yes No
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Direct labor cost Yes Yes
D. Packaging and shipping costs Yes Yes
Answer (D) is correct.
Under absorption costing, all manufacturing costs, both fixed and variable, are treated as product costs.
Under variable costing, only variable costs of manufacturing are inventoried as product costs. Fixed
manufacturing costs are expensed as period costs. Packaging and shipping costs are not product costs
under either method because they are incurred after the goods have been manufactured. Instead, they
are included in selling and administrative expenses for the period.
Question: 4When a firm prepares financial reports by using absorption costing,
A. Profits will always increase with increases in sales.
B. Profits will always decrease with decreases in sales.
C. Profits may decrease with increased sales even if there is no change in selling prices and costs.
Answer (C) is correct.
In an absorption costing system, fixed overhead costs are included in inventory. When sales exceed
production, more overhead is expensed under absorption costing due to fixed overhead carried over
from the prior inventory. If sales increase over production, more than one period’s overhead is
recognized as expense. Accordingly, if the increase in overhead expensed is greater than the
contribution margin of the increased units sold, profit may be lower with an increased level of sales.
D. Decreased output and constant sales result in increased profits.
Question: 5The contribution margin is the excess of revenues over
A. Cost of goods sold.
B. Manufacturing cost.
C. Direct cost.
D. All variable costs.
Answer (D) is correct.
Contribution margin is the excess of revenues over all variable costs (including both manufacturing
and nonmanufacturing variable costs) that vary with an output-related cost driver. The contribution
margin equals the revenues that contribute toward covering the fixed costs and providing a net income.
Question: 6A company pays bonuses to its managers based on operating income. The company uses absorption
costing, and overhead is applied on the basis of direct labor hours. To increase bonuses, the managers may do all of
the following except
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Produce those products requiring the most direct labor.
B. Defer expenses such as maintenance to a future period.
C. Increase production schedules independent of customer demands.
D. Decrease production of those items requiring the most direct labor.
Answer (D) is correct.
Under an absorption costing system, income can be manipulated by producing more products than are
sold because more fixed manufacturing overhead will be allocated to the ending inventory. When
inventory increases, some fixed costs are capitalized rather than expensed. Decreasing production,
however, will result in lower income because more of the fixed manufacturing overhead will be
expensed in the current period.
Question: 7Which one of the following is an advantage of using variable costing?
A. Variable costing complies with the U.S. Internal Revenue Code.
B. Variable costing complies with generally accepted accounting principles.
C. Variable costing makes cost-volume relationships more easily apparent.
Answer (C) is correct.
Under variable costing, only the variable costs of manufacturing attach to the units of output; fixed
costs are expensed in the period in which they are incurred. Thus, the variations in cost directly
attributable to changes in production level are immediately apparent under variable costing.
D. Variable costing is more relevant to long-run pricing strategies.
Question: 8A corporation pays bonuses to its managers based on operating income, as calculated under variable
costing. It is now 2 months before year end, and earnings have been depressed for some time. Which one of the
following actions should the production manager definitely implement to maximize the bonus for this year?
A. Step up production so that more manufacturing costs are deferred into inventory.
B. Cut $2.3 million of advertising and marketing costs.
C. Postpone $1.8 million of discretionary equipment maintenance until next year.
Answer (C) is correct.
Because the production manager wishes to maximize the bonus for the coming year, the action the
manager must take will necessarily have most of its effect in the short run. The action the manager
should take to achieve this goal is to defer costs under the manager’s control until the following period.
D. Implement, with the aid of the controller, an activity-based costing and activity-based management
system.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 9When comparing absorption costing with variable costing, which of the following statements
is not true?
A. Absorption costing enables managers to increase operating profits in the short run by increasing
inventories.
B. When sales volume is more than production volume, variable costing will result in higher operating
profit.
C. A manager who is evaluated based on variable costing operating profit would be tempted to increase
production at the end of a period in order to get a more favorable review.
Answer (C) is correct.
Absorption (full) costing is the accounting method that considers all manufacturing costs as product
costs. These costs include variable and fixed manufacturing costs whether direct or indirect. Variable
(direct) costing considers only variable manufacturing costs to be product costs, i.e., inventoriable.
Fixed manufacturing costs are considered period costs and are expensed as incurred. If production is
increased without increasing sales, inventories will rise. However, all fixed costs associated with
production will be an expense of the period under variable costing. Thus, this action will not artificially
increase profits and improve the manager’s review.
D. Under absorption costing, operating profit is a function of both sales volume and production volume.
Question: 10Which one of the following is the best reason for using variable costing?
A. Fixed factory overhead is more closely related to the capacity to produce than to the production of
specific units.
Answer (A) is correct.
Because fixed factory overhead is more closely related to the capacity to produce than to the
production of specific units, variable costing more accurately depicts the variations in cost resulting
from changes in the level of output.
B. All costs are variable in the long term.
C. Variable costing is acceptable for income tax reporting purposes.
D. Variable costing usually results in higher operating income than if a company uses absorption costing.
Question: 11If a manufacturing company uses variable costing to cost inventories, which of the following costs
are considered inventoriable costs?
A. Only raw material, direct labor, and variable manufacturing overhead costs.
Answer (A) is correct.
Under variable costing, only variable costs (direct materials, direct labor, and variable overhead) are
considered product costs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. Only raw material, direct labor, and variable and fixed manufacturing overhead costs.
C. Only raw material, direct labor, variable manufacturing overhead, and variable selling and administrative
costs.
D. Only raw material and direct labor costs.
Question: 12An airline is in the process of preparing a contribution margin income statement that will allow a
detailed look at its variable costs and profitability of operations. Which one of the following cost combinations
should be used to evaluate the variable cost per flight of the company’s flights along a specific route?
A. Flight crew salary, fuel, and engine maintenance.
B. Fuel, food service, and airport landing fees.
Answer (B) is correct.
Fuel, food service, and airport landing fees are all variable and traceable to individual flights.
C. Airplane depreciation, baggage handling, and airline marketing.
D. Communication system operation, food service, and ramp personnel.
Question: 13A firm uses direct (variable) costing for internal reporting and absorption costing for the external
financial statements. A review of the firm’s internal and external disclosures will likely find
A. A difference in the treatment of fixed selling and administrative costs.
B. A higher inventoriable unit cost reported to management than to the shareholders.
C. A contribution margin rather than gross margin in the reports released to shareholders.
D. Internal income figures that vary closely with sales and external income figures that are influenced by
both units sold and productive output.
Answer (D) is correct.
Under variable costing, only costs that vary with the level of production are treated as product costs.
Thus, internal income figures will vary closely with sales. Under absorption costing, all production
costs (both variable and fixed) are treated as product costs. Thus, external income figures are
influenced by both units sold and productive output.
Question: 14Which of the following correctly shows the treatment of (1) factory insurance, (2) direct labor, and
(3) finished goods shipping costs under absorption costing and variable costing?
Absorption Costing Variable Costing
Product
Cost
Period
Cost
Product
Cost
Period
Cost
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. 1, 2 3 2 1, 3
Answer (A) is correct.
Factory insurance (item 1) is a factory operating cost, one of the three components of manufacturing
overhead (the other two being indirect materials and indirect labor). Since it is a manufacturing cost, it
must be treated as a product cost under absorption costing, and since it is fixed over the relevant range,
it must be treated as a period cost under variable costing. Direct labor (item 2) is treated as a product
cost under both systems. Finished goods shipping (item 3) is a variable selling and administrative cost,
and, as such, is treated as a period cost under both systems.
B. 2 1, 3 1, 2 3
C. 1, 2 3 1 2, 3
D. 1 2, 3 2, 3 1
Question: 15When comparing absorption costing with variable costing, the difference in operating income can
be explained by the difference between the
A. Units sold and the units produced, multiplied by the unit sales price.
B. Ending inventory in units and the beginning inventory in units, multiplied by the budgeted fixed
manufacturing cost per unit.
Answer (B) is correct.
Absorption and variable costing differ in their treatment of fixed overhead: It is capitalized as
inventory under absorption costing and not under variable costing. Thus, the difference in operating
income between the two can be explained by the difference between the ending inventory in units and
the beginning inventory in units, multiplied by the budgeted fixed manufacturing cost per unit.
C. Ending inventory in units and the beginning inventory in units, multiplied by the unit sales price.
D. Units sold and the units produced, multiplied by the budgeted variable manufacturing cost per unit.
Question: 16A company has significant fixed overhead costs in the manufacturing of its sole product, auto
mufflers. For internal reporting purposes, in which one of the following situations would ending finished goods
inventory be higher under direct (variable) costing rather than under absorption costing?
A. If more units were produced than were sold during a given year.
B. If more units were sold than were produced during a given year.
C. In all cases when ending finished goods inventory exists.
D. None of these situations.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
The monetary value of ending inventory is never higher under direct costing than under absorption
costing because fewer costs are capitalized under direct costing.
Question: 17A corporation produces and sells smart phones. The following information relates to operations for
the last year:
Variable cost per unit
$5.20
Total fixed manufacturing overhead cost
$260,000
Total fixed selling and administrative cost
$180,000
Units produced and sold
400,000
Using absorption costing, what was the cost per unit last year?
A. $4.55
B. $5.00
C. $5.85
Answer (C) is correct.
Under absorption costing, the fixed portion of manufacturing overhead is “absorbed” into the cost of
each unit of product. Product cost thus include all manufacturing costs, both fixed and variable. The
total manufacturing cost is equal to $2,340,000 [($5.20 × 400,000) + $260,000]. The cost per unit is
thus $5.85 ($2,340,000 ÷ 400,000).
D. $6.30
Question: 18The primary difference between absorption and variable costing is that variable costing treats
A. Only direct materials and direct labor as product cost.
B. Direct materials, direct labor, the variable portion of manufacturing overhead, and an allocated portion of
fixed manufacturing overhead as product costs.
C. Only direct materials, direct labor, the variable portion of manufacturing overhead, and the variable
portion of selling and administrative expenses as product cost.
D. Only direct materials, direct labor, and the variable portion of manufacturing overhead as product costs.
Answer (D) is correct.
Variable costing treats only direct materials, direct labor, and the variable portion of manufacturing
overhead as product costs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 19Management would like to determine profitability of its Alpha product line. To eliminate the
possibility of profit distortion due to changes in production, the managers should primarily review
A. Variable (direct) costing income statements.
Answer (A) is correct.
Under variable costing, fixed manufacturing costs are not included in product costs. Rather, they are
period costs and expensed in the current period as incurred. Consequently, any variability in profits
will not be attributed to changes in production. Instead, profits will vary closely with sales. Thus,
managers should primarily review variable costing income statements to eliminate the possibility of
profit distortion due to changes in production.
B. Absorption costing income statements.
C. Multi-step income statements.
D. Cash flow statements.
Question: 20In which one of the following situations will ending inventory on the balance sheet computed under
absorption costing be exactly equal to ending inventory computed under variable costing?
A. When the number of units produced equals the number of units sold.
B. When there is no fixed factory overhead cost.
Answer (B) is correct.
Fixed factory overhead cost is treated as a product cost under absorption costing and as a period cost
under variable costing. Under variable costing, only variable costs are assigned to units of product and
therefore included in the inventory. Under absorption costing, both variable factory overhead costs and
fixed factory overhead costs are assigned to units of product and therefore included in the inventory.
Thus, ending inventory is the same under both absorption costing and variable costing only when there
is no fixed factory overhead cost.
C. When the denominator variance is zero.
D. When there is no variable overhead cost.
Question: 21Which of the following costs are generally included in a calculation of operating income when
using absorption costing?
I.
Fixed direct manufacturing costs
II.
Variable direct manufacturing costs
III.
Variable manufacturing overhead costs
IV.
Fixed manufacturing overhead costs
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. II and III only.
B. I and IV only.
C. I, II, and III only.
D. I, II, III, and IV.
Answer (D) is correct.
Under absorption costing, the fixed portion of manufacturing overhead is absorbed into the cost of
each unit product. Product cost thus includes all manufacturing costs, both fixed and variable.
Question: 22Which one of the following is true with respect to variable and absorption costing systems?
A. Variable costing systems include fixed manufacturing overhead as period costs.
Answer (A) is correct.
Variable costing capitalizes on the variable costs of production. Fixed manufacturing overhead is
treated as a period cost and is expensed in the period that the cost is incurred.
B. Absorption costing systems include fixed manufacturing overhead as period costs.
C. Variable costing systems include variable manufacturing overhead as period costs.
D. Absorption costing systems include variable manufacturing overhead as period costs.
Question: 23The costing method that is properly classified for both external and internal reporting purposes is
External Internal
Reporting Reporting
A. Activity-based costing No Yes
B. Job-order costing No Yes
C. Variable costing No Yes
Answer (C) is correct.
Activity-based costing, job-order costing, process costing, and standard costing can all be used for both
internal and external purposes. Variable costing is not acceptable under GAAP for external reporting
purposes.
D. Process costing No No
Question: 24Which of the following statements is correct regarding the difference between the absorption
costing and variable costing methods?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. When production equals sales, absorption costing income is greater than variable costing income.
B. When production equals sales, absorption costing income is less than variable costing income.
C. When production is greater than sales, absorption costing income is greater than variable costing income.
Answer (C) is correct.
When production exceeds sales, ending inventory increases. Under absorption costing, some fixed
costs are included in ending inventory. Under variable costing, all fixed costs are expensed.
Accordingly, income is higher under absorption costing.
D. When production is less than sales, absorption costing income is greater than variable costing income.
Question: 25In an income statement prepared as an internal report, total fixed costs normally are shown
separately under
Absorption Costing Variable Costing
A. No No
B. No Yes
Answer (B) is correct.
In a variable-costing income statement, all variable costs are deducted from sales revenue to arrive at
the contribution margin. Total fixed costs are then deducted from the contribution margin to determine
operating income. In an absorption-costing income statement, fixed factory overhead included in the
cost of goods sold is deducted from sales revenue in the calculation of the gross margin. Other fixed
costs are among the amounts subtracted from the gross margin to determine operating income.
C. Yes Yes
D. Yes No
Subunit 2: Absorption and Variable Costing – Calculations
Fact Pattern: At the end of its fiscal year, Jubal Manufacturing recorded the data below:
Prime cost
$800,000
Variable manufacturing overhead
100,000
Fixed manufacturing overhead
160,000
Variable selling and other expenses
80,000
Fixed selling and other expenses
40,000
Question: 1If Jubal uses variable costing, the inventoriable costs for the fiscal year are
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $800,000
B. $900,000
Answer (B) is correct.
The only costs capitalized are the variable costs of manufacturing. Prime costs (direct materials and
direct labor) are variable.
Prime costs (direct materials and direct labor)
$800,000
Variable manufacturing overhead
100,000
Total inventoriable costs
$900,000
C. $980,000
D. $1,060,000
Fact Pattern: At the end of its fiscal year, Jubal Manufacturing recorded the data below:
Prime cost
$800,000
Variable manufacturing overhead
100,000
Fixed manufacturing overhead
160,000
Variable selling and other expenses
80,000
Fixed selling and other expenses
40,000
Question: 2Using absorption (full) costing, Jubal’s inventoriable costs are
A. $800,000
B. $900,000
C. $1,060,000
Answer (C) is correct.
The absorption method is required for financial statements prepared according to GAAP. It charges all
costs of production to inventories. The prime costs of $800,000, variable manufacturing overhead of
$100,000, and the fixed manufacturing overhead of $160,000 are included. They total $1,060,000.
D. $1,180,000
Fact Pattern: Osawa, Inc., planned and actually manufactured 200,000 units of its single
product during its first year of operations. Variable manufacturing costs were $30 per unit of
product. Planned and actual fixed manufacturing costs were $600,000, and selling and
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of
$40 per unit. Question: 3Osawa’s operating income for the year using variable costing is
A. $200,000
Answer (A) is correct.
The contribution margin from manufacturing (Sales – Variable costs) is $10 ($40 – $30) per unit sold,
or $1,200,000 (120,000 units × $10). The fixed costs of manufacturing ($600,000) and selling and
administrative costs ($400,000) are deducted from the contribution margin to arrive at an operating
income of $200,000.
B. $440,000
C. $800,000
D. $600,000
Fact Pattern: Osawa, Inc., planned and actually manufactured 200,000 units of its single
product during its first year of operations. Variable manufacturing costs were $30 per unit of
product. Planned and actual fixed manufacturing costs were $600,000, and selling and
administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of
$40 per unit. Question: 4Osawa’s operating income using absorption (full) costing is
A. $200,000
B. $440,000
Answer (B) is correct.
Absorption costing net income is computed as follows:
Sales (120,000 units × $40)
Variable production costs (200,000 units × $30)
Fixed production costs
Total production costs
Ending inventory (80,000 units × $33)
Cost of goods sold
$4,800,000
$6,000,000
600,000
$6,600,000
(2,640,000)
(3,960,000)
Gross profit
$ 840,000
Selling and administrative expenses
Operating income
(400,000)
$ 440,000
C. $600,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $840,000
Question: 5A manufacturing company employs variable costing for internal reporting and analysis purposes.
However, it converts its records to absorption costing for external reporting. The Accounting Department always
reconciles the two operating income figures to assure that no errors have occurred in the conversion. The fixed
manufacturing overhead cost per unit was based on the planned level of production of 480,000 units. Financial data
for the year are presented below:
Budget
Actual
Sales (in units)
495,000
510,000
Production (in units)
480,000
500,000
Variable Absorption
Costing
Variable costs
Costing
$10.00
$10.00
0
6.00
Total unit manufacturing costs $10.00
$16.00
Fixed manufacturing overhead
The difference between the operating income calculated under the variable costing method and the operating income
calculated under the absorption costing method would be
A. $57,600
B. $60,000
Answer (B) is correct.
The difference between variable costing and absorption costing is that variable costing treats fixed
manufacturing overhead as a period cost. Absorption costing treats it as a product cost. Given that sales
exceeded production, both methods expense all fixed manufacturing overhead incurred during the year.
However, 10,000 units (510,000 sales – 500,000 production) manufactured in a prior period were also
sold. These units presumably were recorded at $10 under variable costing and $16 under absorption
costing. Consequently, absorption costing operating income is $60,000 (10,000 units × $6) less than
that under variable costing.
C. $90,000
D. $120,000
Fact Pattern: The following is taken from Fortech Company’s records for the fiscal year just
ended:
Direct materials used
$300,000
Direct labor
100,000
Variable manufacturing overhead
50,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Fixed manufacturing overhead
80,000
Selling and admin. costs--variable
40,000
Selling and admin. costs--fixed
20,000
Question: 6If Fortech Company uses variable costing, the inventoriable costs for the fiscal year are
A. $400,000
B. $450,000
Answer (B) is correct.
Under variable costing, the only costs that are capitalized are the variable costs of manufacturing.
These include
Direct materials used
$300,000
Direct labor
100,000
Variable manufacturing overhead
Total inventoriable costs
50,000
$450,000
C. $490,000
D. $530,000
Fact Pattern: The following is taken from Fortech Company’s records for the fiscal year just
ended:
Direct materials used
$300,000
Direct labor
100,000
Variable manufacturing overhead
50,000
Fixed manufacturing overhead
80,000
Selling and admin. costs--variable
40,000
Selling and admin. costs--fixed
20,000
Question: 7Using absorption (full) costing, Fortech Company’s inventoriable costs are
A. $400,000
B. $450,000
C. $530,000
Answer (C) is correct.
The absorption method is required for financial statements prepared according to GAAP. It charges all
costs of production to inventories. The variable cost of materials of $300,000, direct labor of $100,000,
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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variable manufacturing overhead of $50,000, and the fixed manufacturing overhead of $80,000 are
included. They total $530,000.
D. $590,000
Fact Pattern: Estimated unit costs for Cole Lab using full absorption costing and operating at a
production level of 12,000 units per month:
Cost Item
Question:
Estimated
Unit Cost
Direct material
$32
Direct labor
20
Variable manufacturing overhead 15
Fixed manufacturing overhead
6
Variable selling
3
Fixed selling
4
8Cole Lab’s estimated conversion costs per unit are
A. $35
B. $41
Answer (B) is correct.
Conversion costs consist of labor plus fixed and variable manufacturing overhead. The total is $41
($20 + $15 + $6).
C. $44
D. $48
Fact Pattern: Estimated unit costs for Cole Lab using full absorption costing and operating at a
production level of 12,000 units per month:
Cost Item
Question:
Estimated
Unit Cost
Direct material
$32
Direct labor
20
Variable manufacturing overhead 15
Fixed manufacturing overhead
6
Variable selling
3
Fixed selling
4
9Cole Lab’s estimated prime costs per unit are
A. $73
B. $32
C. $67
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $52
Answer (D) is correct.
Prime costs consist of direct materials and direct labor. The total is $52 ($32 + $20).
Fact Pattern: Farber Company employs a normal (nonstandard) absorption cost system. The
following information is from the financial records of the company for the year.
• Total manufacturing costs were $2,500,000.
• Cost of goods manufactured was $2,425,000.
Applied factory overhead was 30% of total manufacturing costs.
Factory overhead was applied to production at a rate of 80% of direct labor cost.
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
Question: 10Total cost of direct material used by Farber Company for the year is
A. $750,000
B. $812,500
Answer (B) is correct.
Factory overhead is 30% of total manufacturing costs, or $750,000. Direct labor is $937,500 (750,000
÷ 0.8). Thus, raw materials must account for the remaining $812,500 ($2,500,000 – $750,000 –
$937,500).
C. $937,500
D. $1,150,000
Fact Pattern: Farber Company employs a normal (nonstandard) absorption cost system. The
following information is from the financial records of the company for the year.
• Total manufacturing costs were $2,500,000.
• Cost of goods manufactured was $2,425,000.
Applied factory overhead was 30% of total manufacturing costs.
Factory overhead was applied to production at a rate of 80% of direct labor cost.
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
Question: 11The carrying value of Farber Company’s work-in-process inventory at December 31 is
A. $300,000.
Answer (A) is correct.
Cost of goods manufactured ($2,425,000) equals total manufacturing costs ($2,500,000) plus
beginning work-in-process (75% of EWIP) minus ending work-in-process. The ending work-inprocess is $300,000.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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$2,500,000 + .75 EWIP – EWIP = $2,425,000
$2,500,000 – .25 EWIP = $2,425,000
EWIP = $75,000 ÷ .25
EWIP = $300,000
B. $225,000.
C. $100,000.
D. $75,000.
Fact Pattern: Farber Company employs a normal (nonstandard) absorption cost system. The
following information is from the financial records of the company for the year.
• Total manufacturing costs were $2,500,000.
• Cost of goods manufactured was $2,425,000.
Applied factory overhead was 30% of total manufacturing costs.
Factory overhead was applied to production at a rate of 80% of direct labor cost.
Work-in-process inventory at January 1 was 75% of work-in-process inventory at December 31.
Question: 12Farber Company’s total direct labor cost for the year is
A. $750,000
B. $600,000
C. $909,375
D. $937,500
Answer (D) is correct.
Total manufacturing cost of $2,500,000 is composed of raw materials, direct labor, and factory
overhead. Factory overhead is 30% of total manufacturing costs, or $750,000. If factory overhead is
80% of direct labor cost, direct labor cost is $937,500 ($750,000 ÷ 80%).
Fact Pattern:
Valyn Corporation employs an absorption
costing system for internal reporting purposes;
however, the company is considering using
variable costing. Data regarding Valyn’s
planned and actual operations for the calendar
year are presented below.
Planned Costs
Per Unit Total
Direct materials
Direct labor
Incurred
Costs
$12.00 $1,680,000 $1,560,000
9.00
1,260,000 1,170,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Planned
Actual
Activity
Activity
Variable
manufacturing
overhead
overhead
35,000
35,000
Sales in units
140,000
125,000
Production in units
140,000
130,000 Variable
520,000
5.00
700,000
715,000
Variable selling expenses
8.00
Fixed selling expenses
7.00
980,000
980,000
2.00
280,000
250,000
3.00
420,000
425,000
The planned per-unit cost figures shown in the
schedule were based on the estimated
production and sale of 140,000 units for the
year. Valyn uses a predetermined
manufacturing overhead rate for applying
manufacturing overhead to its product; thus, a
combined manufacturing overhead rate of $9.00
per unit was employed for absorption costing
purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of
goods sold account at the end of the reporting
year.
Question:
560,000
Fixed manufacturing
Beginning finished goods
inventory in units
4.00
1,120,000 1,000,000
administrative
expenses
Fixed administrative
expenses
Total
$50.00 $7,000,000 $6,620,000
The beginning finished goods inventory for absorption costing
purposes was valued at the previous year’s planned unit
manufacturing cost, which was the same as the current year’s
planned unit manufacturing cost. There are no work-in-process
inventories at either the beginning or the end of the year. The
planned and actual unit selling price for the current year was
$70.00 per unit.
13The value of Valyn Corporation’s actual ending finished goods inventory on the absorption costing
basis was
A. $900,000
B. $1,200,000
Answer (B) is correct.
Under the absorption method, unit cost is $30 ($12 direct materials + $9 direct labor + $4 variable
overhead + $5 fixed overhead). Given beginning inventory of 35,000 units, the ending inventory
equals 40,000 units (35,000 BI + 130,000 produced – 125,000 sold). Hence, ending inventory was
$1,200,000 (40,000 units × $30).
C. $1,220,000
D. $1,350,000
Fact Pattern:
Valyn Corporation employs an absorption
costing system for internal reporting purposes;
however, the company is considering using
variable costing. Data regarding Valyn’s
Planned Costs
Per Unit Total
Direct materials
Incurred
Costs
$12.00 $1,680,000 $1,560,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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planned and actual operations for the calendar
year are presented below.
Planned
Actual
Activity
Activity
Direct labor
manufacturing
overhead
4.00
560,000
520,000
5.00
700,000
715,000
Fixed manufacturing
overhead
Sales in units
1,260,000 1,170,000
Variable
Beginning finished goods
inventory in units
9.00
35,000
140,000
35,000
Variable selling expenses
125,000 Fixed selling expenses
8.00
7.00
1,120,000 1,000,000
980,000
980,000
130,000 Variable
administrative
The planned per-unit cost figures shown in the
expenses
2.00
280,000
250,000
schedule were based on the estimated
production and sale of 140,000 units for the
Fixed administrative
year. Valyn uses a predetermined
manufacturing overhead rate for applying
expenses
3.00
420,000
425,000
manufacturing overhead to its product; thus, a
$50.00 $7,000,000 $6,620,000
combined manufacturing overhead rate of $9.00 Total
per unit was employed for absorption costing
purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of The beginning finished goods inventory for absorption costing
goods sold account at the end of the reporting purposes was valued at the previous year’s planned unit
manufacturing cost, which was the same as the current year’s
year.
planned unit manufacturing cost. There are no work-in-process
inventories at either the beginning or the end of the year. The
planned and actual unit selling price for the current year was
$70.00 per unit.
Question: 14The value of Valyn Corporation’s actual ending finished goods inventory on the variable costing
basis was
Production in units
140,000
A. $1,400,000
B. $1,125,000
C. $1,000,000
Answer (C) is correct.
Using variable costing, the unit cost of ending inventory is $25 ($12 direct materials + $9 direct labor
+ $4 variable overhead). Given beginning inventory of 35,000 units, the ending inventory equals
40,000 units (35,000 BI + 130,000 produced – 125,000 sold). Thus, ending inventory was $1,000,000
(40,000 units × $25).
D. $750,000
Fact Pattern:
Valyn Corporation employs an absorption
costing system for internal reporting purposes;
however, the company is considering using
Planned Costs
Per Unit Total
Incurred
Costs
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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variable costing. Data regarding Valyn’s
planned and actual operations for the calendar
year are presented below.
Planned
Actual
Activity
Activity
Direct materials
Direct labor
1,260,000 1,170,000
manufacturing
Beginning finished goods
4.00
560,000
520,000
5.00
700,000
715,000
Fixed manufacturing
overhead
35,000
35,000
Sales in units
140,000
125,000
Production in units
140,000
130,000 Variable
Variable selling expenses
8.00
Fixed selling expenses
7.00
980,000
980,000
2.00
280,000
250,000
3.00
420,000
425,000
The planned per-unit cost figures shown in the
schedule were based on the estimated
production and sale of 140,000 units for the
year. Valyn uses a predetermined
manufacturing overhead rate for applying
manufacturing overhead to its product; thus, a
combined manufacturing overhead rate of $9.00
per unit was employed for absorption costing
purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of
goods sold account at the end of the reporting
year.
Question:
9.00
Variable
overhead
inventory in units
$12.00 $1,680,000 $1,560,000
1,120,000 1,000,000
administrative
expenses
Fixed administrative
expenses
Total
$50.00 $7,000,000 $6,620,000
The beginning finished goods inventory for absorption costing
purposes was valued at the previous year’s planned unit
manufacturing cost, which was the same as the current year’s
planned unit manufacturing cost. There are no work-in-process
inventories at either the beginning or the end of the year. The
planned and actual unit selling price for the current year was
$70.00 per unit.
15Valyn Corporation’s absorption costing operating income was
A. Higher than variable costing operating income because actual production exceeded actual sales.
Answer (A) is correct.
Absorption costing results in a higher income figure than variable costing whenever production
exceeds sales because absorption costing capitalizes some fixed factory overhead as part of inventory.
These costs are expensed during the period incurred under variable costing. Consequently, variable
costing recognizes greater expenses and lower income when production exceeds sales. The reverse is
true when sales exceed production. In that case, the absorption method results in a lower income
because some fixed costs of previous periods absorbed by the beginning inventory are expensed in the
current period as cost of goods sold. Variable costing income is never burdened with fixed costs of
previous periods.
B. Lower than variable costing operating income because actual production exceeded actual sales.
C. Lower than variable costing operating income because actual production was less than planned
production.
D. Lower than variable costing operating income because actual sales were less than planned sales.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Fact Pattern:
Planned Costs
Valyn Corporation employs an absorption
costing system for internal reporting purposes;
however, the company is considering using
variable costing. Data regarding Valyn’s
planned and actual operations for the calendar
year are presented below.
Planned
Actual
Activity
Activity
Per Unit Total
Direct materials
Direct labor
$12.00 $1,680,000 $1,560,000
9.00
1,260,000 1,170,000
manufacturing
overhead
4.00
560,000
520,000
5.00
700,000
715,000
Fixed manufacturing
35,000
35,000
Sales in units
140,000
125,000
Production in units
140,000
130,000
overhead
Variable selling expenses
8.00
Fixed selling expenses
7.00
980,000
980,000
2.00
280,000
250,000
3.00
420,000
425,000
The planned per-unit cost figures shown in the
schedule were based on the estimated
production and sale of 140,000 units for the
year. Valyn uses a predetermined
manufacturing overhead rate for applying
manufacturing overhead to its product; thus, a
combined manufacturing overhead rate of $9.00
per unit was employed for absorption costing
purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of
goods sold account at the end of the reporting
year.
Question:
Costs
Variable
Beginning finished goods
inventory in units
Incurred
1,120,000 1,000,000
Variable
administrative
expenses
Fixed administrative
expenses
Total
$50.00 $7,000,000 $6,620,000
The beginning finished goods inventory for absorption costing
purposes was valued at the previous year’s planned unit
manufacturing cost, which was the same as the current year’s
planned unit manufacturing cost. There are no work-in-process
inventories at either the beginning or the end of the year. The
planned and actual unit selling price for the current year was
$70.00 per unit.
16Valyn Corporation’s actual manufacturing contribution margin calculated on the variable costing
basis was
A. $4,375,000
B. $4,935,000
C. $4,910,000
D. $5,625,000
Answer (D) is correct.
At $70 per unit, actual sales revenue was $8,750,000 for 125,000 units. Actual variable costs of
manufacturing were $25 per unit ($12 + $9 + $4). The unit costs incurred for the actual production
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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level of 130,000 units were the same as the unit costs for a planned production level of 140,000 units.
These unit costs were the same for units manufactured in both the current and previous year. For
example, total planned direct materials cost for 140,000 units was $1,680,000, or $12 per unit. The
incurred unit cost was also $12 ($1,560,000 ÷ 130,000 units). Thus, total variable manufacturing cost
was $3,125,000 (125,000 units × $25). Consequently, manufacturing contribution margin was
$5,625,000 ($8,750,000 – $3,125,000).
Fact Pattern:
Planned Costs
Valyn Corporation employs an absorption
costing system for internal reporting purposes;
however, the company is considering using
variable costing. Data regarding Valyn’s
planned and actual operations for the calendar
year are presented below.
Planned
Actual
Activity
Activity
Per Unit Total
Direct materials
Direct labor
$12.00 $1,680,000 $1,560,000
9.00
1,260,000 1,170,000
manufacturing
overhead
4.00
560,000
520,000
5.00
700,000
715,000
Fixed manufacturing
35,000
35,000
Sales in units
140,000
125,000
Production in units
140,000
130,000
overhead
Variable selling expenses
8.00
Fixed selling expenses
7.00
980,000
980,000
2.00
280,000
250,000
3.00
420,000
425,000
The planned per-unit cost figures shown in the
schedule were based on the estimated
production and sale of 140,000 units for the
year. Valyn uses a predetermined
manufacturing overhead rate for applying
manufacturing overhead to its product; thus, a
combined manufacturing overhead rate of $9.00
per unit was employed for absorption costing
purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of
goods sold account at the end of the reporting
year.
Question:
Costs
Variable
Beginning finished goods
inventory in units
Incurred
1,120,000 1,000,000
Variable
administrative
expenses
Fixed administrative
expenses
Total
$50.00 $7,000,000 $6,620,000
The beginning finished goods inventory for absorption costing
purposes was valued at the previous year’s planned unit
manufacturing cost, which was the same as the current year’s
planned unit manufacturing cost. There are no work-in-process
inventories at either the beginning or the end of the year. The
planned and actual unit selling price for the current year was
$70.00 per unit.
17The total variable cost currently expensed by Valyn Corporation on the variable costing basis was
A. $4,375,000
Answer (A) is correct.
The unit variable manufacturing cost was $25 ($12 direct materials + $9 direct labor + $4 variable
overhead). Other variable costs included selling expenses ($8 per unit) and administrative expenses ($2
per unit). The unit selling and administrative costs actually incurred for sales of 125,000 units were the
same as the planned unit costs. For example, actual unit variable selling expense was $8 ($1,000,000 ÷
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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125,000 units sold), which equaled the planned unit cost. Thus, total unit variable cost was $35 ($25 +
$8 + $2). The total expensed was $4,375,000 (125,000 units sold × $35).
B. $4,500,000
C. $4,325,000
D. $4,550,000
Fact Pattern:
Planned Costs
Valyn Corporation employs an absorption
costing system for internal reporting purposes;
however, the company is considering using
variable costing. Data regarding Valyn’s
planned and actual operations for the calendar
year are presented below.
Planned
Actual
Activity
Activity
Per Unit Total
Direct materials
Direct labor
Costs
$12.00 $1,680,000 $1,560,000
9.00
1,260,000 1,170,000
Variable
manufacturing
overhead
Beginning finished goods
inventory in units
Incurred
4.00
560,000
520,000
5.00
700,000
715,000
Fixed manufacturing
35,000
35,000
Sales in units
140,000
125,000
Production in units
140,000
130,000
overhead
Variable selling expenses
8.00
Fixed selling expenses
7.00
980,000
980,000
2.00
280,000
250,000
3.00
420,000
425,000
The planned per-unit cost figures shown in the
schedule were based on the estimated
production and sale of 140,000 units for the
year. Valyn uses a predetermined
manufacturing overhead rate for applying
manufacturing overhead to its product; thus, a
combined manufacturing overhead rate of $9.00
per unit was employed for absorption costing
purposes. Any over- or underapplied
manufacturing overhead is closed to the cost of
goods sold account at the end of the reporting
year.
1,120,000 1,000,000
Variable
administrative
expenses
Fixed administrative
expenses
Total
$50.00 $7,000,000 $6,620,000
The beginning finished goods inventory for absorption costing
purposes was valued at the previous year’s planned unit
manufacturing cost, which was the same as the current year’s
planned unit manufacturing cost. There are no work-in-process
inventories at either the beginning or the end of the year. The
planned and actual unit selling price for the current year was
$70.00 per unit.
Question: 18The difference between Valyn Corporation’s operating income calculated on the absorption costing
basis and calculated on the variable costing basis was
A. $65,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $25,000
Answer (B) is correct.
The difference is caused by the capitalization of some of the fixed manufacturing overhead. When
inventories increase during the period, the absorption method capitalizes that overhead and transfers it
to future periods. The variable costing method expenses it in the current period. Inventories increased
by 5,000 units during the period, and each of those units would have included $5 of fixed
manufacturing overhead under absorption costing. Accordingly, $25,000 of fixed manufacturing
overhead would have been capitalized. Recognizing $25,000 of fixed costs in the balance sheet instead
of the income statement results in a $25,000 difference in income between the two costing methods.
C. $40,000
D. $90,000
Question: 19The marketing manager has learned the following about a new product that is being introduced:
Sales of this product are planned at $100,000 for the first year. Sales commission expense is budgeted at 8% of sales
plus the marketing manager’s incentive budgeted at an additional 1/2%. The preparation of a product brochure will
require 20 hours of marketing salaried staff time at an average rate of $100 per hour, and 10 hours at $150 per hour
for an outside illustrator’s effort. The variable marketing cost for this new product will be
A. $8,000
B. $8,500
Answer (B) is correct.
The variable marketing costs for the new product consist of sales commissions and the marketing
manager’s incentive ($100,000 × 8.5% = $8,500).
C. $10,000
D. $10,500
Question: 20A cracker and cookie manufacturer has the following unit costs for the month of June:
Variable
Variable
Fixed
Fixed
manufacturing
marketing
manufacturing
marketing
cost
cost
cost
cost
$5.00
$3.50
$2.00
$4.00
A total of 100,000 units were manufactured during June, 10,000 of which remain in ending inventory. The
manufacturer uses the first-in, first-out (FIFO) inventory method, and the 10,000 units are the only finished goods
inventory at month end. Using the full absorption costing method, the manufacturer’s finished goods inventory value
would be
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $50,000
B. $70,000
Answer (B) is correct.
The manufacturer’s ending inventory consists of 10,000 units, made up of $50,000 variable
manufacturing cost (10,000 × $5) and $20,000 fixed manufacturing cost (10,000 × $2).
C. $85,000
D. $145,000
Question: 21A company has just completed the first month of producing a new product but has not yet shipped
any of this product. The product incurred variable manufacturing costs of $5,000,000, fixed manufacturing costs of
$2,000,000, variable marketing costs of $1,000,000, and fixed marketing costs of $3,000,000. If the company uses
the variable cost method to value inventory, the inventory value of the new product will be
A. $5,000,000
Answer (A) is correct.
Under variable costing, only variable manufacturing costs are capitalized as part of inventory. Thus,
ending inventory is valued at $5,000,000.
B. $6,000,000
C. $8,000,000
D. $11,000,000
Fact Pattern: Consider the following situation for Weisman Corporation for the prior year:
 The company
produced 1,000 units and sold 900 units, both as budgeted.
 There were no beginning or ending work-in-process inventories and no beginning
finished goods inventory.
 Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected
by volume of production only, and all variable selling costs are affected by sales volume
only.
 Budgeted per unit revenues and costs were as follows.

Per Unit
Sales price
$100
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Direct materials
30
Direct labor
20
Variable manufacturing overhead
10
Fixed manufacturing overhead
5
Variable selling costs
12
Fixed selling costs ($3,600 total)
4
Fixed administrative costs ($1,800 total)
2
Question: 22If Weisman uses absorption costing, its operating income earned in the last fiscal year was
A. $13,600
B. $14,200
C. $15,300
Answer (C) is correct.
Weisman’s absorption-basis operating income can be calculated as follows:
Sales
900 units
at $ 100
=
Beginning inventory
$90,000
$
Variable production costs
1,000 units
at $
Fixed production costs
1,000 units
at $
60
5
=
60,000
=
5,000
Goods available for sale
Less: Ending inventory
0
$65,000
100 units
at $
65
=
Abs. cost of goods sold
(6,500)
(58,500)
Gross margin
$31,500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Variable S&A expenses
900 units
at $
Fixed S&A expenses
900 units
at $
12
6
=
(10,800)
=
(5,400)
Operating income
$15,300
D. $15,840
Fact Pattern: Consider the following situation for Weisman Corporation for the prior year:
 The company
produced 1,000 units and sold 900 units, both as budgeted.
 There were no beginning or ending work-in-process inventories and no beginning
finished goods inventory.
 Budgeted and actual fixed costs were equal, all variable manufacturing costs are affected
by volume of production only, and all variable selling costs are affected by sales volume
only.
 Budgeted per unit revenues and costs were as follows.

Per Unit
Sales price
$100
Direct materials
30
Direct labor
20
Variable manufacturing overhead
10
Fixed manufacturing overhead
Variable selling costs
Fixed selling costs ($3,600 total)
5
12
4
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Fixed administrative costs ($1,800 total)
2
Question: 23If Weisman uses variable costing, its operating income earned in the last fiscal year was
A. $13,600
B. $14,200
C. $14,800
Answer (C) is correct.
Weisman’s variable-basis operating income can be calculated as follows:
Sales
900 units
at $ 100
=
Beginning inventory
$90,000
$
Variable production costs
1,000 units
at $
60
=
Goods available for sale
0
60,000
$60,000
Less: Ending inventory
100 units
at $
60
=
Var. cost of goods sold
(6,000)
(54,000)
Variable S&A expenses
900 units
at $
12
=
Contribution margin
(10,800)
$25,200
Fixed production costs
1,000 units
at $
5
=
(5,000)
900 units
at $
6
=
(5,400)
Fixed S&A expenses
Operating income
$14,800
D. $15,300
Question: 24A corporation had the following unit costs for the recently concluded calendar year:
Variable
Fixed
Manufacturing
$8.00
$3.00
Nonmanufacturing
$2.00
$5.50
Inventory for the sole product totaled 6,000 units on January 1 and 5,200 units on December 31. When compared to
variable costing income, absorption costing income is
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $2,400 lower.
Answer (A) is correct.
Since beginning inventory was 6,000 and ending inventory was 5,200, inventory decreased by 800
units which means sales exceeded production. If production is less than sales, operating income is
higher under variable costing. It follows that income is lower under absorption costing.
B. $2,400 higher.
C. $6,800 lower.
D. $6,800 higher.
Question: 25During the month of May, a corporation sold 1,000 units. The cost per unit for May was as follows:
Cost per Unit
Direct materials
$ 5.50
Direct labor
3.00
Variable manufacturing overhead
1.00
Fixed manufacturing overhead
1.50
Variable administrative costs
.50
Fixed administrative costs
Total
3.50
$15.00
May’s income using absorption costing was $9,500. The income for May, if variable costing had been used, would
have been $9,125. The number of units produced during May was
A. 750
B. 925
C. 1,075
D. 1,250
Answer (D) is correct.
The difference between absorption-basis and variable-basis operating income ($9,500 – $9,125 =
$375) is equal to the change in inventory for the period (in units) multiplied by fixed manufacturing
cost per unit. Stated another way, the difference in operating incomes divided by fixed per-unit
manufacturing cost equals the change in ending inventory ($375 ÷ $1.50 = 250 units). Since 1,000
units were sold and ending inventory increased by 250 units, 1,250 units were produced (1,000 + 250).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 26The following information relates to a corporation, which produced and sold 50,000 units during a
recent accounting period:
Sales
$850,000
Manufacturing costs:
Fixed
210,000
Variable
140,000
Selling and administrative costs:
Fixed
300,000
Variable
45,000
Income tax rate
40%
For the next accounting period, if production and sales are expected to be 40,000 units, the company should
anticipate a contribution margin per unit of
A. $1.86
B. $3.10
C. $7.30
D. $13.30
Answer (D) is correct.
Unit contribution margin is the difference between unit selling price and unit variable cost. Unit selling
price is $17 ($850,000 ÷ 50,000 units), and unit variable cost is $3.70 [($140,000 variable
manufacturing cost + $45,000 variable S&A cost) ÷ 50,000 units sold]. Accordingly, unit contribution
margin is $13.30 ($17 – $3.70).
Fact Pattern: Kator Co. is a manufacturer of industrial components. One of its products that is
used as a subcomponent in auto manufacturing is KB-96. This product has
the following financial structure per unit:
Selling price
$150
Direct materials
$ 20
Direct labor
15
Variable manufacturing overhead
12
Fixed manufacturing overhead
30
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Shipping and handling
3
Fixed selling and administrative
Total costs
10
$ 90
Question: 27During the next year, KB-96 sales are expected to be 10,000 units. All of the costs will remain the
same except that fixed manufacturing overhead will increase by 20% and direct materials will increase by 10%. The
selling price per unit for next year will be $160. Based on this data, the contribution margin from KB-96 for next
year will be
A. $620,000
B. $750,000
C. $1,080,000
Answer (C) is correct.
Contribution margin equals sales minus variable costs. All variable costs will remain the same except
that direct materials will increase to $22 per unit (1.1 × $20). Thus, total unit variable costs will be $52
($22 + $15 + $12 + $3), and the contribution margin will be $1,080,000 [10,000 units ($160 unit
selling price – $52)].
D. $1,110,000
Fact Pattern: Pontotoc Industries manufactures a product that is used as a subcomponent by
other manufacturers. It has the following price and cost structure:
Selling price
$300
Costs
Direct materials
Direct labor
$40
30
Variable manufacturing overhead 24
Fixed manufacturing overhead
Variable shipping
Fixed selling and administrative
Operating margin
60
6
20 (180)
$120
Question: 28What will the contribution margin per unit be if the company sells 10,000 units?
A. $206
B. $200
Answer (B) is correct.
Contribution margin is the excess of sales over variable costs. Sales will be at $300 per unit. Variable
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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costs are $100, consisting of $40 of direct materials, $30 of direct labor, $24 of variable overhead, and
$6 of variable selling costs. Thus, the contribution margin will be $200 per unit ($300 – $100).
C. $140
D. $120
Fact Pattern: Pontotoc Industries manufactures a product that is used as a subcomponent by
other manufacturers. It has the following price and cost structure:
Selling price
$300
Costs
Direct materials
Direct labor
$40
30
Variable manufacturing overhead 24
Fixed manufacturing overhead
Variable shipping
Fixed selling and administrative
Operating margin
60
6
20 (180)
$120
Question: 29During the next year, sales are expected to be 10,000 units. All costs will remain the same except for
fixed manufacturing overhead, which will increase 20%, and direct materials, which will increase 10%. The selling
price per unit for next year will be $320. Based on this information, Pontotoc’s contribution margin for next year
will be
A. $1,240,000
B. $1,360,000
C. $2,160,000
Answer (C) is correct.
Contribution margin is the excess of sales over variable costs. Sales of 10,000 units at $320 each will
produce total revenue of $3,200,000. Variable costs will be $104 per unit, consisting of $44 for direct
materials, $30 for direct labor, $24 for variable overhead, and $6 for selling costs. At $104 per unit, the
10,000 units will have total variable costs of $1,040,000, resulting in a contribution margin of
$2,160,000 ($3,200,000 – $1,040,000).
D. $2,200,000
Question: 30Last year a company had sales of 75,000 units and production of 100,000 units. Other information
for the year is shown below.
Direct manufacturing labor
$187,500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Variable manufacturing overhead 100,000
Direct materials
150,000
Variable selling expenses
100,000
Fixed administrative expenses
100,000
Fixed manufacturing overhead
200,000
Assuming no beginning inventory, what is the total value of ending finished goods inventory under absorption
costing?
A. $159,375
Answer (A) is correct.
With no beginning inventory, cost of goods manufactured is simply the sum of direct labor, direct
materials, variable overhead, and fixed overhead, or $637,500 ($187,500 + $100,000 + $150,000 +
$200,000). The cost of the ending inventory is equal to $159,375 [$637,500 × (25,000 units ÷ 100,000
units)].
B. $184,375
C. $209,375
D. $279,175
Question: 31Using absorption costing, a company’s income for October was $250,000. The company began the
month with 10,000 units in finished goods inventory that contained $30,000 of fixed manufacturing overhead costs.
During October, the company produced 330,000 units and sold 325,000 units. The fixed manufacturing overhead for
October totaled $990,000. If the company used variable costing, its income for October would be
A. $265,000
B. $250,000
C. $235,000
Answer (C) is correct.
Under variable costing, fixed manufacturing overhead is treated as a period expense and is expensed in
the period incurred. Each of the units produced under absorption costing carries $3/unit of fixed
manufacturing overhead expense that is incurred when the unit is sold. Therefore, because they
increased their inventory by 5,000 units (330,000 produced – 325,000 sold), an additional $15,000
($5,000 × $3) must be expensed in the current period that would not have been otherwise expensed
until sale under absorption costing, reducing income to $235,000.
D. $234,308
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 32At the end of Killo Co.’s first year of operations, 1,000 units of inventory remained on hand.
Variable and fixed manufacturing costs per unit were $90 and $20, respectively. If Killo uses absorption costing
rather than variable (direct) costing, the result would be a higher pretax income of
A. $0
B. $20,000
Answer (B) is correct.
The difference between variable and absorption costing is that variable costing eliminates fixed costs
from product inventories. These fixed costs are charged to operating costs during the period in which
the costs are incurred under variable costing. Absorption costing charges the fixed costs to the
remaining inventory for $20,000 (1,000 × $20). These costs will be recognized during the following
period, assuming the inventory is sold. Because variable costing charges the fixed manufacturing costs
to the current period, the operating expenses will be $20,000 higher than under absorption costing.
Because operating costs would be $20,000 lower using absorption costing, the result would be a higher
pretax income of $20,000.
C. $70,000
D. $90,000
Question: 33Last year, a company had sales of 75,000 units and production of 100,000 units. Other information
for the year is shown below.
Direct manufacturing labor
$187,500
Variable manufacturing overhead
100,000
Direct materials
150,000
Variable selling expenses
100,000
Fixed administrative expenses
100,000
Fixed manufacturing overhead
200,000
Assuming no beginning inventory, what is the cost of goods sold under variable costing?
A. $553,125
B. $478,125
C. $403,125
D. $328,125
Answer (D) is correct.
Under variable costing, product cost includes only the variable portion of manufacturing costs. Thus,
the direct manufacturing labor, the variable manufacturing overhead, and the direct materials costs are
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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all included in the cost of goods sold calculation. The total variable manufacturing cost is equal to
$437,500 ($187,500 + 100,000 + 150,000), and the total variable manufacturing cost per unit is equal
to $4.375 ($437,500 ÷ 100,000 units manufactured). Since 100,000 units were produced but only
75,000 were sold, the cost of goods sold is $328,125 ($4.375 × 75,000 units sold).
Question: 34At the end of a company’s first year of operations, 2,000 units of inventory are on hand. Variable
costs are $100 per unit, and fixed manufacturing costs are $30 per unit. The use of absorption costing, rather than
variable costing, would result in a higher net income of what amount?
A. $60,000
Answer (A) is correct.
Absorption costing is required under GAAP. It includes all manufacturing costs in product cost: direct
materials, direct labor, and fixed as well as variable manufacturing overhead. Variable costing differs
only in that it expenses fixed manufacturing costs. Hence, given no beginning inventory, pretax net
income for absorption costing purposes exceeds pretax net income for variable costing purposes by
$60,000 (2,000 units in EI × $30 fixed manufacturing cost per unit). This amount is expensed using
variable costing and treated as a product cost using absorption costing.
B. $140,000
C. $200,000
D. $260,000
Question: 35At the start of its fiscal year, a company anticipated producing 300,000 units throughout the year.
The annual budgeted manufacturing overhead was $150,000 for variable costs and $600,000 for fixed costs. In
April, when there was a beginning inventory for finished goods of 5,000 units, the company showed an income of
$40,000 using absorption costing. That same month, ending inventory for finished goods was 7,000 units. What
amount would the company recognize as income for April using variable costing?
A. $35,000
B. $36,000
Answer (B) is correct.
The difference between variable costing and absorption costing is the treatment of fixed costs. Under
absorption costing, the fixed portion of manufacturing overhead is included in the cost of each product.
Under variable costing, product cost includes only variable manufacturing costs and fixed costs are
treated as period costs. The rate for assigning fixed overhead costs is $2 per unit ($600,000 budgeted
fixed overhead costs ÷ 300,000 budgeted production units). Since the ending inventory in April is
2,000 units greater than the beginning inventory, the company produced more units than it sold. In
April, under absorption costing, $4,000 ($2 fixed overhead rate per unit × 2,000 units produced and not
sold) of fixed manufacturing overhead costs were still embedded in ending inventory and were not
expensed. Under variable costing, these fixed manufacturing overhead costs of $4,000 were expensed.
Therefore, the operating income under the absorption costing is $4,000 greater than under the variable
costing. Therefore, operating income under variable costing is $36,000 ($40,000 – $4,000).
C. $44,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $45,000
Question: 36A manufacturing company is contemplating switching from its current costing approach, variable
costing, to absorption costing. Relevant data for the company in January 20X2 is as follows:
Selling price
$30/unit
Units produced
40,000
Units sold
30,000
Inventory as of 1/1/X2
None
Direct materials
$6/unit
Direct labor
$3/unit
Variable overhead
$2/unit
Variable selling and administrative expense
$1/unit
Fixed selling and administrative expense
Fixed manufacturing overhead
$75,000
$160,000
Based on the information above, the company’s operating income using absorption costing is
A. $295,000
B. $345,000
Answer (B) is correct.
Absorption costing (also called full costing or full absorption costing) treats all manufacturing costs as
product costs. This means that, in this case, direct materials, direct labor, variable overhead, variable
selling and administrative expenses, and fixed overhead are all treated as product costs and will be
expensed as cost of goods sold.
During the period, 30,000 units were sold. The total revenues and expenses for the period are as
follows:
Revenues = $900,000 ($30 per unit × 30,000 units)
Direct materials = $180,000 ($6 per unit × 30,000 units)
Direct labor = $90,000 ($3 per unit × 30,000 units)
Variable overhead = $60,000 ($2 per unit × 30,000 units)
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Variable S&A expense = $30,000 ($1 per unit × 30,000 units)
Fixed S&A expense = $75,000 (This is a period cost and is completely expensed in the period it is
incurred.)
Fixed manufacturing overhead = $120,000 ($4 per unit* × 30,000 units sold)
*$4 per unit = $160,000 total ÷ 40,000 units produced
Therefore, operating income for the period is $345,000 [$900,000 – ($180,000 + $90,000 + $60,000 +
$30,000 + $75,000 + $120,000)].
C. $335,000
D. $305,000
Question: 37At the end of fiscal year 20X9, Monterrey Manufacturing had the following data in its records:
Direct materials
$500,000
Direct labor
400,000
Variable manufacturing overhead
Fixed manufacturing overhead
90,000
120,000
Variable selling and other expenses
90,000
Fixed selling and other expenses
50,000
Assuming Monterrey employs absorption costing, the inventoriable costs for fiscal year 20X9 equal
A. $900,000
B. $1,080,000
C. $1,110,000
Answer (C) is correct.
Under absorption costing, inventoriable costs include all manufacturing costs, both fixed and variable.
Thus, the inventoriable costs include the prime costs [$900,000 ($500,000 direct materials + $400,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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direct labor)], the variable manufacturing overhead ($90,000), and the fixed manufacturing overhead
($120,000), for a total inventoriable cost of $1,110,000.
D. $1,070,000
Subunit 3: Joint Product and By-Product Costing
Fact Pattern:
Alfa
Atlas Foods produces the following three supplemental food
products simultaneously through a refining process costing $93,000.
10,000 pounds of Alfa, a popular
but relatively rare grain supplement
having a caloric value of
4,400 calories per pound
The joint products, Alfa and Betters, have a final selling price of $4
Betters
5,000
pounds of Betters, a flavoring
per pound and $10 per pound, respectively, after additional
material high in carbohydrates with
processing costs of $2 per pound of each product are incurred after
a caloric value of 11,200 calories
the split-off point. Morefeed, a by-product, is sold at the split-off
per pound
point for $3 per pound.
Morefeed 1,000 pounds of Morefeed, used as
a cattle feed supplement with a
caloric value of 1,000 calories per
pound
Question: 1Assuming Atlas Foods inventories Morefeed, the by-product, the joint cost to be allocated to Alfa
using the net realizable value method is
A. $3,000
B. $30,000
Answer (B) is correct.
The NRV at split-off for each of the joint products must be determined. Given that Alfa has a $4
selling price and an additional $2 of processing costs, the value at the split-off is $2 per pound. The
total value at split-off for 10,000 pounds is $20,000. Betters has a $10 selling price and an additional
$2 of processing costs. Thus, the value at split-off is $8 per pound. The total value of 5,000 pounds of
Betters is therefore $40,000. The 1,000 pounds of Morefeed has a split-off value of $3 per pound, or
$3,000. Assuming that Morefeed (a by-product) is inventoried (recognized in the accounts when
produced) and treated as a reduction of joint costs, the allocable joint cost is $90,000 ($93,000 –
$3,000). (NOTE: Several other methods of accounting for by-products are possible.) The total net
realizable value of the main products is $60,000 ($20,000 Alfa + $40,000 Betters). The allocation to
Alfa is $30,000 [($20,000 ÷ $60,000) × $90,000].
C. $31,000
D. $60,000
Fact Pattern:
Alfa
Atlas Foods produces the following three supplemental food
products simultaneously through a refining process costing $93,000.
The joint products, Alfa and Betters, have a final selling price of $4
per pound and $10 per pound, respectively, after additional
10,000 pounds of Alfa, a popular
but relatively rare grain supplement
having a caloric value of
4,400 calories per pound
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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5,000 pounds of Betters, a flavoring
material high in carbohydrates with
a caloric value of 11,200 calories
per pound
Morefeed 1,000 pounds of Morefeed, used as
a cattle feed supplement with a
caloric value of 1,000 calories per
pound
Question: 2Assuming Atlas Foods does not inventory Morefeed, the by-product, the joint cost to be allocated to
Betters using the net realizable value method is
processing costs of $2 per pound of each product are incurred after
the split-off point. Morefeed, a by-product, is sold at the split-off
point for $3 per pound.
Betters
A. $30,000
B. $31,000
C. $52,080
D. $62,000
Answer (D) is correct.
The NRV of Alfa is $20,000 [10,000 pounds × ($4 selling price – $2 additional processing costs)], and
the NRV of Betters is $40,000 [5,000 pounds × ($10 selling price – $2 additional processing costs)]. If
the joint cost is not adjusted for the value of the by-production, the amount allocated to Betters is
$62,000 {[$40,000 ÷ ($20,000 + $40,000)] × $93,000}.
Fact Pattern:
Alfa
Atlas Foods produces the following three supplemental food
products simultaneously through a refining process costing $93,000.
10,000 pounds of Alfa, a popular
but relatively rare grain supplement
having a caloric value of
4,400 calories per pound
The joint products, Alfa and Betters, have a final selling price of $4
Betters
5,000 pounds of Betters, a flavoring
per pound and $10 per pound, respectively, after additional
material high in carbohydrates with
processing costs of $2 per pound of each product are incurred after
a caloric value of 11,200 calories
the split-off point. Morefeed, a by-product, is sold at the split-off
per pound
point for $3 per pound.
Morefeed 1,000 pounds of Morefeed, used as
a cattle feed supplement with a
caloric value of 1,000 calories per
pound
Question: 3Assuming Atlas Foods inventories Morefeed, the by-product, the joint cost to be allocated to Alfa,
using the physical quantity method based on volume is
A. $3,000
B. $30,000
C. $31,000
D. $60,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Joint cost is $93,000 and Morefeed has a split-off value of $3,000 (1,000 pounds × $3 split-off value
per pound). Assuming the latter amount is treated as a reduction in joint cost, the allocable joint cost is
$90,000. The total physical quantity (volume) of the two joint products is 15,000 pounds (10,000 Alfa
+ 5,000 Betters). Thus, $60,000 of the net joint costs [(10,000 ÷ 15,000) × $90,000] should be
allocated to Alfa.
Fact Pattern:
Alfa
Atlas Foods produces the following three supplemental food
products simultaneously through a refining process costing $93,000.
10,000 pounds of Alfa, a popular
but relatively rare grain supplement
having a caloric value of
4,400 calories per pound
The joint products, Alfa and Betters, have a final selling price of $4
Betters 5,000 pounds of Betters, a flavoring
per pound and $10 per pound, respectively, after additional
material high in carbohydrates with
processing costs of $2 per pound of each product are incurred after
a caloric value of 11,200 calories
the split-off point. Morefeed, a by-product, is sold at the split-off
per pound
point for $3 per pound.
Morefeed 1,000 pounds of Morefeed, used as
a cattle feed supplement with a
caloric value of 1,000 calories per
pound
Question: 4Assuming Atlas Foods inventories Morefeed, the by-product, the joint cost to be allocated to Betters
using the physical quantity method based on caloric value per pound is
A. $39,208
B. $39,600
C. $40,920
D. $50,400
Answer (D) is correct.
Joint cost is $93,000 and Morefeed has a split-off value of $3,000 (1,000 pounds × $3 split-off value
per pound). Assuming the latter amount is treated as a reduction in joint cost, the allocable joint cost is
$90,000. The caloric value of Alfa is 44,000,000 (4,400 × 10,000 pounds), the caloric value of Betters
is 56,000,000 (11,200 × 5,000 pounds), and the total is 100,000,000. Of this total volume, Alfa makes
up 44% and Betters 56%. Thus, $50,400 ($90,000 × 56%) should be allocated to Betters.
Fact Pattern:
Alfa
Atlas Foods produces the following three supplemental food
products simultaneously through a refining process costing $93,000.
10,000 pounds of Alfa, a popular
but relatively rare grain supplement
having a caloric value of
4,400 calories per pound
The joint products, Alfa and Betters, have a final selling price of $4
Betters 5,000 pounds of Betters, a flavoring
per pound and $10 per pound, respectively, after additional
material high in carbohydrates with
processing costs of $2 per pound of each product are incurred after
a caloric value of 11,200 calories
the split-off point. Morefeed, a by-product, is sold at the split-off
per pound
point for $3 per pound.
Morefeed 1,000 pounds of Morefeed, used as
a cattle feed supplement with a
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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caloric value of 1,000 calories per
pound
Question: 5Assuming Atlas Foods inventories Morefeed, the by-product, and that it incurs no additional
processing costs for Alfa and Betters, the joint cost to be allocated to Alfa using the gross market value method is
A. $36,000
B. $40,000
Answer (B) is correct.
The gross market value of Alfa is $40,000 (10,000 pounds × $4), Betters has a total gross value of
$50,000 (5,000 pounds × $10), and Morefeed has a split-off value of $3,000. If the value of Morefeed
is inventoried and treated as a reduction in joint cost, the allocable joint cost is $90,000 ($93,000 –
$3,000). The total gross value of the two main products is $90,000 ($40,000 + $50,000). Of this total
value, $40,000 should be allocated to Alfa [($40,000 ÷ $90,000) × $90,000].
C. $41,333
D. $50,000
Question: 6Joint costs are useful for
A. Setting the selling price of a product.
B. Determining whether to continue producing an item.
C. Evaluating management by means of a responsibility reporting system.
D. Determining inventory cost for accounting purposes.
Answer (D) is correct.
Joint costs are useful for inventory costing when two or more identifiable products emerge from a
common production process. The joint costs of production must be allocated on some basis, such as
relative sales value.
Question: 7In joint-product costing and analysis, which one of the following costs is relevant when deciding the
point at which a product should be sold to maximize profits?
A. Separable costs after the split-off point.
Answer (A) is correct.
Joint products are created from processing a common input. Joint costs are incurred prior to the splitoff point and cannot be identified with a particular joint product. As a result, joint costs are irrelevant
to the timing of sale. However, separable costs incurred after the split-off point are relevant because, if
incremental revenues exceed the separable costs, products should be processed further, not sold at the
split-off point.
B. Joint costs to the split-off point.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Sales salaries for the period when the units were produced.
D. Purchase costs of the materials required for the joint products.
Fact Pattern:
Petro-Chem, Inc., is a small company that acquires high-grade crude oil from
low-volume production wells owned by individuals and small partnerships. The
crude oil is processed in a single refinery into Two Oil, Six Oil, and impure
distillates. Petro-Chem does not have the technology or capacity to process
these products further and sells most of its output each month to major
refineries. There were no beginning inventories of finished goods or work-inprocess on November 1. The production costs and output of Petro-Chem for
November are shown in the next column.
Crude oil acquired and
placed
in production
$5,000,000
Direct labor and
2,000,000
related costs
Manufacturing
3,000,000
overhead
Production and sales
 Two Oil, 300,000 barrels
produced; 80,000 barrels
sold at $20 each
 Six Oil, 240,000 barrels
produced; 120,000 barrels
sold at $30 each
 Distillates, 120,000
barrels produced and sold
at $15 each
Question: 8The portion of Petro-Chem’s joint production costs assigned to Six Oil based upon physical output
would be
A. $3,636,000
Answer (A) is correct.
The total production costs incurred are $10,000,000, consisting of crude oil of $5,000,000, direct labor
of $2,000,000, and manufacturing overhead of $3,000,000. The total physical output was 660,000
barrels, consisting of 300,000 barrels of Two Oil, 240,000 barrels of Six Oil, and 120,000 barrels of
distillates. Thus, the allocation (rounded) is $3,636,000 {[240,000 ÷ (300,000 + 240,000 + 120,000)] ×
$10,000,000}.
B. $3,750,000
C. $1,818,000
D. $7,500,000
Fact Pattern:
Crude oil acquired and
Petro-Chem, Inc., is a small company that acquires high-grade crude oil from
placed
low-volume production wells owned by individuals and small partnerships. The
in production
$5,000,000
crude oil is processed in a single refinery into Two Oil, Six Oil, and impure
distillates. Petro-Chem does not have the technology or capacity to process
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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these products further and sells most of its output each month to major
refineries. There were no beginning inventories of finished goods or work-inprocess on November 1. The production costs and output of Petro-Chem for
November are shown in the next column.
Direct labor and
related costs
Manufacturing
overhead
Production and sales
2,000,000
3,000,000
 Two Oil, 300,000 barrels
produced; 80,000 barrels
sold at $20 each
 Six Oil, 240,000 barrels
produced; 120,000 barrels
sold at $30 each
 Distillates, 120,000
barrels produced and sold
at $15 each
Question: 9The portion of Petro-Chem’s joint production costs assigned to Two Oil based upon the relative sales
value of output would be
A. $4,800,000
B. $4,000,000
Answer (B) is correct.
The total production costs incurred are $10,000,000, consisting of crude oil of $5,000,000, direct labor
of $2,000,000, and manufacturing overhead of $3,000,000. The total value of the output is as follows:
Two Oil (300,000 barrels × $20)
$ 6,000,000
Six Oil (240,000 barrels × $30)
7,200,000
Distillates (120,000 barrels × $15)
1,800,000
Total sales value
$15,000,000
Because Two Oil composes 40% of the total sales value ($6,000,000 ÷ $15,000,000), it will be
assigned 40% of the $10,000,000 of joint costs, or $4,000,000.
C. $2,286,000
D. $2,500,000
Question: 10The principal disadvantage of using the physical quantity method of allocating joint costs is that
A. Costs assigned to inventories may have no relationship to value.
Answer (A) is correct.
Joint costs are most often assigned on the basis of relative sales values or net realizable values. Basing
allocations on physical quantities, such as pounds, gallons, etc., is usually not desirable because the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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costs assigned may have no relationship to value. When large items have low selling prices and small
items have high selling prices, the large items might always sell at a loss when physical quantities are
used to allocate joint costs.
B. Physical quantities may be difficult to measure.
C. Additional processing costs affect the allocation base.
D. Joint costs, by definition, should not be separated on a unit basis.
Fact Pattern:
Travis Petroleum is a small company that acquires crude oil and manufactures it into three intermediate
products, differing only in grade. The products are Grade One, Grade Two, and Grade Three. No beginning
inventories of finished goods or work-in-process existed on November 1. The production costs for November
were as follows (assume separable costs were negligible):
Crude oil acquired and put
into production
$4,000,000
Direct labor and related costs 2,000,000
Manufacturing overhead
3,000,000
The output and sales for November were as follows:
Grade One
Barrels produced
Barrels sold
Grade Two
Grade Three
300,000
240,000
120,000
80,000
120,000
120,000
Prices per barrel sold
$30
$40
$50
Question: 11The portion of Travis’ joint production costs assigned to Grade Two based upon physical output is
(rounded to the nearest thousand dollars)
A. $3,273,000
Answer (A) is correct.
Total joint production costs incurred were $9,000,000 ($4,000,000 + $2,000,000 + $3,000,000). The
total physical output was 660,000 barrels (300,000 barrels of Grade One + 240,000 barrels of Grade
Two + 120,000 barrels of Grade Three). Thus, on a physical output basis, Grade Two should be
allocated $3,273,000 [(240,000 ÷ 660,000) × $9,000,000].
B. $3,375,000
C. $1,636,000
D. $3,512,000
Fact Pattern:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Travis Petroleum is a small company that acquires crude oil and manufactures it into three intermediate
products, differing only in grade. The products are Grade One, Grade Two, and Grade Three. No beginning
inventories of finished goods or work-in-process existed on November 1. The production costs for November
were as follows (assume separable costs were negligible):
Crude oil acquired and put
into production
$4,000,000
Direct labor and related costs 2,000,000
Manufacturing overhead
3,000,000
The output and sales for November were as follows:
Grade One
Barrels produced
Barrels sold
Grade Two
Grade Three
300,000
240,000
120,000
80,000
120,000
120,000
Prices per barrel sold
$30
$40
$50
Question: 12The portion of Travis’ joint production costs assigned to Grade One based upon the relative sales
value of output is (rounded to the nearest thousand dollars)
A. $3,512,000
B. $3,293,000
Answer (B) is correct.
Total joint production costs incurred were $9,000,000 ($4,000,000 + $2,000,000 + $3,000,000). The
sales values of the three products are as follows:
Grade One (300,000 barrels × $30)
$ 9,000,000
Grade Two (240,000 barrels × $40)
9,600,000
Grade Three (120,000 barrels × $50)
6,000,000
Total sales value
$24,600,000
Consequently, Grade One should be assigned joint costs of $3,293,000 [($9,000,000 ÷ $24,600,000) ×
$9,000,000].
C. $1,636,000
D. $4,091,000
Fact Pattern:
Travis Petroleum is a small company that acquires crude oil and manufactures it into three intermediate
products, differing only in grade. The products are Grade One, Grade Two, and Grade Three. No beginning
inventories of finished goods or work-in-process existed on November 1. The production costs for November
were as follows (assume separable costs were negligible):
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Crude oil acquired and put
into production
$4,000,000
Direct labor and related costs 2,000,000
Manufacturing overhead
3,000,000
The output and sales for November were as follows:
Grade One
Barrels produced
Barrels sold
Grade Two
Grade Three
300,000
240,000
120,000
80,000
120,000
120,000
Prices per barrel sold
$30
$40
$50
Question: 13Based on the relative sales values of output, the cost of Travis’ ending inventory of Grade Two is
A. $3,512,000
B. $1,756,000
Answer (B) is correct.
Total joint production costs incurred were $9,000,000 ($4,000,000 + $2,000,000 + $3,000,000). The
sales values of the three products are as follows:
Grade One (300,000 barrels × $30)
$ 9,000,000
Grade Two (240,000 barrels × $40)
9,600,000
Grade Three (120,000 barrels × $50)
6,000,000
Total sales value
$24,600,000
Accordingly, costs assigned to Grade Two on a relative sales value basis (rounded) equal $3,512,000
[($4,000,000 + $3,000,000 + $2,000,000) × ($9,600,000 ÷ $24,600,000)]. Thus, the value of the
ending inventory of Grade Two should be $1,756,000 [120,000 barrels in EI × ($3,512,000 ÷ 240,000
barrels produced)].
C. $1,636,000
D. $3,375,000
Fact Pattern: Pickett Manufacturing uses a joint production process that produces three
products at the split-off point. Joint production costs during April were $720,000. Product
information for April was as follows:
Product
Units produced
Units sold
R
S
T
2,500
2,000
5,000
6,000
7,500
7,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Sales prices:
At split-off
After further processing
$100
$150
$80
$115
$20
$30
Costs to process after split-off $150,000
$150,000
$100,000
Question: 14Assume that all three products are main products and that they can be sold at the split-off point or
processed further, whichever is economically beneficial to the company. What is Pickett’s total cost of Product S in
April if joint cost allocation is based on sales value at split-off?
A. $375,000
B. $390,000
C. $510,000
Answer (C) is correct.
Total sales value at split-off is $800,000 [(2,500 × $100) + (5,000 × $80) + (7,500 × $20)]. Product S
accounts for 50% (5,000 × $80 = $400,000) of the sales value and therefore $360,000 ($720,000 ×
50%) of the joint costs. The total cost of Product S is $510,000 ($360,000 allocated costs + $150,000
differential costs).
D. $571,463
Fact Pattern: Pickett Manufacturing uses a joint production process that produces three
products at the split-off point. Joint production costs during April were $720,000. Product
information for April was as follows:
Product
Units produced
Units sold
Sales prices:
At split-off
After further processing
R
S
T
2,500
2,000
5,000
6,000
7,500
7,000
$100
$150
$80
$115
$20
$30
Costs to process after split-off $150,000
$150,000
$100,000
Question: 15Assume that Product T is treated as a by-product and that the company accounts for the by-product
at net realizable value as a reduction of joint cost. Assume also that Products S and T must be processed further
before they can be sold. What is Pickett’s total cost of Product R in April if joint cost allocation is based on net
realizable values?
A. $220,370
Answer (A) is correct.
The net realizable value (NRV) method is an appropriate method of allocation when products cannot
be sold at split-off. Further processing of R, which is salable at split-off, is not economical because the
cost of $150,000 exceeds the benefit [2,500 units × ($150 – $100) = $125,000]. Thus, R’s NRV is
$250,000 (2,500 units × $100 price at split-off). However, S and T must be processed further. S’s NRV
is $425,000 [(5,000 units × $115) – $150,000], and T’s NRV is $125,000 [(7,500 units × $30) –
$100,000]. Given that the NRV of T is a reduction of joint cost, the total joint cost to be allocated is
therefore $595,000 ($720,000 – $125,000 NRV of T). Accordingly, based on the NRV method, the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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joint cost allocated to R is $220,370 {[$250,000 R’s NRV ÷ ($250,000 R’s NRV + $425,000 S’s
NRV)] × $595,000 allocable joint cost}. Because further processing of R is uneconomical, the total
cost of R is $220,370.
B. $370,370
C. $374,630
D. $595,000
Question: 16The assignment of raw material costs to the major end products resulting from refining a barrel of
crude oil is best described as
A. Indirect costing.
B. Joint costing.
Answer (B) is correct.
Joint products are common products created from processing a single input (e.g., gasoline, diesel fuel,
and kerosene). Joint products have common costs until they reach the split-off point. Joint costing
assigns common costs to joint products.
C. Differential costing.
D. Incremental costing.
Question: 17A company produces two main products and a by-product out of a joint process. The ratio of output
quantities to input quantities of direct material used in the joint process remains consistent from month to month.
The company has employed the physical-volume method to allocate joint production costs to the two main products.
The net realizable value of the by-product is used to reduce the joint production costs before the joint costs are
allocated to the main products. Data regarding the company’s operations for the current month are presented in the
chart below. During the month, the company incurred joint production costs of $2,520,000. The main products are
not marketable at the split-off point and, thus, have to be processed further.
Monthly output in pounds
Selling price per pound
First
Second
Main
Main
By-
Product Product
product
90,000
150,000
60,000
$30
$14
$2
Separable process costs
$540,000 $660,000
The amount of joint production cost that the company would allocate to the Second Main Product by using the
physical-volume method to allocate joint production costs would be
A. $1,200,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $1,260,000
C. $1,500,000
Answer (C) is correct.
The joint cost to be allocated is $2,400,000 [$2,520,000 total joint cost – (60,000 pounds of the byproduct) × $2]. Accordingly, the joint cost to be allocated to the Second Main Product on a physicalvolume basis is $1,500,000 {[150,000 pounds ÷ (90,000 pounds + 150,000 pounds) × $2,400,000]}.
D. $1,575,000
Question: 18A company produces three products (B-40, J-60, and H-102) from a single process. The company
uses the physical volume method to allocate joint costs of $22,500 per batch to the products. Based on the following
information, which product(s) should the company continue to process after the split-off point in order to maximize
profit?
B-40 J-60 H-102
Physical units produced per batch
Sales value per unit at split-off
1,500 2,000 3,200
$10.00 $4.00 $7.25
Cost per unit of further processing after split-off
3.05 1.00 2.50
Sales value per unit after further processing
12.25 5.70 9.75
A. B-40 only.
B. J-60 only.
Answer (B) is correct.
The decision to sell-or-process-further is determined by whether the incremental revenue from further
processing exceeds the incremental cost. Only J-60 produces an incremental profit.
B-40
Sales value after further processing $12.25
Less: sales value at split-off
Incremental revenue per unit
(10.00)
$ 2.25
Less: cost to process further
Incremental profit per unit
(3.05)
J-60
H-102
$ 5.70
$ 9.75
(4.00)
$ 1.70
(1.00)
$ (0.80) $ 0.70
(7.25)
$ 2.50
(2.50)
$ 0.00
C. H-102 only.
D. B-40 and H-102.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 19A company produces three main joint products and one by-product. The by-product’s relative sales
value is quite low compared with that of the main products. The preferable accounting for the by-product’s net
realizable value is as
A. An addition to the revenues of the other products allocated on the basis of their respective net realizable
values.
B. Revenue in the period it is sold.
C. A reduction in the common cost to be allocated to the three main products.
Answer (C) is correct.
Because of the relatively small sales value, a cost-effective allocation method is used for by-products.
The net realizable value of by-products is usually deducted from the cost of the main products.
D. A separate net realizable value upon which to allocate some of the common costs.
Question: 20The primary purpose for allocating common costs to joint products is to determine
A. The selling price of a by-product.
B. Whether one of the joint products should be discontinued.
C. The variance between budgeted and actual common costs.
D. The inventory cost of joint products for financial reporting.
Answer (D) is correct.
Joint products must be valued for external financial reporting purposes based on the full (absorption)
cost of the product. Any common costs attributable to the joint production process must therefore be
allocated on a systematic and rational basis.
Question: 21The distinction between joint products and by-products is largely dependent on
A. Historical costs.
B. Prime costs.
C. Market value.
Answer (C) is correct.
A by-product is one of relatively small total value. The first question that must be answered in regard
to by-products is: Do the benefits of further processing and bringing them to market exceed the costs;
that is, is the incremental revenue worth the effort? Market price determines this. The same can
essentially be said for the main products of the production process.
D. Salvage value.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 22In a production process where joint products are produced, the primary factor that will distinguish a
joint product from a by-product is the
A. Relative total sales value of the products.
Answer (A) is correct.
If production results in joint products, the primary factor that distinguishes a joint product from a byproduct is the relative total sales value of the products.
B. Relative total volume of the products.
C. Relative ease of selling the products.
D. Accounting method used to allocate joint costs.
Question: 23All of the following are methods of allocating joint costs to joint products except
A. Physical quantities method.
B. Net realizable value method.
C. Separable production cost method.
Answer (C) is correct.
No “separable production cost method” is recognized for allocating joint costs. The nature of the
problem is such that all costs are joint and cannot be separated.
D. Gross market value method.
Fact Pattern: Tucariz Company processes Duo into two joint products, Big and Mini. Duo is
purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000
gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon
for Big and $4 per gallon for Mini. Big can be processed further into 600 gallons of Giant if
$1,000 of additional processing costs are incurred. Giant can be sold for $17 per
gallon. Question: 24If Tucariz uses the net realizable value method to allocate costs to the joint products, the
total cost of producing Giant is
A. $5,600
Answer (A) is correct.
First, the final sales prices are estimated:
Giant:
600 gallons at $17/gallon = $10,200
Mini:
200 gallons at $ 4/gallon = $
800
From these amounts, separable costs are subtracted:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Giant:
$10,200 – $1,000 = $9,200
Mini:
No separable costs
This yields a total net realizable value (NRV) for the entire production run of $10,000 ($9,200 Giant +
$800 Mini). The next step is to allocate the total joint costs of $5,000 ($2,000 input cost + $3,000
processing cost) based on the proportion of the total NRV represented by each product:
Giant:
$5,000 × ($9,200 ÷ $10,000) = $4,600
Mini:
$5,000 × ($ 800 ÷ $10,000) = $ 400
The total cost of producing Giant using the estimated NRV method is therefore $5,600 ($4,600
allocated joint cost + $1,000 separable cost).
B. $5,564
C. $5,520
D. $4,600
Fact Pattern: Tucariz Company processes Duo into two joint products, Big and Mini. Duo is
purchased in 1,000 gallon drums for $2,000. Processing costs are $3,000 to process the 1,000
gallons of Duo into 800 gallons of Big and 200 gallons of Mini. The selling price is $9 per gallon
for Big and $4 per gallon for Mini. Big can be processed further into 600 gallons of Giant if
$1,000 of additional processing costs are incurred. Giant can be sold for $17 per
gallon. Question: 25If Tucariz uses the sales-value-at-split-off method to allocate joint costs to the final
products, the per gallon cost (rounded to the nearest cent) of producing Big is
A. $5.63
Answer (A) is correct.
First, the final sales prices are estimated:
Big:
800 gallons at $9/gallon = $7,200
Mini:
200 gallons at $4/gallon = $ 800
This yields a total sales value at split-off for the entire production run of $8,000 ($7,200 Big + $800
Mini). The next step is to multiply the joint costs of $5,000 ($2,000 input cost + $3,000 processing
cost) based on the proportion of the total final sales value represented by each product:
Big:
$5,000 × ($7,200 ÷ $8,000) = $4,500
Mini:
$5,000 × ($ 800 ÷ $8,000) = $ 500
The per-unit cost of producing Big using the sales value at split-off method is therefore $5.63 ($4,500
allocated joint cost ÷ 800 gallons).
B. $5.00
C. $4.50
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $3.38
Question: 26A company produces three products from a joint process. The three products are sold after further
processing as there is no market for any of the products at the split-off point. Joint costs per batch are $315,000.
Other product information is shown below.
Product A
Product B
Product C
20,000
30,000
50,000
marketing cost per unit
$ .70
$3.00
$1.72
Final sales value per unit
5.00
6.00
7.00
Units produced per batch
Further processing and
If the company uses the net realizable value method of allocating joint costs, how much of the joint costs will be
allocated to each unit of Product C?
A. $2.10
B. $2.65
C. $3.15
D. $3.78
Answer (D) is correct.
First, the final sales prices are estimated:
Product A:
20,000 units at $5/unit = $100,000
Product B:
30,000 units at $6/unit = $180,000
Product C:
50,000 units at $7/unit = $350,000
From these amounts, separable costs are deducted:
Product A:
$100,000 – (20,000 × $0.70) = $ 86,000
Product B:
$180,000 – (30,000 × $3.00) = $ 90,000
Product C:
$350,000 – (50,000 × $1.72) = $264,000
This yields a total final sales value for the entire production run of $440,000. Multiply the total joint
costs to be allocated by the proportion of the final expected sales of each product:
Product A:
$315,000 × ($ 86,000 ÷ $440,000) =
$ 61,568
Product B:
$315,000 × ($ 90,000 ÷ $440,000) =
$ 64,432
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Product C:
$315,000 × ($264,000 ÷ $440,000) =
$189,000
Joint costs -- check total
$315,000
The per-unit amount allocated to Product C is therefore $3.78 ($189,000 ÷ 50,000).
Question: 27A company uses a joint manufacturing process in the production of two products, Gummo and
Xylo. Each batch in the joint manufacturing process yields 5,000 pounds of an intermediate material, Valdene, at a
cost of $20,000. Each batch of Gummo uses 60% of the Valdene and incurs $10,000 of separate costs. The resulting
3,000 pounds of Gummo sells for $10 per pound. The remaining Valdene is used in the production of Xylo, which
incurs $12,000 of separable costs per batch. Each batch of Xylo yields 2,000 pounds and sells for $12 per pound.
The company uses the net realizable value method to allocate the joint material costs. The company is debating
whether to process Xylo further into a new product, Zinten, which would incur an additional $4,000 in costs and sell
for $15 per pound. If Zinten is produced, income would increase by
A. $2,000
Answer (A) is correct.
If Xylo is processed further, the incremental sales revenue will be $6,000 [2,000 pounds × ($15 –
$12)]. After subtracting the incremental costs, operating income will increase by $2,000 ($6,000 –
$4,000).
B. $5,760
C. $14,000
D. $26,000
Question: 28A company manufactures several products that originate in a joint process and are separated at a
split-off point. Which one of the following methods of joint-cost allocation would allocate the same unit cost to each
separable product?
A. Net realizable value method.
B. Sales value at split-off method.
C. Physical quantity method.
Answer (C) is correct.
The physical quantity (unit) method is the simplest; it allocates joint production costs to each product
based on their relative proportions of the measure selected. Using this method results in a an identical
unit cost for each separable product.
D. Constant gross margin percentage method.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 29If all of the joint products are sold at the split-off point and an overall profit is made on all of the
products, which one of the following joint costing methods will result in the same gross margin percentage on each
joint product?
A. Sales value at split-off method.
Answer (A) is correct.
The sales value at split-off method is based on the relative sales values of the separate costs at split-off.
Gross margin percentage is calculated as the difference between sales price and cost divided by sales
price. Since each joint product receives the amount of separate cost proportional to its sales value, the
gross margin percentage calculation will be the same. For instance, if there are two products whose
sales prices are $40 and $60, respectively, the joint product costs allocated will also be in a 2:3 ratio,
e.g., $10 and $15.
1.
The first product will have a gross margin percentage of the following:
2.
($40 – $10) ÷ $40 = 75%
3.
The second product will also have a gross margin percentage of the following:
4.
($60 – $15) ÷ $60 = 75%
B. Physical measures method using sales volume.
C. Physical measures method using production volume.
D. Physical measures method using weight.
Question: 30A company manufactures two products that incur joint costs of $60,000. It costs an additional
$10,000 to produce 5,000 units of Product 1 and an additional $30,000 to produce 10,000 units of Product 2.
Product 1 is sold for $8 per unit, and Product 2 is sold for $10 per unit. If the company uses the net realizable value
method to allocate joint costs, the cost per unit of Product 1 is
A. $3.60
B. $5.43
C. $5.60
Answer (C) is correct.
Product 1
Product 2
5,000
10,000
Number of units
Price per unit
×
Final sales price
$8
$40,000
Separable costs
(10,000)
Net realizable value
$30,000
×
$10
$100,000
(30,000)
$ 70,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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This yields a total net realizable value (NRV) for the entire production run of $100,000 ($30,000
Product 1 + $70,000 Product 2). The next step is to allocate the total joint costs of $60,000 based on
the proportion of the total NRV represented by each product: Product 1 = $60,000 × ($30,000 ÷
$100,000) = $18,000. Product 2 = $60,000 × ($70,000 ÷ $100,000) = $42,000. The cost per unit of
Product 1 is therefore $2 ($10,000 ÷ 5,000 units) separable costs + $3.60 ($18,000 ÷ 5,000 units) joint
cost = $5.60.
D. $6.00
Question: 31A company produces two products that incur $50,000 of joint costs. At the split-off point, 5,000
units of Product 1 and 15,000 units of Product 2 can be sold for $5 and $3 per unit, respectively. These products are
processed further. Product 1 incurs $25,000 of separable costs and is then sold for $12 per unit, and Product 2’s
separable costs total $30,000 with a final selling price of $6 per unit. If the company uses the constant gross profit
method to allocate joint costs, the dollar amount of joint costs allocated to Product 1 would be
A
$17,000
.
Answer (A) is correct.
Joint cost allocation ratio is computed using the constant gross margin percentage method as follows:
Estimated gross margin = (5,000 × $12 + 15,000 × $6) – $50,000 – $25,000 – $30,000
= $150,000 – $50,000 – $25,000 – $30,000
= $45,000
Estimated gross margin ratio
= $45,000 ÷ $150,000 = 30%
To determine the total costs that Product 1 will bear, we multiply the gross margin ratio by the sales value of
Product 1, and deduct this amount from the sales value to determine the cost:
Product 1 sales value
= 5,000 × $12
= $60,000
Product 1 total cost
= $60,000 – ($60,000 × 30%)
= $42,000
Then, we deduct the separable costs of Product 1 from the total costs incurred by Product 1 to determine the
joint cost allocated to Product 1:
$42,000 – $25,000 = $17,000
B
$17,857
.
C
$18,421
.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D
$20,000
.
Question: 32A company produces products simultaneously through a refining process costing $186,000. The
joint products, Alpha and Beta, have selling prices of $8 and $20 per pound, respectively, before additional
processing costs of $4 per pound of each product are incurred after the split-off point. Omega, a by-product, is sold
at the split-off point for $6 per pound. The number of pounds produced is shown below.
Alpha
10,000 pounds
Beta
5,000 pounds
Omega
1,000 pounds
Assuming the company inventories Omega, the joint cost allocated to Alpha using the sales value at split-off method
is
A. $72,000
B. $80,000
Answer (B) is correct.
The sales-value at split-off method is based on the relative sales values of separate products at split-off.
Given that Alpha has an $8 selling price, the sales value at the split-off is $80,000. Beta has a $20
selling price; thus, the sales value at split-off is $100,000. The 1,000 pounds of Omega has a split-off
value of $6 per unit, or $6,000. Assuming that Omega is inventoried and treated as a reduction of joint
costs, the allocable joint cost is $180,000 ($186,000 – $6,000). The total sales value of the main
products is $180,000. The allocation to Alpha is $80,000 [($80,000 ÷ $180,000) × $180,000].
C. $82,666
D. $100,000
Question: 33A company produces products simultaneously through a refining process costing $96,000. The joint
products, Alpha and Beta, have selling prices of $8 and $20 per pound, respectively, after additional processing
costs of $4 per pound of each product are incurred after the split-off point. Omega, a by-product, is sold at the splitoff point for $6 per pound. The number of pounds produced is shown below.
Alpha
10,000 pounds
Beta
5,000 pounds
Omega
1,000 pounds
Assuming the company inventories Omega, the joint cost allocated to Alpha using the sales value at split-off method
is
A. $40,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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B. $30,000
Answer (B) is correct.
The sales-value at split-off method is based on the relative sales values of separate products at split-off.
Given that Alpha has a $4 relative sales value, the sales value at the split-off is $40,000. Beta has a $16
relative sales value; thus, the sales value at split-off is $80,000. The 1,000 pounds of Omega has a
split-off value of $6 per unit, or $6,000. Assuming that Omega is inventoried and treated as a reduction
of joint costs, the allocable joint cost is $90,000 ($96,000 – $6,000). The total sales value of the main
products is $120,000. The allocation to Alpha is $30,000 [($40,000 ÷ $120,000) × $90,000].
C. $32,000
D. $60,000
Question: 34A dairy farm produces the following products jointly during the fiscal year for a total joint cost of
€9,000,000:
Product Kilograms
Milk
1,170,000
Butter
570,000
Yogurt
330,000
Cheese
930,000
Based on the information, which one of the following is most accurate regarding the allocation of the joint cost
under the physical measure method?
A. The milk product line should be allocated €1,710,000 of the joint costs.
B. The butter product line should be allocated €990,000 of the joint costs.
C. The yogurt product line should be allocated €3,510,000 of the joint costs.
D. The cheese product line should be allocated €2,790,000 of the joint costs.
Answer (D) is correct.
The total production in kilograms is 3,000,000 (1,170,000 + 570,000 + 330,000 + 930,000). Milk
composes 39% (1,170,000 ÷ 3,000,000) of that total, butter makes up 19% (570,000 ÷ 3,000,000),
yogurt makes up 11% (330,000 ÷ 3,000,000), and cheese makes up 31% (930,000 ÷ 3,000,000).
Therefore, using a physical measure of allocation, cheese should be valued at 31% of the total
€9,000,000 joint cost, or €2,790,000.
Question: 35The following information pertains to a by-product called Moy:
Sales for the month 5,000 units
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Selling price per unit $6
Selling costs per unit $2
Processing costs
$0
Inventory of Moy was recorded at net realizable value when produced in the previous month. No units of Moy were
produced in the month just ended. What amount should be recognized as profit on Moy’s sales?
A. $0
Answer (A) is correct.
Net realizable value is selling price minus selling and disposal costs, which means there is no (zero)
profit when sold. The product’s NRV and recorded inventory cost is equal to $4 per unit ($6 selling
price per unit – $2 selling cost per unit). Therefore, when the units are sold, the company will record
revenue of $30,000 ($6 × 5,000 units), cost of goods sold of $20,000 ($4 × 5,000 units), and selling
costs of $10,000 ($2 × 5,000 units). This leads to the company breaking even on the transaction and
not recognizing any profits on Moy’s sales ($30,000 – $20,000 – $10,000).
B. $10,000
C. $20,000
D. $30,000
Question: 36A processing department produces joint products Ajac and Bjac, each of which incurs separable
production costs after split-off. Information concerning a batch produced at a $60,000 joint cost before split-off
follows:
Separable
Product Costs
Ajac
Bjac
Sales Value
$ 8,000 $ 80,000
22,000
40,000
$30,000 $120,000
What is the joint cost assigned to Ajac if costs are assigned using the relative net realizable value?
A. $16,000
B. $40,000
C. $48,000
Answer (C) is correct.
The NRV of Ajac is $72,000 ($80,000 – $8,000), and the NRV of Bjac is $18,000 ($40,000 –
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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$22,000). Thus, the joint cost assigned to Ajac if costs are assigned based on relative NRV is $48,000
{$60,000 × [$72,000 ÷ ($72,000 + $18,000)]}.
D. $52,000
Question: 37LM Enterprises produces two products in a common production process, each of which is
processed further after the split-off point. Joint costs incurred for the current month are $36,000. The following
information for the current month was also gathered:
Product Units Produced Units Sold Separable Costs Selling Price per Unit
L
10,000
9,500
$20,000
$ 8
M
5,000
4,000
40,000
20
What amount would be the joint cost allocated to product M, assuming that LM Enterprises uses the estimated net
realizable value method to allocate costs?
A. $20,000
B. $18,000
Answer (B) is correct.
The estimated net realizable value method allocates joint costs based on the relative market values of
the products after additional processing is performed to make them salable. Net realizable value at
split-off is equal to the sales price at the point of sale minus costs to complete after split-off (separable
costs). Accordingly, the $18,000 of joint costs allocated to M is calculated as follows:
Step 1: Determine NRV at split-off for both L and M
L: $80,000 (10,000 units × $8) – $20,000 = $60,000
M: $100,000 (5,000 units × $20) – $40,000 = $60,000
Step 2: Determine the proportion of joint costs allocated to M
$60,000 ÷ $120,000 = 50%
Step 3: Multiply the proportion by the amount of joint costs
$36,000 × 50% = $18,000 allocated to M
C. $15,000
D. $12,000
Question: 38Warfield Corporation manufactures products C, D, and E from a joint process. Joint costs are
allocated on the basis of relative sales value at split-off. Additional information is presented below.
C
Units produced
6,000
D
E
Total
4,000
2,000
12,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Joint costs
Sales value at split-off
Additional costs if processed further
$ 72,000
?
?
?
?
$120,000
$30,000 $200,000
$ 14,000 $10,000 $ 6,000 $ 30,000
Sales value if processed further
$140,000 $60,000 $40,000 $240,000
How much of the joint costs should Warfield allocate to product D?
A. $24,000
B. $28,800
C. $30,000
Answer (C) is correct.
Given that total joint costs are $120,000 and total sales value at split-off is $200,000, the ratio of joint
costs to sales value is 60% ($120,000 ÷ $200,000). The joint costs of product C are $72,000. Thus, C’s
sales value at split-off is $120,000 ($72,000 ÷ 60%). If product C’s sales value is $120,000, D’s sales
value is $50,000 ($200,000 – $30,000 E – $120,000 C). Accordingly, the joint costs of product D are
$30,000, which is 60% of D’s $50,000 sales value at split-off.
D. $32,000
Question: 39Ashwood Company manufactures three main products, F, G, and W, from a joint process. Joint
costs are allocated on the basis of relative sales value at split-off. Additional information for June production activity
follows:
F
Units produced
Joint costs
50,000
?
G
40,000
?
W
Total
10,000 100,000
? $450,000
Sales value at split-off
$420,000 $270,000 $60,000 $750,000
Additional costs if processed further
$ 88,000 $ 30,000 $12,000 $130,000
Sales value if processed further
$538,000 $320,000 $78,000 $936,000
Assuming that the 10,000 units of W were processed further and sold for $78,000, what was Ashwood’s gross profit
on this sale?
A. $21,000
B. $28,500
C. $30,000
Answer (C) is correct.
The relative sales-value at split-off method allocates joint costs in proportion to the relative sales value
of the individual products. The total sales value at split-off is $750,000.
Joint Cost
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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W
Sales Value
Weighting Factor
Allocated
$60,000
(60 ÷ 750) × $450,000
$36,000
The joint cost allocated at split-off is thus $36,000. The units are processed further at a cost of $12,000
and sold for $78,000. The gross profit is thus $30,000 ($78,000 – $36,000 – $12,000).
D. $36,000
Question: 40Lowe Co. manufactures products A and B from a joint process. Sales value at split-off was
$700,000 for 10,000 units of A and $300,000 for 15,000 units of B. Using the sales value at split-off approach, joint
costs properly allocated to A were $140,000. Total joint costs were
A. $98,000
B. $200,000
Answer (B) is correct.
The relative sales value is a cost allocation method that allocates joint costs in proportion to the
relative sales value of the individual products. Total sales value is $1,000,000 ($700,000 for A +
$300,000 for B). The $140,000 of joint costs allocated to product A was 70% ($700,000 ÷ $1,000,000)
of total joint costs. The calculation for total joint costs (Y) is
.7Y = $140,000
Y = $140,000 ÷ .7
Y = $200,000
C. $233,333
D. $350,000
Question: 41Mighty, Inc., processes chickens for distribution to major grocery chains. The two major products
resulting from the production process are white breast meat and legs. Joint costs of $600,000 are incurred during
standard production runs each month, which produce a total of 100,000 pounds of white breast meat and 50,000
pounds of legs. Each pound of white breast meat sells for $2, and each pound of legs sells for $1. If there are no
further processing costs incurred after the split-off point, what amount of the joint costs would be allocated to the
white breast meat on a relative sales value basis?
A. $120,000
B. $200,000
C. $400,000
D. $480,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (D) is correct.
Given no additional processing costs, white breast meat has a sales value of $200,000 (100,000 pounds
× $2), and legs have a sales value of $50,000 (50,000 pounds × $1). Thus, the joint costs allocated to
white breast meat based on relative sales value is $480,000 [$600,000 × ($200,000 ÷ $250,000)].
Question: 42A rubber factory takes raw materials and converts them into one of the following products:
footballs, basketballs, soccer balls, and hockey pucks. In the current year, the plant processed 10,000 pounds of raw
materials and incurred $500,000 of joint processing costs. The following table has been constructed to evaluate each
product’s individual performance:
Total Raw
Units
Estimated Sales
Separable Costs
Product
Materials Used
Manufactured
Price per Unit
per Unit
Basketballs
3,000 lbs
300
$12
$2
Footballs
4,000 lbs
400
15
3
Hockey pucks
1,000 lbs
100
6
1
Soccer balls
2,000 lbs
200
10
2
Using the estimated net realizable value (NRV) method, what amount of the $500,000 joint processing costs should
be allocated to footballs?
A. $151,515
B. $242,424
Answer (B) is correct.
The estimated NRV method is similar to the sales-value at split-off method. However, under the
estimated NRV method, all separable costs necessary to make the product salable are subtracted before
the allocation is made. The relevant calculations follow:
Basketballs: NRV per unit = $10 ($12 – $2); Total NRV = $150,000 ($10 × 300 units)
Footballs: NRV per unit = $12 ($15 – $3); Total NRV = $240,000 ($12 × 400 units)
Hockey pucks: NRV per unit = $5 ($6 – $1); Total NRV = $25,000 ($5 × 100 units)
Soccer balls: NRV per unit = $8 ($10 – $2); Total NRV = $80,000 ($8 × 200 units)
Total NRV across all products is therefore $495,000 ($150,000 + $240,000 + $25,000 + $80,000).
Thus, the joint processing costs to be allocated to footballs can be determined to be $242,424
[($240,000 ÷ $495,000) × $500,000] (rounded).
C. $200,000
D. $245,902
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Subunit 4: Overhead Allocation and Normal Costing -- Theory
Question: 1The two most appropriate factors for budgeting manufacturing overhead expenses are
A. Machine hours and production volume.
B. Management judgment and contribution margin.
C. Management judgment and production volume.
Answer (C) is correct.
The most important factor in budgeting manufacturing overhead is production volume. Many overhead
items have variable costs, and those that are fixed with a relevant range of output may increase if
production exceeds that range. The other essential consideration is management’s judgment with
respect to the nature and amount of costs to be incurred and expectations for production volume.
Because overhead is applied based on predetermined rates, accurate judgment is important.
D. Management judgment and sales dollars.
Question: 2Units of production is an appropriate overhead allocation base when
A. Several well-differentiated products are manufactured.
B. Direct labor costs are low.
C. Direct material costs are large relative to direct labor costs incurred.
D. Only one product is manufactured.
Answer (D) is correct.
Allocating overhead on the basis of the number of units produced is usually not appropriate. Costs
should be allocated on the basis of some plausible relationship between the cost object and the
incurrence of the cost, preferably cause and effect. The fixed portion of overhead costs is incurred
regardless of the level of production. When multiple products are involved, the number of units of
production may bear no relationship to the incurrence of the allocated cost. If overhead is correlated
with machine hours but different products require different quantities of that input, the result may be
an illogical allocation. However, if a firm manufactures only one product, this allocation method may
be acceptable because all costs are to be charged to the single product.
Question: 3The appropriate method for the disposition of underapplied or overapplied overhead of a
manufacturer
A. Is to cost of goods sold only.
B. Is to finished goods inventory only.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Is apportioned to cost of goods sold and finished goods inventory.
D. Depends on the significance of the amount.
Answer (D) is correct.
Overapplied or underapplied overhead should be disposed of at the end of an accounting period by
transferring the balance either to cost of goods sold (if the amount is not material) or to cost of goods
sold, finished goods inventory, and work-in-process inventory. Theoretically, the allocation is
preferred, but, because the amount is usually immaterial, the entire balance is often transferred directly
to cost of goods sold. Thus, the entry depends upon the significance of the amount.
Question: 4In determining next year’s overhead application rates, a company desires to focus on manufacturing
capacity rather than output demand for its products. To derive a realistic application rate, the denominator activity
level should be based on
A. Practical capacity.
Answer (A) is correct.
Practical capacity is based on realistic, attainable levels of production and input efficiency and is the
most appropriate denominator level to use in selecting an overhead application rate.
B. Maximum capacity.
C. Normal capacity.
D. Master-budget (expected annual) capacity.
Question: 5Generally, individual departmental rates rather than a plantwide rate for applying manufacturing
overhead are used if
A. A company wants to adopt a standard cost system.
B. A company’s manufacturing operations are all highly automated.
C. Manufacturing overhead is the largest cost component of its product cost.
D. The manufactured products differ in the resources consumed from the individual departments in the plant.
Answer (D) is correct.
Overhead is usually assigned to products based on a predetermined rate or rates. The activity base for
overhead allocation should have a high degree of correlation with the incurrence of overhead. Given
only one cost driver, one overhead application rate is sufficient. If products differ in the resources
consumed in individual departments, multiple rates are preferable.
Question: 6When the amount of overapplied factory overhead is significant, the entry to close overapplied
factory overhead will most likely require
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A. A debit to cost of goods sold.
B. Debits to cost of goods sold, finished goods inventory, and work-in-process inventory.
C. A credit to cost of goods sold.
D. Credits to cost of goods sold, finished goods inventory, and work-in-process inventory.
Answer (D) is correct.
Under a normal costing system, overhead is applied to all jobs worked on during the period at a
predetermined rate. Because cost of goods sold, finished goods inventory, and work-in-process
inventory all relate to these jobs, each should be adjusted by its proportionate share of over- or
underapplied overhead. This apportionment may be based on either the percentage of total overhead
(theoretically preferable) or the percentage of total cost. The entry to close overapplied overhead
requires credits to these three accounts.
Fact Pattern:
Nash Glassworks Company has budgeted fixed
manufacturing overhead of $100,000 per month. The
company uses absorption costing for both external and
Capacity Levels
internal financial reporting purposes. Budgeted
overhead rates for cost allocations for the month of
April using alternative unit output denominator levels Theoretical
are shown in the next column.
Practical
Budgeted
Budgeted
Denominator Level
Overhead
(units of output)
Cost Rate
1,500,000
$.0667
1,250,000
.0800
Normal
775,000
.1290
Master-budget
800,000
.1250
Actual output for the month of April was 800,000 units of
glassware.
Question: 7When Nash Glassworks Company allocates fixed costs, management will select a capacity level to
use as the denominator volume. All of the following are appropriate as the capacity level that approximates actual
volume levels except
A. Normal capacity.
B. Expected annual activity.
C. Theoretical capacity.
Answer (C) is correct.
Theoretical (ideal) capacity is the maximum capacity given continuous operations with no holidays,
downtime, etc. It assumes perfect efficiency at all times. Consequently, it can never be attained and is
not a reasonable estimate of actual volume.
D. Master-budget capacity.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 8Assuming two overhead accounts are used, what is the entry to close them and to charge
underapplied overhead to cost of goods sold?
A.
Cost of goods sold
Finished goods
B.
C.
XX
Factory O/H applied
XX
Factory O/H control
XX
Cost of goods sold
XX
Cost of goods sold
Factory O/H applied
D.
XX
XX
XX
Factory O/H applied
XX
Cost of goods sold
XX
Factory O/H control
XX
Answer (D) is correct.
Although not theoretically sound, total under- or overapplied overhead is often debited (credited) to
COGS. The correct entry to close the overhead accounts and to charge underapplied overhead to
COGS is to debit the factory overhead applied account for the amount of overhead applied for the
period and to credit factory overhead control for the amount of overhead actually incurred for the
period. The amount actually incurred exceeds the amount of overhead applied because overhead is
underapplied. The difference is the amount charged to COGS.
Question: 9The numerator of the overhead application rate equals
A. Estimated overhead costs.
Answer (A) is correct.
The overhead application rate is established at the beginning of each year to determine how much
overhead to accumulate for each job throughout the period. The estimated annual overhead costs are
divided by the annual activity level or capacity in terms of units to arrive at the desired rate.
B. Actual overhead costs.
C. The estimated activity level.
D. The actual activity level.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 10In a labor intensive industry in which more overhead (service, support, more expensive equipment,
etc.) is incurred by the more highly skilled and paid employees, which activity base is most likely to be appropriate
for applying overhead?
A. Direct labor hours.
B. Direct materials cost.
C. Machine hours.
D. Direct labor cost.
Answer (D) is correct.
In labor intensive industries, overhead is usually allocated based on a labor activity base. If more
overhead is incurred by the more highly skilled and paid employees, the overhead rate should be based
upon direct labor cost rather than direct labor hours.
Question: 11Annual overhead application rates are used to
A. Budget overhead.
B. Smooth seasonal variability of overhead costs.
Answer (B) is correct.
Annual overhead application rates smooth seasonal variability of overhead costs and activity levels. If
overhead were applied to the product as incurred, the overhead rate per unit in most cases would vary
considerably from week to week or month to month. The purpose of an annual overhead application
rate is to simulate constant overhead throughout the year.
C. Simulate seasonal variability of activity levels.
D. Treat overhead as period costs.
Question: 12Departmental overhead rates are usually preferred to plant-wide overhead rates when
A. The activities of each of the various departments in the plant are not homogeneous.
Answer (A) is correct.
The activity base for overhead allocation should have a high correlation with the incurrence of
overhead. Thus, the activities of various departments are usually more appropriate as activity bases
than plant-wide activities, particularly when products and production activities are not homogeneous.
B. The costs of many service departments are being allocated to each of the various departments.
C. All products passing through the various departments require the same manufacturing effort in each
department.
D. Most of the overhead costs are fixed.
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Question: 13Normal costing systems are said to offer a user several distinct benefits when compared with actual
costing systems. Which one of the following is not a benefit associated with normal costing systems?
A. More timely costing of jobs and products.
B. A smoothing of product costs throughout the period.
C. Improved accuracy of job and product costing.
Answer (C) is correct.
Normal costing can provide more timely information about job and product costs, and it can helpfully
smooth product costs throughout a period, but it cannot in and of itself improve the accuracy of
costing.
D. A more economical way of attaching overhead to a job or product.
Question: 14A company, which uses direct labor hours to apply overhead to its product line, undertook an
extensive renovation and modernization program 2 years ago. Manufacturing processes were reengineered,
considerable automated equipment was acquired, and 60% of the company’s nonunion factory workers were
terminated. Which of the following statements would apply to the situation at the company?
I. The company’s factory overhead rate has likely increased.
II. The use of direct labor hours seems to be appropriate.
III. The company will lack the ability to properly determine labor variances.
IV. The company has likely reduced its ability to quickly cut costs in order to respond to economic downturns.
A. I, II, III, and IV.
B. I and IV only.
Answer (B) is correct.
The company’s overhead rate will almost certainly increase because of all the new equipment that
must be depreciated. Also, this heavy investment in new machinery will make it more difficult to
quickly cut costs during economic downturns.
C. II and IV only.
D. I and III only.
Question: 15The most important criterion in accurate cost allocations is
A. Using a simple allocation method.
B. Allocating fixed and variable costs by using the same allocation base.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Using homogeneous cost pools.
Answer (C) is correct.
All the cost objects gathered in a cost pool should be similar enough that a single allocation base can
be selected that will accurately allocate the costs in the pool.
D. Using multiple drivers for each cost pool.
Question: 16A capital-intensive manufacturer of large construction equipment has a manufacturing process that
relies heavily on specialized machinery. This machinery is run by a relatively small number of highly skilled
laborers. In determining its predetermined overhead rate, what allocation base should the company use?
A. Sales dollars.
B. Direct labor costs.
C. Machine hours.
Answer (C) is correct.
A cost allocation base is the common denominator for systematically correlating indirect costs and a
cost object. The cost driver of the indirect costs is ordinarily the allocation base. In a capital-intensive
manufacturer, machine hours are the best allocation base to use.
D. Direct labor hours.
Question: 17A company has budgeted overhead costs at its normal capacity based on machine hours. Variable
factory overhead is $180,000, and fixed manufacturing overhead is $560,000. If the firm operates at a slightly lower
rate of activity, it will expect total
A. Fixed manufacturing overhead of $560,000 and a lower hourly rate for variable overhead.
B. Fixed manufacturing overhead of $560,000 and the same hourly rate for variable overhead.
Answer (B) is correct.
If costs are fixed within the relevant range, they remain constant at $560,000. Additionally, variable
overhead costs per hour remain constant in the relevant range.
C. Fixed manufacturing overhead of $560,000 and a higher hourly rate for variable overhead.
D. Variable overhead of less than $180,000 and a lower hourly rate for variable overhead.
Question: 18A company produces a wide variety of hand-crafted rocking chairs. The most appropriate allocation
base for allocating production supervisor salaries to the products is
A. Direct labor hours.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (A) is correct.
In labor-intensive industries, direct labor hours are an appropriate driver. The “hand-crafted” rocking
chairs industry is a labor-intensive industry; thus, direct labor hours is the most appropriate allocation
base.
B. Machine hours.
C. Number of products.
D. Sales dollars.
Question: 19A company manufactures and sells three products. The products are all manufactured at the same
facility. The controller of the company has decided to accumulate all budgeted overhead costs for the manufacturing
facility into a single cost pool. The cost pool is then allocated to the three products based on the direct labor hours
used by each product. What type of overhead rate has the controller most likely used in this allocation
methodology?
A. Departmental rate.
B. Variable rate.
C. Fixed rate.
D. Plant-wide rate.
Answer (D) is correct.
Since the controller is using only a single cost pool and single cost driver for all overhead costs, the
overhead rate being used is most likely a single plant-wide rate.
Question: 20Which one of the following would not be an appropriate cost allocation base for an organization?
A. Machine hours.
B. Direct labor hours.
C. Square feet of a facility.
D. Supervisor salaries.
Answer (D) is correct.
Costs should realistically be allocated on the basis of some cost driver. A cost driver should capture a
cause-and-effect relationship between the level of the driver and the level of the cost being allocated.
In other words, costs should be allocated on the basis of what causes the costs to occur. It is unlikely
that supervisory salaries would ever be a cost driver.
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Subunit 5: Overhead Allocation and Normal Costing -- Calculations
Question: 1A company uses a job costing system and applies overhead to products on the basis of direct labor
cost. Job No. 75, the only job in process on January 1, had the following costs assigned as of that date: direct
materials, $40,000; direct labor, $80,000; and factory overhead, $120,000. The following selected costs were
incurred during the year:
Traceable to jobs:
Direct materials
$178,000
Direct labor
345,000
Total
$523,000
Not traceable to jobs:
Factory materials and supplies
Indirect labor
Plant maintenance
$ 46,000
235,000
73,000
Depreciation on factory equipment
Other factory costs
Total
29,000
76,000
$459,000
The company’s profit plan for the year included budgeted direct labor of $320,000 and overhead of $448,000.
Assuming no work-in-process on December 31, the company’s overhead for the year was
A. $11,000 overapplied.
B. $24,000 overapplied.
Answer (B) is correct.
The company applies overhead to products on the basis of direct labor cost. The rate is 1.4 ($448,000
budgeted OH ÷ $320,000 budgeted DL cost). Thus, $483,000 ($345,000 actual DL cost × 1.4) of
overhead was applied, of which $24,000 ($483,000 – $459,000 actual OH) was overapplied.
C. $11,000 underapplied.
D. $24,000 underapplied.
Question: 2A company applies factory overhead based upon machine hours. At the beginning of the year, the
company budgeted factory overhead at $250,000 and estimated that 100,000 machine hours would be used to make
50,000 units of product. During the year, the company produced 48,000 units using 97,000 machine hours. Actual
overhead for the year was $252,000. Under a standard cost system, the amount of factory overhead applied during
the year was
A. $240,000
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Answer (A) is correct.
The company’s application rate for overhead is $2.50 per machine hour ($250,000 budgeted total ÷
100,000 estimated machine hours), and each unit of output is estimated to require 2 machine hours
(100,000 estimated machine hours ÷ 50,000 units budgeted output). Under a standard cost system, the
amount of overhead applied during the year was therefore $240,000 (48,000 units actual output ×
$2.50 per machine hour application rate × 2 machine hours standard per unit).
B. $242,500
C. $250,000
D. $252,000
Question: 3A manufacturer allocates overhead to jobs in process using direct labor costs, direct materials costs,
and machine hours. The overhead application rates for the current year are
100% of direct labor
20% of direct materials
$117 per machine hour
A particular production run incurred the following costs:
Direct labor, $8,000
Direct materials, $2,000
A total of 140 machine hours were required for the production run.
What is the total cost charged to the production run?
A. $18,000.
B. $18,400.
C. $34,780.
Answer (C) is correct.
The total cost charged to the production run is calculated as follows:
Direct labor
$ 8,000
Direct materials
2,000
Manufacturing overhead:
$8,000 of direct labor × 100%
=
$ 8,000
$2,000 of direct materials × 20%
=
400
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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140 machine hours × $117
=
16,380
Total charged to production
24,780
$34,780
D. None of the answers are true.
Question: 4A review of the year-end accounting records of a company discloses the following information:
Raw materials
$
80,000
Work-in-process
128,000
Finished goods
272,000
Cost of goods sold
1,120,000
The company’s underapplied overhead equals $133,000. On the basis of this information, cost of goods sold
is most appropriately reported as
A. $987,000
B. $1,213,100
C. $1,218,000
Answer (C) is correct.
Given the amounts involved, $133,000 is material; thus, over- or underapplied overhead should be
allocated to all work-in-process, finished goods, and cost of goods sold. The proportion of the total of
these three accounts represented by cost of goods sold is 73.68% [$1,120,000 ÷ ($128,000 + $272,000
+ $1,120,000)]. The amount of underapplied overhead assigned to cost of goods sold is thus $98,000
($133,000 × 73.68%), making the total reported amount of cost of goods sold $1,218,000 ($1,120,000
+ $98,000).
D. $1,253,000
Question: 5During the current accounting period, a manufacturing company purchased $70,000 of raw materials,
of which $50,000 of direct materials and $5,000 of indirect materials were used in production. The company also
incurred $45,000 of total labor costs and $20,000 of other manufacturing overhead costs. An analysis of the workin-process control account revealed $40,000 of direct labor costs. Based upon the above information, what is the
total amount accumulated in the overhead control account?
A. $25,000
B. $30,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Answer (B) is correct.
Overhead consists of all costs, other than direct materials and direct labor, that are associated with the
manufacturing process. The overhead control account should have the following costs:
Indirect materials
$ 5,000
Indirect labor ($45,000 – $40,000)
5,000
Other overhead
20,000
Total overhead
$30,000
C. $45,000
D. $50,000
Fact Pattern:
Northcoast Manufacturing Company, a small
manufacturer of parts used in appliances, has just
completed its first year of operations. The
company’s controller, Vic Trainor, has been
reviewing the actual results for the year and is
concerned about the application of factory
overhead. Trainor is using the following
information to assess its manufacturing operations.
Products manufactured
650,000 units
Machine use
130,000 hours
Direct labor usage
35,000 hours
Labor rate
$15 per hour
Total overhead
$1,130,000
Cost of goods sold
$1,720,960
• Northcoast’s equipment consists of several
Finished goods inventory (at year end)
$430,240
machines with a combined cost of $2,200,000 and
$0
no residual value. Each machine has an output of Work-in-process inventory (at year end)
five units of product per hour and a useful life of
• Total overhead is applied to direct labor cost using a
20,000 hours.
predetermined plant-wide rate.
• Selected actual data of Northcoast’s operations for • The budgeted activity for the year included 20 employees,
the year just ended is presented in the opposite
column.
each working 1,800 productive hours per year to produce
540,000 units of product. The machines are highly
automated, and each employee can operate two to four
machines simultaneously. Normal activity is for each
employee to operate three machines. Machine operators
are paid $15 per hour.
• Budgeted overhead costs for the past year for various
levels of activity are shown in the table below.
Northcoast Manufacturing Company
Budgeted Annual Costs for Total Overhead
Units of Product
Labor hours
Machine hours
Total overhead costs
360,000
540,000
720,000
30,000
72,000
36,000
108,000
42,000
144,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Plant supervision
Plant rent
Equipment depreciation
Maintenance
Utilities
Indirect material
Other costs
Total
$ 70,000
40,000
288,000
42,000
144,600
90,000
11,200
$ 70,000
40,000
432,000
51,000
216,600
135,000
16,600
$
70,000
40,000
576,000
60,000
288,600
180,000
22,000
$685,800
$961,200
$1,236,600
Question: 6What is Northcoast’s predetermined overhead application rate for the year?
A. 1.78
Answer (A) is correct.
The predetermined overhead application rate is found by dividing the total budgeted overhead by the
budgeted direct labor cost. Hence, the predetermined overhead application rate is 1.78 [$961,200 ÷
($15 × 36,000 hours)].
B. 1.83
C. 2.09
D. 2.15
Fact Pattern:
Northcoast Manufacturing Company, a small
manufacturer of parts used in appliances, has just
completed its first year of operations. The
company’s controller, Vic Trainor, has been
reviewing the actual results for the year and is
concerned about the application of factory
overhead. Trainor is using the following
information to assess its manufacturing operations.
Products manufactured
650,000 units
Machine use
130,000 hours
Direct labor usage
35,000 hours
Labor rate
$15 per hour
Total overhead
$1,130,000
Cost of goods sold
$1,720,960
• Northcoast’s equipment consists of several
Finished goods inventory (at year end)
$430,240
machines with a combined cost of $2,200,000 and
$0
no residual value. Each machine has an output of Work-in-process inventory (at year end)
five units of product per hour and a useful life of
• Total overhead is applied to direct labor cost using a
20,000 hours.
predetermined plant-wide rate.
• Selected actual data of Northcoast’s operations for • The budgeted activity for the year included 20 employees,
the year just ended is presented in the opposite
column.
each working 1,800 productive hours per year to produce
540,000 units of product. The machines are highly
automated, and each employee can operate two to four
machines simultaneously. Normal activity is for each
employee to operate three machines. Machine operators
are paid $15 per hour.
• Budgeted overhead costs for the past year for various
levels of activity are shown in the table below.
Northcoast Manufacturing Company
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Budgeted Annual Costs for Total Overhead
Units of Product
Labor hours
Machine hours
Total overhead costs
Plant supervision
Plant rent
Equipment depreciation
Maintenance
Utilities
Indirect material
Other costs
Total
360,000
540,000
720,000
30,000
72,000
36,000
108,000
42,000
144,000
$ 70,000
40,000
288,000
42,000
144,600
90,000
11,200
$ 70,000
40,000
432,000
51,000
216,600
135,000
16,600
$
$685,800
$961,200
$1,236,600
70,000
40,000
576,000
60,000
288,600
180,000
22,000
Question: 7How much is Northcoast’s overhead over/underapplied?
A. $195,500 overapplied.
B. $168,800 overapplied.
C. $168,800 underapplied.
D. $195,500 underapplied.
Answer (D) is correct.
The amount of overhead overapplied/underapplied is found by subtracting the actual incurred overhead
from the actual applied overhead. The predetermined overhead application rate is found by dividing
the total budgeted overhead by the budgeted direct labor cost. Hence, the predetermined overhead
application rate is 1.78 [$961,200 ÷ ($15 × 36,000 hours)]. Therefore, the actual overhead applied is
$934,500 [($15 × 35,000 hours) × 1.78]. The actual overhead incurred is $1,130,000. Thus, the amount
of underapplied overhead is $195,500 ($934,500 – $1,130,000).
Fact Pattern:
Northcoast Manufacturing Company, a small
manufacturer of parts used in appliances, has just
completed its first year of operations. The
company’s controller, Vic Trainor, has been
reviewing the actual results for the year and is
concerned about the application of factory
overhead. Trainor is using the following
information to assess its manufacturing operations.
Products manufactured
650,000 units
Machine use
130,000 hours
Direct labor usage
35,000 hours
Labor rate
$15 per hour
Total overhead
$1,130,000
Cost of goods sold
$1,720,960
• Northcoast’s equipment consists of several
Finished goods inventory (at year end)
$430,240
machines with a combined cost of $2,200,000 and
$0
no residual value. Each machine has an output of Work-in-process inventory (at year end)
five units of product per hour and a useful life of
• Total overhead is applied to direct labor cost using a
20,000 hours.
predetermined plant-wide rate.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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The budgeted activity for the year included 20 employees,
• Selected actual data of Northcoast’s operations for • each working 1,800 productive hours per year to produce
the year just ended is presented in the opposite
540,000 units of product. The machines are highly
automated, and each employee can operate two to four
machines simultaneously. Normal activity is for each
employee to operate three machines. Machine operators
are paid $15 per hour.
column.
• Budgeted overhead costs for the past year for various
levels of activity are shown in the table below.
Northcoast Manufacturing Company
Budgeted Annual Costs for Total Overhead
Units of Product
Labor hours
Machine hours
Total overhead costs
Plant supervision
Plant rent
Equipment depreciation
Maintenance
Utilities
Indirect material
Other costs
Total
360,000
540,000
720,000
30,000
72,000
36,000
108,000
42,000
144,000
$ 70,000
40,000
288,000
42,000
144,600
90,000
11,200
$ 70,000
40,000
432,000
51,000
216,600
135,000
16,600
$
$685,800
$961,200
$1,236,600
70,000
40,000
576,000
60,000
288,600
180,000
22,000
Question: 8What is the amount of underapplied overhead allocated to Northcoast’s cost of goods sold?
A. $0
B. $39,100
C. $156,400
Answer (C) is correct.
Because the amount of underapplied overhead is considered material, the proper accounting treatment
is to prorate this amount to work-in-process, finished goods inventory, and the cost of goods sold.
Thus, the ending balances must be added together to get a denominator of $2,151,200 ($1,720,960 +
$430,240 + $0). The proportion of the total that must be allocated to cost of goods sold is therefore .8
($1,720,960 ÷ $2,151,200). The amount of underapplied overhead is then multiplied by .8 to arrive at
the amount of underapplied overhead allocated to cost of goods sold, or $156,400 ($195,500 × .8).
D. $195,500
Fact Pattern:
Northcoast Manufacturing Company, a small
manufacturer of parts used in appliances, has just
completed its first year of operations. The
company’s controller, Vic Trainor, has been
Products manufactured
650,000 units
Machine use
130,000 hours
Direct labor usage
35,000 hours
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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reviewing the actual results for the year and is
Labor rate
concerned about the application of factory
Total overhead
overhead. Trainor is using the following
information to assess its manufacturing operations. Cost of goods sold
$15 per hour
$1,130,000
$1,720,960
Finished goods inventory (at year end)
$430,240
machines with a combined cost of $2,200,000 and
Work-in-process inventory (at year end)
$0
no residual value. Each machine has an output of
five units of product per hour and a useful life of • Total overhead is applied to direct labor cost using a
20,000 hours.
predetermined plant-wide rate.
• Northcoast’s equipment consists of several
The budgeted activity for the year included 20 employees,
• Selected actual data of Northcoast’s operations for • each working 1,800 productive hours per year to produce
the year just ended is presented in the opposite
540,000 units of product. The machines are highly
automated, and each employee can operate two to four
machines simultaneously. Normal activity is for each
employee to operate three machines. Machine operators
are paid $15 per hour.
column.
• Budgeted overhead costs for the past year for various
levels of activity are shown in the table below.
Northcoast Manufacturing Company
Budgeted Annual Costs for Total Overhead
Units of Product
Labor hours
Machine hours
Total overhead costs
Plant supervision
Plant rent
Equipment depreciation
Maintenance
Utilities
Indirect material
Other costs
Total
360,000
540,000
720,000
30,000
72,000
36,000
108,000
42,000
144,000
$ 70,000
40,000
288,000
42,000
144,600
90,000
11,200
$ 70,000
40,000
432,000
51,000
216,600
135,000
16,600
$
$685,800
$961,200
$1,236,600
70,000
40,000
576,000
60,000
288,600
180,000
22,000
Question: 9If machine hours were used as the application base, what would be Northcoast’s predetermined
overhead rate?
A. $10.46 per machine hour.
B. $8.90 per machine hour.
Answer (B) is correct.
The predetermined overhead rate is found by dividing total budget overhead by budgeted machine
hours. Thus, the budgeted overhead of $961,200 is divided by the budgeted machine hours of 108,000.
The predetermined overhead rate is therefore $8.90 per machine hour.
C. $8.69 per machine hour.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. $7.39 per machine hour.
Fact Pattern:
Madtack Company’s beginning and ending
inventories for the month of November are
Production data for the month of November follows:
Direct labor
$200,000
November 1 November 30
Direct materials $ 67,000
Question:
132,000
Direct materials purchased
163,000
$ 62,000
Work-in-process 145,000
Finished goods
Actual manufacturing overhead
171,000
85,000
Transportation in
4,000
Purchase returns and allowances
2,000
78,000
Madtack uses one overhead control account and charges overhead
to production at 70% of direct labor cost. The company does not
formally recognize over- or underapplied overhead until year end.
10Madtack Company’s net charge to overhead control for the month of November is
A. $8,000 debit, overapplied.
B. $8,000 debit, underapplied.
C. $8,000 credit, overapplied.
Answer (C) is correct.
The overhead control account would have been debited for $132,000 of actual overhead. Credits would
have totaled $140,000 representing 70% of direct labor costs of $200,000. Hence, the $140,000 credit
exceeds the $132,000 debit. Overhead was overapplied by $8,000.
D. $8,000 credit, underapplied.
Question: 11A company allocates its variable factory overhead based on direct labor hours. During the past 3
months, the actual direct labor hours and the total factory overhead allocated were as follows:
January
Direct labor hours
Total factory overhead allocated
February
March
1,000
3,000
5,000
$80,000
$140,000
$200,000
Based upon this information, monthly fixed factory overhead was
A. $50,000
Answer (A) is correct.
This question requires solving simultaneous equations because both the variable overhead per direct
labor hour (Y) and the fixed overhead (X) are unknown.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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$80,000 = X + 1,000Y
$140,000 = X + 3,000Y
$60,000 = 2,000Y
Y = $30 per direct labor hour
Substituting,
$80,000 = X + 1,000($30)
X = $50,000
B. $46,667
C. $33,333
D. $30,000
Question: 12From the following budgeted data, calculate the budgeted indirect cost rate that would be used in a
normal costing system.
Total direct labor hours
250,000
Total indirect labor hours
50,000
Direct costs
$10,000,000
Total indirect labor related costs
5,000,000
Total indirect nonlabor related costs
7,000,000
A. $20
B. $28
C. $40
D. $48
Answer (D) is correct.
Total indirect costs are $12,000,000 ($5,000,000 + $7,000,000). The appropriate allocation base is
direct labor hours, since this more closely matches activity level than does indirect labor or the
combination of the two. The budgeted indirect cost rate is thus $48 per direct labor hour ($12,000,000
÷ 250,000).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 13A printing company uses a job order costing system and applies overhead based on machine hours.
A total of 150,000 machine hours have been budgeted for the year. During the year, an order for 1,000 units was
completed and incurred the following:
Direct material costs
$1,000
Direct labor costs
1,500
Actual overhead
1,980
Machine hours
450
The accountant calculated the inventory cost of this order to be $4.30 per unit. The annual budgeted overhead in
dollars was
A. $577,500
B. $600,000
Answer (B) is correct.
The results from the production run of 1,000 units allow the company to calculate its per-unit costs for
materials ($1,000 ÷ 1,000 units = $1.00) and labor ($1,500 ÷ 1,000 units = $1.50). Overhead can then
be derived as follows:
Total cost per unit
$4.30
Less: direct materials
(1.00)
Less: direct labor
(1.50)
Overhead per unit
$1.80
The number of machine hours required to manufacture a single unit is .45 (450 hours ÷ 1,000 units).
Therefore, $1.80 represents 45% of the cost of a machine hour ($1.80 ÷ .45 = $4.00). Since 150,000
hours were budgeted, total budgeted overhead for the year was $600,000 (150,000 hours × $4.00 per
hour).
C. $645,000
D. $660,000
Question: 14A cost accountant is developing departmental factory overhead application rates for the company’s
tooling and fabricating departments. The budgeted overhead for each department and the data for one job are shown
below.
Department:
Tooling
Supplies
$ 850
Fabricating
$
200
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Supervisor’s salaries
1,500
2,000
Indirect labor
1,200
4,880
Depreciation
1,000
5,500
Repairs
4,075
3,540
$8,625
$16,120
460
620
Total budgeted overhead
Total direct labor hours
Direct labor hours on Job #231
12
3
Using the departmental overhead application rates, total overhead applied to Job #231 in the Tooling and Fabricating
Departments will be
A. $225
B. $303
Answer (B) is correct.
The departmental overhead allocations are determined by the proportion of the total driver expended
by each department on this job, as follows:
Tooling:
$8,625 × (12 ÷ 460)
=
$225
Fabricating:
$16,120 × (3 ÷ 620)
=
78
Total
$303
C. $537
D. $671
Question: 15The cost accountant for a manufacturing company is preparing a management report that must
include an allocation of overhead. Budgeted overhead for each department and the data for one job are shown
below.
Department
Tooling
Supplies
$ 690
Fabricating
$
80
Supervisor’s salaries
1,400
1,800
Indirect labor
1,000
4,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Depreciation
1,200
5,200
Repairs
4,400
3,000
$8,690
$14,080
440
640
Total budgeted overhead
Total direct labor hours
Direct labor hours on Job #231
10
2
Using the departmental overhead application rates and allocating overhead on the basis of direct labor hours,
overhead applied to Job #231 in the Tooling Department would be
A. $44.00
B. $197.50
Answer (B) is correct.
The departmental overhead allocations are determined by the proportion of the total driver expended
by each department on this job. Tooling’s allocation is $197.50 [$8,690 × (10 ÷ 440)].
C. $241.50
D. $501.00
Question: 16A corporation expects to incur $70,000 of factory overhead and $60,000 of general and
administrative costs next year. Direct labor costs at $5 per hour are expected to total $50,000. If factory overhead is
to be applied per direct labor hour, how much overhead will be applied to a job incurring 20 hours of direct labor?
A. $28
B. $120
C. $140
Answer (C) is correct.
Direct labor hours budgeted for next year are 10,000 ($50,000 total ÷ $5 per hour). Factory overhead is
applied at the rate of $7 per direct labor hour ($70,000 ÷ 10,000 hours). A job incurring 20 hours of
direct labor will thus be charged with $140 of overhead ($7 per direct labor hour × 20 hours).
D. $260
Question: 17Using the following budget data for a corporation, which produces only one product, calculate the
company’s predetermined factory overhead application rate for variable overhead.
Units to be produced
11,000
Units to be sold
10,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Indirect materials, varying with production
Indirect labor, varying with production
$ 1,000
10,000
Factory supervisor’s salary, incurred regardless of production
20,000
Depreciation on factory building and equipment
Utilities to operate factory machines
Security lighting for factory
30,000
12,000
2,000
Selling, general, and administrative expenses
5,000
A. $2.09
Answer (A) is correct.
Variable overhead consists of those inputs to the production process that (1) vary with the level of
production and (2) cannot be practicably traced to end products. In the corporation’s case, these
include indirect materials ($1,000), indirect labor ($10,000), and utilities ($12,000), for a total of
$23,000. Dividing this amount by the number of units scheduled for production yields a variable
overhead application rate of $2.09 ($23,000 ÷ 11,000).
B. $2.30
C. $4.73
D. $5.20
Question: 18A company uses departmental rates to assign overhead to its two products. Budgeted data for the
next year are shown below.
Department 1 Department 2
Overhead costs $5,000,000
Cost driver
$7,000,000
Machine hours Labor hours
Machine hours
500,000
120,000
Labor hours
100,000
1,400,000
The company expects to manufacture 400,000 units of Product A during the year. Each unit of Product A requires
0.5 machine hours in Department 1 and 1.5 labor hours in Department 2. The budgeted overhead cost for one unit of
Product A is
A. $11.03
B. $12.50
Answer (B) is correct.
The allocation rate for Department 1 is $10/machine hour ($5,000,000 ÷ 500,000 machine hours). The
allocation rate for Department 2 is $5/labor hour ($7,000,000 ÷ 1,400,000 labor hours). Therefore, a
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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product that requires 0.5 machine hours in Department 1 and 1.5 hours of labor in Department 2 will
have a budgeted overhead cost of $12.50 [(0.5 × $10) + (1.5 × $5)].
C. $12.73
D. $15.00
Question: 19A company manufactures radio-controlled toy dogs. Summary budget financial data for the
company for the current year are as follows:
Sales (5,000 units at $150 each)
$750,000
Variable manufacturing cost
400,000
Fixed manufacturing cost
100,000
Variable selling and administrative cost
Fixed selling and administrative cost
80,000
150,000
The company uses an absorption costing system with overhead applied based on the number of units produced, with
a denominator level of activity of 5,000 units. Underapplied or overapplied manufacturing overhead is written off to
cost of goods sold in the year incurred. The $20,000 budgeted operating income from producing and selling 5,000
toy dogs planned for this year is of concern to the company’s president. She believes she could increase operating
income to $50,000 (her bonus threshold) if the company produces more units than it sells, thus building up the
finished goods inventory. How much of an increase in the number of units in the finished goods inventory would be
needed to generate the $50,000 budgeted operating income?
A. 556 units.
B. 600 units.
C. 1,500 units.
Answer (C) is correct.
The president intends to engineer her bonus by “producing for inventory,” that is, taking advantage of
the fact that, under absorption costing, fixed costs can be piled up in ending inventory (this is why
performance should be measured internally using variable costing). Each additional unit produced but
left unsold adds to operating income its incremental amount of fixed production cost. Fixed production
costs in the company’s relevant range are $20 per unit ($100,000 ÷ 5,000 units). Thus, to generate
$30,000 additional operating income, 1,500 units ($30,000 ÷ $20) must be produced and moved to
ending inventory.
D. 7,500 units.
Fact Pattern: Dremmon Corporation uses a standard cost accounting system. Data for the last
fiscal year are as follows:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Units
Beginning inventory of finished goods
100
Production during the year
700
Sales
750
Ending inventory of finished goods
50
Per Unit
Product selling price
$200
Standard variable manufacturing cost
90
Standard fixed manufacturing cost
20*
Budgeted selling and administrative costs (all fixed) $45,000
*Denominator level of activity is 750 units for the year.
There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off to cost
of goods sold in the year incurred. There are no work-in-process inventories. Question: 20If
Dremmon uses absorption costing, its operating income earned in the last fiscal year was
A. $21,500
Answer (A) is correct.
Dremmon’s absorption-basis operating income can be calculated as follows:
Sales
$150,000
Beginning inventory
100 units
@ $ 110
=
$11,000
Variable production costs
700 units
@ $
90
=
63,000
Fixed production costs
700 units
@ $
20
=
14,000
50 units
@ $
20
=
1,000
Volume variance writeoff
Goods available for sale
$89,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Less: Ending inventory
50 units
@ $ 110
=
(5,500)
Absorption cost of goods sold
(83,500)
Gross margin
$ 66,500
Variable S&A expenses
None
Fixed S&A expenses
Fixed
0
(45,000)
Operating income
$ 21,500
B. $27,000
C. $28,000
D. $30,000
Fact Pattern: Dremmon Corporation uses a standard cost accounting system. Data for the last
fiscal year are as follows:
Units
Beginning inventory of finished goods
100
Production during the year
700
Sales
750
Ending inventory of finished goods
50
Per Unit
Product selling price
$200
Standard variable manufacturing cost
90
Standard fixed manufacturing cost
20*
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Budgeted selling and administrative costs (all fixed) $45,000
*Denominator level of activity is 750 units for the year.
There were no price, efficiency, or spending variances for the year, and actual selling and
administrative expenses equaled the budget amount. Any volume variance is written off to cost
of goods sold in the year incurred. There are no work-in-process inventories. Question: 21If
Dremmon uses variable costing, its operating income earned in the last fiscal year was
A. $21,500
B. $22,500
Answer (B) is correct.
Dremmon’s variable-basis operating income can be calculated as follows:
Sales
$150,000
Beginning inventory
100 units
@ $ 90 =
$ 9,000
Variable production costs
700 units
@ $ 90 =
63,000
Volume variance writeoff
50 units
@ $ 20 =
1,000
Goods available for sale
Less: Ending inventory
$73,000
50 units
@ $ 90 =
Variable cost of goods sold
Variable S&A expenses
(4,500)
(68,500)
None
0
Contribution margin
$ 81,500
Fixed production costs
700 units
Fixed S&A expenses
Fixed
@ $ 20 =
(14,000)
(45,000)
Operating income
$ 22,500
Please note that the volume variance is used to find contribution margin in this case because the
question states, “Any volume variance is written off to cost of goods sold in the year incurred.”
C. $28,000
D. $31,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 22A corporation’s results for the past year are shown below.
Cost of goods available for sale
$136,000
Ending balance, raw material inventory
6,000
Ending balance, work-in-process inventory
14,000
Ending balance, finished goods inventory
13,000
Manufacturing overhead applied
50,000
Actual manufacturing overhead
55,000
If the corporation prorates any overapplied or underapplied overhead at the end of the year, cost of goods sold after
proration would total
A. $140,150
B. $127,100
Answer (B) is correct.
Cost of goods sold before proration is calculated by subtracting the ending balance of finished goods
inventory from cost of goods available for sale to achieve $123,000 ($136,000 – $13,000).
Manufacturing overhead was underapplied by $5,000 ($55,000 actual – $50,000 applied). That excess
$5,000 is prorated among the ending balance of work-in-process, the ending balance of finished goods,
and cost of goods sold. The amount prorated to cost of goods sold is $4,100 {$5,000 × [$123,000 cost
of goods sold ÷ ($123,000 cost of goods sold + $14,000 ending balance work-in-process +
13,000 ending balance finished goods)]}. The cost of goods sold after proration would total $127,100
($123,000 + $4,100).
C. $126,950
D. $118,900
Question: 23Information regarding a company’s year-end account balances is shown below.
Account Balance (Before Proration) Allocated Overhead in Each Balance
Direct material inventory
Work-in-process inventory
Finished goods inventory
Cost of goods sold
$ 100,000
$
0
25,000
10,000
225,000
100,000
2,250,000
890,000
If the company’s overhead was overapplied by $90,000 and the company uses the most accurate method of prorating
overapplied or underapplied overhead, the balance in the cost of goods sold account after proration would be
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $2,169,000
B. $2,169,900
Answer (B) is correct.
The most accurate method of prorating overapplied or underapplied overhead prorates based on the
allocated overhead in each balance. Cost of goods sold after proration of the overapplied overhead
would be $2,169,900 {$2,250,000 cost of goods sold before proration – 90,000 × [$890,000 overhead
in cost of goods sold ÷ ($890,000 overhead in cost of goods sold + $100,000 overhead in finished
goods + $10,000 overhead in work-in-process)]}.
C. $2,172,115
D. $2,330,100
Question: 24A company uses a normal costing system and a predetermined overhead rate to allocate its
overhead costs. The manufacturing process requires the use of machining equipment, which is a primary driver of
overhead. The actual factory overhead amount is $450 for Department A, Job 120 as of the end of the year.
Production costs are shown below.
Estimated annual overhead for all departments
Expected annual machine hours for all departments
$220,000
20,000
Actual machine hours for Department A, Job 120
32
Actual labor hours for Department A, Job 120
21
The overhead cost for Department A, Job 120 is
A. $98 overapplied.
B. $98 underapplied.
Answer (B) is correct.
The company applies overhead based on machine hours. The rate is 11 ($220,000 estimated annual
overhead ÷ 20,000 expected annual machine hours). Thus, the actual applied overhead is $352 (32
actual machine hours × 11). The amount of underapplied overhead is $98 ($450 – $352).
C. $219 overapplied.
D. $219 underapplied.
Question: 25A company had the following applied fixed overhead balances at the end of the year:
Work-in-process inventory $100,000
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Finished goods inventory
Cost of goods sold
50,000
250,000
The company is also showing that it has materially under-applied fixed overhead by $30,000. To record the fixed
overhead variance, the company should charge
A. Work-in-process inventory for $18,750.
B. Finished goods inventory for $3,750.
Answer (B) is correct.
A material overhead variance should be allocated proportionately to work-in-process, finished goods,
and cost of goods sold. The applied overhead totaled $400,000, consisting of $100,000 in work-inprocess, $50,000 in finished goods, and $250,000 in cost of goods sold. Since finished goods accounts
for 12.5% ($50,000 ÷ $400,000) of the total, it should absorb 12.5% of the $30,000 overhead variance,
or $3,750 (12.5% × $30,000).
C. Cost of goods sold for $7,500.
D. Cost of goods sold for $30,000.
Subunit 6: Allocating Service Department Costs -- Theory
Question: 1In allocating factory service department costs to producing departments, which one of the following
items would most likely be used as an activity base?
A. Units of product sold.
B. Salary of service department employees.
C. Units of electric power consumed.
Answer (C) is correct.
Service department costs are considered part of factory overhead and should be allocated to the
production departments that use the services. A basis reflecting cause and effect should be used to
allocate service department costs. Each producing department most likely consumes electrical power to
produce their respective products. Thus, units of electrical power consumed is a likely indicator of
each producing department’s level of activity. The greater the level of activity, the more likely a cause
of factory service department costs. Therefore, units of electrical power consumed is the most likely
activity base to allocate factory service department costs to producing departments.
D. Direct materials usage.
Question: 2When allocating service department costs to production departments, the method that
does not consider different cost behavior patterns is the
A. Step method.
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B. Reciprocal method.
C. Direct method.
D. Single-rate method.
Answer (D) is correct.
The single-rate method combines fixed and variable costs. However, dual rates are preferable because
they allow variable costs to be allocated on a different basis from fixed costs.
Question: 3Allocation of service department costs to the production departments is necessary to
A. Control costs.
B. Coordinate production activity.
C. Determine overhead rates.
Answer (C) is correct.
Service department costs are indirect costs allocated to production departments to better determine
overhead rates when the measurement of full (absorption) costs is desired. Overhead should be charged
to production on some equitable basis to provide information useful for such purposes as allocation of
resources, pricing, measurement of profits, and cost reimbursement.
D. Maximize efficiency.
Question: 4There are several methods for allocating service department costs to the production departments. The
method that recognizes service provided by one service department to another but does not recognize reciprocal
interdepartmental service is the
A. Direct method.
B. Variable method.
C. Reciprocal method.
D. Step-down method.
Answer (D) is correct.
The three major methods of allocating service department costs, in order of increasing sophistication,
are the direct method, the step-down method, and the reciprocal (or simultaneous-equations) method.
The direct method is the simplest. It involves allocating all service department costs to production
departments without recognizing any service provided by one service department to another. The stepdown method is a sequential process that allocates service costs among service as well as production
departments. However, once a department’s costs have been allocated, no additional allocations are
made back to that department. The reciprocal method uses simultaneous equations to recognize mutual
services. The latter method is the most complex.
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Question: 5A large manufacturing company has two service departments and two production departments. Each
of the service departments renders services to each other and to the two production departments. Which one of the
following methods would most accurately allocate the costs of the service departments to the production
departments of this company?
A. The direct allocation method.
B. The step-down allocation method.
C. The linear allocation method.
D. The reciprocal allocation method.
Answer (D) is correct.
The reciprocal method uses simultaneous equations to allocate each service department’s costs. It
allocates costs by explicitly including the mutual services rendered among all departments. When
service departments render services to each other, the use of the direct method or the step-down
method would not be theoretically accurate. Accordingly, in such situations, the reciprocal method
would result in the most accurate allocation.
Question: 6When allocating service and administrative costs, the least useful criterion as a basis for allocation is
A. Fairness.
B. Benefit.
C. Cause.
D. Ability to bear.
Answer (D) is correct.
Ability to bear, measured in terms of the cost object’s profitability, is not an acceptable method
because it has a dysfunctional effect on management behavior. It penalizes high performance instead of
rewarding profitability.
Question: 7A corporation allocates indirect corporate overhead costs to its operating divisions. The company
uses a cause-and-effect criterion in the selection of appropriate allocation bases. Which of the following would be an
appropriate allocation base to assign the costs of the corporate personnel department to the operating divisions using
a cause-and-effect criterion?
A. Number of employees in each division.
Answer (A) is correct.
The cause-and-effect criterion seeks a relationship between cost and the cost objective (for example, an
operating division) such that changes in total costs can be predicted based on activities of the cost
objective. Thus, the number of employees in an operating division is likely to correlate with incurrence
of costs by the personnel department.
B. Square footage of space occupied by each division.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Total service years of employees in each division.
D. Total book value of identifiable division assets.
Question: 8A public accounting firm has two departments, Management Consulting Services (MCS) and Tax
Advisory Services (TAS). These two departments use the services of two service departments, Computer
Programming (CP) and Computer Operations (CO). The percentages of each service used by each department for a
typical period are
CP
CO
MCS
TAS
CP
--
30%
50%
20%
CO
25%
--
45%
30%
The company prices its management consulting and tax advisory services on the basis of estimated costs of
providing those services. Based upon this information, the most appropriate method for allocating service
department costs is the
A. Physical-units method.
B. Step-down method.
C. Estimated NRV method.
D. Reciprocal method.
Answer (D) is correct.
The reciprocal method uses simultaneous equations to allocate costs by explicitly recognizing the
mutual services rendered among all departments. Because it acknowledges all sources of cost, it should
be used when management is using the results of allocations to make decisions on pricing products.
Question: 9When allocating costs from one department to another, a dual-rate cost-allocation method may be
used. The dual-rate cost-allocation method is most useful when
A. Two or more cost pools are to be allocated.
B. Two or more departments’ costs are to be allocated.
C. Two or more products are produced.
D. Costs are separated into variable-cost and fixed-cost subpools.
Answer (D) is correct.
The dual-rate method of allocating costs from one department to another involves classifying the costs
to be allocated into two pools, one variable and one fixed.
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Question: 10The management of a company wishes to encourage all other departments to use the legal
department, as circumstances warrant. To accomplish this, legal department costs should be
A. Allocated to users on the basis of the actual cost of hours used.
B. Allocated to users on the basis of the budgeted cost of actual hours used.
C. Allocated to users on the basis of standard cost for the type of service provided.
D. Absorbed as a corporate expense.
Answer (D) is correct.
The most effective way to encourage more use of a service is to keep the user from having to bear the
cost of the service.
Question: 11A tax firm has three divisions – Compliance, Tax Planning, and Financial Consulting. Based on the
divisional data presented below, which one of the allocation bases for common company expenses would likely have
the least negative behavioral impact on the Financial Consulting Division manager?
Tax
Financial
Compliance
Planning
Consulting
$4,500,000
$6,000,000
$4,500,000
Variable expenses
1,500,000
3,750,000
2,250,000
No. of employees
68
76
56
Revenues
A. Revenues.
B. Contribution margin.
C. Equal sharing.
D. Number of employees.
Answer (D) is correct.
The Financial Consulting Division has the fewest employees. Using that as the basis for allocation
would therefore be the most advantageous.
Question: 12A furniture company manufactures several steel products. It has three production departments:
Fabricating, Assembly, and Finishing. The service departments include Maintenance, Material Handling, and
Designing. Currently, the company does not allocate service department costs to the production departments. The
new cost accountant believes that service department rates should be developed and charged to the production
departments for services requested. If the company adopts this new policy, the production department managers
would be least likely to
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Request an excessive amount of service.
Answer (A) is correct.
When a user is forced to bear a realistic cost for a service, the user is less likely to use an excessive
amount of that service.
B. Replace outdated and inefficient systems.
C. Refrain from using unnecessary services.
D. Be encouraged to control costs.
Question: 13A company has two service departments and three operating departments. In allocating service
department costs to the operating departments, which of the following three methods (direct, step-down, reciprocal)
will result in the same amount of service department costs being allocated to each operating department, regardless
of the order in which the service department costs are allocated?
A. Direct and reciprocal methods only.
Answer (A) is correct.
With the direct and reciprocal methods, the order of allocation is irrelevant. However, under the stepdown method, some service department cost is allocated to other service departments before allocation
to the operating departments. These first allocations change the proportions of the total constituted by
each department.
B. Step-down and reciprocal methods only.
C. Direct and step-down methods only.
D. Direct method only.
Fact Pattern:
Wilcox Industrial has two support departments, the Information Systems Department and the
Personnel Department, and two manufacturing departments, the Machining Department and the
Assembly Department. The support departments service each other as well as the two production
departments. Company studies have shown that the Personnel Department provides support to a
greater number of departments than the Information Systems Department.
Question: 14If Wilcox uses the reciprocal method of department allocation, which one of the following
departmental allocations would occur? The costs of the
A. Assembly Department are allocated to the Information Systems Department and the Personnel
Department.
B. Information Systems Department are allocated to the Machining Department and the costs of the
Machining Department are allocated to the Assembly Department.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Personnel Department are allocated solely to the Information Systems Department.
D. Information Systems Department are allocated to the Personnel Department, Machining Department, and
Assembly Department.
Answer (D) is correct.
The reciprocal method is the most complex and the most theoretically sound of the three service
department allocation methods. The reciprocal method recognizes services rendered by all service
departments to each other as well as to the production departments.
Fact Pattern:
Wilcox Industrial has two support departments, the Information Systems Department and the
Personnel Department, and two manufacturing departments, the Machining Department and the
Assembly Department. The support departments service each other as well as the two production
departments. Company studies have shown that the Personnel Department provides support to a
greater number of departments than the Information Systems Department.
Question: 15If Wilcox uses the step-down method of departmental allocation, which one of the following cost
allocations would not occur? Some of the costs of the
A. Personnel Department would be allocated to the Information Systems Department.
B. Information Systems Department would be allocated to the Personnel Department.
Answer (B) is correct.
The step or step-down method allocates some of the costs of services rendered by service departments
to each other. The step method derives its name from the procedure involved: The service departments
are allocated in order, from the one that provides the most service to other service departments down to
the one that provides the least. Since Personnel provides more services than Information Systems,
Personnel will be allocated to Information Systems, but not the other way around.
C. Personnel Department would be allocated to the Assembly Department.
D. Personnel Department would be allocated to the Assembly Department and the Machining Department.
Fact Pattern:
Wilcox Industrial has two support departments, the Information Systems Department and the
Personnel Department, and two manufacturing departments, the Machining Department and the
Assembly Department. The support departments service each other as well as the two production
departments. Company studies have shown that the Personnel Department provides support to a
greater number of departments than the Information Systems Department.
Question: 16If Wilcox uses the direct method of departmental allocation, which one of the following cost
allocations would occur? Some of the costs of the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Personnel Department would be allocated to the Information Systems Department.
B. Machining Department would be allocated to the Information Systems Department.
C. Information Systems Department would be allocated to the Assembly Department.
Answer (C) is correct.
The direct method of service department allocation is the simplest. Service department costs are
allocated directly to the producing departments without regard for services rendered by service
departments to each other. Service department costs are allocated to production departments based on
an allocation base appropriate to each service department’s function.
D. Assembly Department would be allocated to the Machining Department.
Question: 17A company has four support departments (maintenance, power, human resources, and legal) and
three operating departments. The support departments provide services to the operating departments as well as to the
other support departments. The method of allocating the costs of the support departments that best recognizes the
mutual services rendered by support departments to other support departments is the
A. Direct allocation method.
B. Dual-rate allocation method.
C. Step-down allocation method.
D. Reciprocal allocation method.
Answer (D) is correct.
The reciprocal method is the most complex and the most theoretically sound of the three service
department allocation methods. The reciprocal method recognizes services rendered by all service
departments to each other as well as to the production departments.
Question: 18A company has two service departments and is planning to use the reciprocal method to allocate
service department costs. The following information from operations was collected for analysis.
Budgeted overhead costs
Human Resources
$400,000
Data Processing
70,000
Machining
225,000
Assembly
125,000
Services furnished
Labor Hours
Human Resources to
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Data Processing
3,000
Machining
5,000
Assembly
8,200
Data Processing to
Human Resources
Machining
Assembly
600
3,500
600
Which one of the following equations represents the complete reciprocated cost of the Data Processing Department?
A. $70,000 + [(600 ÷ 4,700) × $400,000]
B. $70,000 + [Fully Reciprocated Cost of Human Resources × (3,000 ÷ 16,200)]
Answer (B) is correct.
The reciprocal cost of a service department incorporates the cost of other service departments’ service.
Therefore, Data Processing has a reciprocal cost of $70,000, plus the allocable portion of Human
Resources cost used. This is best represented by either of the following equations: $70,000 + [Fully
Reciprocated Cost of Human Resources × (3,000 ÷ 16,200)] or $70,000 + {[$400,000 + (Fully
Reciprocated Cost of Data Processing × 12.77%)] × (3,000 ÷ 16,200)}.
C. $70,000 × (600 ÷ 4,700) + $350,000 × (3,000 ÷ 16,200)
D. $400,000 + [(600 ÷ 16,200) × $70,000]
Question: 19A company produces two products that are serviced by two support areas. The company uses the
reciprocal method to allocate support area costs to the products with information as follows.
Allocation base
Support Area 1
Support Area 2
Hours used
Square feet
Area 1 hours used
Space occupied
Direct costs
5,000
3,000
$350,000
Product 1
Product 2
120,000
75,000
40,000
20,000
$200,000
What additional information does Columbia need in order to complete the cost allocation?
A. Direct costs of Products 1 and 2.
B. Hours used by Support Area 1 and the space occupied by Support Area 2.
C. Order in which the support areas will be allocated.
D. No additional information is needed.
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Answer (D) is correct.
All the information necessary to allocate costs is provided. The reciprocal method is the most complex
and the most theoretically sound of the three methods. Under the reciprocal method, services rendered
by all service departments to each other are recognized.
Question: 20A large company is in the process of allocating service department costs to revenue-generating
departments. Under which one of the following allocation methods will the amount allocated to each revenuegenerating department be different if the order in which service department costs are allocated is different?
A. Step-down method.
Answer (A) is correct.
Under the step-down method, the service departments are allocated in order, from the one that provides
the most service to other service departments down to the one that provides the least service. Thus, the
order in which service department costs are allocated is important.
B. Direct method.
C. Reciprocal method.
D. Activity-based method.
Subunit 7: Allocating Service Department Costs -- Calculations
Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the
cost of service departments, such as Quality Control and Maintenance, to the production
departments. To aid them in this discussion, the controller has provided the following
information:
Quality Control
Maintenance Machining Assembly Total
Budgeted overhead costs
before allocation
$350,000
$200,000
Budgeted machine hours
--
--
Budgeted direct labor hours --
--
$400,000
50,000
--
$300,000 $1,250,000
--
50,000
25,000
25,000
7,000
35,000
Budgeted hours of service:
Quality Control
--
7,000
21,000
Maintenance
10,000
-18,000
12,000
40,000
Question: 1If Rochester uses the step-down method of allocating service costs beginning with quality control, the
maintenance costs allocated to the assembly department would be
A. $70,000
B. $108,000
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Answer (B) is correct.
The step-down method allocates service costs to both service and production departments but does not
involve reciprocal allocations among service departments. Accordingly, Quality Control will receive
no allocation of maintenance costs. The first step is to allocate quality control costs to the Maintenance
Department. Maintenance is expected to use 20% (7,000 ÷ 35,000) of the available quality control
hours and will be allocated $70,000 ($350,000 × 20%) of quality control costs. Thus, total allocable
maintenance costs equal $270,000 ($70,000 + $200,000). The Assembly Department is estimated to
use 40% (12,000 ÷ 30,000) of the available maintenance hours. Consequently, it will be allocated
maintenance costs of $108,000 ($270,000 × 40%).
C. $162,000
D. $200,000
Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the
cost of service departments, such as Quality Control and Maintenance, to the production
departments. To aid them in this discussion, the controller has provided the following
information:
Quality Control
Maintenance Machining Assembly Total
Budgeted overhead costs
before allocation
$350,000
$200,000
Budgeted machine hours
--
--
Budgeted direct labor hours --
--
$400,000
50,000
--
$300,000 $1,250,000
--
50,000
25,000
25,000
21,000
7,000
35,000
18,000
12,000
40,000
Budgeted hours of service:
Quality Control
Maintenance
--
7,000
10,000
--
Question: 2Using the direct method, the total amount of overhead allocated to each machine hour at Rochester
would be
A. $2.40
B. $5.25
C. $8.00
D. $15.65
Answer (D) is correct.
Machining uses 75% (21,000 ÷ 28,000) of the total quality control hours and 60% (18,000 ÷ 30,000) of
the total maintenance hours budgeted for the production departments. Under the direct method, it will
therefore be allocated $262,500 ($350,000 × 75%) of quality control costs and $120,000 ($200,000 ×
60%) of maintenance costs. In addition, Machining is expected to incur another $400,000 of overhead
costs. Thus, the total estimated Machining overhead is $782,500 ($262,500 + $120,000 + $400,000),
and the overhead cost per machine hour is $15.65 ($782,500 ÷ 50,000 hours).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the
cost of service departments, such as Quality Control and Maintenance, to the production
departments. To aid them in this discussion, the controller has provided the following
information:
Quality Control
Maintenance Machining Assembly Total
Budgeted overhead costs
before allocation
$350,000
$200,000
Budgeted machine hours
--
--
Budgeted direct labor hours --
--
$400,000
50,000
$300,000 $1,250,000
--
--
50,000
25,000
25,000
21,000
7,000
35,000
18,000
12,000
40,000
Budgeted hours of service:
Quality Control
--
Maintenance
7,000
10,000
--
Question: 3If Rochester uses the direct method of allocating service department costs, the total service costs
allocated to the assembly department would be
A. $80,000
B. $87,500
C. $120,000
D. $167,500
Answer (D) is correct.
Under the direct method, service department costs are allocated directly to the production departments,
with no allocation to other service departments. The total budgeted hours of service by the Quality
Control Department to the two production departments is 28,000 (21,000 + 7,000). Given that the
Assembly Department is expected to use 25% (7,000 ÷ 28,000) of the total hours budgeted for the
production departments, it will absorb 25% of total quality control costs ($350,000 × 25% = $87,500).
The total budgeted hours of service by the Maintenance Department to the production departments is
30,000 (18,000 + 12,000). The Assembly Department is expected to use 40% (12,000 ÷ 30,000) of the
total maintenance hours budgeted for the production departments. Thus, the Assembly Department will
be allocated 40% of the $200,000 of maintenance costs, or $80,000. The total service department costs
allocated to the Assembly Department is $167,500 ($87,500 + $80,000).
Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the
cost of service departments, such as Quality Control and Maintenance, to the production
departments. To aid them in this discussion, the controller has provided the following
information:
Quality Control
Maintenance Machining Assembly Total
Budgeted overhead costs
before allocation
$350,000
$200,000
Budgeted machine hours
--
--
$400,000
50,000
$300,000 $1,250,000
--
50,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Budgeted direct labor hours --
--
--
25,000
25,000
7,000
35,000
Budgeted hours of service:
Quality Control
--
7,000
21,000
Maintenance
10,000
-18,000
12,000
40,000
Question: 4If Rochester uses the reciprocal method of allocating service costs, the total amount of quality control
costs (rounded to the nearest dollar) to be allocated to the other departments would be
A. $284,211
B. $336,842
C. $350,000
D. $421,053
Answer (D) is correct.
The reciprocal method involves mutual allocations of service costs among service departments. For
this purpose, a system of simultaneous equations is necessary. The total costs for the Quality Control
Department consist of $350,000 plus 25% (10,000 hours ÷ 40,000 hours) of maintenance costs. The
total costs for the Maintenance Department equal $200,000 plus 20% (7,000 hours ÷ 35,000 hours) of
quality control costs. These relationships can be expressed by the following equations:
Q = $350,000 + .25M
M = $200,000 + .2Q
To solve for Q, the second equation can be substituted into the first as follows:
Q
= $350,000 + .25($200,000 + .2Q)
Q
= $350,000 + $50,000 + .05Q
.95Q
= $400,000
Q
= $421,053
Fact Pattern: The managers of Rochester Manufacturing are discussing ways to allocate the
cost of service departments, such as Quality Control and Maintenance, to the production
departments. To aid them in this discussion, the controller has provided the following
information:
Quality Control
Maintenance Machining Assembly Total
Budgeted overhead costs
before allocation
$350,000
$200,000
Budgeted machine hours
--
--
Budgeted direct labor hours --
--
$400,000
50,000
--
$300,000 $1,250,000
--
50,000
25,000
25,000
Budgeted hours of service:
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Quality Control
--
7,000
21,000
7,000
35,000
Maintenance
10,000
-18,000
12,000
40,000
Question: 5If Rochester decides not to allocate service costs to the production departments, the overhead
allocated to each direct labor hour in the Assembly Department would be
A. $3.20
B. $3.50
C. $12.00
Answer (C) is correct.
With no allocation of service department costs, the only overhead applicable to the Assembly
Department is the $300,000 budgeted for that department. Hence, the overhead cost applied per direct
labor hour will be $12 ($300,000 budgeted overhead ÷ 25,000 hours).
D. $16.00
Fact Pattern: Longstreet Company’s Photocopying Department provides photocopy services
for both Departments A and B and has prepared its total budget using the following information
for next year:
Fixed costs
$100,000
Available capacity 4,000,000 pages
Budgeted usage
Department A
1,200,000 pages
Department B
2,400,000 pages
Variable cost
$0.03 per page
Question: 6Assume that Longstreet uses the single-rate method of cost allocation and the allocation base is
budgeted usage. How much photocopying cost will be allocated to Department B in the budget year?
A. $72,000
B. $122,000
C. $132,000
D. $138,667
Answer (D) is correct.
Department B is budgeted to use 66 2/3% of total production (2,400,000 ÷ 3,600,000), so it should be
allocated fixed costs of $66,667 ($100,000 × 66 2/3%). The variable cost allocation is $72,000
(2,400,000 pages × $.03 per page), and the total allocated is therefore $138,667 ($66,667 + $72,000).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Fact Pattern: Longstreet Company’s Photocopying Department provides photocopy services
for both Departments A and B and has prepared its total budget using the following information
for next year:
Fixed costs
$100,000
Available capacity 4,000,000 pages
Budgeted usage
Department A
1,200,000 pages
Department B
2,400,000 pages
Variable cost
$0.03 per page
Question: 7Assume that Longstreet uses the dual-rate cost allocation method, and the allocation basis is budgeted
usage for fixed costs and actual usage for variable costs. How much cost would be allocated to Department A during
the year if actual usage for Department A is 1,400,000 pages and actual usage for Department B is 2,100,000 pages?
A. $42,000
B. $72,000
C. $75,333
Answer (C) is correct.
Based on budgeted usage, Department A should be allocated 33 1/3% [1,200,000 pages ÷ (1,200,000
pages + 2,400,000 pages)] of fixed costs, or $33,333 ($100,000 × 33 1/3%). The variable costs are
allocated at $.03 per unit for 1,400,000 pages, or $42,000. The sum of the fixed and variable elements
is $75,333.
D. $82,000
Fact Pattern: M&P Tool has three service departments that support the production area.
Outlined below is the estimated overhead by department for the upcoming year:
Estimated Number of
Service Departments
Receiving
Overhead Employees
$25,000
2
35,000
2
Tool
10,000
Production Departments
1
Repair
Assembly
Bolting
25
12
The Repair Department supports the greatest number of departments, followed by the Tool
Department. Overhead cost is allocated to departments based upon the number of
employees. Question: 8If M&P uses the direct method of allocation, how much of the Repair Department’s
overhead will be allocated to the Tool Department?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. $0
Answer (A) is correct.
The direct method allocates service department costs directly to the producing departments without
recognition of services provided among the service departments. Hence, no service cost is allocated to
the Tool Department because it is a service department.
B. $875
C. $7,000
D. $11,667
Fact Pattern: M&P Tool has three service departments that support the production area.
Outlined below is the estimated overhead by department for the upcoming year:
Estimated Number of
Service Departments
Receiving
Overhead Employees
$25,000
2
35,000
2
Tool
10,000
Production Departments
1
Repair
Assembly
Bolting
25
12
The Repair Department supports the greatest number of departments, followed by the Tool
Department. Overhead cost is allocated to departments based upon the number of
employees. Question: 9If M&P uses the step-down method of allocation, the allocation from the Repair
Department to the Tool Department would be
A. $0
B. $875
Answer (B) is correct.
Under the step-down method, service costs are allocated to all departments. However, no reciprocal
allocations among service departments are performed. The process usually begins with the department
that provides the greatest percentage of its services to other service departments. Thus, the Repair
Department is the logical starting point. Given that service costs are allocated to each department
(service or production) on the basis of its proportion of employees (excluding employees in the
allocating department), the allocation of the Repair Department’s overhead to the Tool Department is
$875 {[1 employee ÷ (1 + 2 + 25 + 12)] × $35,000}.
C. $7,000
D. $11,667
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Fact Pattern: Fabricating and Finishing are the two production departments of Ewell
Company. Building Operations and Information Services are service departments that provide
support to the two production departments as well as to each other. Ewell uses departmental
overhead rates in the two production departments to allocate the service department costs to the
production departments. Square footage is used to allocate Building Operations, and computer
time is used to allocate Information Services. The costs of the service departments and relevant
operating data for the departments are as follows:
Building
Information
Operations
Services
$200,000
$ 300,000
350,000
900,000
$550,000
$1,200,000
5,000
10,000
Fabricating
Finishing
Costs:
Labor and benefit costs
Other traceable costs
Total
Operating Data:
Square feet occupied
16,000
24,000
Computer time (in hours)
200
1,200
600
Question: 10If Ewell employs the step method to allocate the costs of the service departments and if Information
Services costs are allocated first, then the total amount of service department costs (Information Services and
Building Operations) allocated to Finishing would be
A. $657,000
B. $681,600
C. $730,000
D. $762,000
Answer (D) is correct.
The step method of service department cost allocation is a sequential (but not a reciprocal) process.
These costs are allocated to other service departments as well as to users. The process usually begins
with the service department that renders the greatest percentage of its services to other service
departments. If the $1,200,000 of Information Services costs is allocated first, the allocation base is
2,000 computer hours (200 + 1,200 + 600). Thus, $120,000 [$1,200,000 × (200 ÷ 2,000)] will be
allocated to Building Operations and $360,000 [$1,200,000 × (600 ÷ 2,000)] to Finishing. The total of
the Building Operations costs to be allocated to production equals $670,000 ($550,000 + $120,000).
The allocation base will be 40,000 square feet because no costs are allocated back to Information
Services. Accordingly, the total of service costs allocated to Finishing equals $762,000 {$360,000 +
[$670,000 × (24,000 ÷ 40,000)]}.
Fact Pattern: Fabricating and Finishing are the two production departments of Ewell
Company. Building Operations and Information Services are service departments that provide
support to the two production departments as well as to each other. Ewell uses departmental
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
overhead rates in the two production departments to allocate the service department costs to the
production departments. Square footage is used to allocate Building Operations, and computer
time is used to allocate Information Services. The costs of the service departments and relevant
operating data for the departments are as follows:
Building
Information
Operations
Services
$200,000
$ 300,000
350,000
900,000
$550,000
$1,200,000
5,000
10,000
Fabricating
Finishing
Costs:
Labor and benefit costs
Other traceable costs
Total
Operating Data:
Square feet occupied
Computer time (in hours)
200
16,000
24,000
1,200
600
Question: 11If Ewell employs the direct method to allocate the costs of the service departments, then the amount
of Building Operations costs allocated to Fabricating would be
A. $140,000
B. $160,000
C. $176,000
D. $220,000
Answer (D) is correct.
The direct method does not allocate service costs to other service departments. Hence, the allocation
base is the square footage in the two production departments. Fabricating’s share is 40% (16,000 ÷
40,000) of the total cost incurred by Building Operations, or $220,000 ($550,000 × 40%).
Fact Pattern: Logo, Inc., has two service departments (the Systems Department and the
Facilities Department) that provide support to the company’s three production departments
(Machining Department, Assembly Department, and Finishing Department). The overhead costs
of the Systems Department are allocated to other departments on the basis of computer usage
hours. The overhead costs of the Facilities Department are allocated based on square feet
occupied (in thousands). Other information pertaining to Logo is as follows:
Computer
Department
Overhead Usage Hours
Square Feet
Occupied
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Systems
$200,000
300
1,000
Facilities
100,000
900
600
Machining
400,000 3,600
2,000
Assembly
550,000 1,800
3,000
Finishing
620,000 2,700
5,000
9,300
11,600
Total
Question: 12Logo employs the direct method of allocating service department costs. The overhead of the
Systems Department would be allocated by dividing the overhead amount by
A. 1,200 hours.
B. 8,100 hours.
Answer (B) is correct.
The direct method of service department allocation is the simplest. Service department costs are
allocated directly to the producing departments without regard for services rendered by service
departments to each other. Service department costs are allocated to production departments based on
an allocation base appropriate to each service department’s function. The appropriate allocation base
for the Systems Department is computer usage hours. Thus, the denominator for allocating Systems
will be the total computer hours used by the production departments (3,600 + 1,800 + 2,700 = 8,100).
C. 9,000 hours.
D. 9,300 hours.
Fact Pattern: Logo, Inc., has two service departments (the Systems Department and the
Facilities Department) that provide support to the company’s three production departments
(Machining Department, Assembly Department, and Finishing Department). The overhead costs
of the Systems Department are allocated to other departments on the basis of computer usage
hours. The overhead costs of the Facilities Department are allocated based on square feet
occupied (in thousands). Other information pertaining to Logo is as follows:
Computer
Square Feet
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
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Department
Overhead Usage Hours
Occupied
Systems
$200,000
300
1,000
Facilities
100,000
900
600
Machining
400,000 3,600
2,000
Assembly
550,000 1,800
3,000
Finishing
620,000 2,700
5,000
9,300
11,600
Total
Question: 13Logo employs the step-down method of allocating service department costs and begins with the
Systems Department. Which one of the following correctly denotes the amount of the Systems Department’s
overhead that would be allocated to the Facilities Department and the Facilities Department’s overhead charges that
would be allocated to the Machining Department?
Systems to Facilities
Facilities to Machining
A
$0 $20,000
.
B
$19,355 $20,578
.
C
$20,000 $20,000
.
D
$20,000 $24,000
.
Answer (D) is correct.
The first step in applying the step-down method is to determine the percentage of the total driver for the first
service department that is to be assigned to the other departments:
Allocate
Systems:
Computer
Hours
% of
Amount to Be
Total
Allocated
Departmental
Allocations
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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To Facilities
900
10.0%
$200,000
$ 20,000
To Machining
3,600
40.0%
200,000
80,000
To Assembly
1,800
20.0%
200,000
40,000
To Finishing
2,700
30.0%
200,000
60,000
9,000
100.0%
Totals
$200,000
The second step is to allocate the costs of the first service department ($000 omitted):
Service Depts.
Systems
Production Departments
Facilities
Machining
Assembly
Finishing
Totals before
allocation
Allocate Sys.
$200
(200)
$100
$400
$550
$620
20
80
40
60
$120
$480
$590
$680
Totals after first
allocation
$
0
The third step is to determine the percentage of the total driver for the second allocated service department
that is to be assigned to each of the remaining departments:
Allocate
Square
% of
Amount to Be
Departmental
Facilities:
Footage
Total
Allocated
Allocations
To Machining
2,000
20.0%
$120,000
24,000
To Assembly
3,000
30.0%
120,000
36,000
To Finishing
5,000
50.0%
120,000
60,000
10,000
100.0%
Totals
$120,000
The final step is to allocate the costs of the second service department:
Service
Dept.
Facilities
Production Departments
Machining
Assembly
Finishing
Totals after
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Total
first allocation
$120,000
Allocate Facil.
(120,000)
$480,000
$590,000
$680,000
$1,870,000
24,000
36,000
60,000
0
$504,000
$626,000
$740,000
$1,870,000
Totals after 2nd
allocation
$
0
Fact Pattern: Adam Corporation manufactures computer tables and has the following
budgeted indirect manufacturing cost information for next year:
Support Departments
Budgeted overhead
Operating Departments
Maintenance
Systems
Machining Fabrication
Total
$360,000
$95,000
$200,000
10%
50%
40%
100%
45%
50%
100%
$300,000 $955,000
Support work finished:
From Maintenance
From Systems
5%
Question: 14If Adam uses the step-down method, beginning with the Maintenance Department, to allocate
support department costs to production departments, the total overhead (rounded to the nearest dollar) for the
Machining Department to allocate to its products would be
A
$415,526
.
B. $422,750
C. $442,053
Answer (C) is correct.
The first step in applying the step-down method is to determine the percentage of the total driver for the first
service department that is to be assigned to the other departments:
Allocate
% of
Amount to Be
Departmental
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Maintenance:
Proportion
Total
Allocated
Allocations
To Systems
10
10.0%
$360,000
$ 36,000
To Machining
50
50.0%
360,000
180,000
To Fabrication
40
40.0%
360,000
144,000
Totals
100.0%
$360,000
The second step is to allocate the costs of the first service department:
Service Departments
Maint.
Tot. bef. allocation
Systems
$360,000
Allocate Maint.
Production Departments
(360,000)
Machining
Fabrication
Total
$ 95,000
$200,000
$300,000
$955,000
36,000
180,000
144,000
$131,000
$380,000
$444,000
Totals after first
allocation
$
0
$955,000
The third step is to determine the percentage of the total driver for the second allocated service department
that is to be assigned to each of the remaining departments:
Allocate
Systems:
Proportion
% of
Amount to Be
Departmental
Total
Allocated
Allocations
To Machining
45
47.4%
$131,000
$ 62,053
To Fabrication
50
52.6%
131,000
68,947
Totals
100.0%
$131,000
The final step is to allocate the costs of the second service department:
Service
Department
Production Departments
Systems
Machining
Fabrication
Total
$131,000
$380,000
$444,000
$955,000
62,053
68,947
0
Totals after first
allocation
Allocate Systems
(131,000)
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Totals after
second allocation
$
0
$442,053
$512,947
$955,000
D
$445,000
.
Fact Pattern: Adam Corporation manufactures computer tables and has the following
budgeted indirect manufacturing cost information for next year:
Support Departments
Budgeted overhead
Operating Departments
Maintenance
Systems
Machining Fabrication
Total
$360,000
$95,000
$200,000
10%
50%
40%
100%
45%
50%
100%
$300,000 $955,000
Support work finished:
From Maintenance
From Systems
5%
Question: 15If Adam uses the direct method to allocate support department costs to production departments, the
total overhead (rounded to the nearest dollar) for the Machining Department to allocate to its products would be
A
$418,000
.
B. $422,750
C. $442,053
D
$445,000
.
Answer (D) is correct.
The first step in applying the direct method is to determine the percentage of the total drivers for the two
service departments that are to be assigned to the production departments:
Allocate
% of
Amount to be
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Departmental
Maintenance:
Proportion
Total
Allocated
Allocations
To Machining
50
55.6%
$360,000
$200,000
To Fabrication
40
44.4%
360,000
160,000
Totals
100.0%
Allocate
$360,000
% of
Systems:
Proportion
Amount to be
Total
Departmental
Allocated
Allocations
To Machining
45
47.4%
$95,000
$45,000
To Fabrication
50
52.6%
95,000
50,000
Totals
100.0%
$95,000
The second step is to allocate the costs of the service departments:
Service Departments
Production Departments
Maint.
Systems
Machining
Fabrication
Total
$360,000
$95,000
$200,000
$300,000
$955,000
--
200,000
160,000
0
45,000
50,000
0
$445,000
$510,000
$955,000
Totals before allocation
Allocate
Maintenance
Allocate
Systems
(360,000)
--
Totals after
allocation
$
(95,000)
0
$
0
Question: 16A company has accumulated its support costs into three pools that will be allocated to numerous
products using the step-down method. Usage of each pool’s services is shown below.
Pool 1
Pool 2
Usage of Pool 1
0%
10%
8%
82%
Usage of Pool 2
6%
4%
10%
70%
Usage of Pool 3
10%
8%
10%
78%
Direct costs
$150,000
Pool 3 All Products
$80,000 $55,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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If the company allocates Pool 1’s costs first, Pool 2’s costs second, and Pool 3’s costs third, the amount of costs
allocated from Pool 2 to Pool 3 is
A. $11,875
Answer (A) is correct.
The amount of costs allocated from Pool 2 to Pool 3 can be calculated as follows:
Pool 1
Total costs before allocation
Pool 2
Pool 3
$150,000 $80,000 $55,000
Allocate Pool 1’s costs
(150,000)
Total after allocating Pool 1’s costs
0
Allocate Pool 2’s costs
15,000*
95,000
(95,000)
12,000**
67,000
11,875***
*$150,000 × [10% ÷ (10% + 8% + 82%)] = $15,000
**$150,000 × [8% ÷ (10% + 8% + 82%)] = $12,000
***$95,000 × [10% ÷ (10% + 70%)] = $11,875
B. $11,047
C. $9,500
D. $8,000
Question: 17A company has two supporting departments, Maintenance and Information Systems, and two
operating departments, the Machining Department and the Assembly Department. Each department’s overhead costs
are shown below.
Information
Maintenance
Overhead costs
$6,300,000
Maintenance hours
Information Systems hours
Systems
Machining Assembly
$1,452,150 $4,000,000 $2,000,000
-
4,000
6,000
10,000
500
-
4,000
500
Using the step-down method, the total overhead costs allocated to each operating department are
Machining Assembly
A. $8,300,800 $5,451,350
Answer (A) is correct.
Using the step-down method, the first step is to allocate the $6,300,000 from Maintenance to the other
three departments based on the 20,000 maintenance hours worked for the other three departments
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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(4,000 + 6,000 + 10,000). Thus, 20% (4,000 ÷ 20,000) of the overhead cost, or $1,260,000, would be
allocated to Information Systems. Another 30% (6,000 ÷ 20,000), or $1,890,000, would go to
Machining, while the remaining 50% (10,000 ÷ 20,000), or $3,150,000, would go to Assembly. With
the addition of $1,260,000 in the previous step, the total for Information Systems becomes $2,712,150
($1,452,150 + $1,260,000). The amount of $2,712,150 will be allocated to the other two departments at
an 8/9 to 1/9 ratio (4,000 hours ÷ 4,500 hours to 500 hours ÷ 4,500 hours). Multiplying $2,712,150 by
8/9 equals $2,410,800 for Machining. Multiplying $2,712,150 by 1/9 equals $301,350 for Assembly.
Adding all of the elements of cost together for each of the two operating departments results in
$8,300,800 ($4,000,000 + $1,890,000 + $2,410,800) for Machining and $5,451,350 ($2,000,000 +
$3,150,000 + $301,350) for Assembly.
B. $7,653,300 $6,098,850
C. $8,187,025 $5,565,125
D. $5,451,350 $8,300,800
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Study Unit 8: Operational Efficiency and Business Process
Performance
Subunit 1: Just-in-Time Inventory and Lean Manufacturing (Lean
Resource Management)
Question: 1The benefits of a just-in-time system for raw materials usually include
A. Elimination of nonvalue-adding operations.
Answer (A) is correct.
Nonvalue-adding activities are those that do not add to customer value or satisfy an organizational
need. Inventory activities are inherently nonvalue-adding. Thus, a system, such as JIT, that promotes
lean production and reduces inventory and its attendant procedures (storage, handling, etc.) also
reduces nonvalue-adding activities.
B. Increase in the number of suppliers, thereby ensuring competitive bidding.
C. Maximization of the standard delivery quantity, thereby lessening the paperwork for each delivery.
D. Decrease in the number of deliveries required to maintain production.
Question: 2A company changed from a traditional manufacturing philosophy to a just-in-time philosophy. What
are the expected effects of this change on inventory turnover and inventory as a percentage of total assets reported
on the balance sheet?
Inventory Inventory
Turnover Percentage
A. Decrease Decrease
B. Decrease Increase
C. Increase Decrease
Answer (C) is correct.
A JIT system is intended to minimize inventory. Inventory should be delivered or produced just in time
to be used. Thus, JIT increases inventory turnover (cost of sales ÷ average inventory) and decreases
inventory as a percentage of total assets.
D. Increase Increase
Question: 3Which trends in purchasing and carrying costs are most conducive to switching from a traditional
inventory ordering system to a just-in-time ordering system?
Cost per
Inventory Unit
Purchase Order Carrying Costs
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Increasing Increasing
B. Decreasing Increasing
Answer (B) is correct.
A JIT system is intended to minimize inventory. Thus, if inventory carrying costs are increasing, a JIT
system becomes more cost effective. Moreover, purchases are more frequent in a JIT system.
Accordingly, a decreasing cost per purchase order is conducive to switching to a JIT system.
C. Decreasing Decreasing
D. Increasing Decreasing
Question: 4A manufacturing company is attempting to implement a just-in-time (JIT) purchase policy system by
negotiating with its primary suppliers to accept long-term purchase orders which result in more frequent deliveries
of smaller quantities of raw materials. If the JIT purchase policy is successful in reducing the total inventory costs of
the manufacturing company, which of the following combinations of cost changes would be most likely to occur?
Cost Category
Cost Category
to Increase
to Decrease
A. Purchasing costs Stockout costs
B. Purchasing costs Quality costs
C. Quality costs Ordering costs
D. Stockout costs Carrying costs
Answer (D) is correct.
The objective of a JIT system is to reduce carrying costs by eliminating inventories and increasing the
deliveries made by suppliers. Ideally, shipments are received just in time to be incorporated into the
manufacturing process. This system increases the risk of stockout costs because the inventory buffer is
reduced or eliminated.
Question: 5The effectiveness of a JIT system is often facilitated by the elimination of some common forms of
internal control. The elimination of which internal control is usually acceptable with a JIT system?
A. Preparation of hard copy receiving reports.
Answer (A) is correct.
Receiving departments are often eliminated with a JIT system so receiving reports are not needed.
Also, the quantity received should be exactly equal to immediate production needs.
B. Voucher approval prior to paying accounts payable.
C. Two signatures required on large checks.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Locked doors on production areas.
Question: 6Just-in-time manufacturing practices are based in part on the belief that
A. High inventory levels provide greater flexibility in production scheduling.
B. Attempting to reduce inventory to a consistently low level can lead to “panic” situations.
C. Goods should be “pulled” through the production process, not “pushed.”
Answer (C) is correct.
Just-in-time (JIT) manufacturing is a pull system; items are pulled through production by current
demand, not pushed through by anticipated demand as in traditional manufacturing setups.
D. Beefed-up internal control in the central warehouse can greatly enhance productivity in the production
areas.
Question: 7Companies that adopt just-in-time purchasing systems often experience
A. A reduction in the number of suppliers.
Answer (A) is correct.
The objective of JIT is to reduce carrying costs by eliminating inventories and increasing the deliveries
made by suppliers. Ideally, shipments of raw materials are received just in time to be incorporated into
the manufacturing process. The focus of quality control under JIT is the prevention of quality
problems. Quality control is shifted to the supplier. JIT companies typically do not inspect incoming
goods; the assumption is that receipts are of perfect quality. Suppliers are limited to those who
guarantee perfect quality and prompt delivery.
B. Fewer deliveries from suppliers.
C. A greater need for inspection of goods as the goods arrive.
D. Less need for linkage with a vendor’s computerized order entry system.
Question: 8A company changed from a traditional manufacturing operation with a job-order costing system to a
just-in-time operation with a backflush costing system. What is(are) the expected effect(s) of these changes on the
company’s inspection costs and recording detail of costs tracked to jobs in process?
Inspection Detail of Costs
Costs Tracked to Jobs
A. Decrease Decrease
Answer (A) is correct.
In a JIT system, materials go directly into production without being inspected. The assumption is that
the vendor has already performed all necessary inspections. The minimization of inventory reduces the
number of suppliers, storage costs, transaction costs, etc. Backflush costing eliminates the traditional
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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sequential tracking of costs. Instead, entries to inventory may be delayed until as late as the end of the
period. For example, all product costs may be charged initially to cost of sales, and costs may be
flushed back to the inventory accounts only at the end of the period. Thus, the detail of cost accounting
is decreased.
B. Decrease Increase
C. Increase Decrease
D. Increase Increase
Question: 9Just-in-time production is also called
A. Kaizen.
B. Lean manufacturing.
Answer (B) is correct.
Lean manufacturing, or lean processes, expands the concept of just-in-time. The central focus is on
accomplishing more with less resources.
C. Activity-based management.
D. Backflush costing.
Question: 10Which of the following is not a benefit of lean production?
A. Reduced setup time.
B. Lower central support costs.
C. Lower training costs.
Answer (C) is correct.
Since every worker in a manufacturing cell must be able to operate every piece of machinery in the
cell, reduced training costs do not necessarily accompany the deployment of lean production.
D. Improved on-time delivery.
Question: 11Which of the following internal controls is not one typically eliminated when a just-in-time
inventory system is introduced?
A. Sophisticated inventory tracking system.
B. Central receiving dock.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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C. Statistical methods for quality assurance.
Answer (C) is correct.
Under a JIT system, the quality of parts provided by suppliers is verified by use of statistical controls
rather than inspection of incoming goods. Storage, counting, and inspection are eliminated in an effort
to perform only value-adding work.
D. Hard copy receiving report.
Question: 12The physical reconfiguration of equipment that often accompanies the institution of a just-in-time
manufacturing regime is described as the creation of
A. Cells.
Answer (A) is correct.
Plant layout in a JIT-lean production environment is not arranged by functional department or process
but by manufacturing cells (work cells). Cells are sets of machines, often grouped in semicircles, that
produce a given product or product type.
B. A pull system.
C. Electronic Data Interchange.
D. Tickets.
Question: 13Which of the following terms is not connected with the employment of just-in-time (JIT)
manufacturing?
A. Cells.
B. Kanban.
C. Lean production.
D. Safety stock.
Answer (D) is correct.
Safety stock involves always keeping enough raw materials on hand to overcome the effects of an
interruption in supply. In a JIT system, manufacturers are completely dependent upon the reliability of
their suppliers in delivering raw materials as they are needed. Keeping safety stock undercuts the entire
philosophy of JIT.
Question: 14Which of the following is not a correct comparison of a just-in-time system with a traditional
system?
Traditional
Just-in-Time
A. Longer lead times Shorter lead times
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B. Inventory is an asset Inventory is a liability
C. Some scrap tolerated Zero defects desired
D. Lot size based on immediate need Lot size based on formulas
Answer (D) is correct.
Lot sizes based on immediate need are typical of just-in-time systems, while lot sizes based on
formulas are characteristic of traditional inventory management systems.
Question: 15A company manufactures its products in a highly automated, just-in-time environment and uses a
standard cost system. The variance that would cause the most concern would be a
A. 10% unfavorable fixed overhead spending variance caused by an unanticipated raise given to production
supervisors.
B. 5% unfavorable material quantity variance caused by low-quality materials that resulted in reworks.
Answer (B) is correct.
A just-in-time inventory system is characterized by a low amount of waste and inventories as well as a
high level of quality. Issues with low-quality materials would be of particular concern because they
may slow production, causing ripple effects throughout the manufacturing system.
C. 6% unfavorable labor efficiency variance caused by the hiring of lower-skilled part-time workers.
D. 7% unfavorable variable overhead spending variance caused by the part-time workers using more
supplies than predicted.
Question: 16Which one of the following is not an expected benefit of implementing a just-in-time (JIT)
production system?
A. Lower total storage costs.
B. Lower total setup costs.
Answer (B) is correct.
Production setup costs and times per lot are reduced by a JIT production system. However, because
smaller lots are used, total setup costs are not necessarily lower using a JIT production system.
C. Lower manufacturing lead time.
D. Lower total rework cost.
Question: 17The work cell concept relates to
A. A just-in-time production system.
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Answer (A) is correct.
To implement a JIT inventory or lean production system, the factory is reorganized around what are
called manufacturing cells. In a cellular layout, each cell is a miniature manufacturing plant. Cells are
sets of machines, often grouped in semicircles, that produce a given product or product family.
Because of the free flow of materials in cellular manufacturing, it has the ability to produce products
just in time.
B. Material requirements planning.
C. Throughput costing.
D. Enterprise resource planning.
Question: 18A company is considering implementing a just-in-time system and would like to test the system on
its packaging materials purchases. An analysis indicated that the company could reduce its carrying costs by $5,000
each month if the just-in-time system was implemented. Before making this decision, the company should also
consider a possible change in all of the following costs except an increase in the cost of
A. Ordering.
B. Packaging labor.
Answer (B) is correct.
Packaging labor should not increase with a just-in-time system. The new system should only impact
the different facets of direct material costs, not labor costs. The company does not need to consider a
possible change in labor costs.
C. Packaging materials.
D. Stockouts.
Question: 19A company recently installed just-in-time production and purchasing systems. If the company’s
experience is similar to that of other companies, the company will likely
A. Reduce the number of suppliers with which it does business.
Answer (A) is correct.
The use of a just-in-time production system generally involves developing relationships with a
minimum number of suppliers that reliably deliver high-quality products.
B. Increase the size of individual orders of raw materials.
C. Increase the dollar investment in finished goods inventory.
D. Be less reliant on sales orders as “trigger” mechanisms for production runs.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 20A company is planning to implement a just-in-time (JIT) inventory management system. All of the
following are benefits expected from implementing JIT except
A. Lower investment in inventory.
B. Lower obsolescence and other carrying costs.
C. Higher inventory turnover.
D. Increased demand.
Answer (D) is correct.
A company’s demand for its products is unaffected by its inventory management method.
Question: 21All of the following are benefits of just-in-time manufacturing except that it
A. Can significantly reduce inventory.
B. Helps produce a higher-quality product in less time.
C. Allows for minor defects without shutting down operations.
Answer (C) is correct.
Since there is no safety stock with a JIT system, minor defects will immediately halt production.
D. Helps eliminate rework costs.
Subunit 2: Enterprise Resource Planning and Outsourcing
Question: 1In contrast to just-in-time manufacturing, materials requirements planning is a(n)
A. Push system.
Answer (A) is correct.
MRP is a push system, that is, the demand for raw materials is driven by the forecasted demand for the
final product, which can be programmed into the computer. This is in contrast with just-in-time
manufacturing, which is a pull system, meaning items are pulled through production by current
demand, not pushed through by anticipated demand.
B. Pull system.
C. Automated system.
D. Manual system.
Question: 2Materials requirements planning (MRP) sometimes results in
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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A. Longer idle periods.
B. Less flexibility in responding to customers.
C. Increased inventory carrying costs.
D. Decreased setup costs.
Answer (D) is correct.
Among the benefits of MRP are reduced idle time, lower setup costs, lower inventory carrying costs,
and increased flexibility in responding to market changes.
Question: 3A company uses material requirements planning (MRP) and manufactures a product with the
following product structure tree.
The company has just received an order for 100 units of X, the finished product. The company has 20 units of X,
100 units of B, and 50 units of E in inventory. How many units of E must the company purchase in order to fill the
order?
A. 1,000
B. 950
C. 800
D. 550
Answer (D) is correct.
The company already has 20 units of the finished product in inventory so 80 will need to be
manufactured to fill this order. The amount of Subunit B that must be purchased is [(80 × 5) – 100 on
hand] = 300. The amount of Subunit E that must be purchased is therefore [(300 × 2) – 50 on hand] =
550.
Question: 4The manufacturing concept that relates demand forecasts to specific dates for completion is
A. Master production schedule.
Answer (A) is correct.
The yearly/quarterly/monthly numbers and styles of finished goods called for in the demand forecasts
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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included in the operational plans must be turned into specific dates for completion and availability for
shipment to the customer. This is the task of the master production schedule (MPS).
B. Materials requirements planning.
C. Manufacturing resource planning.
D. Bill of materials.
Question: 5Which of the following is not a typical benefit of an outsourcing arrangement?
A. Reduced costs.
B. Access to technology.
C. Avoidance of risk of obsolescence.
D. Increased control over a necessary function.
Answer (D) is correct.
Outsourcing results in a loss of control over the outsourced function.
Question: 6Which of the following is not a goal of materials requirements planning?
A. Right part.
B. Right quantity.
C. Right customer.
Answer (C) is correct.
The three basic goals of MRP are the right part in the right quantity at the right time.
D. Right time.
Question: 7One reason to outsource is so a firm can focus on its
A. Customers.
B. Suppliers.
C. Undifferentiated activities.
D. Core competencies.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Answer (D) is correct.
Firms may gain a competitive advantage by outsourcing those activities which can be performed more
efficiently, and thus at lower cost, by outside providers. Doing this allows the company to expend its
effort on those activities which it performs comparatively well, referred to as its core competencies.
Question: 8The following MRP (material requirements planning) diagram describes the assembly of Finished
Good A.
The current inventory levels are shown below.
A: 0 B: 50 C: 60 D: 100 E: 120
If the company has just received an order for 500 units of A, how many units of E must the company purchase?
A. 3,000
B. 2,880
C. 2,820
D. 2,700
Answer (D) is correct.
Each unit of A requires 2 units of C, and in turn, each unit of C requires 3 units of E. Since there is no
inventory of A, the company must assemble all 500 units from the order. These 500 units require a
total of 1,000 units of C (500 units of A × 2 units of C). Since there are 60 units of C in the inventory,
the company would need to assemble 940 units of C. These 940 units of C require 2,820 units of E
(940 units of C × 3 units of E). Since there are 120 units of E in the inventory, the company only needs
to purchase an additional 2,700 units of E (2,820 – 120).
Question: 9A manufacturer needs to produce 100 wreaths in November to meet customer demand. The
manufacturing facility has the capacity to produce 120 wreaths. The bill of materials for wreaths is as follows.
Material Quantity November 1 Inventory Level
Frame
1
Pine ribbon 3 feet
100
15 feet
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Pinecones
6
24
To produce 1 foot of pine ribbon, the manufacturer needs 4 units of TRX and 2 units of RBX. On November 1, the
manufacturer has 80 units of TRX and 110 units of RBX on hand. Using material requirements planning, how many
units of TRX will the manufacturer need to purchase in November to complete the orders for wreaths?
A. 1,020
B. 1,060
Answer (B) is correct.
To produce 100 wreaths, 300 feet of pine ribbon are needed (3 feet per wreath). Beginning inventory
already includes 15 feet, so 285 feet need to be produced (300 – 15). To produce 285 feet of pine
ribbon, 1,140 TRX units are needed (4 units of TRX × 285 feet of pine ribbon). Beginning inventory
already includes 80 units, so 1,060 units of TRX need to be purchased (1,140 – 80).
C. 1,200
D. 1,360
Question: 10An advantage of an enterprise resource planning system is that
A. It can usually be installed by organizations of all sizes.
B. The system can be easily customized to suit the unique needs of the organization.
C. The comprehensiveness of the system reduces resistance to change.
D. Its implementation improves business processes.
Answer (D) is correct.
An enterprise resource planning system allows a company to determine what hiring decisions might
need to be made or whether a company should invest in new capital assets. It also improves
productivity, increases efficiencies, decreases costs, and streamlines processes.
Question: 11Enterprise resource planning (ERP) systems integrate
A. Financial and non-financial information from an organization’s business processes.
Answer (A) is correct.
ERP is a software platform designed to integrate enterprise-wide information systems by creating one
database linked to all of an organization’s applications and subsystems to share data and coordinate
their activities. ERP is used to plan and maintain records of resources including finances, labor
capabilities and capacity, materials, and property.
B. Financial information among different organizations only.
C. Financial and human resources systems only.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. Financial and non-financial information from an organization’s accounting processes.
Question: 12In a traditional ERP system, the receipt of a customer order may result in
I. Customer tracking of the order’s progress
II. Automatic replenishment of inventory by a supplier
III. Hiring or reassigning of employees
IV. Automatic adjustment of output schedules
A. I, II, and IV only.
B. I and III only.
C. III and IV only.
Answer (C) is correct.
The traditional ERP system is one in which subsystems share data and coordinate their activities. Thus,
if sales receives an order, it can quickly verify that inventory is sufficient to notify shipping to process
the order. Otherwise, production is notified to manufacture more of the product, with a consequent
automatic adjustment of output schedules. If materials are inadequate for this purpose, the system will
issue a purchase order. If more labor is needed, human resources will be instructed to reassign or hire
employees. However, the subsystems in a traditional ERP system are internal to the organization.
Hence, they are often called back-office functions. The information produced is principally (but not
exclusively) intended for internal use by the organization’s managers.
The current generation of ERP software (ERP II) has added front-office functions. Consequently, ERP
II (but not traditional ERP) is capable of customer tracking of the order’s progress and automatic
replenishment of inventory by a supplier.
D. I, II, III, and IV.
Question: 13A primary advantage of an ERP system is
A. Program-data dependence.
B. Data redundancy.
C. Separate data updating for different functions.
D. Centralization of data.
Answer (D) is correct.
An advantage of an ERP system is the elimination of data redundancy through the use of a central
database. In principle, information about an item of data is stored once, and all functions have access to
it. Thus, when the item (such as a price) is updated, the change is effectively made for all functions.
The result is reliability (data integrity).
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Question: 14An enterprise-wide resource planning (ERP) system integrates the organization’s computerized
subsystems and may also provide links to external parties. An advantage of ERP is that
A. The reengineering needed for its implementation should improve business processes.
Answer (A) is correct.
The benefits of ERP may significantly derive from the business process reengineering that is needed
for its implementation. Using ERP software that reflects the best practices forces the linked subunits in
the organization not only to redesign and improve their processes but also to conform to one standard.
B. Customizing the software to suit the unique needs of the organization will facilitate upgrades.
C. It can be installed by organizations of all sizes.
D. The comprehensiveness of the system reduces resistance to change.
Question: 15Enterprise resource planning (ERP) belongs to which of the following categories of IT?
A. Applications.
Answer (A) is correct.
Applications are programs that perform specific tasks related to business process. ERP belongs to the
category of applications.
B. External connections.
C. IT management.
D. Technical infrastructure.
Question: 16Buy-side, sell-side, back-office, and enterprise resource planning (ERP) are subcategories of which
layer of IT?
A. Technical infrastructure.
B. IT management.
C. External connections.
D. Applications.
Answer (D) is correct.
Applications are programs that perform specific tasks related to processes. They may be transactional
or support applications. Transactional applications perform buy-side tasks (e.g., procurement), sell-side
tasks (e.g., order processing), and back-office tasks (e.g., invoicing payables and recording
receivables). ERP is software that integrates some of the other functions.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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Subunit 3: Theory of Constraints and Throughput
Question: 1A company manufactures three products at its highly automated factory. The products are very
popular, with demand far exceeding the company’s ability to supply the marketplace. To maximize profit,
management should focus on each product’s
A. Gross margin.
B. Segment margin.
C. Contribution margin ratio.
D. Contribution margin per machine hour.
Answer (D) is correct.
When demand far exceeds a company’s ability to supply the marketplace, management will want to
maximize its profits per unit of scarce resource. If the scarce resource is raw materials, the products
that provide the greatest contribution margin per unit of raw materials are the products to emphasize. If
machine hours are the constraint, profits are maximized by emphasizing the contribution margin per
machine hour.
Question: 2Three of the basic measurements used by the theory of constraints (TOC) are
A. Gross margin (or gross profit), return on assets, and total sales.
B. Number of constraints (or subordinates), number of nonconstraints, and operating leverage.
C. Throughput (or throughput contribution), inventory (or investments), and operational expense.
Answer (C) is correct.
Theory of constraints (TOC) analysis describes three basic measurements: throughput contribution
(sales – direct materials), investments (raw materials; work-in-process; finished goods; R&D costs;
and property, plant, and equipment), and operating costs (all costs except direct materials).
D. Fixed manufacturing overhead per unit, fixed general overhead per unit, and unit gross margin (or gross
profit).
Question: 3Under throughput costing, the only cost considered to be truly variable in the short run is
A. Direct materials.
Answer (A) is correct.
Throughput costing, also called supervariable costing, recognizes only direct materials costs as being
truly variable and thus relevant to the calculation of throughput margin.
B. Direct labor.
C. Manufacturing overhead.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. All manufacturing costs are considered variable.
Question: 4A manufacturer produces a single product that sells for $150 per unit. The product is processed
through the Cutting and Finishing Departments. Additional data for these departments are as follows:
Cutting
Finishing
Annual capacity (36,000 direct labor hours available in each department)
180,000 units
135,000 units
Current production rate (annualized)
108,000 units
108,000 units
$1,296,000
$1,944,000
864,000
1,296,000
Fixed manufacturing overhead
Fixed selling and administrative expense
Direct materials cost per unit
45
15
The current production rate is the budgeted rate for the entire year. Direct labor employees earn $20 per hour, and
the company has a “no layoff” period in effect. What is the amount of the throughput contribution per unit as
computed using the theory of constraints?
A. $90.00
Answer (A) is correct.
Throughput costing, sometimes called supervariable costing, recognizes only direct materials costs as
being truly variable and thus relevant to the calculation of throughput margin (throughput
contribution). All other manufacturing costs are ignored because they are considered fixed in the short
turn. For the manufacturer’s single product, the throughput margin is therefore $90 ($150 selling price
– $45 direct materials in Cutting – $15 direct materials in Finishing).
B. $76.67
C. $46.67
D. $26.67
Question: 5A manufacturer can sell its single product for $660. Below are the cost data for the product:
Direct materials
$170
Direct labor
225
Manufacturing overhead
90
The relevant margin amount when beginning a theory of constraints (TOC) analysis is
A. $490
Answer (A) is correct.
A theory of constraints (TOC) analysis proceeds from the assumption that only direct materials costs
are truly variable in the short run. This is called throughput, or supervariable, costing. The relevant
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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margin amount is throughput margin, which equals price minus direct materials. Thus, the relevant
margin amount for this manufacturer is $490 ($660 – $170).
B. $345
C. $265
D. $175
Question: 6The immediate goal of a theory of constraints (TOC) analysis is to
A. Maximize the efficiency of the entire production process.
B. Minimize direct materials cost.
C. Maximize contribution margin through the constraint.
Answer (C) is correct.
A basic principle of TOC analysis is that short-term profit maximization requires maximizing the
contribution margin through the constraint, called the throughput margin or throughput contribution.
D. Smooth production flow to eliminate backup in the system.
Fact Pattern: Bakker Industries sells three products (Products 611, 613, and 615) that it
manufactures in a factory consisting of one department. Both labor and machine time are applied
to the products. Bakker’s management is planning its production schedule for the next several
months. There are labor shortages in the community. Some of the machines will be out of service
for extensive overhauling. Available machine and labor time for each of the next 6 months is
listed below.
Monthly Capacity Availability
Normal machine capacity in machine hours
3,500
Capacity of machines being repaired in machine hours
(500)
Available machine capacity in machine hours
3,000
Labor capacity in direct labor hours
4,000
Available labor in direct labor hours
3,700
Labor and Machine
Specifications per Unit of Product
Product
611
Labor and Machine Time
Direct labor hours
2
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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613
615
Machine hours
2
Direct labor hours
1
Machine hours
1
Direct labor hours
2
Machine hours
2
The Sales Department’s forecast of product demand over the next 6 months is presented below.
Product
Monthly Sales Volume (in units)
611
500
613
400
615
1,000
Bakker’s inventory levels will not be increased or decreased during the next 6 months. The unit
price and cost data valid for the next 6 months are presented below.
Product
611
613
615
Unit costs:
Direct material
$
7 $ 13
$ 17
Direct labor
12
6
12
Variable overhead
27
20
25
Fixed overhead
15
10
32
Variable selling
3
2
4
$196 $123
$167
Unit selling price
Question: 7What is the excess (deficiency) for machine hours?
A. (700) hours.
B. (400) hours.
Answer (B) is correct.
The excess (deficiency) for machine hours in a given department is found by initially multiplying
machine hours required per unit for that product by demand for that product. In this case, the total
would be 1,000 for 611, 400 for 613, and 2,000 for 615. The next step is to add these numbers together
to get 3,400, and subtract that from machine hours available, 3,000. Therefore, the excess (deficiency)
for machine hours would be a 400-hour deficiency (3,000 hours – 3,400 hours).
C. 0 hours.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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D. 1,100 hours.
Fact Pattern: Bakker Industries sells three products (Products 611, 613, and 615) that it
manufactures in a factory consisting of one department. Both labor and machine time are applied
to the products. Bakker’s management is planning its production schedule for the next several
months. There are labor shortages in the community. Some of the machines will be out of service
for extensive overhauling. Available machine and labor time for each of the next 6 months is
listed below.
Monthly Capacity Availability
Normal machine capacity in machine hours
3,500
Capacity of machines being repaired in machine hours
(500)
Available machine capacity in machine hours
3,000
Labor capacity in direct labor hours
4,000
Available labor in direct labor hours
3,700
Labor and Machine
Specifications per Unit of Product
Product
Labor and Machine Time
611
613
615
Direct labor hours
2
Machine hours
2
Direct labor hours
1
Machine hours
1
Direct labor hours
2
Machine hours
2
The Sales Department’s forecast of product demand over the next 6 months is presented below.
Product
Monthly Sales Volume (in units)
611
500
613
400
615
1,000
Bakker’s inventory levels will not be increased or decreased during the next 6 months. The unit
price and cost data valid for the next 6 months are presented below.
Product
611
613
615
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Unit costs:
Direct material
$
7 $ 13
$ 17
Direct labor
12
6
12
Variable overhead
27
20
25
Fixed overhead
15
10
32
Variable selling
3
2
4
$196 $123
$167
Unit selling price
Question: 8What is the excess (deficiency) for labor hours each month?
A. (100) hours.
B. 300 hours.
Answer (B) is correct.
The excess (deficiency) for labor hours in a given department is found by initially multiplying the
labor hours required to produce a product by the demand for that product. The totals would then be
1,000 for product 611, 400 for product 613, and 2,000 for product 615. The totals are then added
together to get 3,400 hours. This number is then subtracted from labor hours available, 3,700, to get an
excess of 300 labor hours.
C. 700 hours.
D. 1,800 hours.
Fact Pattern: Bakker Industries sells three products (Products 611, 613, and 615) that it
manufactures in a factory consisting of one department. Both labor and machine time are applied
to the products. Bakker’s management is planning its production schedule for the next several
months. There are labor shortages in the community. Some of the machines will be out of service
for extensive overhauling. Available machine and labor time for each of the next 6 months is
listed below.
Monthly Capacity Availability
Normal machine capacity in machine hours
Capacity of machines being repaired in machine hours
3,500
(500)
Available machine capacity in machine hours
3,000
Labor capacity in direct labor hours
4,000
Available labor in direct labor hours
3,700
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Labor and Machine
Specifications per Unit of Product
Product
Labor and Machine Time
611
613
615
Direct labor hours
2
Machine hours
2
Direct labor hours
1
Machine hours
1
Direct labor hours
2
Machine hours
2
The Sales Department’s forecast of product demand over the next 6 months is presented below.
Product
Monthly Sales Volume (in units)
611
500
613
400
615
1,000
Bakker’s inventory levels will not be increased or decreased during the next 6 months. The unit
price and cost data valid for the next 6 months are presented below.
Product
611
613
615
Unit costs:
Direct material
$
7 $ 13
$ 17
Direct labor
12
6
12
Variable overhead
27
20
25
Fixed overhead
15
10
32
Variable selling
3
2
4
$196 $123
$167
Unit selling price
Question: 9What is product 615’s contribution per machine hour?
A. $54.50
Answer (A) is correct.
The contribution per machine hour of a given product is found by initially calculating the contribution
margin. Product 615 has a selling price of $167 and variable costs of $58. This gives a contribution
margin of $109 ($167 – $58). The contribution per machine hour is then found by dividing the
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
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contribution per unit by the machine hours required to produce the product, or $109 divided by 2 hours
to give a contribution per machine hour of $54.50.
B. $58
C. $109
D. $167
Fact Pattern: Bakker Industries sells three products (Products 611, 613, and 615) that it
manufactures in a factory consisting of one department. Both labor and machine time are applied
to the products. Bakker’s management is planning its production schedule for the next several
months. There are labor shortages in the community. Some of the machines will be out of service
for extensive overhauling. Available machine and labor time for each of the next 6 months is
listed below.
Monthly Capacity Availability
Normal machine capacity in machine hours
3,500
Capacity of machines being repaired in machine hours
(500)
Available machine capacity in machine hours
3,000
Labor capacity in direct labor hours
4,000
Available labor in direct labor hours
3,700
Labor and Machine
Specifications per Unit of Product
Product
Labor and Machine Time
611
613
615
Direct labor hours
2
Machine hours
2
Direct labor hours
1
Machine hours
1
Direct labor hours
2
Machine hours
2
The Sales Department’s forecast of product demand over the next 6 months is presented below.
Product
Monthly Sales Volume (in units)
611
500
613
400
615
1,000
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Bakker’s inventory levels will not be increased or decreased during the next 6 months. The unit
price and cost data valid for the next 6 months are presented below.
Product
611
613
615
Unit costs:
Direct material
$
7 $ 13
$ 17
Direct labor
12
6
12
Variable overhead
27
20
25
Fixed overhead
15
10
32
Variable selling
3
2
4
$196 $123
$167
Unit selling price
Question: 10If Bakker’s strategy is to maximize dollar profits, how many units of product 615 will be produced?
A. 400 units.
B. 500 units.
C. 800 units.
Answer (C) is correct.
When a company has a scarce resource machine hour capacity, the company should maximize
contribution per machine hour to maximize overall profits. Because product 615 has the lowest
contribution per machine hour of the three products, product 615 will be produced using the remaining
hours after product 613 and product 611 have been produced to equal demand. Therefore, the 400
hours needed to produce product 613 and the 1,000 hours needed to produce product 611 are
subtracted from the 3,000 available machine hours. This leaves a total of 1,600 machine hours for
product 615, which equates to 800 units being produced.
D. 1,000 units.
Fact Pattern: Bakker Industries sells three products (Products 611, 613, and 615) that it
manufactures in a factory consisting of one department. Both labor and machine time are applied
to the products. Bakker’s management is planning its production schedule for the next several
months. There are labor shortages in the community. Some of the machines will be out of service
for extensive overhauling. Available machine and labor time for each of the next 6 months is
listed below.
Monthly Capacity Availability
Normal machine capacity in machine hours
3,500
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
Capacity of machines being repaired in machine hours
(500)
Available machine capacity in machine hours
3,000
Labor capacity in direct labor hours
4,000
Available labor in direct labor hours
3,700
Labor and Machine
Specifications per Unit of Product
Product
Labor and Machine Time
611
613
615
Direct labor hours
2
Machine hours
2
Direct labor hours
1
Machine hours
1
Direct labor hours
2
Machine hours
2
The Sales Department’s forecast of product demand over the next 6 months is presented below.
Product
Monthly Sales Volume (in units)
611
500
613
400
615
1,000
Bakker’s inventory levels will not be increased or decreased during the next 6 months. The unit
price and cost data valid for the next 6 months are presented below.
Product
611
613
615
Unit costs:
Direct material
$
7 $ 13
$ 17
Direct labor
12
6
12
Variable overhead
27
20
25
Fixed overhead
15
10
32
Variable selling
3
2
4
$196 $123
$167
Unit selling price
Question: 11If Bakker’s strategy is to maximize total profits, what is the total contribution?
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
A. $113,150
B. $193,500
Answer (B) is correct.
The number of units being produced for each product multiplied by the contribution margin of the
respective product will equate to the contribution of that product. The accumulation of the product
contributions will give the total contribution of a department:
Product 611 (500 × $147) $ 73,500
Product 613 (400 × $82)
32,800
Product 615 (800 × $109)
87,200
$193,500
When a company has a scarce resource machine hour capacity, the company should maximize
contribution per machine hour to maximize overall profits. Because product 615 has the lowest
contribution per machine hour of the three products, product 615 will be produced using the remaining
hours after product 613 and product 611 have been produced to equal demand. Therefore, the 400
hours needed to produce product 613 and the 1,000 hours needed to produce product 611 are
subtracted from the 3,000 available machine hours. This leaves a total of 1,600 machine hours for
product 615, which equates to 800 units being produced.
C. $215,300
D. $280,800
Question: 12Below are data concerning the hours spent by a manufacturer’s two products in its two processes.
Assembly Painting
Product A 21
14
Product B 32
8
The constraint is
A. Product A.
B. Product B in Assembly.
C. The assembly activity.
Answer (C) is correct.
In theory of constraints (TOC) analysis, the constraint (bottleneck) operation is the slowest part of the
process. It can usually be identified as the one where work-in-process backs up the most. Of this
manufacturer’s two operations, the one that requires the most total time is assembly.
‫ﻛﻝ ﺍﻟﻛﺗﺏ ﻭﺍﻻﺳﺋﻠﻪ ﺍﻟﻠﻲ ﺗﺣﺗﺎﺟﻭﻫﺎ ﺣﺗﻼﻗﻭﻫﺎ ﻋﻠﻰ ﺍﻟﻘﻧﺎﺗﻳﻥ ﺩﻭﻝ‬
https://t.me/CMA_part1
https://t.me/CMA_part2
D. Cannot be determined from the information given.
Question: 13A company produces two components: A-1 and A-2. The unit throughput contribution margins for
A-1 and A-2 are $150 and $300, respectively. Each component must proceed through two processes: Operation 1
and Operation 2. The capacity of Operation 1 is 180 machine hours, with A-1 and A-2 requiring 1 hour and 3 hours,
respectively. Furthermore, the company can sell only 45 units of A-1 and 100 units of A-2. However, the company
is considering expanding Operation 1’s capacity by 90 machine hours at a cost of $80 per hour. Assuming that
Operation 2 has sufficient capacity to handle any additional output from Operation 1, the company should produce
Units of A-1 Units of A-2
A. 180 0
B. 45 100
C. 45 75
Answer (C) is correct.
A-1’s throughput contribution margin per unit of the scarce resource (the internal binding constraint) is
$150 ($150 UCM ÷ 1 machining hour). A-2’s throughput contribution margin per unit of the scarce
resource is $100 ($300 UCM ÷ 3 machine hours). Consequently, t