Question 1 - CMA 678 4-12 - Classifications of Costs Controllable

Part 1 : 07/28/10 08:46:46

Question 1 - CMA 678 4-12 - Classifications of Costs

Controllable costs are those that

A. 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.

B. Are likely to respond to the amount of attention devoted to them by a specified manager.

C. Management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers.

D. Will be unaffected by current managerial decisions.

A. This is the definition of a committed cost.

B. Controllable costs are the costs that can be controlled by a manager. Therefore, the more time a manager devotes to them, the more the cost will change.

C. This is the definition of a discretionary cost.

D. This is the definition of a sunk cost.


A cost that always can be physically traced to a cost object is

A. A variable cost.

B. A conversion cost.

C. An indirect cost.

D. A prime cost.

A. Not all overhead costs can be traced to a cost object. For example, variable overhead needs to be applied to all of the units produced and is not able to be traced.

B. Conversion costs are direct labor and overhead. Overheads are not able to be traced to cost objects and must be applied to them.

C. Indirect costs are costs that are not able to be directly traced to a cost object. This is what makes them indirect costs.

D. Prime costs are direct materials and direct labor and they can always be traced to a specific cost object.

A cost object is anything for which costs are accumulated for managerial purposes: a specific product, job, product line, a market or certain customers.


Hitchcock Industries has developed two new products but has only enough plant capacity to introduce one of these products this year. The company controller has gathered the following data to assist management in deciding which product should be selected for production.

Hitchcock's fixed overhead includes proportional rent and utilities, machinery depreciation, and supervisory salaries.

Selling and administrative expenses are not allocated to products.

Cost per unit:

Raw materials

Machining at $12/hr.

Assembly at $10/hr.

Power Drill Power Saw

$22.00 $18.00

9.00

15.00

7.50

5.00

(c) HOCK international, page 1

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Variable O/H at $8/hr.

Fixed O/H at $4/hr.

Total unit cost:

Suggested selling price

18.00

9.00

$73.00

$88.98

9.00

4.50

$44.00

$49.95

Actual research and development costs $180,000 $95,000

Proposed advertising and promotion costs $300,000 $250,000

The total overhead cost of $13.50 for Hitchcock's power saw is a

A. Committed cost.

B. Carrying cost.

C. Sunk cost.

D. Mixed cost.

A. A committed cost is a cost for the company's infrastructure. Committed costs are costs that are required in order to establish and maintain the readiness to do business. Examples are fixed assets such as property, plant and equipment and intangible assets such as the purchase of a franchise. They are usually on the balance sheet as assets and become expenses in the form of amortization and depreciation.

B. A carrying cost is the cost of keeping inventory.

C. A sunk cost is a cost that has already been spent and cannot be changed by any current or future decisions.

D. Because there are both fixed and variable overhead costs, the total overhead cost is a mixed cost.


Madtack Company's beginning and ending inventories for the month of November are:

Direct materials

Work-in-process

Finished goods

November 1 November 30

$67,000 $62,000

145,000

85,000

171,000

78,000

Production data for the month of November:

Direct labor

Actual factory overhead

$200,000

132,000

Direct materials purchased

Transportation in

163,000

4,000

Purchase returns and allowances 2,000

Madtack uses one factory overhead control account and charges factory overhead to production at 70% of direct labor cost. The company does not formally recognize over/underapplied overhead until year-end.

Madtack Company's cost of goods sold for November is

A. $502,000

B. $491,000

C. $476,000

D. $484,000

A. This answer is incorrect.

B.

For a manufacturing company, the cost of goods sold can be calculated as the beginning finished goods


Part 1 : 07/28/10 08:46:46 inventory plus the cost of goods manufactured minus the ending finished goods. This is $85,000 + $484,000

$78,000 and totals $491,000.

To calculate the cost of goods manufactured, we simply take the total cost of manufacturing and adjust it for the change in work-in-progress. Total manufacturing cost is made up of prime costs plus manufacturing overheads applied. The prime costs are direct materials used and direct labor used. We are told that the direct labor was $200,000, but we will need to calculate the direct materials used for November. The beginning inventory of direct materials was $67,000. During the period, they purchased $163,000 of direct materials and also incurred $4,000 in transportation-in costs. However, they also returned $2,000 of direct materials during the period. Adding these together, we can calculate the total direct materials that they had available for use during November was $232,000 ($67,000 + $163,000 + $4,000 $2,000). Since there was an ending inventory of $62,000, they must have used $170,000 of direct materials during the period ($232,000

$62,000). Adding $170,000 of direct materials used to the $200,000 of direct labor used, the total prime costs were $370,000. We do not worry about the raw materials and finished goods inventory numbers because the amounts in those accounts were not related to the current period.

Overhead is applied as 70% of direct labor, which equals $140,000 ($200,000 × 70%). Adding the prime costs and the overhead together, we get $510,000. Work-in-progress increased during the period by $26,000. This means that $26,000 of the work performed during the period ended up in work-in-progress and not finished goods, so this amount needs to be subtracted from cost of goods manufactured.

The cost of goods manufactured is $484,000. The beginning balance of finished goods was $85,000. Adding together the cost of goods manufactured and beginning inventory balance we get $569,000. The ending balance of finished goods inventory was $78,000. Subtracting the amount of ending finished goods inventory from the amount of finished goods available for sale, we get the amount of COGS: $491,000.

C. This answer is incorrect.

D. For a manufacturing company, the cost of goods sold can be calculated as the beginning finished goods inventory plus the cost of goods manufactured minus the ending finished goods. This is the cost of goods manufactured.

Question 5 - CIA 1193 IV-1 - Classifications of Costs

Many 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.

B. The delivery costs for the tires on each automobile.

C. The cost of the laborers who place tires on each automobile.

D. The cost of the tires on each automobile.

A. The cost of small tools cannot be traced to an individual automobile so would be included in factory overhead.

B. The delivery costs for each tire will be included in the cost of the tire and are therefore direct materials.

C. The laborers who place the tires on the automobile are direct labor and can be traced to each automobile.

D. The tires are direct materials and can be traced to each individual automobile.


A cost incurred for the benefit of more than one cost object is

A. A variable cost.

B. A common cost.


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C. A conversion cost.

D. A prime cost.

A. Variable costs are costs that vary as production changes. They may or may not benefit more than one cost object.

B. Common costs are the costs that are shared by more than one cost object. A cost object is anything for which costs are accumulated for managerial purposes: a specific product, job, product line, a market or certain customers.

C. Conversion costs are the costs of converting direct material to the finished goods. They include direct labor and overhead. They may or may not benefit more than one cost object.

D. Prime costs are direct material and direct labor and they are traceable to one cost object.



Direct materials

Work-in-process

Finished goods


$67,000 $62,000

145,000

85,000

171,000

78,000


Direct labor $200,000



Transportation in

Purchase returns and allowances

132,000

163,000

4,000

2,000


Madtack Company's total manufacturing cost for November is

A. $503,000

B. $363,000

C. $502,000

D. $510,000

A. Total manufacturing cost is made up of prime costs plus manufacturing overheads applied. We do not worry about the raw materials and finished goods inventory numbers because the amounts in those accounts were not related to the current period. This answer includes the change in the finished goods inventory.

B. Total manufacturing cost is made up of prime costs plus manufacturing overheads applied. This answer does not calculate prime costs correctly and does not include overhead at all.

C. Total manufacturing cost is made up of prime costs plus manufacturing overheads applied . This answer uses actual factory overhead incurred.

D.

Total manufacturing cost is made up of prime costs plus manufacturing overheads applied. The prime costs are direct materials and direct labor. We are told that the direct labor was $200,000, but we will need to calculate the direct materials used for November. The beginning inventory of direct materials was $67,000.

During the period, they purchased $163,000 of direct materials and also incurred $4,000 in transportation-in costs. However, they also returned $2,000 of direct materials during the period. Adding these together, we


Part 1 : 07/28/10 08:46:46 can calculate the total direct materials that they had available for use during November was $232,000

($67,000 + $163,000 + $4,000 $2,000). Since there was an ending inventory of $62,000, they must have used

$170,000 of direct materials during the period ($232,000 $62,000). Adding $170,000 of direct materials used to the $200,000 of direct labor used, the total prime costs were $370,000. We do not worry about the raw materials and finished goods inventory numbers because the amounts in those accounts were not related to the current period. Overhead is applied as 70% of direct labor, which equals $140,000 ($200,000 × 70%).

Adding the prime costs ($370,000) and the overhead ($140,000) together, we get $510,000.





Cost per unit:

Raw materials


Assembly at $10/hr.


Fixed O/H at $4/hr.


$22.00

9.00

15.00

18.00

9.00

$18.00

7.50

5.00

9.00

4.50



$73.00

$88.98

$44.00

$49.95

Actual research and development costs $180,000 $95,000


Research and development costs for Hitchcock's two new products are

A. Sunk costs.

B. Opportunity costs.

C. Conversion costs.

D. Relevant costs.

A. Because these R & D costs have already been spent, they are sunk costs.

B. Opportunity costs are the lost benefits from the next best use of a resource. These R & D costs have already been incurred, and are therefore not opportunity costs.

C. Conversion costs are the costs of direct labor and overhead, i.e., the costs of converting raw materials to the finished goods.

D. Relevant costs are costs that are different between options. Since there are no options in this question, these R &

D costs are not relevant costs.


A cost that bears an observable and known relationship to a quantifiable activity base is a(n)

A. Engineered cost.

B. Sunk cost.

C. Indirect cost.

D. Target cost.


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A. An engineered cost is one that has an observable and known relationship to an activity base. Direct materials and direct labor and anything that varies with product specifications and production volume are engineered costs.

B. A sunk cost is a cost that has already been spent and cannot be changed by any current or future activity. A sunk cost does not have an observable or direct relationship to an activity base.

C. An indirect cost is a cost that does not have a clear and observable relationship to an activity base.

D. A target cost is the goal that the company will try to produce the product for. This does not have any relationship to an activity base as it is simply management's goal for the cost of production.

Question 10 - CIA 1190 IV-5 - Classifications of Costs

In a traditional manufacturing operation, direct costs would normally include

A. Machine repairs in an automobile factory.

B. Commissions paid to sales personnel.

C. Electricity in an electronics plant.

D. Wood in a furniture factory.

A. Machine repairs and maintenance in an automobile factory are a good example of factory overhead (indirect) costs.

B. Commissions paid to sales personnel are a classic example of a period cost related to sales (non-manufacturing overhead). These costs are neither direct nor indirect production costs.

C. Electricity in an electronics plant is a classic example of factory overhead (indirect) costs.

D. Direct costs are those that can be easily traced to the specific units of products. There are two main categories of direct costs: direct labor and direct materials. Direct labor costs are the costs of labor that may be directly traced to the production of a unit. Direct material costs are the materials that are directly put into the finished product. The costs included in the direct material cost are all of the costs associated with acquiring it - the item itself, shipping, insurance and taxes, among others. Common examples of direct materials are plastic, metal, tires and components. Thus, wood in a furniture factory is a direct cost.

Question 11 - IMA 08-P2-104 - Classifications of Costs

The marketing manager of Ames Company has learned the following about a new product that is being introduced by Ames. 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. $8,500

B. $10,500

C. $8,000

D. $10,000

A.

Variable marketing costs are costs which are the same per unit sold and which vary in total with sales volume. The only variable marketing costs are the sales commissions and the marketing manager's incentive. Based on projected sales of $100,000, sales commissions are .08 × $100,000, or $8,000. The marketing manager's incentive is .005 × $100,000, or $500 based on the projected sales. Since both these


Part 1 : 07/28/10 08:46:46 costs will vary with sales volume, they are both variable costs. Total variable marketing costs for the new product are thus $8,500. The other costs are all fixed costs.

B. This includes the sales commissions and the marketing manager's incentive expenses, which are both variable marketing costs since they are tied directly to sales. However, it also includes the cost of the marketing staff in producing the brochure. The cost to produce the brochure will not change based on the sales volume. Therefore, it is not a variable marketing cost.

C. This is the cost of the sales commissions, which are a variable marketing cost. However, the sales commissions are not the only variable marketing cost. The marketing manager's incentive is also tied to sales performance and will therefore vary with the sales volume.

D. This includes the cost of the sales commissions as well as the cost of the salaried marketing staff's time to produce the brochure. The cost of the brochure is not directly dependent on sales, making it a fixed cost. This calculation also does not take into consideration the marketing manager's incentive, which is tied to sales and so is a variable marketing cost.


A fixed cost that would be considered a direct cost is

A. A cost accountant's salary when the cost object is a unit of product.

B. A production supervisor's salary when the cost object is the Production Department.

C. Board of directors' fees when the cost object is the Marketing Department.

D. The rental cost of a warehouse to store inventory when the cost object is the Purchasing Department.

A. A direct cost is a cost that can be specifically attributed to the cost object. The accountant is not a direct cost when the cost object is a unit of product.

B. The supervisor's salary would be a fixed cost and when looking at the production department, this is a direct cost since the cost can be associated with the cost object (the production department).

C. A direct cost is a cost that can be specifically attributed to the cost object. The board of directors fees are not directly traceable to the Marketing Department so they are not a direct cost of the Marketing Department.

D. A direct cost is a cost that can be specifically attributed to the cost object. The rent for a warehouse is not directly traceable to the purchasing department because other departments (for example, the production departments) also have control over how much inventory is held.


Lucy Sportswear manufactures a specialty line of T-shirts using a job-order cost 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. Factory 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

A. This answer includes selling and administrative costs. Cost of goods sold includes direct materials, direct labor and overhead applied. Selling and administrative costs are not part of the cost of goods sold.

B. This answer includes selling costs. Cost of goods sold includes direct materials, direct labor and overhead applied. Selling costs are not part of the cost of goods sold.


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C. This answer includes administrative costs. Cost of goods sold includes direct materials, direct labor and overhead applied. Administrative costs are not part of the cost of goods sold.

D. Cost of goods sold includes direct materials ($13,700), direct labor ($4,800) and overhead applied

($20,000, or 800 hours × $25 per hour). In total this is $38,500. Allocated to the 7,000 units, this is a cost per unit of $5.50. Administrative and selling costs are not part of the cost of goods sold.





Cost per unit:

Raw materials



$22.00 $18.00

9.00 7.50

Assembly at $10/hr.


Fixed O/H at $4/hr.


15.00

18.00

9.00

$73.00

5.00

9.00

4.50

$44.00


Actual research and development costs

$88.98

$180,000

$49.95

$95,000


The costs included in Hitchcock's fixed overhead are

A. Prime costs.

B. Discretionary costs.

C. Committed costs.

D. Sunk costs.

A. Prime costs are the costs of direct material and direct labor.

B. Discretionary costs are costs that do not need to be incurred in the short-term. Since these are production costs, they do need to be incurred and are not discretionary costs.

C. Because the costs for fixed overhead relate to items like rent, these are committed costs. A committed cost is a cost for the company's infrastructure. Committed costs are costs that are required in order to establish and maintain the readiness to do business. Examples are fixed assets such as property, plant and equipment and intangible assets such as the purchase of a franchise. They are usually on the balance sheet as assets and become expenses in the form of amortization and depreciation.

D. Sunk costs are costs that have already been spent and cannot be changed by current or future decisions. Not all of the fixed overhead costs are sunk costs, though it is possible that some of them are.


Discretionary costs are

A. Likely to respond to the amount of attention devoted to them by a specified manager.


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B. Those management decides to incur in the current period to enable the company to achieve objectives other than the filling of orders placed by customers.

C. Unaffected by current managerial decisions.

D. Governed mainly by past decisions that established the current levels of operating and organizational capacity and that only change slowly in response to small changes in capacity.

A. This is the definition of a controllable cost.

B. Discretionary costs are costs that management may choose to incur or not incur without a substantial impact on the business. Employee training is often given as an example of a discretionary cost. There is no direct correlation between the level of activity and discretionary costs.

C. This is the definition of a sunk cost.

D. This is the definition of a committed cost.


Adams Manufacturing, Inc. produces farm tractors. The details of its budgeted cost of goods manufactured schedule should come from which of the following schedules?

A. Direct materials used, direct labor, manufacturing overhead, and the change in work-in-process.

B. Purchases, raw material, work-in-process, and finished goods.

C. Cost of goods sold plus or minus the change planned in finished goods.

D. Purchases, direct labor, manufacturing overhead, finished goods, and work-in-process.

A.

Cost of goods manufactured is:

Direct Materials Used + Direct Labor Used + Manufacturing Overhead Applied + Beginning WIP Inventory

Ending WIP Inventory = Cost of Goods Manufactured.

Direct Materials Used is Beginning Direct Materials Inventory + Purchases + Transportation In Net

Returns Ending Direct Materials Inventory.

B. Purchases is used in calculating Direct Materials Used. Finished goods inventory is used in the calculation of cost of goods sold.

C.

Cost of goods manufactured is used in the calculation of cost of goods sold, not the other way around.

D. Finished goods inventory is used in the calculation of cost of goods sold.



Direct materials

Work-in-process

Finished goods


$67,000

145,000

85,000


$62,000

171,000

78,000


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Direct labor



Transportation in


$200,000

132,000

163,000

4,000

2,000


Madtack Company's prime cost for November is

A. $170,000

B. $363,000

C. $370,000

D. $168,000

A. This is only the direct materials used and does not include direct labor used.

B. This is the total of direct labor used ($200,000) + purchases ($363,000). Prime costs are direct labor used and direct materials used , not direct materials purchased.

C. The prime costs are direct materials used and direct labor used. We are told that the direct labor was

$200,000, but we will need to calculate the direct materials used for November. The beginning inventory of direct materials was $67,000. During the period, they purchased $163,000 of direct materials and also incurred $4,000 in transportation-in costs. However, they also returned $2,000 of direct materials during the period. Adding these together, we can calculate the total direct materials that they had available for use during November was $232,000 ($67,000 + $163,000 + $4,000 $2,000). Since there was an ending inventory of $62,000, they must have used $170,000 of direct materials during the period ($232,000 $62,000). Adding

$170,000 of direct materials used to the $200,000 of direct labor used, the total prime costs were $370,000.

We do not worry about the work in process or finished goods inventory numbers, because the amounts in those accounts were not related to the usage of direct materials during the current period.

D. This answer is simply the amount of purchases adjusted for the change in inventory and does not include transportation-in, returns or direct labor.


Which of the following is the best example of a variable cost?

A. Interest charges.

B. The corporate president's salary.

C. Property taxes.

D. Cost of raw materials.

A. A variable cost is a cost that changes in total as the level of activity (either sales or production) changes. Interest charges will not be affected by the level of activity either of sales or of production.

B. A variable cost is a cost that changes in total as the level of activity (either sales or production) changes. The corporate president's salary will not be affected by the level of activity either of sales or of production.

C. A variable cost is a cost that changes in total as the level of activity (either sales or production) changes. Property taxes will not be affected by the level of activity either of sales or of production.

D. A variable cost is a cost that changes in total as the level of activity (either sales or production) changes.

Direct materials is a very good example of a variable cost, because it changes with the level of production.


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An imputed cost is

A. The difference in total costs which results from selecting one alternative instead of another.

B. A cost that does not entail any dollar outlay but is relevant to the decision-making process.

C. A cost that continues to be incurred even though there is no activity.

D. A cost that cannot be avoided because it has already been incurred.

A. This is the definition of an opportunity cost.

B. An imputed cost is one that does not need to be paid out in cash, but it still relevant for decision making.

C. This is the definition of a fixed cost.

D. This is the definition of a sunk cost.





Cost per unit:

Raw materials


Assembly at $10/hr.


Fixed O/H at $4/hr.



$22.00 $18.00

9.00

15.00

18.00

9.00

$73.00

7.50

5.00

9.00

4.50

$44.00


Actual research and development costs

$88.98

$180,000

$49.95

$95,000


The advertising and promotion costs for the product selected by Hitchcock will be

A. Discretionary costs.

B. Committed costs.

C. Mixed costs.

D. Opportunity costs.

A. A discretionary cost is a cost that does not need to be incurred in the short-term and if it is not incurred, it will not cause great losses for the company. Advertising is a cost that does not need to be incurred and in the short-term not advertising will probably not have a great impact on sales.

B. A committed cost is a cost for the company's infrastructure. Committed costs are costs that are required in order to establish and maintain the readiness to do business. Examples are fixed assets such as property, plant and equipment and intangible assets such as the purchase of a franchise. They are usually on the balance sheet as assets and become expenses in the form of amortization and depreciation.

C. Mixed costs are costs that include both variable and fixed elements. We are not given enough information to determine if this is the case, but it appears that they are fixed costs.

D. Opportunity costs are the lost benefits from the next best use of a resource. The opportunity cost of advertising would be the benefit that is given up by not using the money for something else.


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If 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. $130,150

B. $127,650

C. $157,650

D. $101,400

A. This question is like a cost of goods sold question and the formula that we need to use is: beginning inventory + purchases materials used = ending inventory. Putting the numbers into the formula, we get

$27,500 + X $128,900 = $28,750. Solving for X, we get $130,150 of materials purchased during the period.

B. This question is like a cost of goods sold question and the formula that we need to use is: beginning inventory + purchases materials used = ending inventory. This answer switches the beginning and ending inventory amounts in the formula.

C. This question is like a cost of goods sold question and the formula that we need to use is: beginning inventory + purchases materials used = ending inventory. This answer does not take into account the beginning inventory.

D. This question is like a cost of goods sold question and the formula that we need to use is: beginning inventory + purchases materials used = ending inventory. This answer does not take into account the ending inventory.


Conversion 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.

D. The sum of raw materials costs and direct labor costs.

A. Manufacturing costs include direct materials, which are not included in conversion costs.

B. This is the definition of overhead, and conversion costs include more than just overhead.

C. By definition, conversion costs are the costs of direct labor and factory overhead. It is the cost of converting the raw materials to the finished goods.

D. This is the definition of prime costs.

Question 23 - CMA 1292 H3 - Classifications of Costs

The information contained in a cost of goods manufactured budget most directly relates to the

A. Materials used, direct labor, overhead applied, and ending work-in-process budgets.

B. Materials used, direct labor, overhead applied, and finished goods inventories budgets.

C. Materials used, direct labor, overhead applied, work-in-process inventories, and finished goods inventories budgets.

D. Materials used, direct labor, overhead applied, and work-in-process inventories budgets.


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A. The budgeted amount for cost of goods manufactured is calculated in the same way as the actual cost of goods manufactured is calculated, except the amounts used are budgeted amounts instead of actual amounts. The budgeted amount for beginning work-in-process should also be included in the calculation of budgeted cost of goods manufactured.

B. The budgeted amount for cost of goods manufactured is calculated in the same way as the actual cost of goods manufactured is calculated, except the amounts used are budgeted amounts instead of actual amounts. The budgeted amounts for beginning and ending work-in-process inventories should also be included in the calculation of budgeted cost of goods manufactured. Finished goods inventories should not be included.

C. The budgeted amount for cost of goods manufactured is calculated in the same way as the actual cost of goods manufactured is calculated, except the amounts used are budgeted amounts instead of actual amounts. Finished goods inventories are not included in the calculation of budgeted cost of goods manufactured.

D. The budgeted amount for cost of goods manufactured is calculated in the same way as the actual cost of goods manufactured is calculated, except the amounts used are budgeted amounts instead of actual amounts.

Cost of goods manufactured is calculated as follows:

Cost of Goods Manufactured = Direct Materials Used + Direct Labor Used + Manufacturing Overhead

Applied + Beginning WIP Inventory Ending WIP Inventory.

Direct Materials Used = Beginning Inventory + Purchases + Transportation-In – Net Returns – Ending

Inventory.


Conversion cost pricing

A. Places minimal emphasis on the cost of materials used in manufacturing a product.

B. Places heavy emphasis on direct costs and disregards consideration of indirect costs.

C. Could be used when the customer furnishes the material used in manufacturing a product.

D. Places heavy emphasis on indirect costs and disregards consideration of direct costs.

A. Conversion cost pricing does not use materials at all in the pricing because materials are not a conversion cost.

B. Overheads are indirect costs and also conversion costs so this statement is not true.

C. Conversion costs are the costs of converting the materials to the finished product. They include direct labor and manufacturing overhead (both fixed and variable). As such, in a situation in which the customer provides the materials, conversion cost pricing could be appropriate because conversion costs would be the only costs involved.

D. Direct labor is a conversion cost and is also a conversion cost, so this statement is not true.


Variable costs are all costs

A. That do not change in total for a given period and relevant range but become progressively smaller on a per unit basis as volume increases.

B. Of manufacturing incurred to produce units of output.

C. That are associated with marketing, shipping, warehousing, and billing activities.

D. That fluctuate in total in response to small changes in the rate of utilization of capacity.


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A. This is the definition of fixed costs as fixed costs do not change in total as production levels change.

B. While many manufacturing costs are variable, not all of them are variable.

C. These are selling and administration costs and while some of these costs may be variable, some of them will be fixed.

D. Variable costs are costs that are incurred only if activity (production or sales) takes place. Therefore, the more units that are produced, the greater the total variable costs of production will be. And if production decreases, so will the total variable production costs.


Which one of the following is correct regarding a relevant range?

A. Actual fixed costs usually fall outside the relevant range.

B. The relevant range cannot be changed after being established.

C. Total variable costs will not change.

D. Total fixed costs will not change.

A. Actual fixed costs should not differ much from budgeted, so actual fixed costs should always fall within the relevant range.

B. The relevant range may be changed as circumstances change.

C. In the relevant range, total variable costs will increase as output increases and decrease as output decreases.

D. Within the relevant range total fixed costs do not change.



Direct materials

Work-in-process


$67,000 $62,000

145,000 171,000

78,000 Finished goods 85,000


Direct labor



$200,000

132,000

163,000

Transportation in


4,000

2,000


Madtack Company's cost of goods transferred to finished goods inventory for November is

A. $469,000

B. $484,000

C. $495,000

D. $477,000


Part 1 : 07/28/10 08:46:46

A. Cost of goods transferred to finished goods inventory is the same as cost of goods manufactured. Cost of goods manufactured is beginning WIP inventory + direct labor used + direct materials used + overhead applied ending

WIP inventory. This answer uses actual overhead incurred instead of overhead applied and subtracts the change in finished goods inventory.

B.

Cost of goods transferred to finished goods inventory is the same as cost of goods manufactured. Cost of goods manufactured is beginning WIP inventory + direct labor used + direct materials used + overhead applied ending WIP inventory.

To calculate the cost of goods manufactured/transferred to finished goods inventory, we first need to calculate direct materials used, because that is the only number we need that is not given.

Direct materials used is:

Beginning Direct Materials Inventory

Plus Purchases

Plus Transportation-in

$ 67,000

163,000

4,000

Minus Purchase Returns & Allowances (2,000)

Minus Ending Direct Materials Inventory (62,000)

Direct Materials Used $170,000

Now, we can calculate the amount of WIP Inventory transferred to Finished Goods Inventory during the month, as follows:

Beginning WIP Inventory $145,000

Plus Direct Materials Used

Plus Direct Labor Used

Plus Overhead Applied (70% of $200,000)

170,000

200,000

140,000

Minus Ending WIP Inventory (171,000)

Cost of Goods Manufactured/Transferred to Finished Goods Inventory $484,000

C. Cost of goods transferred to finished goods inventory is the same as cost of goods manufactured. Cost of goods manufactured is beginning WIP inventory + direct labor used + direct materials used + overhead applied ending

WIP inventory. This answer uses direct materials purchased instead of direct materials used and actual factory overhead incurred instead of overhead applied.

D. Cost of goods transferred to finished goods inventory is the same as cost of goods manufactured. Cost of goods manufactured is beginning WIP inventory + direct labor used + direct materials used + overhead applied ending

WIP inventory. This answer subtracts the amount of change in finished goods inventory.


The term prime costs refers to

A. All costs associated with manufacturing other than direct labor costs and raw materials costs.

B. The sum of direct labor costs and all factory overhead costs.

C. The sum of raw materials costs and direct labor costs.

D. Costs that are predetermined and should be attained.

A. This is the definition of overhead and overhead is not a prime cost.

B. This is the definition of conversion costs.

C. Prime costs include direct materials and direct labor.


D. This is the definition of a standard cost.

Part 1 : 07/28/10 08:46:46


Committed costs are

A. Those 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. Those that fluctuate in total in response to small changes in the rate of use of capacity.

C. Governed mainly by past decisions that established the current levels of operating and organizational capacity and that only change slowly in response to small changes in capacity.

D. Likely to respond to the amount of attention devoted to them by a specified manager.

A. This is the definition of a discretionary cost.

B. This is the definition of a variable cost.

C. Committed costs are costs for the company's infrastructure. They are costs that are required in order to establish and maintain the readiness to do business. Examples are fixed assets such as property, plant and equipment and intangible assets such as the purchase of a franchise. They are usually on the balance sheet as assets and become expenses in the form of amortization and depreciation. Therefore, they are governed mainly by past decisions that established the current levels of operating and organizational capacity, and they change slowly in response to small changes in capacity.

D. This is the definition of a controllable cost.


Question 1 - CMA 678 4-12 - Classifications of Costs Controllable

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