Wages paid to factory machine operators of a manufacturing plant are an element of prime cost

Chapter 2

C1.A cost accounting information system necessarily should accomplish all of the following except:

A. reflect the division of authority so that individual managers can be held accountable

B.provide management with information that facilitates prompt identification of activities needing attention

C.be more sophisticated than is required by legal, regulatory, and contractual requirements

D. be tailored to give the most efficient blend of sophistication and simplicity

E.focus management's attention

A2.Cost classifications are based on the relationship of costs to all of the following except:

A. ledger accounts

B.accounting periods

C.products

D.volume of production

E.manufacturing departments

B3. Direct materials and direct labor are considered to be:

A.selling expenses

B.prime costs

C.administrative expenses

D.conversion costs

E. factory overhead

E4.Depreciation on factory buildings and equipment is classified as:

A.selling expense

B.administrative expense

C.direct labor

D.indirect materials

E.factory overhead

A5.A typical marketing expense is:

A.freight out

B.indirect labor

C.audit fees

D.uncollectible accounts expense

E.direct labor

E6.A typical indirect labor cost for a manufacturer is:

A. sales office salaries

B.freight out

C.factory insurance

D.sales commissions

E.materials handling

D7. Usually, a cost easy to assign accurately to a specific operating department is a:

A.standard cost

B.common cost

C.fixed cost

D.variable cost

E. joint cost

C8.In constructing a chart of accounts, all of the following guidelines should be adhered to except:

A.using numbers rather than letters in coding the accounts

B.dividing charts into balance sheet accounts and income statement accounts

C.using account titles that reflect a maximum level of detail about each item

D.giving maximum information with a minimum of supplementary analysis

E.providing sufficient classification to enable cost assignment to responsible managers

C9.An expense that is likely to contain both fixed and variable components is:

A.security guard wages

B.supplies

C.heat, light, and power

D. small tools

E.taxes on real estate

C10.A type of employee whose wages are not a component of indirect labor is a(n):

A.inspector

B.supervisor

C.assembler

D.maintenance worker

E.shop clerk

B11.Pitino Company has a beginning inventory of direct materials on March 1 of $30,000 and an ending inventory on March 31 of $36,000.  The following additional manufacturing cost data were available for the month of March:

Direct materials purchased$84,000

Direct labor60,000

Factory overhead80,000

During March, prime cost added to production was:

A.$140,000

B.$138,000

C.$144,000

D.$150,000

E.none of the above

SUPPORTING CALCULATION:  

$84,000 + $60,000 - ($36,000 - $30,000) = $138,000

C12.Pitino Company has a beginning inventory of direct materials on March 1 of $30,000 and an ending inventory on March 31 of $36,000.  The following additional manufacturing cost data were available for the month of March:

Direct materials purchased$84,000

Direct labor60,000

Factory overhead80,000

During March, conversion cost added to production was:

A. $80,000

B.$144,000

C.$140,000

D.$138,000

E.none of the above

SUPPORTING CALCULATION:  $60,000 + $80,000 = $140,000

A 13.The term "variable costs" refers to:

A.all costs whose total amounts change in proportion to changes in activity within a relevant range

B.all costs that are likely to respond to the amount of attention devoted to them by a specified manager

C. all costs that are associated with marketing, shipping, warehousing, and billing activities

D.all costs that do not change in total for a given period and relevant range, but become progressively smaller on a perunit basis as volume increases

E.all manufacturing costs incurred to produce units of output

C 14.The following statement that best describes a fixed cost is:

A.it may change in total when such change depends on production within the relevant range

B.it increases on a perunit basis as production increases

C.it decreases on a per-unit basis as production increases

D.it may change in total when such change is related to changes in production

E.it is constant per unit of production

A15.The term "relevant range" as used in cost accounting means the range over which:

A.cost relationships are valid

B.production may vary

C.relevant costs are incurred

D.costs may fluctuate

E.none of the above

B16.When the number of units manufactured increases, the most significant change in average unit cost will be reflected as:

A.a decrease in the variable element

B.a decrease in the nonvariable element

C. an increase in the semivariable element

D.an increase in the variable element

E.an increase in the nonvariable element

C17.Within a relevant range, the amount of variable cost per unit:

A. moves in the same direction as fixed cost per unit

B.differs at each production level

C.remains constant at each production level

D.increases as production increases

E.decreases as production increases

B18.The term "prime costs" refers to:

A.the sum of direct labor costs and all factory overhead costs

B.the sum of direct materials costs and direct labor costs

C. manufacturing costs incurred to produce units of output

D.all costs associated with manufacturing other than direct labor and direct materials costs

E.cost standards that are predetermined and should be attained

B19.The term "conversion costs" refers to:

A.costs that are associated with marketing, shipping, warehousing, and billing activities

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

C.the sum of direct materials costs and direct labor costs

D. manufacturing costs incurred to produce units of output

E.all costs associated with manufacturing other than direct labor costs and direct materials costs

A20.Direct labor is a:

Conversion CostManufacturing CostPrime Cost

A.YesYesYes

B.NoYesYes

C. NoNoNo

D.NoNoYes

E.YesYesNo

C 21.A factory overhead cost:

A.is a direct cost

B.is a prime cost

C.can be a variable cost or a fixed cost

D.can only be a fixed cost

E. includes all factory labor

A22.Prime cost and conversion cost share what common element of total cost?

A.direct labor

B.commercial expense

C.variable overhead

D.fixed overhead

E.direct materials

E23.Factory overhead includes:

A.indirect materials but not indirect labor

B. indirect labor but not indirect materials

C.prime costs

D.all manufacturing costs

E.all manufacturing costs, except direct materials and direct labor

C 24.Indirect materials are a(n):

A.fixed cost

B.irrelevant cost

C.factory overhead cost

D.direct cost

E. prime cost

C25.Wages of the security guard for a small plant are an example of:

Fixed Factory

Indirect Labor   Overhead  

A.NoYes

B.NoNo

C.YesYes

D.Yes No

E. none of the above

B26.Wages paid to factory machine operators of a manufacturing plant are an element of:

Prime CostConversion Cost

A.YesNo

B. YesYes

C.NoNo

D.NoYes

E.none of the above

E27. Common costs are:

A.costs that occur when the production of one product is possible only if one or more other products are manufactured at the same time

B.intended to benefit future periods

C.variable in direct proportion to the level of production

D.chargeable directly to the product

E.costs of facilities or services employed by two or more operations

D28.Joint costs are:

A.direct costs

B. costs of facilities or services employed by two or more operations

C.revenue expenditures

D.incurred when the production of one product is possible only if other products are produced at the same time

E.always variable

B 29.All of the following are examples of nonfinancial performance measures except:

A.the number of defective units produced

B.the gross margin on a product line income statement

C.hours of machine downtime

D.number of days on schedule

E.weight of scrap material produced

E30.Reasons for the increased attention being given to nonfinancial performance measures include:

A. dissatisfaction with exclusive reliance on financial measures

B.dissatisfaction with financial measures of plant utilization

C.dissatisfaction with financial measures of processing efficiency

D.dissatisfaction with the slow pace at which a company's data processing system can modify traditional financial measures

E.all of the above

E31.Of the following items, a cost object is:

A.a unit of product

B.a customer order

C. a project

D.a division of the company

E.all of the above

E32.General corporate-level costs, such as bond interest and taxes, would be readily traceable to:

A. each unit of product

B.each division of the company

C.each batch of production

D.all units of product ever produced

E.none of the above

D 33.A revenue expenditure is one that:

A.varies with the volume of production

B.is intended to benefit future periods

C.is reported as an asset

D.benefits the current period only

E.remains the same in total as production changes

B34.An example of a cost that is irrelevant to a future decision is a(n):

A.differential cost

B.sunk cost

C.out-of-pocket cost

D.opportunity cost

1. variable cost

A35.The measures in a balanced scorecard’s growth and learning perspective attempt to report on:

A. three kinds of intangible resources: human capital, information, and the alignment of incentives

B.the organization’s most important work—work in which the organization must excel in order to successful

C.the final results that are most important to the owners of the organization, and the rates of improvement in those results

D.the extent to which the organization is creating and sustaining desirable customer relationships

1. all of the above

E36.An example of a cost that is irrelevant to a future decision is a(n):

A. communicating plans

B.focusing attention

C.implementing strategy

D.monitoring progress toward strategic objectives

1. all of the above

A 37.When a balanced scorecard represents a series of predictions telling how management intends for the organization to succeed, the predictions are in a sequence that begins with:

A.growth and learning

B.innovation

C.customer service

D.customer satisfaction

1. investment opportunity

A38.Balanced scorecards are called “balanced” because they report:

A.both leading and lagging measures

B. both balance sheets and income statements

C.both historical costs and replacements costs

D.both original costs and book values

1. all of the above

PROBLEMS

PROBLEM

1.

Identification of Variable, Fixed, and Semivariable Costs.  Place a check mark in the appropriate column to indicate whether the following costs are variable, fixed, or semivariable.

ItemVariableFixedSemivariable

1.Small tools

2.Patent amortization

3.Health and accident insurance

4. Heat, light, and power

5.Straightline depreciation

6.Maintenance of buildings and

grounds

7. Royalties

8.Materials handling

9.Property and liability insurance

10.Maintenance of factory equipment

SOLUTION

1.Variable

2.Fixed

3.Semivariable

4. Semivariable

5.Fixed

6.Fixed

7.Variable

8.Variable

9.Fixed

10.Semivariable

PROBLEM  

2.

Classification of Costs.  Place a check mark in the appropriate column to indicate the proper classification of each of the following costs.

Other

IndirectAdmini-

IndirectIndirectFactory Marketingstrative

ItemMaterials  Labor _ Costs _Expenses _Expenses

1. Factory heat, light,

and power

2.Advertising

3.Wages of stockroom clerk

4. Freight out

5.Oil for machines

6.Salary of vice president

of human relations

7. Legal expenses

8.Salary of the factory manager

9.Employer payroll taxes on

controller's salary

10. Idle time due to assembly

line breakdown

SOLUTION

1.Other indirect factory costs

2.Marketing expenses

3. Indirect labor

4.Marketing expenses

5.Indirect materials

6.Administrative expenses

7. Administrative expenses

8.Indirect labor

9.Administrative expenses

10.Indirect labor

PROBLEM  

3.

Fixed and Variable Costs.  In 19A, the Lin Company had sales of $2,500,000, with $1,250,000 variable and $900,000 fixed costs. In 19B, sales are expected to decrease 10% and the fixed costs are not expected to change.

Required:  Determine Lin Company's expected operating income or loss for 19B.

SOLUTION

Sales ($2,500,000 x 90%)$2,250,000

Less:Variable costs

($1,250,000 x 90%)$1,125,000

Fixed costs    900,000  2,025,000

Operating income$    225,000

PROBLEM

4.

Determination of per Unit Total Costs.  The estimated unit costs for Hoteling Industries, when operating at a production and sales level of 10,000 units, are as follows:

Cost ItemEstimated Unit Cost

Direct materials$15

Direct labor 10

Variable factory overhead8

Fixed factory overhead5

Variable marketing4

Fixed marketing 3

Required:

(1)Identify the estimated conversion cost per unit.

(2)Identify the estimated prime cost per unit.

(3)Determine the estimated total variable cost per unit.

(4) Compute the total cost that would be incurred during a month with a production level of 10,000 units and a sales level of 12,000 units.

SOLUTION

(1) $10 + $8 + $5 = $23 conversion cost per unit

(2) $15 + $10 = $25 prime cost per unit

(3) $15 + $10 + $8 + $4 = $37 variable cost per unit

(4)[ ( $15 + $10 + $8 + $5 + $3 ) x 10,000 ] + ( $4 x 12,000 )

= $410,000 + $48,000 = $458,000 total cost

PROBLEM

5.

Components of Manufacturing Cost.  Myerson Inc. produces video cameras.  The direct labor cost of one camera is $200, and the total manufacturing cost is $650.  The overhead cost of one camera is two-thirds as large as its conversion cost.

Required:

(1)Compute the conversion cost per unit.

(2)Determine the factory overhead cost per unit.

(3) Determine the direct materials cost per unit.

SOLUTION

(1)Let x= Conversion cost per unit

x= $200 + 2/3 x

1/3 x= $200

x= $600

(2)Factory overhead = 2/3 x $600 = $400

(3)Direct materials = $650 - $200 - $400 = $50

PROBLEM

6.

Identification of financial measures, customer measures, internal business process measures, and growth & learning measures for a balanced scorecard. Place a check mark in the appropriate column to indicate which one of the four perspectives of a typical balanced scorecard is most likely to contain each of the following measures.

Internal

BusinessGrowth &

Item Financial         CustomerProcessLearning

1.   Number of shipments rejected

      by customers. . . . . . . . . . . . . .

2.   Number of defective units removed

      from work in process. . . . . . . . .

3.   Percentage of employees who’ve

      completed all training relevant

      to their duties. . . . . . . . . . . . . .

4.   Growth rate of sales revenue . . . .

5.   Percentage of employees whose

      cash bonuses depend on

      achieving scorecard objectives . . .

6.   Income from continuing

      operations, before income taxes . .

7.   Percentage of employees who

      receive all information their job

      requires, on time and error-free . .

8.   Market share in targeted market

       segment . . . . . . . . . . . . . . . . .

9.   Number of new products launched

10.  Number of patents received . . . . .

SOLUTION

1.  customer

2.  internal business process

3.  growth & learning

4.  financial

5.  growth & learning

6.  financial

7.  growth & learning

8.  customer

9.  internal business process

10. internal business process

Which of the following is an element of prime cost?

Is machine operator a direct cost?

Are prime costs manufacturing costs?

Which of the following combinations of costs make up prime cost?