Question

1. For a manufacturing company, which of the following is an example of a period cost rather than a product cost?

a. Depreciation on factory equipment

b. Wages of salespersons

c. Wages of machine operators

d. Insurance on factory equipment

2. A manager that is establishing objectives (strategic or operational) is performing which management function?

a. Controlling

b. Directing

c. Planning

d. Constraining

3. As product costs expire(expensed), they become part of

a. selling expenses.

b. inventory.

c. cost of goods sold.

d. sales revenue.

4. Property taxes on a manufacturing plant are an element of a

Product Cost Period Cost

a. Yes No

b. Yes Yes

c. No Yes

d. No No

5. A product requires processing in two departments, Department A and then Department B, before it is completed. Costs transferred out of Department A will be transferred to

a. Finished Goods Inventory.

b. Cost of Goods Sold.

c. Work in Process Department B.

d. Manufacturing Overhead.

6. An example of both a prime cost and a conversion cost for manufacturing a vehicle would be

a. wages of assembly line workers

b. steel

c. engine

d. depreciation on factory machinery.

7. A cost of goods manufactured schedule shows beginning and ending inventories for:

a. raw materials and work in process only

b. work in process only.

c. raw materials only.

d. raw materials, work in process, and finished goods.   

8. A process cost accounting system is most appropriate when

a. a variety of different products are produced, each one requiring different types of materials, labor, and overhead.

b. the focus of attention is on a particular job or order.

c. similar products are mass-produced.

d. individual products are custom made to the specification of customers.

9. The following information was gathered for the Buckley Corporation for the most recent year. Manufacturing overhead is allocated using direct labor hours.

Estimated direct labor hours

54,000

Actual direct labor hours

57,000

Estimated manufacturing overhead costs

$729,000

Actual manufacturing overhead costs

$685,000

What is the amount of overallocated or underallocated overhead for the year?

a. $44,000 overallocated

b. $44,000 underallocated

c. $84,500 overallocated

d. $84,500 underallocated

10. XYZ Company uses job costing. Actual manufacturing overhead for the period is $19,600 while allocated manufacturing overhead is $18,700. What entry will close the manufacturing overhead balance?

a. Debit manufacturing overhead and credit work in process for $900.

b. Debit manufacturing overhead and credit cost of goods sold for $900.

c. Debit cost of goods sold and credit finished goods inventory for $900.

d. Debit costs of goods sold and credit manufacturing overhead for $900..

11. Select the answer that best represents which industry would use (1) process costing and (2) job costing, respectively.

a. (1) Aircraft, (2) pharmaceuticals

b. (1) Chemicals, (2) Commercial building construction

c. (1) Construction, (2) Chemicals

d. (1) Printing, (2) Food and Beverage

12. For the year, Redder Company has cost of goods manufactured of $600,000, beginning finished goods inventory of $200,000, and ending finished goods inventory of $250,000. The cost of goods sold is:

a. $450,000.

b. $500,000.

c. $550,000.

d. $600,000.

13. Cost of Materials Used $45,000

Direct Labor costs $48,000

Factory Overhead $39,000

Work in Process, beg. $28,000

Work in Process, end. $18,000

What is Cost of Goods Manufactured?

a.

$178,000

b.

$132,000

c.

$122,000

d.

$142,000

14. Smith Paints allocates overhead based on machine hours. Selected data for the most recent year follow.

Estimated manufacturing overhead cost

$250,000

Actual manufacturing overhead cost

$230,000

Estimated machine hours

20,000

Actual machine hours

21,000

(The estimates were made as of the beginning of the year, while the actual results were for the entire year.)

The predetermined manufacturing overhead rate per machine hour is closest to:

a. $11.90.

b. $10.95.

c. $12.50.

d. $11.50.

15. Williams Company reports production costs for 2015 as follows:

Direct materials used

$345,000

Direct labor incurred

250,000

Factory overhead incurred

400,000

Operating expenses

175,000

Williams Company's period costs for 2015 amount to:

a.

$345,000

b.

$250,000

c.

$400,000

d.

$175,000

Williams Company�s productcosts for 2015 amount to:

a.

$995,000

b.

$920,000

c.

$825,000

d.

$770,000

16. In accumulating raw material costs, the cost of raw materials purchased in a perpetual inventory system is debited to:

a. Raw Materials Purchases

b. Raw Materials Inventory

c. Purchases

d. Work in Process

17. A manufacturing company income statement reports only two types of inventory accounts, Raw Materials and Finished Goods.

a True

b. False

18. Before these materials are used to manufacture its cars, Honda classifies steel, glass, and plastic as:

A. finished goods inventory.

B. work in process inventory.

C. raw materials inventory.

D. merchandise inventory.

19. Which of the following is an example of overhead in a factory?

A. Wages of machine operators

B. Wages of factory maintenance personnel

C. Wages of administrators in the corporate office

D. Salaries of salespersons

20. Factory labor data for Reyes Tool & Die is $5,000 (note: Job 1 $1,200; Job 2 $1,600; Job 3 $1,400 and general factory use $800). The summary journal entry to record factory labor incurred is

a. Work in process 4,200

Factory overhead 800

Wages payable 5,000

b. Work in process 5,000

Wages payable 5,000

c. Wages payable 4,200

General wage expense 800

Wages expense 5,000

d. Factory overhead 4,200

Work in process 800

Wages payable 5,000

Answer 1

Concepts and reason

Job order costing system: Job order costing system is a type of system in which the businesses creates products or provides services based on the specifications of order placed by the customer or as required by the client. There are different types of companies like manufacturers of special equipment, accounting and consulting and legal firms, architects, aircraft and ship manufacturers, film studios or retail companies, book publishers who employ job costing system.

Companies that manufacture products using job order costing system usually receive orders for products with customized specifications. These companies treat each order as a separate job and allocate costs on the basis of units done. For example an order may be received by a clothing factory for manufacture of men’s shirts with a particular size, color, quality and design.

Fundamentals

Period cost: These costs are incurred irrespective of production throughout the year. These costs are incurred as the time passes. A company which has no manufacturing activity doesn’t incur any product costs but it incurs the period costs as these costs are incurred irrespective of production activity.

Product costs: These costs form part of cost of units produced. These costs are direct material, direct labor, production supplies, manufacturing overhead etc.

1.

Give an example of period cost as shown below:

Period cost: It is such cost which is not considered as part of cost of units produced.

The answer is wages of sales persons

2.

The planning function of management involves establishing objectives that are strategic and operational in nature. The planning function involves determining goals in a strategic manner and to direct the organization in making the goals operational.

The correct answer is “planning”.

3.

Explain how the product costs would convert into, if they expire as shown below:

Product costs are the cost incurred for producing the output. These costs include direct material, direct labor, production supplies and manufacturing overhead etc. These costs are expensed off when the output is sold. The product costs becomes part of cost of gods sold

The answer is cost of goods sold.

4.

Explain whether the property taxes on manufacturing plant are a product or period cost as shown below:

The answer is the property taxes are product costs but not period costs.

5.

Explain the work-in process and how the goods semi-processed gets transferred from one department to other department as shown below.

Manufacturing products which are required to be processed in various departments before they are turned into finished goods and become ready for sale are transferred from one department to another department as work-in process.

Thus, the semi-finished goods of department A are transferred to work-in process of department B.

6.

Prime costs are direct material and direct labor. Direct material is an input for producing the output. Direct labor is cost of labor worked to convert raw materials to finished goods. Thus, the direct labor is both a prime cost and conversion cost.

The answer is wages of assembly line workers.

7.

Explain the cost of goods manufactured and the schedule of computing the cost of goods manufactured.

Cost of goods manufactured: It is a schedule or a statement which shows the production costs for the products that were completed during at the end of the period. The cost structure includes the cost of direct materials, cost of direct labor, manufacturing overhead and work-in process during the period.

The schedule of Cost of goods manufactured is shown below:

Thus, the cost of goods manufactured schedule shows beginning and ending inventories of raw materials and work-in process only.

8.

Explain when a process costing system is most appropriate as shown below:

Process costing system: This costing system is used where there is mass production of similar goods and they should pass through different processes to become a finished product.

So, the process costing system is appropriate when the similar products are mass-produced.

9.

Calculate the amount of under or over applied manufacturing overhead as shown below:

Manufacturing overhead: These are also called as indirect factory costs. These costs are incurred for the purposes of production and includes, only such costs incurred within the factory premises. These costs are incurred as a whole and cannot be traced to a particular unit of output. Therefore, these costs shall be allocated based on an appropriate basis.

Actual manufacturing overhead: These are also called as indirect factory costs. These costs are incurred for the purposes of production and includes, only such costs incurred within the factory premises. These costs are actually incurred in the accounting period.

Applied manufacturing overhead: The manufacturing overhead applied to the work-in process is called applied manufacturing overhead. The manufacturing overhead is estimated at the beginning of the accounting period. This overhead is applied using a pre-determined overhead allocation rate to the work-in process.

Pre-determined overhead allocation rate: It is a rate to apply the indirect manufacturing costs to products. It is calculated at the beginning of the period by dividing the estimated manufacturing overhead costs by the estimated amount of units of cost driver. Commonly used cost drivers include direct labor costs, direct labor hours, or machine hours.

The formula for calculating the pre-determined overhead rate is

Compute the pre-determined overhead allocation rate as shown below:

Thus, the pre-determined overhead allocation rate is.

Now, compute the overhead applied as shown below:

Thus, the overhead applied is.

Now, compute the over-under applied overhead

Thus, the over-applied overhead is.

10.

Pass the entry to close the manufacturing overhead as shown below:

Manufacturing overhead: These are also called as indirect factory costs. These costs are incurred for the purposes of production and includes, only such costs incurred within the factory premises. These costs are incurred as a whole and cannot be traced to a particular unit of output. Therefore, these costs shall be allocated based on an appropriate basis.

Actual manufacturing overhead: These are also called as indirect factory costs. These costs are incurred for the purposes of production and includes, only such costs incurred within the factory premises. These costs are actually incurred in the accounting period.

Applied manufacturing overhead: The manufacturing overhead applied to the work-in process is called applied manufacturing overhead. The manufacturing overhead is estimated at the beginning of the accounting period. This overhead is applied using a pre-determined overhead allocation rate to the work-in process.

Pre-determined overhead allocation rate: It is a rate to apply the indirect manufacturing costs to products. It is calculated at the beginning of the period by dividing the estimated manufacturing overhead costs by the estimated amount of units of cost driver. Commonly used cost drivers include direct labor costs, direct labor hours, or machine hours.

The formula for calculating the pre-determined overhead rate is

In case the applied manufacturing overhead is more than the actual manufacturing overhead, then the overhead is said to be over-applied.

In case the applied manufacturing overhead is less than the actual manufacturing overhead, then the overhead is said to be under applied.

The under-applied manufacturing overhead is

Thus, the under-applied manufacturing overhead is.

Pass the entry to close the under-applied manufacturing overhead as shown below

11.

Describe process costing and job costing and choose the correct option that best represents the two costing systems as shown below:

Process costing system: This costing system is used where there is mass production of similar goods and they should pass through different processes to become a finished product.

Job order costing system is a type of system in which the businesses creates products or provides services based on the specifications of order placed by the customer or as required by the client. Companies treat each order as a separate job and allocate costs on the basis of units done. There are different types of companies like manufacturers of special equipment, accounting and consulting and legal firms, architects, aircraft and ship manufacturers, film studios or retail companies, book publishers who employ job costing system.

Chemicals and commercial building construction is the correct answer.

12.

Cost of goods sold: Cost of goods sold is the cost incurred or to be incurred to sell the goods. It is an expense to an organization. The difference of the sales revenues and the cost of goods sold will result in either gross profit or gross loss. Cost of goods sold will be calculated to set the selling price for a particular period.

Calculate the cost of goods sold as shown below:

Thus, the amount of cost of goods sold is.

13.

Cost of goods manufactured: Cost of goods manufactured is the cost incurred or to be incurred to manufacture the goods. It is an expense to an organization. Cost of goods manufactured will be calculated to calculate the cost of goods sold.

Calculate the cost of goods manufactured as shown below:

Thus, the amount of cost of goods manufactured is.

14.

Predetermined overhead rate is used to apply manufacturing overhead to work in process inventory. Usually this predetermined overhead rate will be calculated at the beginning of the period. This rate is used to charge overhead costs to a particular job. It is calculated by dividing the overhead cost with the labor hours or machine hours as per the policy adapted by a company.

Calculate the predetermined manufacturing overhead rate as shown below:

Thus, the predetermined manufacturing overhead rate per machine hour is closest to

.

15.

Period costs: Period costs are the costs which are not included in product costs. These costs are reported in the income statement as they incurred. Hence these costs are not included in cost of purchased or manufactured goods. All selling and administrative costs will form part of period costs.

Thus, the period costs for the year 2015 is.

16.

Explain which account the cost of raw materials purchased in a perpetual inventory is debited as shown below:

Perpetual inventory system: It is also called continuous system where in the inventory records are updated on a continual basis. This results in consensus of book and real inventory in the warehouse. Under this system the inventory purchased is debited to raw materials inventory.

Thus, the correct answer is raw materials inventory.

17.

Describe a manufacturing company income statement and the type of inventory accounts it reports as shown below:

Manufacturing company income statement: This income statement reports the sales revenue and the cost of goods sold. The calculation of cost of goods sold is shown by adding the goods manufactured to the opening finished goods inventory and deducting the ending cost of goods manufactured.

Thus the manufacturing company income statement reports only the finished goods.

18.

Explain when an inventory is merchandise inventory or raw materials inventory for a company.

Raw material inventory: It is the basic input in a manufacturing concern used to produce a finished product. It is processed and converted into a finished product by incurring conversion costs like direct labor and overhead.

Merchandise inventory: The goods which were purchased in the finished form and held for resale are called merchandise inventory.

The steel, glass and plastic are merchandise inventory for Honda Company.

19.

Explain what a factory overhead is as shown below:

Factory overhead: These are also called as indirect factory costs. These costs are incurred for the purposes of production and includes, only such costs incurred within the factory premises. These costs are incurred as a whole and cannot be traced to a particular unit of output. Therefore, these costs shall be allocated based on an appropriate basis.

Thus, the wages of factory maintenance personnel is the overhead in a factory.

20.

Prepare the journal entry to record the general factory overhead incurred:

Ans: Part 1

For a manufacturing company, the example of a period cost is wages of salespersons.

Part 2

The management function establishing objectives of strategic and operational in nature is planning.

Part 3

As the product costs expire or expensed off, they become part of cost of goods sold.

Part 4

The property taxes are product costs but not period costs.

Part 5

The semi-finished goods of department A are transferred to work-in process - department B

Part 6

Both prime cost and conversion cost for a manufacturing vehicle is wages of assembly line workers.

Part 7

The cost of goods manufactured schedule shows beginning and ending inventories of raw materials and work-in process only.

Part 8

The process costing system is most appropriate when similar products are mass produced.

Part 9

The overhead is over allocated by $84,500.

Part 10

To close the under applied manufacturing overhead, debit the cost of goods sold and credit the manufacturing overhead with $900.

Part 11

The process costing best represents chemicals and the job costing best represents commercial building construction.

Part 12

The amount of cost of goods sold is $550,000.

Part 13

The amount of cost of goods manufactured is $142,000.

Part 14

The predetermined manufacturing overhead rate per machine hour is closest to $12.50.

Part 15

The period costs for the year 2015 is $175,000.

Part 16

The raw material purchased is debited to raw materials inventory account under the perpetual inventory system.

Part 17

The manufacturing company income statement reports only the finished goods.

Part 18

The steel, glass and plastic are merchandise inventory for Honda Company.

Part 19

The wages of factory maintenance personnel is the overhead in a factory.

Part 20

To record the factory labor applied and factory overhead incurred, debit the work in process inventory account with $4,200, manufacturing overhead with $800 and credit the factory labor account with $5,000.