Chapter 02
Cost Terms, Concepts, and Classifications

Multiple Choice Questions
 
1. What would be the classification of corporate controller's salary? 
A. Manufacturing cost.
B. Product cost.
C. Administrative cost.
D. Selling cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-08 Non-manufacturing Costs
 
2. How should the cost of the fire insurance for a manufacturing plant be classified? 
A. Prime cost.
B. Product cost.
C. Period cost.
D. Variable cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

3. How would the cost of rent for a manufacturing plant generally be classified? 
A. A product cost but not a prime cost.
B. Neither a product nor prime cost.
C. A prime cost but not a product cost.
D. Both a prime cost and product cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
4. For a lamp manufacturing company, the cost of the insurance on its vehicles that deliver lamps to customers is best described as a: 
A. Prime cost.
B. Manufacturing overhead cost.
C. Period cost.
D. Differential cost of a lamp.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
5. For a manufacturing company, which of the following is an example of a period cost rather than a product cost? 
A. Depreciation of factory equipment.
B. Wages of salespersons.
C. Wages of machine operators.
D. Insurance on factory equipment.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

6. Which of the following would be considered a product cost for external financial reporting purposes? 
A. Cost of a warehouse used to store finished goods.
B. Cost of guided public tours through the company's facilities.
C. Cost of travel necessary to sell the manufactured product.
D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
7. Which of the following would NOT be treated as a product cost for external financial reporting purposes? 
A. Depreciation on a factory building.
B. Salaries of factory workers.
C. Indirect labour in the factory.
D. Advertising expenses.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
8. What would be the classification of the transportation costs incurred by a manufacturing company to ship its product to its customers? 
A. Product cost.
B. Manufacturing overhead.
C. Period cost.
D. Administrative cost.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

9. The advertising costs incurred by Pepsi to air its commercials during the hockey season can best be described as a: 
A. Variable cost.
B. Fixed cost.
C. Prime cost.
D. Conversion cost.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
Topic: 02-21 Fixed Cost
 
10. Micro Computer Company has set up a toll-free telephone line for customer inquiries regarding computer hardware produced by the company. How would the cost of this toll-free line be classified? 
A. Product cost.
B. Manufacturing overhead.
C. Direct labour.
D. Period cost.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

11. How would the wages of factory maintenance personnel usually be classified? 
A. Direct labour and manufacturing overhead.
B. Indirect labour and manufacturing overhead.
C. Direct labour and period cost.
D. Indirect labour and period cost

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost
 
12. Prime costs consist of: 
A. Direct Labour and Manufacturing Overhead.
B. Direct Material and Direct Labour.
C. Direct Material and Manufacturing overhead.
D. Direct Material, Direct Labour and Manufacturing Overhead.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
13. What does manufacturing overhead cost consist of? 
A. All manufacturing costs.
B. All manufacturing costs, EXCEPT direct materials and direct labour.
C. Indirect materials but NOT indirect labour.
D. Indirect labour but NOT indirect materials.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-06 Manufacturing Overhead
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

14. A brewery produces many variety of beer. If the cost object is a particular brand of beer the factory supervisor salary is classified a/an _____________ cost of the brand of beer and a _____________ cost of the entire division. 
A. Direct; Common
B. Indirect; Common
C. Direct; Prime
D. Fixed; Period

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost
 
15. Rossiter Company failed to record a credit sale at the end of the year, although the reduction in finished goods inventories was correctly recorded when the goods were shipped to the customer. Which one of the following statements is correct? 
A. Accounts receivable was not affected, inventory was not affected, sales were understated, and cost of goods sold was understated.
B. Accounts receivable was understated, inventory was overstated, sales were understated, and cost of goods sold was overstated.
C. Accounts receivable was not affected, inventory was understated, sales were understated, and cost of goods sold was understated.
D. Accounts receivable was understated, inventory was not affected, sales were understated, and cost of goods sold was not affected.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-17 Inventoriable Costs

16. What is the outcome if the cost of goods sold is greater than the cost of goods manufactured? 
A. Work-in-process inventory has decreased during the period.
B. Finished goods inventory has increased during the period.
C. Total manufacturing costs must be greater than cost of goods manufactured.
D. Finished goods inventory has decreased during the period.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look
Topic: 02-17 Inventoriable Costs
 
17. Last month, when 10,000 units of a product were manufactured, the cost per unit was $60. At this level of activity, variable costs were 50% of total unit costs. If 10,500 units are manufactured next month and cost behaviour patterns remain unchanged, how will costs be affected? 
A. Total variable costs will remain unchanged.
B. Fixed costs will increase in total.
C. Variable cost per unit will increase.
D. Total cost per unit will decrease.
The average cost per unit will decrease as activity increases due to the presence of fixed costs. Refer to page 41 of text.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
Topic: 02-21 Fixed Cost

18. Which of the following statements regarding variable cost is true? 
A. Variable cost increases on a per unit basis as the number of units produced increases.
B. Variable cost remains constant on a per unit basis as the number of units produced increases.
C. Variable cost remains the same in total as production increases.
D. Variable cost decreases on a per unit basis as the number of units produced increases.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
 
19. Within the relevant range, what is the difference between variable costs and fixed costs? 
A. Variable costs per unit fluctuate and fixed costs per unit remain constant.
B. Variable costs per unit are constant and fixed costs per unit fluctuate.
C. Total variable costs and total fixed costs are constant.
D. Total variable costs and total fixed costs fluctuate.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
Topic: 02-21 Fixed Cost

20. The Target store in your home town is one of many Target department stores across the province. Some of the costs associated with the store in your home town last month appear below:

Shoe Department Cost of Sales	$80,000	
Other Department Salaries	62,000	
Store Managers Salary	14,000	
Shoe Department Sales Commissions	8,000	
Store Utilities	13,000	
Shoe Department Manager's Salary	9,000	
Store Lease Cost	11,000	
Store Janitorial Costs	11,000	
Other Store Costs	98,000	

The Shoe Department is one of many departments in the home town store. The direct costs of the Shoe Department total: 
A. $80,000
B. $88,000
C. $97,000
D. $108,000
80,000 + 8,000 + 9,000 = $97,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

21. Which of the following best defines an opportunity cost? 
A. The difference in total costs from selecting one alternative instead of another.
B. The benefit forgone by selecting one alternative instead of another.
C. A cost that may be saved by NOT adopting an alternative.
D. A cost that may be shifted to the future with little or no effect on current operations.

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-27 Opportunity Cost

22. To what does the term differential cost refer? 
A. A difference in cost that results from selecting one alternative instead of another.
B. The benefit forgone by selecting one alternative instead of another.
C. A cost that does not entail any dollar outlay, but which is relevant to the decision-making process.
D. A cost that continues to be incurred even though there is no activity.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-26 Differential Cost and Revenue
 
23. Which of the following costs is often important in decision making, but is omitted from conventional accounting records? 
A. Fixed cost.
B. Sunk cost.
C. Opportunity cost.
D. Indirect cost.

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-27 Opportunity Cost
 
24. When a decision is made among a number of alternatives, the benefit that is lost by choosing one alternative over another is called what? 
A. Realized cost.
B. Opportunity cost.
C. Conversion cost.
D. Accrued cost.

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-27 Opportunity Cost

25. What does conversion cost consist of? 
A. Manufacturing overhead cost.
B. Direct materials and direct labour cost.
C. Direct labour cost.
D. Direct labour and manufacturing overhead cost.

Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
26. Prime cost consists of direct materials and what? 
A. Direct labour.
B. Manufacturing overhead.
C. Indirect materials.
D. Cost of goods manufactured.

Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

27. Which one of the following costs should NOT be considered a direct cost of serving a particular customer who orders a customized personal computer by phone directly from the manufacturer? 
A. The cost of the hard disk drive installed in the computer.
B. The cost of shipping the computer to the customer.
C. The cost of leasing a machine on a monthly basis that automatically tests hard disk drives before they are installed in computers.
D. The cost of packaging the computer for shipment.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost
 
28. Which one of the following costs should NOT be considered an indirect cost of serving a particular customer at a Dairy Queen fast food outlet? 
A. The cost of the hamburger patty in the burger the customer ordered.
B. The wages of the employee who takes the customer's order.
C. The cost of heating and lighting the kitchen.
D. The salary of the outlet's manager.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost

29. Green Company's costs for the month of August are as follows:

Direct materials used	$27,000	
Direct labour	$34,000	
Sales salaries	$14,000	
Indirect labour	$10,000	
Indirect materials	$15,000	
General corporate administrative cost	$12,000	
Taxes on manufacturing facility	$2,000	
Rent on factory	$17,000	

The beginning work-in-process inventory is $16,000 and the ending work-in-process inventory is $9,000. What is the cost of goods manufactured for the month? 
A. $105,000.
B. $132,000.
C. $138,000.
D. $112,000.
DM + DL + MOH + WIP B.I. - WIP E.I.
27,000 + 34,000 + (10,000 + 15,000 + 2,000 + 17,000) + 16,000 - 9,000 = $112,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look
 
30. A manufacturing company prepays its insurance coverage for a three-year period. The premium for the three years is $2,700 and is paid at the beginning of the first year. Eighty percent of the premium applies to manufacturing operations and 20% applies to selling and administrative activities. What amounts should be considered product costs and period costs respectively for the first year of coverage?

	Product Costs	Period Costs	
A)	$2,700	$0	
B)	$2,160	$540	
C)	$1,440	$360	
D)	$720	$180	
A. Option A
B. Option B
C. Option C
D. Option D
($2,700/3) * 80% and ($2,700/3) * 20%.

Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

31. You have the following data:

Cost of goods sold	$70	
Direct labour	$20	
Direct materials	$15	
Cost of goods manufactured	$80	
Work-in-process ending	$10	
Finished goods ending	$15	
Manufacturing overhead	$30	

Which of the following represents the beginning work-in-process inventory? 
A. $20.
B. $15.
C. $55.
D. $25.
CGM + EI - Manufacturing Costs = 80 + 10 - (15 + 20 + 30) = $25.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

32. During the month of May, Bennett Manufacturing Company purchases $43,000 of raw materials. The manufacturing overhead totals $27,000 and the total manufacturing costs are $106,000. Assuming a beginning inventory of raw materials of $8,000 and an ending inventory of raw materials of $6,000, what must be the total for direct labour? 
A. $34,000.
B. $38,000.
C. $36,000.
D. $45,000.
DM used = 8,000 + 43,000 - 6,000 = $45,000.
DL = 106,000 - 45,000 - 27,000 = $34,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

33. You are given the following data for January:

Direct materials	$38,000	
Direct labour	$24,000	
Manufacturing overhead	$17,000	
Beginning work in process inventory	$10,000	
Ending work in process inventory	$11,000	

Which of the following is the cost of goods manufactured? 
A. $89,000.
B. $78,000.
C. $79,000.
D. $80,000.
38,000 + 24,000 + 17,000 + 10,000 - 11,000 = $78,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look
 
34. During the month of June, Reardon Company incurs $17,000 of direct labour and $8,500 of manufacturing overhead, and purchases $15,000 of raw materials. Between the beginning and the end of the month, the raw-materials inventory increases by $2,000, the finished goods inventory increases by $1,500, and the work-in-process inventory decreases by $3,000. What is the cost of goods manufactured? 
A. $38,500.
B. $40,500.
C. $41,500.
D. $43,500.

RM purchased	$15,000	
LESS: Increase in RM inv.	2,000	
RM used	$13,000	
+ DL	17,000	
+ MOH	8,500	
= Total Man. Costs	$38,500	
ADD: Decrease in WIP inv.	3,000	
CGM	$41,500	

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

35. Mueller Company reports the following data for the year just ended:

Raw materials used in production	$800,000	
Direct labour	$700,000	
Total overhead costs	$900,000	
Ending work in process inventory	$400,000	
Cost of goods manufactured	$2,500,000	

What was the beginning work-in-process inventory? 
A. $300,000.
B. $500,000.
C. $1,300,000.
D. $100,000.
C.G.M. + E.I. - Man. Costs
(2,500,000 + 400,000 - 800,000) - 700,000 - 900,000 = $500,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

36. Williams Company's direct labour cost is 25% of its conversion cost. If the manufacturing overhead cost for the last period is $45,000 and the direct materials cost is $25,000, what is the direct labour cost? 
A. $15,000.
B. $60,000.
C. $33,333.
D. $20,000.
Let x = CC (conversion costs)
CC = DL + OH
x =.25x + 45,000
x = 60,000 Therefore DL 60,000 *.25 = $15,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

37. The Lyons Company's cost of goods manufactured was $120,000 when its sales were $360,000 and its gross margin was $220,000. If the ending inventory of finished goods was $30,000, what was the beginning inventory of finished goods? 
A. $20,000.
B. $50,000.
C. $110,000.
D. $150,000.
CGS = Sales - gross margin = $360,000 - $220,000 = 140,000
B.I. = CGS + E.I. - CGM
B.I. = 140,000 + 30,000 - 120,000 = $50,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
38. The gross margin for Cushing Company for the first quarter of last year was $325,000 when sales were $700,000. The beginning inventory of finished goods was $60,000, and the ending inventory of finished goods was $85,000. What was the cost of goods manufactured for the first quarter? 
A. $375,000.
B. $350,000.
C. $400,000.
D. $385,000.
CGM = CGS + EI - BI
= (700,000 - 325,000) + 85,000 - 60,000 = $400,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

39. Last month, a manufacturing company had the following operating results:

Beginning finished goods inventory	$74,000	
Ending finished goods inventory	$73,000	
Sales	$464,000	
Gross margin	$52,000	

What was the cost of goods manufactured for the month? 
A. $413,000
B. $411,000
C. $412,000
D. $463,000
CGM = CGS + EI -BI
= (464,000 - 52,000) + 73,000 - 74,000 = $411,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
40. The following information was provided by Wilson Company for the year just ended:

Beginning finished goods inventory	$150,750	
Ending finished goods inventory	$140,475	
Sales	$475,000	
Gross margin	$150,000	

What was the cost of goods manufactured for the year? 
A. $314,725.
B. $335,275.
C. $325,000.
D. $464,725.
CGM = CGS + EI - BI
(475,000 - 150,000) + 140,475 - 150,750 = $314,725.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

41. The following information was provided by Grand Company for the year just ended:

Decrease in finished goods inventory	$4,655	
Sales	$500,000	
Gross margin	$100,000	

What was the cost of goods manufactured for the year? 
A. $95,345.
B. $104,655.
C. $395,345.
D. $404,655.
CGM = CGS - decrease in FG inventory
CGM = (500,000 - 100,000) - 4,655 = $395,345.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

42. The following inventory valuation errors were discovered by Knox Corporation's new controller just after the annual financial statements were published at the end of Year 3.

The year 3 ending inventory was understated by $17,000.
The year 2 ending inventory was understated by $61,000.
The year 1 ending inventory was overstated by $23,000.

The net income for Knox in each of these years was:

	Year 3	Year 2	Year 1	
Net income	$168,000	$254,000	$138,000	

Assuming there were no income taxes, what was the adjusted net income in each year?

	Year 3	Year 2	Year 1	
A)	$212,000	$170,000	$161,000	
B)	$124,000	$338,000	$115,000	
C)	$90,000	$338,000	$161,000	
D)	$124,000	$170,000	$115,000	
A. Option A
B. Option B
C. Option C
D. Option D
When BI is overstated Net Income is understated. When EI is overstated Net Income is overstated.

Year 1	NI = 138,000 - 23,000 = $115,000	
Year 2	BI is overstated by 23,000, EI understated by 61,000.
NI = 254,000 + 84,000 = $338,000	
Year 3	BI is understated by 61,000, EI understated 17,000
NI = 168,000 - 61,000 + 17,000 = $124,000	

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-17 Inventoriable Costs

43. Delta Merchandising, Inc., has provided the following information for the year just ended:

Net sales	$128,500	
Beginning inventory	$24,000	
Purchases	$80,000	
Gross margin	$38,550	

What was the ending inventory for the company at year-end? 
A. $65,450.
B. $24,500.
C. $14,050.
D. $9,950.
EI = BI + Purchases - CGS
EI = 24,000 + 80,000 - (128,500 - 38,550) = $14,050.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

44. The beginning balance of the raw materials inventory account for May was $27,500. The ending balance for May was $28,750, and $128,900 of raw materials were used during the month. What was the cost of the materials purchased during the month? 
A. $131,300.
B. $127,650.
C. $130,150.
D. $157,650.
RM purchased = RM used + EI - BI
= 128,900 + 28,750 - 27,500 = $130,150.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

45. Gabel Inc. is a merchandising company. Last month, the company's merchandise purchases totalled $63,000. The company's beginning merchandise inventory was $13,000, and its ending merchandise inventory was $15,000. What was the company's cost of goods sold for the month? 
A. $91,000.
B. $63,000.
C. $65,000.
D. $61,000.
CGS = BI + Purchases - EI = 13,000 + 63,000 - 15,000 = $61,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
46. Haack Inc. is a merchandising company. Last month, the company's cost of goods sold was $84,000. The company's beginning merchandise inventory was $20,000, and its ending merchandise inventory was $18,000. What was the total amount of the company's merchandise purchases for the month? 
A. $86,000.
B. $82,000.
C. $84,000.
D. $122,000.
Purchases = CGS + EI - BI = 84,000 + 18,000 - 20,000 = $82,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

47. During January, the cost of goods manufactured was $93,000. The beginning finished goods inventory was $16,000, and the ending finished goods inventory was $20,000. What was the cost of goods sold for the month? 
A. $129,000.
B. $89,000.
C. $93,000.
D. $97,000.
CGS = BI + CGM - EI = 16,000 + 93,000 - 20,000 = $89,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
48. Sally Smith is employed in the production of various electronic products, and she earns $8 per hour. She is paid time-and-a-half for work in excess of 40 hours per week. During a given week, she worked 45 hours and had no idle time. How much of her week's wages would be charged to manufacturing overhead? 
A. $60.
B. $20.
C. $40.
D. $0.
(45 - 40) hours = 5 hours overtime. MOH = 5  8  0.5 = $20.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-05 Direct Labour
Topic: 02-06 Manufacturing Overhead
Topic: 02-07 Classification of Manufacturing Labour Costs

49. During the first week of April, Gillian worked a total of 50 hours assembling products and had no idle time. Gillian is paid $15 per hour for regular time, and is paid time-and-a-half for all hours in excess of a 40-hour week. How much of Gillian's wages for the week should be charged to direct labour? 
A. $600.
B. $225.
C. $750.
D. $975.
50 hours * $15/hr. = $750.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-05 Direct Labour
Topic: 02-06 Manufacturing Overhead
Topic: 02-07 Classification of Manufacturing Labour Costs
 
50. Robert Smith earns $16 per hour assembling products. For each hour over 40 he works in a week he is paid time-and-a-half. During a given week, he worked 40 hours for which 3 hours were idle time. How much of his weekly wages would be charged to direct labour? 
A. $640.
B. $592.
C. $688.
D. $48.
37 hrs. * $16/hr = $592.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-07 Classification of Manufacturing Labour Costs
 
 The following data (in thousands of dollars) have been taken from the accounting records of Karling Corporation for the year just ended.

Sales	$990	
Raw materials inventory, beginning	$40	
Raw materials inventory, ending	$70	
Purchases of raw materials	$120	
Direct labour	$200	
Manufacturing overhead	$230	
Administrative expenses	$150	
Selling expenses	$140	
Work-in-process inventory, beginning	$70	
Work-in-process inventory, ending	$50	
Finished goods inventory, beginning	$120	
Finished goods inventory, ending	$160	

51. What was the cost (in thousands of dollars) of the raw materials used in production during the year? 
A. $190.
B. $90.
C. $150.
D. $160.
Cost of RM used = RM BI + Purchases RM - RM EI = 40 + 120 - 70 = $90.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
52. What was the cost of goods manufactured (finished) for the year (in thousands of dollars)? 
A. $540.
B. $500.
C. $570.
D. $590.
CGM = Cost of RM used + DL + OH + WIP BI - WIP EI
= 90 + 200 + 230 + 70 - 50 = $540.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

53. What was the cost of goods sold (in thousands of dollars) for the year? 
A. $700.
B. $500.
C. $660.
D. $580.
CGS = BI + CGM - EI = 120 + 540 - 160 = $500.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
54. What was the net income (in thousands of dollars) for the year? 
A. $150.
B. $200.
C. $490.
D. $250.
NI = Sales - CGS - Admin. Expenses - Selling Expenses
= 990 - 500 - 150 - 140 = $200.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 The following data (in thousands of dollars) have been taken from the accounting records of Karlana Corporation for the year just ended.

Sales	$910	
Raw materials inventory, beginning	$80	
Raw materials inventory, ending	$20	
Purchases of raw materials	$100	
Direct labour	$130	
Manufacturing overhead	$200	
Administrative expenses	$160	
Selling expenses	$140	
Work-in-process inventory, beginning	$40	
Work-in-process inventory, ending	$10	
Finished goods inventory, beginning	$130	
Finished goods inventory, ending	$150	

55. What was the cost of the raw materials used in production (in thousands of dollars) during the year? 
A. $180.
B. $40.
C. $120.
D. $160.
RM used = RM BI + RM Purchases - RM EI = 80 + 100 - 20 = $160.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
56. What was the cost of goods manufactured (finished) for the year (in thousands of dollars)? 
A. $530.
B. $520.
C. $500.
D. $460.
CGM = DM used + DL + OH + BI WIP - EI WIP
= 160 + 130 + 200 + 40 - 10 = $520.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

57. What was the cost of goods sold for the year (in thousands of dollars)? 
A. $530.
B. $520.
C. $500.
D. $460.
CGS = BI + CGM - EI = 130 + 520 - 150 = $500.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
58. What was the net income (in thousands of dollars) for the year? 
A. $410.
B. $110.
C. $40.
D. $180.
NI = Sales - CGS - Admin. Expenses - Selling expenses
= 910 - (130 + 520 - 150) - 160 - 140 = $110.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 The following data (in thousands of dollars) have been taken from the accounting records of Karlist Corporation for the just completed year.

Sales	$800	
Raw materials inventory, beginning	$60	
Raw materials inventory, ending	$70	
Purchases of raw materials	$180	
Direct labour	$100	
Manufacturing overhead	$190	
Administrative expenses	$110	
Selling expenses	$150	
Work-in-process inventory, beginning	$70	
Work-in-process inventory, ending	$80	
Finished goods inventory, beginning	$120	
Finished goods inventory, ending	$160	

59. What was the cost of the raw materials used in production (in thousands of dollars) during the year? 
A. $240.
B. $190.
C. $170.
D. $250.
Cost of RM used = RM BI + RM Purchases - RM EI = 60 + 180 - 70 = $170.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
60. What was the cost of goods manufactured (finished) for the year (in thousands of dollars)? 
A. $450.
B. $460.
C. $530.
D. $540.
CGM = RM used + DL + OH + BI WIP - EI WIP
= 170 + 100 + 190 + 70 - 80 = $450.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

61. What was the cost of goods sold (in thousands of dollars) for the year? 
A. $610.
B. $410.
C. $490.
D. $570.
CGS = BI + CGM - EI = 120 + 450 - 160 = $410.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
62. What was the Gross Margin (in thousands of dollars) for the year? 
A. $350.
B. $130.
C. $390.
D. $190.
GM = Sales - CGS = 800 - 410 = $390.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 The following data pertain to Harriman Company's operations during July:

	July 1	July 31	
Raw materials	0	$5,000	
Work-in-process inventory	?	$4,000	
Finished goods inventory	$12,000	?	

Other data:	 	
Cost of goods manufactured	$105,000	
Raw materials used	$40,000	
Manufacturing overhead costs	$20,000	
Direct labour costs	$39,000	
Gross Margin	$100,000	
Sales	$210,000	

63. What was the beginning work-in-process inventory? 
A. $10,000.
B. $14,000.
C. $1,000.
D. $4,000.
BI WIP = CGM + EI WIP - RM used - DL - OH
= 105,000 + 4,000 - 40,000 - 39,000 - 20,000 = $10,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
64. What was the ending finished goods inventory? 
A. $17,000.
B. $12,000.
C. $7,000.
D. $2,000.
EI = BI + CGM - CGS
= 12,000 + 105,000 - (210,000 - 100,000) = $7,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 Bergeron Inc. reported the following data for last year:

Work-in-process inventory, beginning	$100	
Work-in-process inventory, ending	$150	
Finished goods inventory, beginning	$180	
Finished goods inventory, ending	$200	
Direct labour cost	$300	
Direct materials cost	$500	
Manufacturing overhead cost	$400	

65. Which of the following is the prime cost? 
A. $900.
B. $800.
C. $1,200.
D. $700.
Prime cost = DM + DL = 500 + 300 = $800.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
66. Which of the following is the conversion cost? 
A. $700.
B. $800.
C. $900.
D. $1,200.
CC = DL + OH = 300 + 400 = $700.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

67. Which of the following is the cost of goods manufactured? 
A. $1,250.
B. $1,200.
C. $1,220.
D. $1,150.
CGM = DM + DL + OH + WIP BI - WIP EI
= 500 + 300 + 400 + 100 - 150 = $1,150.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 Geneva Steel Corporation produces large sheets of heavy gauge steel. The company showed the following amounts relating to its production for the year just completed:

Direct materials used in production	$110,000	
Direct labour cost for the year	$55,000	
Work in process, beginning	$22,000	
Finished goods, beginning	$45,000	
Cost of goods available for sale	$288,000	
Cost of goods sold	$238,000	
Work in process, ending	$16,000	

68. What was the balance of the finished goods inventory at the end of the year? 
A. $95,000.
B. $50,000.
C. $193,000.
D. $45,000.
EI = Cost of Goods Available for sale - Cost of Goods Sold
= 288,000 - 238,000 = $50,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

69. What was the cost of goods manufactured for the year? 
A. $171,000.
B. $160,000.
C. $243,000.
D. $244,000.
CGM = Cost of Goods Available for sale - Finished Goods B.I.
= 288,000 - 45,000 = $243,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
70. What was the manufacturing overhead cost for the year? 
A. $84,000.
B. $78,000.
C. $56,000.
D. $72,000.
Compute Total Manufacturing Costs = CGM + EI WIP - BI WIP
= 243,000 + 16,000 - 22,000 = $237,000
Then compute manufacturing overhead = Total Man. Costs - DM - DL
Manufacturing overhead = 237,000 - 110,000 - 55,000 = $72,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 Boardman Company reported the following data for the month of January:

Inventories:	1/1	1/31	
Raw materials	$32,000	$31,000	
Work in process	$18,000	$12,000	
Finished goods	$30,000	$35,000	

Additional information:	 	
Sales revenue	$210,000	
Direct labour costs	$40,000	
Manufacturing overhead costs	$70,000	
Selling expenses	$25,000	
Administrative expenses	$35,000	

71. If raw materials costing $35,000 were purchased during January, what were the total manufacturing costs for the month? 
A. $145,000.
B. $144,000.
C. $151,000.
D. $146,000.
TMC = DM used + DL + MOH
= (32,000 + 35,000 - 31,000) + 40,000 + 70,000 = $146,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
72. Assuming that cost of goods sold for January was $124,000, what was the net income for January? 
A. $61,000.
B. $26,000.
C. $51,000.
D. $25,000.
NI = Sales - CGS - Selling Exp. - Admin. Exp.
= 210,000 - 124,000 - 25,000 - 35,000 = $26,000.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

73. Which of the following is Boardman Company's total conversion cost for January? 
A. $110,000.
B. $170,000.
C. $135,000.
D. $130,000.
CC = DL + OH = 40,000 + 70,000 = $110,000.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
74. Assuming that cost of goods sold for Boardman Company for January was $140,000, what was the cost of goods manufactured for the month? 
A. $140,000
B. $135,000
C. $145,000
D. $139,000
CGM = COGS + EI - BI = 140,000 + 35,000 - 30,000 = $145,000.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
 At a sales volume of 32,000 units, CD Company's total fixed costs are $64,000 and total variable costs are $60,000. The relevant range is 30,000 to 55,000 units.

75. If CD Company sells 43,000 units, what is the total expected cost (Do not round your intermediate calculations)? 
A. $146,000.
B. $166,625.
C. $144,625.
D. $124,000.
VC/unit = $60,000/32,000 units = $1.875/unit
Total Cost = VC + FC
= 43,000 * 1.875 + 64,000 = $144,625.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
Topic: 02-21 Fixed Cost
 
76. If CD Company sells 50,000 units, what is the total expected cost per unit? (Do not round intermediate computations). Round final answer to the nearest cent. 
A. $3.20.
B. $2.48.
C. $3.88.
D. $3.16.
VC/unit = 60,000/32,000 = $1.875/unit
TC = VC + FC = 50,000 * 1.875 + 64,000 = $157,750
Expected Cost/unit = 157,750/50,000 = 3.155 = $3.16/unit.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
Topic: 02-21 Fixed Cost

True / False Questions

77. All costs incurred in a merchandising firm are considered to be period costs. 
FALSE

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
78. In a manufacturing firm, depreciation is always considered a product cost for external financial reporting purposes. 
FALSE

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
 
79. In external financial reports, factory utilities costs may be included in an asset account on the balance sheet at the end of the period. 
TRUE

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-06 Manufacturing Overhead
Topic: 02-07 Classification of Manufacturing Labour Costs
 
80. Advertising costs are considered product costs for external financial reports since they are incurred in order to promote specific products. 
FALSE

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-08 Non-manufacturing Costs
Topic: 02-10 Product Costs

81. Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead. 
TRUE

Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-06 Manufacturing Overhead
 
82. Manufacturing overhead combined with direct materials is known as conversion cost. 
FALSE

Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-06 Manufacturing Overhead
Topic: 02-10 Product Costs
 
83. If the ending inventory of finished goods is understated, net income will be overstated. 
FALSE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement
 
84. In a manufacturing company, goods available for sale equals the sum of the cost of goods manufactured and the beginning finished goods inventory. 
TRUE

Blooms: Understand
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-14 The Income Statement

85. Variable costs are costs whose per unit costs vary as the activity level rises and falls. 
FALSE

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-20 Variable Cost
 
86. On a per unit basis, a fixed cost varies inversely with the level of activity. 
TRUE

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-21 Fixed Cost
 
87. The following would typically be considered indirect costs of manufacturing a particular Boeing 747 to be delivered to Singapore Airlines: electricity to run production equipment, the factory manager's salary, and the cost of the General Electric jet engines installed on the aircraft. 
FALSE

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Easy
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost
 
88. When raw materials are used in production, their costs are transferred to the work in process inventory account as direct materials. 
TRUE

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-16 Product Costs—A Closer Look
Topic: 02-17 Inventoriable Costs

89. The following costs should be considered by a law firm to be indirect costs of defending a particular client in court: rent on the law firm's offices, the law firm's receptionist's wages, the costs of heating the law firm's offices, and the depreciation on the personal computer in the office of the attorney who has been assigned the client. 
TRUE

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-24 Indirect Cost
 
90. As goods are completed their cost is transferred from the Work in Process account to the Finished Goods account where they await sale to customer. 
TRUE

Blooms: Remember
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-16 Product Costs—A Closer Look
 
91. Some companies classify labour fringe benefits for direct labour workers as part of the direct labour cost and some classify these costs as manufacturing overhead. 
TRUE

Blooms: Remember
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-07 Classification of Manufacturing Labour Costs

Short Answer Questions

92. Stony Electronics Corporation manufactures a portable radio designed for mounting on the wall of the bathroom. The following list represents some of the different types of costs incurred in the manufacture of these radios:

1) The plant manager's salary.
2) The cost of heating the plant.
3) The cost of heating executive offices.
4) The cost of printed circuit boards used in the radios.
5) Salaries and commissions of company salespersons.
6) Depreciation on office equipment used in the executive offices.
7) Depreciation on production equipment used in the plant.
8) Wages of janitorial personnel who clean the plant.
9) The cost of insurance on the plant building.
10) The cost of electricity to light the plant.
11) The cost of electricity to power plant equipment.
12) The cost of maintaining and repairing equipment in the plant.
13) The cost of printing promotional materials for trade shows.
14) The cost of solder used in assembling the radios.
15) The cost of telephone service for the executive offices.

Required:

Classify each of the items above as product (inventoriable) cost or period (noninventoriable) costs for the purpose of preparing external financial statements. 

1) Product.
2) Product.
3) Period.
4) Product.
5) Period.
6) Period.
7) Product.
8) Product.
9) Product.
10) Product.
11) Product.
12) Product.
13) Period.
14) Product.
15) Period.

Blooms: Understand
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Easy
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs

93. Bill Pope has developed a new device that is so exciting he is considering quitting his job in order to produce and market it on a large-scale basis. Bill will rent a garage for $300 per month for production purposes. Utilities will cost $40 per month. Bill has already taken an industrial design course at the local community college to help prepare for this venture. The course cost $300. Bill will rent production equipment at a monthly cost of $800. He estimates the material cost will be $5 per unit, and the labour cost will be $3 per unit. He will hire workers and spend his time promoting the product. To do this, he will quit his job, which pays $3,000 per month. Advertising and promotion will cost $900 per month.

Required:

Complete the chart below by placing an "X" under each heading that helps to identify the cost involved. You can place an "X" under more than one heading for a single cost: for example, a cost may be a sunk cost, an overhead cost, and a product cost; you would place an "X" under each of these headings opposite the cost.

* Between the alternatives of going into business to make the device or not going into business to make the device. See columnheading "Differential Cost".

	Opportunity Cost	Sunk Cost	Variable Cost	Fixed Cost	Mfg. Overhead	Product Cost	Selling Cost	Differential Cost	
Garage rent	 	 	 	 	 	 	 	 	
Utilities	 	 	 	 	 	 	 	 	
Cost of the industrial design course	 	 	 	 	 	 	 	 	
Equipment rented	 	 	 	 	 	 	 	 	
Material cost	 	 	 	 	 	 	 	 	
Labour cost	 	 	 	 	 	 	 	 	
Present salary	 	 	 	 	 	 	 	 	
Advertising	 	 	 	 	 	 	 	 	

* Between the alternatives of going into business to make the device or not going into business to make the device. 
	Opportunity Cost	Sunk Cost	Variable Cost	Fixed Cost	Mfg. Overhead	Product Cost	Selling Cost	Differential Cost	
Garage rent	 	 	 	X	X	X	 	X	
Utilities	 	 	 	X	X	X	 	X	
Cost of the industrial design course	 	X	 	 	 	 	 	 	
Equipment rented	 	 	 	X	X	X	 	X	
Material cost	 	 	X	 	 	X	 	X	
Labour cost	 	 	X	 	 	X	 	X	
Present salary	X	 	 	 	 	 	 	X	
Advertising	 	 	 	X	 	 	X	X	

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Learning Objective: 02-07 Describe the cost classifications used in making decisions: differential costs; opportunity costs; and sunk costs.
Topic: 02-10 Product Costs
Topic: 02-20 Variable Cost
Topic: 02-23 Direct Cost
Topic: 02-26 Differential Cost and Revenue

94. Logan Products, a small manufacturer, has submitted the items below concerning last year's operations. The president's secretary, trying to be helpful, has alphabetized the list.

Administrative salaries	$2,400	
Advertising expense	$1,200	
Depreciation - factory building	$800	
Depreciation - factory equipment	$1,600	
Depreciation - office equipment	$180	
Direct labour cost	$21,900	
Raw materials inventory, beginning	$2,100	
Raw materials inventory, ending	$3,200	
Finished goods inventory, beginning	$46,980	
Finished goods inventory, ending	$44,410	
General liability insurance expense	$240	
Indirect labour cost	$11,800	
Insurance on factory	$1,400	
Purchases on raw materials	$14,600	
Repairs and maintenance of factory	$900	
Sales salaries	$2,000	
Taxes on factory	$450	
Travel and entertainment expense	$1,410	
Work-in-process inventory, beginning	$1,670	
Work-in-process inventory, ending	$1,110	

Required:

a.) Prepare a schedule of cost of goods manufactured in good form for the year.
b.) Determine the cost of goods sold for the year. 
a.) LOGAN COMPANY
Schedule of Cost of Goods Manufactured

Raw materials used:	 	 	
Beginning inventory	$2,100	 	
Purchases	14,600	 	
Available	16,700	 	
Less ending inventory	3,200	$13,500	
Direct labour	 	21,900	
Manufacturing overhead:	 	 	
Depreciation - factory building	800	 	
Depreciation - factory equipment	1,600	 	
Indirect labor cost	11,800	 	
Insurance on factory	1,400	 	
Repairs and maintenance	900	 	
Taxes on factory	450	16,950	
Total manufacturing cost	 	52,350	
Add work in process inventory, beginning	 	1,670	
 	 	54,020	
Less work in process inventory, ending	 	1,110	
Cost of goods manufactured	 	$52,910	

b.) 
Finished goods inventory, beginning	$46,980	
Cost of goods manufactured (above)	52,910	
Available for sale	99,890	
Less finished goods inventory, ending	44,410	
Cost of goods sold	$55,480	

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

95. Lake Company recorded the following data for the month of January 20xx:

Inventories	January 1, 20xx	January 31, 20xx	
Direct Material	$24,000	$23,000	
Work in Process	18,000	15,000	
Finished Goods	22,000	27,000	

Additional Data:

Net Sales Revenue	$325,000	
Direct Labour Costs	40,000	
Indirect Labour Costs	45,000	
Sales Commissions	15,000	
Administrative Expenses	18,000	
Direct Materials Purchased during January	30,000	
Depreciation, factory	10,000	
Factory Maintenance and Supplies	8,000	
Utilities, (80% factory , 20% office)	25,000	
General Office Salaries	12,000	

Required:

a) Compute the amount of direct materials used in January.
b) List and total the Manufacturing Overhead costs for the month of January.
c) Compute the Cost of Goods Manufactured.

Note: It may be helpful to prepare a Cost of Goods Manufactured statement in rough form but it is not required. You may use short forms in your answers for DM, DL etc. 

a: 
D.M. Jan. 1	$24,000	
Add: D.M. purchased	30,000	
 	$54,000	
Less: D.M. Jan. 3	23,000	
Direct Material Used	$31,000	

b:
Indirect Labour	$45,000	
Depreciation, factory	10,000	
Factory Maintenance and Supplies	8,000	
Utilities, factory (25,000 * 80%)	20,000	
Total Man. Overhead	$83,000	

c:
DM	$31,000	
DL	40,000	
MOH	83,000	
Total Man. Costs	$154,000	
Add: WIP, Jan. 1	18,000	
 	$172,000	
Less: WIP, Jan. 31	15,000	
Cost Goods Man.	$157,000	

Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement

96. The accounts for a manufacturing company for an accounting period are listed below. Find the unknown amounts indicated by question marks.

Sales	$39,000	
Cost of goods sold	?	
Purchases of direct materials	$11,000	
Direct labour	$5,000	
Finished goods inventory, beginning	$5,000	
Work in process, beginning	$800	
Work in process, ending	$3,000	
Gross margin	$11,700	
Finished goods inventory, ending	?	
Accounts payable, beginning	$4,000	
Accounts payable, ending	$2,800	
Direct materials inventory, beginning	$1,000	
Direct materials inventory, ending	$3,000	
Indirect labour	$2,000	
Indirect materials used	$4,000	
Utilities expense, factory	$3,000	
Depreciation on factory equipment	$7,000	
Cost of goods sold = $39,000 - $11,700 = $27,300.
Direct materials used = $1,000 + $11,000 - $3,000 = $9,000.
Cost of goods manufactured = $9,000 + $5,000 + ($2,000 + $4,000 + $3,000 + $7,000) + $800 - $3,000 = $27,800.
Finished goods inventory, ending = $5,000 + $27,800 - $27,300 = $5,500.

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

97. Use the following information to determine the gross margin for Pacific States Manufacturing for the year just ended (all amounts are in thousands of dollars):

Sales	$31,800	
Purchases of direct materials	$7,000	
Direct labour	$5,000	
Work in process, 1/1	$800	
Work in process, 1/31	$3,000	
Finished goods inventory, 1/1	$4,000	
Finished goods inventory, 1/31	$5,300	
Accounts payable, 1/1	$1,700	
Accounts payable, 1/31	$1,500	
Direct materials inventory, 1/1	$6,000	
Direct materials inventory, 1/31	$1,000	
Indirect labour	$600	
Indirect materials used	$500	
Utilities expense, factory	$1,900	
Depreciation on factory equipment	$3,500	
Direct materials used = $6,000 + $7,000 - $1,000 = $12,000.
Cost of goods manufactured = $12,000 + $5,000 + ($600 + $500 + $1,900 + $3,500) + $800 - $3,000 = $21,300.
Cost of goods sold = $4,000 + $21,300 - $5,300 = $20,000.
Gross margin = $31,800 - $20,000 = $11,800.

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

98. The following information is from Marchant Manufacturing Co. for September:

Direct materials used in production	$95,000	
Direct labour	$67,000	
Total manufacturing cost	$234,000	
Raw materials inventory, Sept. 1	$24,000	
Work-in-process inventory, Sept. 1	$6,000	
Finished goods inventory, Sept. 1	$101,000	
Purchases of raw materials	$102,000	
Cost of goods manufactured	$233,000	
Administrative expense	$41,000	
Selling expense	$56,000	
Sales	$344,000	
Gross margin	$127,000	
Net income	$30,000	

Required:

(a.) Compute the cost of goods sold.
(b.) Compute the balance in finished goods inventory at September 30.
(c.) Compute the balance in work-in-process inventory at September 30.
(d.) Compute the balance in raw materials inventory at September 30.
(e.) Compute the total manufacturing overhead.

(Hint: The easiest method of solving this problem is to sketch out the income statement and the schedule of cost of goods manufactured, enter the given amounts, and then enter the unknowns as plug figures.) 
MARCHANT MANUFACTURING
Schedule of Cost of Goods Manufactured

Direct materials used:	 	
Inventory, Sept. 1	$24,000	
Purchases	102,000	
 	126,000	
Inventory, Sept. 30 (d) - plug	31,000	
Direct materials used - given	95,000	
Direct labour	67,000	
Manufacturing overhead (e) - plug	72,000	
Total manufacturing cost - given	234,000	
Inventory of work in process, Sept. 1	6,000	
 	240,000	
Inventory of work in process, Sept. 30 (c) - plug	7,000	
Cost of goods manufactured - given	$233,000	

MARCHANT MANUFACTURING
Income Statement

Sales	 	$344,000	
Cost of goods sold:	 	 	
Finished goods, Sept. 1	$101,000	 	
Cost of goods manufactured - above	$233,000	 	
Available for sale	 	334,000	
Finished goods, Sept. 30 (b) - plug	 	117,000	
Cost of goods sold (a) - plug	 	217,000	
Gross margin - given	 	127,000	
Operating expenses:	 	 	
Administrative expenses	41,000	 	
Selling expenses	56,000	97,000	
Net income - given	 	$30,000	

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

99. The following data (in thousands of dollars) have been taken from the accounting records of Larsen Corporation for the year just ended:

Sales	$860	
Purchases of raw materials*	$150	
Direct labour	$110	
Manufacturing overhead	$210	
Administrative expenses	$130	
Selling expenses	$180	
Raw materials inventory, beginning*	$40	
Raw materials inventory, ending*	$80	
Work in process inventory, beginning	$20	
Work in process inventory, ending	$80	
Finished goods inventory, beginning	$80	
Finished goods inventory, ending	$150	

Required:

(a.) Prepare a schedule of cost of goods manufactured in good form.
(b.) Compute the cost of goods sold.
(c.) Using data from your answers above as needed, prepare an income statement in good form. 
(a.) Schedule of cost of goods manufactured.

Direct materials:	 	 	
Raw materials inventory, beginning	$40	 	
Add: Purchases of raw materials	150	 	
Raw materials available for use	$190	 	
Deduct: Raw materials in inventory, ending	80	 	
Raw materials used in production	 	$110	
Direct labour	 	110	
Manufacturing overhead	 	210	
Total manufacturing cost	 	$430	
Add: Work-in-process inventory, beginning	 	20	
 	 	$450	
Deduct: Work-in-process inventory, ending	 	80	
Cost of goods manufactured	 	$370	

(b.) Computation of cost of goods sold

Finished goods inventory, beginning	$80	
Add: Cost of goods manufactured	$370	
Goods available for sale	$450	
Deduct: Finished goods inventory, ending	$150	
Cost of goods sold	$300	

(c.) Income statement

Sales	 	$860	
Deduct: Cost of goods sold	 	300	
Gross margin	 	$560	
Operating expenses:	 	 	
Administrative expenses	$130	 	
Selling expenses	180	210	
Net income	 	$250	

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

100. The following data (in thousands of dollars) have been taken from the accounting records of Larner Corporation for the year just completed:

Sales	$870	
Purchases of raw materials*	$110	
Direct labour	$130	
Manufacturing overhead	$200	
Administrative expenses	$160	
Selling expenses	$140	
Raw materials inventory, beginning*	$30	
Raw materials inventory, ending*	$60	
Work in process inventory, beginning	$50	
Work in process inventory, ending	$10	
Finished goods inventory, beginning	$150	
Finished goods inventory, ending	$140	

Required:

(a.) Prepare a schedule of cost of goods manufactured in good form.
(b.) Compute the cost of goods sold.
(c.) Using data from your answers above as needed, prepare an income statement in good form. 
(a.) Schedule of cost of goods manufactured

Direct materials:	 	 	
Raw materials inventory, beginning	$30	 	
Add: Purchases of raw materials	110	 	
Raw materials available for use	$140	 	
Deduct: Raw materials in inventory, ending	60	 	
Raw materials used in production	 	$80	
Direct labour	 	130	
Manufacturing overhead	 	200	
Total manufacturing cost	 	$410	
Add: Work-in-process inventory, beginning	 	50	
 	 	$460	
Deduct: Work-in-process inventory, ending	 	10	
Cost of goods manufactured	 	$450	

(b.) Computation of cost of goods sold

Finished goods inventory, beginning	$150	
Add: Cost of goods manufactured	$450	
Goods available for sale	$600	
Deduct: Finished goods inventory, ending	$140	
Cost of goods sold	$460	

(c.) Income statement

Sales	 	$870	
Deduct: Cost of goods sold	 	460	
Gross margin	 	$410	
Operating expenses:	 	 	
Administrative expenses	$160	 	
Selling expenses	140	210	
Net income	 	$110	

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

101. The following data (in thousands of dollars) have been taken from the accounting records of Larmont Corporation for the year just completed:

Sales	$990	
Purchases of raw materials*	$100	
Direct labour	$240	
Indirect labour	$100	
Indirect material	$10	
Other Factory Overhead	$100	
Administrative expenses	$100	
Selling expenses	$140	
Raw materials inventory, beginning*	$20	
Raw materials inventory, ending*	$80	
Work in process inventory, beginning	$50	
Work in process inventory, ending	$30	
Finished goods inventory, beginning	$160	
Finished goods inventory, ending	$150	

*Raw Materials Inventory consist of both direct and indirect materials.

Required:

(a.) Prepare a schedule of cost of goods manufactured in good form.
(b.) Compute the cost of goods sold.
(c.) Using data from your answers above as needed, prepare an income statement in good form. 
(a.) Schedule of cost of goods manufactured
Note: For calculation of Direct Materials used you must remember to take out the portion that is indirect material.

Direct materials:	 	 	
Raw materials inventory, beginning	$20	 	
Add: Purchases of raw materials	100	 	
Raw materials available for use	$120	 	
Deduct: Raw materials inventory, ending	80	 	
Raw materials used in production	$40	 	
Less: Indirect Material	10	 	
Direct Material used	 	$30	
Direct labour	 	240	
Manufacturing overhead:	 	 	
Indirect labour	$100	 	
Indirect material	10	 	
Other Manufacturing Overhead	100	 	
Total Manufacturing Overhead	 	210	
Total Manufacturing Cost	 	$480	
Add: Work-in-process inventory, beginning	 	50	
 	 	$530	
Deduct: Work-in-process inventory, ending	 	30	
Cost of goods manufactured	 	$500	

(b.) Computation of cost of goods sold

Finished goods inventory, beginning	$160	
Add: Cost of goods manufactured	$500	
Goods available for sale	$660	
Deduct: Finished goods inventory, ending	$150	
Cost of goods sold	$510	

(c.) Income statement

Sales	 	$990	
Deduct: Cost of goods sold	 	510	
Gross margin	 	$480	
Operating expenses:	 	 	
Administrative expenses	$100	 	
Selling expenses	140	240	
Net income	 	$240	

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-06 Manufacturing Overhead
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

102. The following costs relate to one month's activity in Martin Company:

Indirect materials	$300	
Rent on factory building	$500	
Maintenance of equipment	$50	
Direct material used	$1,200	
Utilities on factory	$250	
Direct labour	$1,500	
Selling expense	$500	
Administrative expense	$300	
Work in process inventory, beginning	$600	
Work in process inventory, ending	$800	
Finished goods inventory, beginning	$500	
Finished goods inventory, ending	$250	

Required:

(a.) Prepare a schedule of cost of goods manufactured in good form.
(b.) Determine the cost of goods sold.
(c.) Assume Martin Company produced the equivalentof 500 units during this particular month. What was the average cost per unit for direct materials? For rent on factory building?
(d.) Assume next month Martin Company plans to produce 600 units of product. What average cost per unit and total cost would you expect to be incurred for direct material?, for rent? 

a) 
Direct materials:	 	$1,200	
Direct labour	 	1,500	
Manufacturing overhead:	 	 	
Indirect materials	$300	 	
Rent	500	 	
Maintenance	50	 	
Utilities	250	1,100	
Total manufacturing costs	 	3,800	
Add: WIP, beginning	 	600	
 	 	4,400	
Deduct: WIP, ending	 	800	
Cost of goods manufactured	 	$3,600	

b) 
Finished goods, beginning	 	$500	
Add: Cost of goods manufactured	 	3,600	
Goods available for sale	 	4,100	
Finished goods, ending	 	250	
Cost of goods sold	 	$3,850	

c. Direct material $1,200/500units = $2.40 per unit
Rent $500/500 = $1.00 per unit
d. Average cost per unit for Direct Material remains at $2.40 for a total of $1,440 (600 * $2.40).
Average cost per unit for Rent will be $0.83 ($500/600) and the total remains at $500. Fixed costs per unit decrease as activity increases.

Blooms: Apply
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Learning Objective: 02-05 Explain the differences between variable and fixed costs.
Topic: 02-07 Classification of Manufacturing Labour Costs
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look
Topic: 02-20 Variable Cost

103. Brooke Foster is employed by Wong Laboratories, Inc., and is directly involved in preparing and packaging the company's leading sleep aid, RestWell. Brooke's basic wage rate is $15 per hour, and she is paid time-and-a-half for any work in excess of 40 hours per week. Additionally, Wong Laboratories provides a fringe benefit package that costs the company $5 for each hour of employee time (regular or overtime). During a recent week, Brooke worked 49 hours but was idle for 3 hours due to materials shortages.

Required:

(a.) Assume that Wong Laboratories treats all fringe benefits as part of manufacturing overhead. Compute Brooke's total wages and fringe benefits for the week and indicate how much of her wages and fringe benefits for the week would be allocated to direct labour and how much would be allocated to manufacturing overhead.
(b.) Assume that Wong Laboratories treats the part of fringe benefits related to direct labour as a component of direct labour cost. Compute Brooke's total wages and fringe benefits for the week and indicate how much of her wages and fringe benefits would be allocated to direct labour and how much would be allocated to manufacturing overhead. 
(a.) 
Regular time:40 hours × $15	$600.00	
Overtime: 9 hours × $22.50	202.50	
Fringe benefits: 49 hours × $5	245.00	
Total wages and fringe benefits	$1,047.50	
Allocation of wages and fringe benefits:	 	
Direct labour: 46 hrs × $15	$690.00	
Manufacturing overhead:	 	
Idle time: 3 hrs × $15	45.00	
Overtime premium: 9 hrs × $7.50	67.50	
Fringe benefit: 49 hrs × $5	245.00	
Total wages and fringe benefits	$1,047.50	

(b.) Total wages and fringe benefits would be $1,047.50 as shown in (a.) above.
Allocation of wages and fringe benefits:

Direct labour:	 	
Wage cost: 46 hrs × $15	$690.00	
Fringe benefits: 46 hrs × $5	230.00	
Total direct labour	$920.00	
Manufacturing overhead:	 	
Idle time: 3 hrs × $15	45.00	
Overtime premium: 9 hrs × $7.50	67.50	
Fringe benefit: 3 hrs × $5	15.00	
Total manufacturing overhead	$127.50	
Total wages and fringe benefits	$1,047.50	

Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Hard
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-05 Direct Labour
Topic: 02-07 Classification of Manufacturing Labour Costs

104. Fred Adams is employed by the Cedar Manufacturing Company on their assembly line. Fred is paid $15 per hour for regular time, and time-and-a-half for all work in excess of 40 hours per week. During the two weeks of the pay period just completed, Fred reported the following:

Week 1:	 	
Idle time due to machine breakdowns	3 hours	
Idle time due to material shortages	2 hours	
Overtime	None	
 	 	
Week 2:	 	
Idle time	None	
Overtime	9 hours	

Required:

Compute Fred's wages for each week and allocate Fred's wages for each week between direct labour cost and manufacturing overhead. 
Week 1:
Fred's wages equal 40 hours  $15 per hour, or $600.
Fred's wages would be allocated between direct labour and manufacturing overhead as follows:

Direct labour cost: 35 hours × $15	$525.00	
Manufacturing overhead: 5 hours × $15	75.00	
Total	$600.00	

Week 2:
Fred's wages equal:

40 hours × $15 per hour	$600.00	
9 hours × $22.50 per hour	202.50	
Total wages for Week 2	$802.50	

Fred's wages would be allocated between direct labour and manufacturing overhead as follows:

Direct labour cost: 49 hours × $15 per hour	$735.00	
Manufacturing overhead: 9 hours × $7.50	67.50	
Total	$802.50	

Blooms: Analyze
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
Difficulty: Medium
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Topic: 02-05 Direct Labour
Topic: 02-07 Classification of Manufacturing Labour Costs

105. The following inventory and cost data for the just completed year are taken from the accounting records of Sankar Company:

Inventories	 	
Increase in raw materials	$4,000	
Increase in work in process	30,000	
Decrease in finished goods	90,000	
Costs incurred	 	
Advertising expense	$200,000	
Direct labour cost	180,000	
Purchases of raw materials	264,000	
Rent, factory building	60,000	
Indirect factory labour	112,600	
Sales commissions	70,000	
Utilities, factory	18,000	
Maintenance, factory equipment	48,000	
Supplies, factory	1,400	
Depreciation, office equipment	16,000	
Depreciation, factory equipment	80,000	

Required:

(a.) Calculate the cost of goods manufactured.
(b.) Calculate the cost of goods sold 

 (a.) 
Direct material used:	 	 	
Purchases of raw materials	$264,000	 	
Deduct: Increase in raw materials	4,000	$260,000	
Direct labour cost	 	180,000	
Manufacturing overhead cost incurred:	 	 	
Rent, factory building	$60,000	 	
Indirect factory labour	112,600	 	
Utilities, factory	18,000	 	
Maintenance, factory equipment	48,000	 	
Supplies, factory	1,400	 	
Depreciation, factory equipment	80,000	320,000	
Total manufacturing cost added	 	$760,000	
Deduct: Increase in work in process inventory	 	30,000	
Cost of goods manufactured	 	$730,000	

(b.) 
Cost of goods manufactured	$730,000	
Add: Decrease in finished goods inventory	90,000	
Cost of goods sold	$820,000	

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

106. The following selected account balances for the year ended December 31 are provided for Amita Company:

Purchases of raw materials	$260,000	
Direct labour	65,000	
Maintenance, factory	74,000	
Selling and administrative salaries	179,000	
Depreciation, factory equipment	110,000	
Cleaning supplies	6,000	
Sales commissions	350,000	
Utilities, factory building	52,000	
Rent, factory	90,000	
Depreciation, sales equipment	80,000	
Insurance, factory equipment	8,000	
Advertising expense	300,000	

In addition, you have the following information about inventories during the year:

Increase in raw materials	$10,000	
Decrease in work in process	$15,000	
Decrease in finished goods	$30,000	

Cleaning supplies are in the factory.
Assume the company uses FIFO.

Required:

(a.) Calculate the cost of goods manufactured.
(b.) Calculate the cost of goods sold. 
(a.) Cost of goods manufactured during the year.

Direct material used:	 	 	
Purchases of raw materials	$260,000	 	
Deduct: Increase in raw materials	10,000	$250,000	
Direct labour cost	 	65,000	
Manufacturing overhead cost incurred:	 	 	
Maintenance, factory	$74,000	 	
Depreciation, factory equipment	110,000	 	
Cleaning supplies, factory	6,000	 	
Utilities, factory	52,000	 	
Rent, factory building	90,000	 	
Insurance, factory equipment	8,000	340,000	
Total manufacturing cost added	 	$655,000	
Add: Decrease in work in process inventory	 	15,000	
Cost of goods manufactured	 	$670,000	

(b.) 
Cost of goods manufactured	$670,000	
Add: decrease in finished goods inventory	30,000	
Cost of Goods Sold	$700,000	

Blooms: Analyze
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look

107. Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her desk a memo from her boss, Gary Resnick, to the controller of the company. The memo appears below:
Galaxy Toys Internal Memo
Sept 15
To: Harry Wilson, Controller
Fm: Gary Resnick, Executive Vice President
As you know, we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season. Meanwhile, we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month. Unfortunately, we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see. Is there any possibility that we could change the classification of some of our period costs to product costs--such as the rent on the finished goods warehouse?
Please let me know as soon as possible. The President is pushing for results.
Mary didn't know what to do about the memo. It wasn't intended for her, but its contents were alarming.

Required:

a. Why has Gary Resnick suggested reclassifying some period costs as product costs?
b. Why do you think Mary was alarmed about the memo? 

a. Gary Resnick has suggested reclassifying some period costs as product costs since the company is building up large finished goods inventories in anticipation of the Christmas selling season. Product costs are inventoried and flow through to the income statement only when products are sold. Period expenses, in contrast, flow directly to the income statement. Since most of the finished goods inventories will be held over to the next quarter, reclassifying period costs as product costs will effectively defer recognition of expenses until next quarter and therefore will improve the current quarter's net operating income.
b. Mary Tappin is probably alarmed by both the economic situation the company finds itself in and by the apparent willingness of top management to bend the rules. Improperly reclassifying costs is an indication that top management does not feel like it has to play by the rules or be honest in its dealings with the bank. With such loose ethical standards, Mary may wonder what other things they are doing that are unethical and/or illegal.

Blooms: Evaluate
CPA Competency: 3.1.2 Evaluates the types of information systems used and the role they play in an organization
CPA Competency: 3.3.1 Evaluates cost classifications and costing methods for management of ongoing operations.
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement
Topic: 02-16 Product Costs—A Closer Look
Topic: 02-17 Inventoriable Costs

108. For the majority of manufacturing companies, the distinction between period costs and product costs is essential because of its effect on net income for a period. Failure to make the distinction can affect the cost of goods manufactured and cost of goods sold.

Required:

Would the need to make the distinction between product costs and period costs still be essential if a manufacturing company were to adopt the just-in-time technique in the lean thinking model? Explain. 
The need for the distinction would not be essential in terms of its impact on net income. There will literally be no inventories of any kind (raw materials, work-in-process, and finished goods). Cost of goods manufactured will equal all the manufacturing costs incurred (nothing to be held back as product costs or assets in either raw materials inventory or work-in-process inventory). Cost of goods sold will also equal cost of goods manufactured (again because nothing will be held back as product cost in finished goods inventory). All manufacturing costs will be released to the income statement and therefore, in essence, treated as period costs.

Blooms: Evaluate
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement
Topic: 02-17 Inventoriable Costs

109. The following data (in thousands of dollars) have been taken from the accounting records of Karling Corporation for the year just ended.

Sales	$990	
Direct Materials Used	$90	
Direct labour	$200	
Manufacturing overhead	$230	
Administrative expenses	$150	
Selling expenses	$140	
Work in process, beginning	$70	
Work in process, ending	$50	
Finished goods inventory, beginning	$120	
Finished goods inventory, ending	$160	

Required:

a) Compute the Cost of Goods Manufactured
b) Compute Cost of Goods Sold
c) What is the Gross Margin for the Year?
d) Compute Net Operating Income. 
a. CGM = DM + DL + MOH + WIP beg. - WIP end. =
90 + 200 + 230 +70 - 50 = $540
b. CGS = Fin. Goods beg. + CGM - Fin. Goods end =
120 + 540 - 160 = $500
c. GM = Sales - CGS = 990 - 500 = $490
d. Net Op. Income = GM - Operating Expenses =
490 - (150 + 140) = $200

Blooms: Apply
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Medium
Learning Objective: 02-02 Distinguish between product costs and period costs; and give examples of each.
Learning Objective: 02-03 Prepare an income statement; including the calculation of cost of goods sold.
Learning Objective: 02-04 Prepare a schedule of cost of goods manufactured.
Topic: 02-10 Product Costs
Topic: 02-11 Period Costs
Topic: 02-14 The Income Statement

110. Manufacturing overhead is one of the three elements of manufacturing costs. Unlike direct materials and direct labour costs, assigning manufacturing overhead cost to products can be a very difficult task.

Required:

Do you agree with this aspect of manufacturing overhead? Why or why not? 
The response is an emphatic yes (note: this response may not be so obvious to many students at this stage of the course). Manufacturing overhead costs are indirect in the sense that they cannot be conveniently traced to particular products. Some of these costs are consumed in very small amounts and therefore tracing is not cost-effective. Others may be common costs because they are consumed jointly by several products. An example is the straight-line depreciation cost of factory equipment used to manufacture multiple products. It is almost impossible to trace such cost to individual products.
Manufacturing overhead costs are, therefore, assigned to products only by using some allocation base, such as some aspects of direct labour (for example; direct labour hours and direct labour cost). Choosing an appropriate allocation is not easy since there are usually several competing ones. Overhead application is covered in more detail in chapter 5. It should be noted that recent advances in technology and managerial accounting techniques are making it possible to conveniently (and economically) trace some of the so-called overhead costs to products. Some of these advances (for example, activity-based costing and bar coding) will be covered in later topics.

Blooms: Create
CPA Competency: 3.3.2 Evaluates and applies cost management techniques appropriate for specific costing decisions.
Difficulty: Hard
Learning Objective: 02-01 Identify and give examples of each of the three basic manufacturing cost categories.
Learning Objective: 02-06 Identify the differences between direct and indirect costs.
Topic: 02-06 Manufacturing Overhead
Topic: 02-07 Classification of Manufacturing Labour Costs
Topic: 02-23 Direct Cost
Topic: 02-24 Indirect Cost