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COST ACCOUNTING SYSTEMS TRADITIONAL COST ACCOUNTING
THEORIES:
Basic concepts
Cost Accounting
1. Cost accounting involves the measuring, recording, and reporting of
A. product costs C. future costs
B. manufacturing process D. managerial accounting decisions
Cost management
3. The cost management function is usually under
A. the chief information officer. C. purchasing manager.
B. treasurer. D. controller.
2. The cost management information system provides information
A. that the accountant needs to prepare the financial statements.
B. that the manager needs to effectively manage the firm.
C. that the manager needs to effectively manage not-for-profit organization.
D. b and c.
4. The main focus of cost management information must be
A. usefulness and accuracy. C. usefulness and timeliness.
B. timeliness and accuracy. D. relevance and good format.
5. With regard to the task of management’s decision making, cost management information is needed to
A. make sound strategic decisions regarding choice of products, methods, and techniques.
B. support recurring decisions regarding replacement of equipment, managing cash flow, etc.
C. provide a fair and effective basis for identifying inefficient operations.
D. provide accurate accounting for inventory, receivables, and other assets.
Product costing
6. Product costing system design or selection:
A. requires an understanding of the nature of the business
B. should provide useful cost information for strategic and operational decision needs
C. should be cost effective in design and selection
D. all the above answers are correct
Cost concepts
Committed vs. Discretionary fixed costs
Commited fixed costs
7. Which of the following is an example of a committed fixed costs?
A. direct materials C. supervisor’s salary
B. depreciation on a factory building D. insurance on a building
16. An example of a committed fixed cost is:
A. a training program for salespersons.
B. executive travel expenses.
C. property taxes on the factory building.
D. new product research and development.
Discretionary fixed cost
8. Which of the following is an example of discretionary fixed cost?
A. direct labor C. property taxes on a factory building
B. insurance on a building D. depreciation on a factory building
Controllable costs
10. Controllable costs are:
A. Costs that management decides to incur in the current period to enable the company to achieve operating objectives other than the filling of orders placed by customers.
B. Costs that are governed mainly by past decisions that established the present levels of operating and organizational capacity and that only change slowly in response to small changes in capacity.
C. Costs that will unaffected by current managerial decisions.
D. Costs that are likely to respond to the amount of attention devoted to them by a specified manager.
11. Controllable costs for responsibility accounting purposes are directly influenced only by
A. A given manager within a given period.
B. A change in activity.
C. Production volume.
D. Sales volume.
Imputed costs
12. An imputed cost is
A. The difference in total costs which results from selecting one choice instead of another.
B. A cost that does not entail any cash outlay but which is relevant to the decision-making process.
C. A cost that may be shifted to the future with little or no effect on current operations.
D. A cost that continues to be incurred even though there is no activity.
Cost According to Behavior
Semi-variable costs
14. Semi-variable costs
A. per unit remain the same regardless of total output
B. remain the same within the relevant range of output
C. increase in steps as the amount of the cost driver volume increases
D. have both fixed and variable components in them
Step cost
15. A step cost is
A. the same as semi-fixed cost
B. the same as mixed cost
C. a cost that increases in steps as the amount of cost-driver volume increases
D. a and c only.
Product Cost vs. Period Cost
Period cost
18. Which of the following would NOT be a period cost for a manufacturing firm?
A. Selling expenses
B. Salary paid to the CEO of the company
C. Repairs to the Receptionist's computer
D. Utilities in manufacturing plant
Direct vs. indirect costs
17. What kind of costs can be conveniently and economically traced to a cost object or pool?
A. Indirect Costs. C. Direct Costs.
B. Relevant Costs. D. Overhead Costs.
47. Direct product expenses
A. are incurred for the benefit of the business as a whole
B. cannot be identified readily with a given product
C. can be assigned to product only by a process of allocation
D. would not be incurred if the product did not exist
9. The distinction between direct and indirect costs depends on whether a cost
A. is controllable or non-controllable.
B. is variable or fixed.
C. can be conveniently and physically traced to a cost object under consideration.
D. will increase with changes in levels of activity.
19. Of most relevance in deciding how indirect costs should be assigned to products is the degree of
A. Linearity. C. Avoidability.
B. Causality. D. Controllability.
Comprehensive
13. Almos, Inc. makes ski-boards in Davao. Identify the correct matching of terms.
A. Fiberglass is factory overhead
B. Plant real estate taxes are a period cost
C. Depreciation on delivery trucks is a product cost
D. Payroll taxes for workers in the Packaging Dept. are direct labor
Traditional Costing Accounting
28. An accounting system that focuses on transactions is
A. an activity-based accounting system. C. a traditional accounting system.
B. a product life cycle costing system. D. all of the above.
29. Traditionally, managers have focused cost reduction efforts on
A. activities. C. departments.
B. processes. D. costs.
33. Which of the following is a trait of a traditional cost management system?
A. unit-based drivers C. tracing is intensive
B. detailed activity information D. focus on managing activities
23. Which of the following is typically regarded as a cost driver in traditional accounting practices?
A. number of purchase orders processed C. number of transactions processed
B. number of customers served D. number of direct labor hours worked
21. Which of the following is not a trait of a traditional cost management system?
A. unit-based drivers C. focus on managing activities
B. allocating intensive D. narrow and rigid product costing
24. Which of the following is not typical of traditional costing systems?
A. Use of a single predetermined overhead rate.
B. Use of direct labor hours or direct labor cost to assign overhead.
C. Assumption of correlation between direct labor an incurrence of overhead cost.
D. Use of multiple cost drivers to allocate overhead.
Overhead allocation
35. Conventional product costing uses which of the following procedures?
A. Overhead costs are traced to departments, then costs are traced to products.
B. Overhead costs are traced to activities, then costs are traced to products.
C. Overhead costs are traced directly to product.
D. All overhead costs are expensed as incurred.
36. The overhead rates of the traditional approach to product costing use
A. nonunit-based cost drivers C. unit-based cost drivers
B. process costing D. job-order costing
Effect of Traditional overhead allocation
22. The use of unit-based activity drivers to assign costs tends to
A. overcost low-volume products. C. overcost all products.
B. overcost high-volume products. D. undercost all products.
30. Traditional overhead allocations result in which of the following situations?
A. Overhead costs are assigned as period costs to manufacturing operations.
B. High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead.
C. Low-volume products are assigned too much, and high-volume products are assigned too little overhead.
D. The resulting allocations cannot be used for financial reports.
32. Product costs can be distorted if a unit-based cost driver is used and
A. nonunit-based overhead costs are a significant proportion of total overhead
B. the consumption ratios differ between unit-based and nonunit-based input categories
C. both a and b
D. neither a nor b
Process Costing
40. Which of the following items is not a characteristic of a process cost system?
A. Once production begins, it continues until the finished product emerges
B. The products produced are heterogeneous in nature
C. The focus is on continually producing homogeneous products
D. When the finished product emerges, all units have precisely the same amount of materials, labor, and overhead
Actual Costing, Normal costing, & Standard Costing
Predetermined overhead rate
39. The formula for computing the predetermined manufacturing overhead rate is estimated annual overhead costs divided by an expected annual operating activity, expressed as
A. direct labor cost C. direct labor hours
B. machine hours D. any of these
37. The two main advantages of using predetermined factory overhead rates are to provide more accurate unit cost information and to:
A. simplify the accounting process
B. provide cost information on a timely basis
C. insure transmission of correct data
D. adjust for variances in data sources
34. The effect of uniform production levels on production cost per unit can be achieved
A. by using a factory overhead rate based on different production levels for each year
B. by using a factory overhead rate based on selling price
C. by closing the factory overhead at the end of the accounting period
D. by using a factory overhead rate based on long-run normal production activity level
38. No matter which method is used, underapplied or overapplied overhead usually is adjusted only:
A. at the end of a year.
B. monthly during the year
C. if the difference exceeds P1,000 or one percent of total overhead.
D. when the company's profit projections require an adjustment
Actual Costing
43. Disadvantages of actual costing include
A. actual cost systems cannot provide accurate unit cost information on a timely basis
B. actual cost systems produce unit costs that fluctuate from period to period
C. estimates must be used when calculating the actual overhead rate
D. a and b
Normal Costing
42. The principal difficulty with normal costing is that
A. the unit cost information is not received on a timely basis
B. it can result in fluctuating per-unit overhead costs
C. estimated overhead and estimated activity are likely to differ from actual overhead and actual costs, resulting in underapplied or overapplied overhead
D. there is no difficulty associated with using normal costing
46. Normal costing and standard costing differ in that
A. the two systems can show different overhead budget variances.
B. only normal costing can be used with absorption costing.
C. the two systems show different volume variances if standard hours do not equal actual hours.
D. normal costing is less appropriate for multiproduct firms.
Standard Costing
20. The product cost which is determined in a conventional standard cost accounting system is a(an)
A. Joint cost. C. Expected cost.
B. Fixed cost. D. Direct cost.
Plant-wide vs. Department-side Overhead Rates
44. Volume-based plant-wide rates produce inaccurate product cost when:
A. a large share of factory overhead cost is not volume-based
B. firms produce a diverse mix of product
C. large volumes of production occur
D. Both a and b are correct.
Activity-based Costing
25. An activity that has a direct cause-effect relationship with the resources consumed is a(n)
A. cost driver. C. cost pool.
B. overhead rate. D. product activity.
27. The term cost driver refer to:
A. any activity that can be used to predict cost changes.
B. the attempt to control expenditures at a reasonable level.
C. the person who gathers and transfers cost data to the management accountant.
D. any activity that causes costs to be incurred.
26. Each group of overhead costs should be applied based on
A. direct labor hours or cost.
B. units produced.
C. whatever activity drives those specific overhead costs.
D. machine time.
31. Which of the following statements is true?
A. The traditional approach to costing uses many different cost drivers.
B. Costs that are indirect to products are by definition traceable to directly to products.
C. Costs that are indirect to products are traceable to some activity.
D. All of the above statements are true.
41. Why is it better to use separate overhead rates?
A. Some departments are labor-intensive, some are machine-intensive.
B. Labor rates vary considerably among departments.
C. The resulting overhead rates are all about the same.
D. All jobs require about the same percentage of time in all departments.
Operating Leverage
45. If company A has a higher degree of operating leverage than company B, then:
A. the company A has higher variable expenses.
B. the company A's profits are more sensitive to percentage changes in sales.
C. the company A is more profitable.
D. the company A is less risky.
PROBLEMS:
Total manufacturing costs
. Answer: C
Direct materials and direct labor P120,000
Factory overhead P400 x 150 60,000
Total manufacturing cost P180,000. Direct materials and direct labor costs total P120,000, conversion costs total P100,000, and factory overhead costs total P400 per machine hour. If 150 machine hours were used for Job #201, what is the total manufacturing cost for Job #201?
A. 120,000 C. 180,000
B. 160,000 D. 280,000
Overhead
Budgeted overhead
. Answer: D
Overhead rate per hour (P60,000 ÷ 24,000) P2.50
Budgeted overhead (25,000 x P2.50) P62,500. Machine hours used to set the predetermined overhead rate were 25,000, actual hours were 24,000, and overhead applied was P60,000. Budgeted overhead for the year was
A. P57,600. C. P60,000.
B. P59,000. D. P62,500.
Overhead per unit
. Answer: D
Total number of hours: (1,000 x 3) + (3,000 x 1) 6,000
Overhead cost per hour (P360,000 ÷ 6,000) P 60
Overhead charged per unit of product A: 3 hrs. x P60 P180. ABC Company had a total overhead of P360,000 and selling and administrative expense of P140,000 for the year. 1,000 units of A and 3,000 units of B were produced. A requires 3 machine hours and B requires one machine hour per unit. What is overhead chargeable per unit of A
A. P 60 C. P120
B. P 90 D. P180
. Answer: A
Labor-related overhead: (P360,000 x 0.40) P144,000
Total number of labor hours: (1,000 x 6) + (3,000 x 4) 18,000
Labor-related overhead per DLH: (P144,000 ÷ 18,000) P 8. ABC Company had a total overhead of P360,000 and selling and administration expense of P140,000 for the year. 1,000 units of A and 3,000 units of B were produced. A requires 3 and B requires one machine hours per unit. A requires 6 direct labor hours and B requires 4 direct labor hours per unit. 40% of overhead is related to labor and the balance to machines. Labor-related overhead per hour amounts to
A. P 8 C. P18
B. P12 D. P24
. Answer: B
Machine-related overhead: (P360,000 x 0.6) P216,000
Total number of machine hours (1,000 x 3) + 3,000 6,000
Machine-related OH per MH: (P216,000 ÷ 6,000) P36
Overhead applied per unit of Product B:
Labor-related (4 hours x P8) P32
Machine-related (1 x P36) 36 Overhead per unit P68
The overhead is broken down into two volume-based cost pools. This is a more modified example of traditional costing. ABC Company had a total overhead of P360,000 and selling and administration expense of P140,000 for the year. 1,000 units of A and 3,000 units of B were produced. A requires 3 and B requires one machine hours per unit. A requires 6 direct labor hours and B requires 4 direct labor hours per unit. 40% of overhead is related to labor and the balance to machines. The overhead per unit of B amounts to
A. P 60 C. P156
B. P 68 D. P180
. Answer: B
Batch related costs: (360,000 + 140,000) × 20% P100,000
Batch related costs, Product A: 100,000 × 40% 40,000
Batch-related overhead per unit of Product A: 40,000 / 1,000 P 40
In ABC costing, there is no need to make a distinction between manufacturing and non-manufacturing costs in computing the relevant product costs. ABC Company had a total overhead of P360,000 and selling and administration expense of P140,000 for the year. 1,000 units of A and 3,000 units of B were produced. Assuming that 20% of all overhead are batch-related for 1,000 batches, 40% of which was for producing product A, batch-related overhead for product A per unit amounts to
A. P20 C. P60
B. P40 D. P80 Answer: A
Product-related overhead cost (360,000 + 140,000) × 30% P150,000
Product-related overhead cost, Product A: 150,000 × 20% P 30,000
Product-related overhead cost per unit, Product A: 30,000 / 1,000 P 30. ABC Company had a total overhead of P360,000 and selling and administration expense of P140,000 for the year. 1,000 units of A and 3,000 units of B were produced. Assuming that 30% of overhead is product related overhead - 20% of which is related to product A, product-related overhead per unit of A amounts to
A. P30 C. P50
B. P40 D. P60
Total overhead variance
. Answer: A
Variable overhead P1.50
Predetermined fixed overhead (P450,000 ÷ 150,000) 3.00
Total overhead rate P4.50
Actual overhead P697,500
Applied overhead (156,000 hours x P4.50) 702,000
Total overhead variance, favorable P 4,500. Cooke Company uses the equation P450,000 + P1.50 per direct labor hour to budget manufacturing overhead. Cooke has budgeted 150,000 direct labor hours for the year. Actual results were 156,000 direct labor hours and P697,500 total manufacturing overhead. The total overhead variance for the year is
A. P4,500 favorable. C. P4,500 unfavorable.
B. P18,000 favorable. D. P18,000 unfavorable.
Over(under)-applied overhead
. Answer: D
Applied overhead 38,000 x P2 P76,000
Actual overhead 82,000
Underapplied overhead P6,000
Overhead rate per direct labor hour (P800,000 ÷ 400,000) P2.00. If estimated annual factory overhead is P800,000, estimated annual direct labor hours are 400,000, actual June factory overhead is P82,000, and actual June direct labor hours are 38,000, then overhead is:
A. P6,000 overapplied C. P1,800 underapplied
B. P1,800 overapplied D. P6,000 underapplied
Gross profit
. Answer: B
Gross Profit:
2006: (25,000 x 10) - 175,000 = P75,000
2007: (25,000 x 10) - 195,000 = P55,000
Overhead application rates:
2006: 60,000/30,000 = P2.00
2007: 60,000/20,000 = P3.00
Unit Costs:
2006: 5 + 2 = P7.00
2007: 5 + 3 = P8.00
Costs of goods sold:
2006: 25,000 x P7 P175,000
2007: (5,000 x P7) + (20,000 x P8) P195,000
Note: In 2007 the company has a beginning inventory of 5,000 units at unit cost of P7.. BKY Company predicted that factory overhead for 2006 and 2007 would be P60,000 for each year. The predicted and actual activity for 2006 and 2007 were 30,000 and 20,000 direct labor hours, respectively. 2006 2007
Sales in units 25,000 25,000
Selling price per unit P10 P10
Direct materials and direct labor per unit P 5 P 5
The company assumes that the long-run production level is 20,000 direct labor hours per year. The actual factory overhead cost for the end of 2006 and 2007 was P60,000. Assume that it takes one direct labor hour to make one finished unit.
When the annual estimated factory overhead rate is used, the gross profits for 2006 and 2007, respectively, are
A. P 75,000 and P 75,000 C. P125,000 and P125,000
B. P 75,000 and P 55,000 D. P 75,000 and P 50,000
Process costing
Work in process
. Answer: B
Materials cost (2,500 x P10) P25,000
Conversion cost (2,500 x 0.4 x P30) 30,000
Total costs of Work in Process P55,000. Britney Company has unit costs of P10 for materials and P30 for conversion costs. If there are 2,500 units in ending work in process, 40% complete as to conversion costs,...