66) What are the three types of manufacturing cost?
Answer: Direct materials costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. Examples of direct materials costs include steel used to manufacture cars, wood used in furniture, and semiconductor chips used in laptops.
Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Examples of direct manufacturing labor include wages paid to assembly-line workers.
Indirect manufacturing costs are all manufacturing costs that are related to the cost object (work in
process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Examples of indirect manufacturing costs include plant insurance paid, plant rent, property taxes on plant.
Diff: 3
Objective: 5
AACSB: Analytical thinking
67) Explain the difference between an inventoriable cost and a period cost. What potential problems does an inaccurate classification of product and period costs cause?
Answer: Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and which become cost of goods sold only when the product is sold. Period costs are treated as expenses of the accounting period in which they are incurred. Note that the cost of goods sold includes all manufacturing costs (direct materials, direct manufacturing labor, and manufacturing overhead costs) that are inventoriable costs incurred to produce them. Period costs are all costs in the income statement other than cost of goods sold. An inaccurate classification of inventoriable and period costs could lead to violations of the matching principle, which states that costs used in producing revenue should be matched on the income statement when the revenue is recognized. In extreme cases, net income for a given period might be significantly misstated.
Diff: 2
Objective: 5
AACSB: Analytical thinking
41
Copyright ? 2015 Pearson Education, Inc.
Objective 2.6
1) Which of the following formulas determine cost of goods sold in a merchandising entity? A) Beginning inventory + Purchases + Ending inventory = Cost of goods sold B) Beginning inventory + Purchases - Ending inventory = Costs of goods sold C) Beginning inventory - Purchases + Ending inventory = Cost of goods sold D) Beginning inventory - Ending inventory - Purchases = Cost of goods sold Answer: B
Diff: 1
Objective: 6
AACSB: Analytical thinking
2) Which of the following formulas determine cost of goods sold in a manufacturing entity?
A) Beginning work-in-process inventory + Cost of goods manufactured - Ending work-in-process inventory = Cost of goods sold
B) Beginning work-in-process inventory + Cost of goods manufactured + Ending work-in-process inventory = Cost of goods sold
C) Cost of goods manufactured - Beginning finished goods inventory - Ending finished goods inventory = Cost of goods sold
D) Cost of goods manufactured + Beginning finished goods inventory - Ending finished goods inventory = Cost of goods sold Answer: D
Diff: 1
Objective: 6
AACSB: Analytical thinking
3) A company reported revenues of $375,000, cost of goods sold of $118,000, selling expenses of $11,000, and total operating costs of $70,000. Gross margin for the year is ________. A) $257,000 B) $246,000 C) $176,000 D) $252,000 Answer: A
Explanation: A) $375,000 ? $118,000 = $257,000
Diff: 2
Objective: 6
AACSB: Application of knowledge
42
Copyright ? 2015 Pearson Education, Inc.
Answer the following questions using the information below:
Leslie Manufacturing reported the following: Revenue Beginning inventory of direct materials, January 1, 2015 Purchases of direct materials Ending inventory of direct materials, December 31, 2015 Direct manufacturing labor Indirect manufacturing costs Beginning inventory of finished goods, January 1, 2015 Cost of goods manufactured Ending inventory of finished goods, December 31, 2015 Operating costs 4) What is Leslie's cost of goods sold? A) $103,000 B) $109,000 C) $112,000 D) $118,000 Answer: B
Explanation: B) $40,000 + $114,000 ? $45,000 = $109,000
Diff: 3
Objective: 6
AACSB: Application of knowledge
$450,000 20,000 156,000 18,000 21,000 42,000 40,000 114,000 45,000 150,000 5) What is Leslie's gross margin (or gross profit)? A) $103,000 B) $152,000 C) $341,000 D) $317,000 Answer: C
Explanation: C) $450,000 ? ($40,000 + $114,000 ? $45,000) = $341,000
Diff: 3
Objective: 6
AACSB: Application of knowledge
6) Inventoriable costs and period costs flow through the income statement at a merchandising company similar to the way costs flow at a manufacturing company. Answer: TRUE
Explanation: Depreciation on a factory is classified as a product cost.
Diff: 2
Objective: 6
AACSB: Analytical thinking
43
Copyright ? 2015 Pearson Education, Inc.
7) Cost of goods sold refers to the products brought to completion, whether they were started before or during the current accounting period. Answer: FALSE
Explanation: Cost of goods manufactured refers to the products brought to completion, whether they were started before or during the current accounting period.
Diff: 2
Objective: 6
AACSB: Application of knowledge
8) Springfield Manufacturing produces electronic storage devices, and uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labor, and indirect manufacturing costs. Total indirect manufacturing costs for January were $300 million, and were
allocated to each product on the basis of direct manufacturing labor costs of each line. Summary data (in millions) for January for the most popular electronic storage device, the Big Bertha, was: Big Bertha Direct manufacturing costs $4,500,000 Direct manufacturing labor costs $1,500,000 Indirect manufacturing costs $4,250,000 Units produced 40,000 Required:
a. Compute the manufacturing cost per unit for each product produced in January.
b. Suppose production will be reduced to 30,000 units in February. Speculate as to whether the unit costs in February will most likely be higher or lower than unit costs in January; it is not necessary to calculate the exact February unit cost. Briefly explain your reasoning. Answer:
a. Unit costs for January were:
($4,500,000 + $1,500,000 + $4,250,000) / 40,000 = $256.25 per unit
b. Unit costs should be higher in February if only 30,000 units are to be produced. Indirect
manufacturing costs most likely include both fixed and variable components. Since fewer units are
expected to be produced in February, total fixed costs will be spread over fewer units. This will result in an increase in total cost per unit since variable costs per unit will most likely not change with the decreased production.
Diff: 2
Objective: 6
AACSB: Application of knowledge
44
Copyright ? 2015 Pearson Education, Inc.
9) Helmer Sporting Goods Company manufactured 100,000 units in 2015 and reported the following costs:
Sandpaper $ 32,000 Leasing costs-plant $ 384,000 Materials handling 320,000 Depreciation-equipment 224,000 Coolants & lubricants 22,400 Property taxes-equipment 32,000 Indirect manufacturing labor 275,200 Fire insurance-equipment 16,000 Direct manufacturing labor 2,176,000 Direct material purchases 3,136,000 Direct materials, 1/1/15 384,000 Direct materials, 12/31/15 275,200 Finished goods, 1/1/15 672,000 Sales revenue 12,800,000 Finished goods, 12/31/15 1,280,000 Sales commissions 640,000 Work-in-process, 1/1/15 96,000 Sales salaries 576,000 Work-in-process, 12/31/15 64,000 Advertising costs 480,000 Administration costs 800,000
Required:
a. What is the amount of direct materials used during 2015? b. What manufacturing costs were added to WIP during 2015? c. What is cost of goods manufactured for 2015? d. What is cost of goods sold for 2015? Answer:
a. $384,000 + $3,136,000 - $275,200 = $3,244,800
b. $3,244,800 + $2,176,000 + $32,000 + $320,000 + $22,400 + $275,200 + $384,000 + $224,000 + $32,000 + $16,000 = $6,726,400
c. $6,726,400 + $96,000 - $64,000 = $6,758,400
d. $6,758,400 + $672,000 - $1,280,000 = $6,150,400
Diff: 3
Objective: 6
AACSB: Application of knowledge
45
Copyright ? 2015 Pearson Education, Inc.