MODELA Islamic university – Gaza College of commerce Accounting department

Final exam 2009/2010

Cost accounting 1 Sunday 24/01/2010 2 hours

Name: …………………………………………………… Id.:…………………………

Question 1 (17 marks): True or False. 1. 2. 3. 4.

Direct costs are allocated to the cost object using a cost-allocation method. Raw materials that can be traced to a cost object are an example of an indirect cost. Fixed and variable costs may be allocated to a cost object Quality control costs may be a direct cost of the Manufacturing Department, but an indirect cost of an individual job. 5. Cost objects may be jobs, products, or customers. 6. The two most common methods of costing inventories in manufacturing companies are variable costing and fixed costing. 7. Absorption costing "absorbs" only variable manufacturing costs. 8. Variable costing includes all variable costs, both manufacturing and non manufacturing in inventory. 9. Under both variable and absorption costing, all variable manufacturing costs are inventoriable costs. 10.The main difference between variable costing and absorption costing is the way in which fixed manufacturing costs are accounted for. 11.The dual cost-allocation method classifies costs into two pools, a budgeted cost pool and an actual cost pool. 12.The single-rate method makes a distinction between fixed and variable costs. 13.Using the single-rate method transforms the fixed costs per hour into a variable cost to users of that facility. 14.The single-rate cost-allocation method provides better information for decision making than the dual-rate method. 15.An advantage of the single-rate method is that it is easier and always the most accurate cost-allocation choice. 16.Retailers generally have a high percentage of net income to revenues. 17.Inventory management is the planning, organizing, and controlling activities that focus on the flow of materials into, through, and from the organization.

Please transfer your answer to the following table: Q. NO. ANSWER

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 F F T T T F F F T T F F T F F F T

IMPORTANT NOTE: any answer out of the table will not consider. 1

Question 2(15marks) : choose the best answer. 1. Job costing information is used: a. To develop strategies. b. To make pricing decisions. c. For external financial reporting. d. All of these answers are correct. 2. In a costing system: a. Cost tracing allocates indirect costs. b. Cost allocation assigns direct costs. c. A cost-allocation base can be either financial or non financial. d. A cost object should be a product and not a department or a geographic territory. 3. Identifying department costs helps managers: a. Control the costs for which they are responsible. b. Evaluate the performance of subordinates. c. Evaluate the performance of subunits. d. All of these answers are correct. 4. Job costing: a. b. c. d.

Can only be used in manufacturing. Records the flow of costs for each customer. Allocates an equal amount of cost to each unit made during a time period. Is commonly used when each unit of output is identical.

5. Job-costing may only be used by: a. Service companies. b. merchandising companies c. Manufacturing companies. d. All of these may use job-costing. 6. Which of the following cost(s) are inventoried when using variable costing? a. b. c. d.

Direct manufacturing costs. Variable marketing costs. Fixed manufacturing costs. Both A and B are correct

7. Absorption costing is required for all of the following EXCEPT: a. Generally accepted accounting principles. b. Determining a competitive selling price. c. External reporting to shareholders. d. Income tax reporting. 8. Variable costing: a. Expenses administrative costs as cost of goods sold. b. Treats direct manufacturing costs as a product cost. c. Includes fixed manufacturing overhead as an inventoriable cost. d. Is required for external reporting to shareholders. 2

9. Variable costing regards fixed manufacturing overhead as a(n): a. b. c. d.

Administrative cost. Inventoriable cost. Period cost. Product cost.

10. The only difference between variable and absorption costing is the expensing of: a. Direct manufacturing costs. b. Variable marketing costs. c. Fixed manufacturing costs. d. Both A and C are correct.

11. The method that allocates costs in each cost pool using the same rate per unit is known as the: a. Incremental cost-allocation method. b. Reciprocal cost-allocation method. c. Single-rate cost allocation method. d. Dual-rate cost-allocation method. 12. The dual-rate cost-allocation method classifies costs in each cost pool into a: a. Budgeted-cost pool and an actual-cost pool. b. Variable-cost pool and a fixed-cost pool. c. Used-capacity-cost pool and a practical-capacity-cost pool. d. Direct-cost pool and a reciprocal-cost pool. 13. The advantage of using practical capacity to allocate costs: a. Is that it allows a downward demand spiral to develop. b. Is that it focuses management's attention on managing unused capacity. c. Is that budgets are much easier to develop. d. Either A or B are correct. 14. When using the single-rate method, fixed cost allocation may be based on: a. Actual usage. b. Budgeted usage. c. Incremental cost allocation. d. Either A or B are correct.

15. Benefits of the single-rate method include: a. The low cost of implementation. b. Fixed costs that are transformed into variable costs for user decision making. c. Signals regarding how variable and fixed costs behave differently. d. Information that leads to outsourcing decisions that benefit the organization as a whole.

Please transfer your answer to the following table: Q. NO. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 ANSWER D C D B D A B B C D C B B D A IMPORTANT NOTE: any answer out of the table will not consider. 3

Question 3(16 marks): ASHI Furniture Company manufactures tables. In March, the two production departments had budgeted allocation bases of 4,000 machine-hours in Department 100 and 8,000 direct manufacturing labor-hours in Department 200. The budgeted manufacturing overheads for the month were $57,500 and $62,500, respectively. For Job A, the actual costs incurred in the two departments were as follows: Department 100 Department 200 Direct materials purchased on account $110,000 $177,500 Direct materials used 32,500 13,500 Direct manufacturing labor 52,500 53,500 Indirect manufacturing labor 11,000 9,000 Indirect materials used 7,500 4,750 Lease on equipment 16,250 3,750 Utilities 1,000 1,250 Job A incurred 800 machine-hours in Department 100 and 300 manufacturing labor-hours in Department 200. The company uses a budgeted overhead rate for applying overhead to production. Required: a. Determine the budgeted manufacturing overhead rate for each department . b. Prepare the necessary journal entries to summarize the March transactions for Department 100 . (WITHOUT EXPLAINATION) c. What is the total cost of Job A? A: The budgeted manufacturing overhead rate for each department Manufacturing overhead rate Department 100 Manufacturing overhead rate Department 200

= $57,500/4,000 hours = $14.375 per machine-hour = $62,500/8,000 hours = $7.8125 per labor-hour

B: The journal entries to summarize the March transactions for Department 100. # #

1 2

ENTRY

DEBIT

CREDIT

110,000

Materials Control Department 100

110,000

Accounts Payable Control

32,500

Work-in-Process Control Department 100

32,500

Materials Control Department 100

7,500

3

Manufacturing Overhead Control Department 100

4

Work-in-Process Control Department 100

5

Manufacturing Overhead Control Department 100

6

Manufacturing Overhead Control Department 100

7

Manufacturing Overhead Control Department 100

8

Work-in-Process Control Dept. 100 ($14.375 × 800 hrs)

7,500

Materials Control Department 100

52,500 52,500

Wages Payable Control

11,000 11,000

Wages Payable Control

16,250 16,250

Leaseholds Payable Control

1,000 1,000

Leaseholds Payable Control

1,500 1,500

Manufacturing Overhead Allocated

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C: The total cost of Job A # ITEM 1 Direct materials Dept. 100 2 Direct materials Dept. 200 3 Direct manufacturing labor Dept. 100 4 Direct manufacturing labor Dept. 200 5 Manufacturing overhead Dept. 100 ($14.375 x 800) 6 Manufacturing overhead Dept. 200 ($7.8125 x 300) 7

AMOUNT 32,500 13,500 52,500 53,500 11,500 2,344 165,844

TOTAL

QUESTION 4(5 marks): MMM University offers only high-tech graduate-level programs. MMM has two principal operating departments, Engineering and Computer Sciences, and two support departments, Facility and Technology Maintenance and Enrollment Services. The base used to allocate facility and technology maintenance is budgeted total maintenance hours. The base used to allocate enrollment services is number of credit hours for a department. The Facility and Technology Maintenance budget is $350,000, while the Enrollment Services budget is $950,000. The following chart summarizes budgeted amounts and allocation-base amounts used by each department: F&T Enrollment Computer Budget Engineering Maintenance Service Sciences F&T $350,000 Zero 5,000 1,000 2,000 Maintenance Enrollment $950,000 2,000 Zero 24,000 36,000 Service REQUIRED: Prepare a schedule which allocates service department costs using the step-down method. Calculations: F&T

Maintenance provided to enrollment services = 5,000/8,000 Enrollment services provided to maintenance = 2,000/62,000 F&T Maintenance provides the greatest amount of service to support departments, so it is allocated first.

F&T Maintenance $350,000 to Enrollment Services = $350,000 × 5/8= $218,750 to Engineering = $350,000 × 1/8= $ 43,750 to Computer Science = $350,000 × 2/8= $ 87,500 Enrollment Service costs of $950,000 + $218,750 = $1,168,750 are allocated to Engineering and Computer Science to Engineering = $1,168,750 × 24/60 = $467,500 to Computer Science = $1,168,750 × 36/60 = $701,250 F&T Maintenance Enrollment Service Engineering Computer Science $350,000 $950,000 ($350,000) $218,750 $ 43,750 $ 87,500 $0 ($1,168,750) $467,500 $701,250 Totals $0 $511,250 $788,750

5

QUESTION 5(12 marks): BBB Company sells a special putter for $20 each. In March, it sold 28,000 putters while manufacturing 30,000. There was no beginning inventory on March . Production information for March was: Direct manufacturing labor per unit 15 minutes Fixed selling and administrative costs $ 40,000 Fixed manufacturing overhead 132,000 Direct materials cost per unit 2 Direct manufacturing labor per hour 24 Variable manufacturing overhead per unit 4 Variable selling expenses per unit 2 Required: a. Compute the cost per unit under both absorption and variable costing . b. Compute the ending inventories under both absorption and variable costing. c. Compute operating income under both absorption and variable costing. a. Compute the cost per unit under both absorption and variable costing # 1 2 3 4 5 6 7

ITEM Direct manufacturing labor ($24/4) Direct materials Variable manufacturing overhead Fixed manufacturing overhead ($132,000/30,000)

TOTAL

ABSORPTION 6.00 2.00

VARIABLE 6.00 2.00

4.00 4.40

4.00 0

16.40

12.00

b. Compute the ending inventories under both absorption and variable costing. # 1 2 3 4 5 6 7

ITEM Beginning inventory Cost of goods manufactured: 30,000 × $16.40 ,,30,000 × $12.00 Cost of goods available for sale Cost of goods sold: 28,000 × $16.40,,28,000 × $12.00 Total of Ending inventory

ABSORPTION 0

VARIABLE 0

$492,000 $492,000

$360,000 $360,000

$459,200 $ 32,800

$336,000 $ 24,000

c. Compute operating income under both absorption and variable costing. # 1 2 3 4 5 6 7

ITEM Sales (28,000 × $20) Cost of goods sold (28,000 × $16.40),,(28,000 × $12) Variable selling expenses (28,000 × $2) Gross margin ,, Contribution margin Less : Variable selling and administrative ,, Manufacturing Fixed selling and administrative,, Selling and administrative TOTAL

With best wishes Mohammad Marwan Al Ashi

6

ABSORPTION $560,000 459,200 0 100,800

VARIABLE $560,000 $336,000 56,000 168,000

$56,000 40,000 $ 4,800

$132,000 40,000 $ (4,000)