P1 U5 Q&A - CMA Part 1Q&A PDF

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Study Unit 5: Cost Management ConceptsSubunit 1: Cost Management TerminologyQuestion: 1Inventoriable costsA. Include only the prime costs of manufacturing a product.B. Include only the conversion costs of manufacturing a product.C. Are expensed when products become part of finished goods inventory.D...

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Study Unit 5: Cost Management Concepts

Subunit 1: Cost Management Terminology Question: 1Inventoriable costs A. Include only the prime costs of manufacturing a product. B. Include only the conversion costs of manufacturing a product. C. Are expensed when products become part of finished goods inventory D. Are regarded as assets before the products are sold Answer (D) is correct. Under an absorption costing system, inventoriable (product) costs include all costs necessary for good production. These include direct materials and conversion costs (direct labor and overhead). Both fixed and variable overhead is included in inventory under an absorption costing system. Inventoriable costs are treated as assets until the products are sold because they represent future economic benefits. These costs are expensed at the time of sale

Question: 2Which one of the following best describes direct labor? A. A prime cost. B. A period cost. C. A product cost. D. Both a product cost and a prime cost. Answer (D) is correct. Direct labor is both a product cost and a prime cost. Product costs are incurred to produce units of output and are deferred to future periods to the extent that output is not sold. Prime costs are defined as direct materials and direct labor.

Question: 3Which of the following is a period cost rather than a product cost of a manufacturer? A. Direct materials. B. Variable overhead. C. Fixed overhead. D. Abnormal spoilage.

Answer (D) is correct. Materials, labor, and overhead (both fixed and variable) are examples of product costs. Abnormal spoilage is an example of a period cost. Abnormal spoilage is not inherent in a production process and should not be categorized as a product cost. Abnormal spoilage should be charged to a loss account in the period that detection of the spoilage occurs.

Question: 4Cost drivers are A. Activities that cause costs to increase as the activity increases Answer (A) is correct. A cost driver is “a measure of activity, such as direct labor hours, machine hours, beds occupied, computer time used, flight hours, miles driven, or contracts, that is a causal factor in the incurrence of cost to an entity” (IMA). It is a basis used to assign costs to cost objects. B. Accounting techniques used to control costs. C. Accounting measurements used to evaluate whether or not performance is proceeding according to plan D. A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of factory, used to assign costs to activities.

Question: 5In cost terminology, conversion costs consist of A. Direct and indirect labor. B. Direct labor and direct materials. C. Direct labor and factory overhead. Answer (C) is correct. Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw materials into a finished product. D. Indirect labor and variable factory overhead.

Question: 6Conversion costs do not include A. Depreciation. B. Direct materials. Answer (B) is correct. Conversion costs are necessary to convert raw materials into finished products. They include all manufacturing costs, for example, direct labor and factory overhead, other than direct materials C. Indirect labor.

D. Indirect materials.

Question: 7Conversion cost pricing A. Places minimal emphasis on the cost of materials used in manufacturing a product. B. Could be used when the customer furnishes the material used in manufacturing a product. Answer (B) is correct. Conversion costs consist of direct labor and factory overhead, the costs of converting raw materials into finished goods. Normally, a company does not consider only conversion costs in making pricing decisions, but if the customer were to furnish the raw materials, conversion cost pricing would be appropriate.

C. Places heavy emphasis on indirect costs and disregards consideration of direct costs D. Places heavy emphasis on direct costs and disregards consideration of indirect costs.

Question: 8The term “prime costs” refers to A. Manufacturing costs incurred to produce units of output. B. All costs associated with manufacturing other than direct labor costs and raw material costs C. The sum of direct labor costs and all factory overhead costs. D. The sum of raw material costs and direct labor costs. Answer (D) is correct. Prime costs are raw material costs and direct labor costs

Question: 9The terms direct cost and indirect cost are commonly used in accounting. A particular cost might be considered a direct cost of a manufacturing department but an indirect cost of the product produced in the manufacturing department. Classifying a cost as either direct or indirect depends upon A. The behavior of the cost in response to volume changes. B. Whether the cost is expensed in the period in which it is incurred. C. The cost object to which the cost is being related. Answer (C) is correct. A direct cost can be specifically associated with a single cost object in an economically feasible way. An indirect cost cannot be specifically associated with a single cost object. Thus, the specific cost object influences whether a cost is direct or indirect. For example, a cost might be directly associated with a single plant. The same cost, however, might not be directly associated with a particular department in the plant.

D. Whether an expenditure is unavoidable because it cannot be changed regardless of any actiontaken.

Question: 10Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is a purpose of cost allocation? A. Evaluating revenue center performance. B. Measuring income and assets for external reporting. Answer (B) is correct. Cost allocation is the process of assigning and reassigning costs to cost objects. It is used for those costs that cannot be directly associated with a specific cost object. Cost allocation is often used for purposes of measuring income and assets for external reporting purposes. Cost allocation is less meaningful for internal purposes because responsibility accounting systems emphasize controllability, a process often ignored in cost allocation. C. Budgeting cash and controlling expenditures. D. Aiding in variable costing for internal reporting.

Question: 11Direct labor costs are wages paid to Machine Factory Corporate Operators Supervisors Vice-President A. Yes Yes Yes B. Yes No No Answer (B) is correct. Direct labor costs are wages paid to labor that can be specifically identified with the production of finished goods. Because the wages of a factory machine operator are identifiable with a finished product, the wages are a direct labor cost. Because a supervisor’s or vice-president’s salary is not identifiable with the production of specific finished goods, it is a part of factory overhead and not a direct labor cost. C. No Yes Yes D. No No Yes

Question: 12A firm manufactures light bulbs. The following salaries were included in the firm’s manufacturing costs for the year: Machine operators Factory supervisors

$145,000 60,000

Machinery mechanics

25,000

What is the amount of direct labor for the year? A. $230,000 B. $205,000 C. $170,000 D. $145,000 Answer (D) is correct. Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Because the wages of machine operators are identifiable with the production of finished goods, their $145,000 of salaries are a direct labor cost. However, because the salaries and wages of the factory supervisors and machinery mechanics are not identifiable with the production of finished goods, their $60,000 and $25,000 of salaries are not direct labor costs.

Question: 13Production costs for July are Direct materials $120,000 Direct labor

108,000

Factory overhead

6,000

What is the amount of costs traceable to specific products? A. $234,000 B. $228,000 Answer (B) is correct. Product costs can be associated with a specific product. Product costs include direct materials and direct labor. Factory overhead cannot be traced to specific products and therefore is allocated to all products produced. Thus, the amount of costs traceable to specific products in the production process is $228,000 ($120,000 + $108,000). C. $120,000 D. $108,000

Question: 14A company used $200,000 of direct materials during June. At June 30, direct materials inventory was $30,000 more than it was at June 1. What were direct materials purchases during June? A. $30,000 B. $170,000

C. $200,000 D. $230,000 Answer (D) is correct. Direct materials costs are the costs of new materials included in finished goods that can be feasibly traced to those goods. Total purchases can be found based on the beginning and ending inventory, as well as products used. The following formula describes their relationship: Purchases = Materials used + Ending inventory – Beginning inventory The question states that the company used $200,000 of direct materials. Beginning inventory can be set as x, and since the balance of direct materials at the end of the the month was $30,000 more than at the beginning of the month, ending inventory can be set as [x + $30,000]. Thus the formula can be used to solve for purchases as follows: Purchases = $200,000 + ($x + $30,000) – $x Purchases = $200,000 + $30,000 + $x – $x Purchases = $230,000

Question: 15An example of an operating cost at a hotel that is both direct and fixed is A. Manager salary. Answer (A) is correct. Direct costs are ones that can be associated with a particular cost object in an economically feasible way, that is, they can be traced to that object. Fixed costs are those that remain unchanged in total over the relevant range of production. A hotel manager’s salary is traceable to the single location (s)he manages, and it remains fixed over a set period of time regardless of the number of guests. B. Water. C. Toilet tissue. D. Advertising for the hotel chain.

Question: 16A company produces 200,000 units of a good that has the following costs: Direct material costs Direct manufacturing labor costs Indirect manufacturing labor costs

$2,000,000 1,000,000 600,000

The company’s per unit prime costs and conversion costs, respectively, are

A. $8 and $15. B. $8 and $18. C. $10 and $8. D. $15 and $8. Answer (D) is correct. Prime cost consists of direct materials and direct labor. Conversion cost consists of direct labor and manufacturing overhead. The per unit calculations are as follows: Direct materials Direct labor Total prime costs

$2,000,000 Direct labor 1,000,000 Manufacturing overhead $3,000,000 Total conversion costs

Divided by: production level ÷ Per unit prime cost

$1,000,000 600,000 $1,600,000

200,000 Divided by: production level ÷ $

15 Per unit conversion cost

200,000 $

8

Question: 17Management accounting differs from financial accounting in that financial accounting is A. More oriented toward the future. B. Primarily concerned with external financial reporting. Answer (B) is correct. Financial accounting is primarily concerned with historical accounting, i.e., traditional financial statements, and with external financial reporting to creditors and shareholders. Management accounting applies primarily to the planning and control of organizational operations, considers nonquantitative information, and is usually less precise C. Primarily concerned with nonquantitative information. D. Heavily involved with decision analysis and implementation of decisions

Question: 18Using absorption costing, fixed manufacturing overhead costs are best described as A. Direct period costs. B. Indirect period costs. C. Direct product costs.

D. Indirect product costs. Answer (D) is correct. Using absorption costing, fixed manufacturing overhead is included in inventoriable (product) costs. Fixed manufacturing overhead costs are indirect costs because they cannot be directly traced to specific units produced.

Question: 19The allocation of costs to particular cost objects allows a firm to analyze all of the following except A. Whether a particular department should be expanded. B. Why the sales of a particular product have increased. Answer (B) is correct. Cost allocation is an internal matter that does not affect demand (except to the extent it results in a change in price). C. Whether a product line should be discontinued. D. Why a particular product should be purchased rather than manufactured in-house.

Question: 20Many companies recognize three major categories of costs of manufacturing a product. These are direct materials, direct labor, and overhead. Which of the following is an overhead cost in the production of an automobile? A. The cost of small tools used in mounting tires on each automobile. Answer (A) is correct. The cost of small tools used in mounting tires cannot be identified solely with the manufacture of a specific automobile. This cost should be treated as factory overhead because it is identifiable with the production process.

B. The cost of the tires on each automobile. C. The cost of the laborers who place tires on each automobile. D. The delivery costs for the tires on each automobile.

Question: 21A company experienced a machinery breakdown on one of its production lines. As a consequence of the breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime to return manufacturing to schedule. Which one of the following methods is the proper way to account for the overtime paid to the direct laborers? A. The overtime hours times the sum of the straight-time wages and overtime premium would be charged entirely to manufacturing overhead.

B. The overtime hours times the sum of the straight-time wages and overtime premium would be treated as direct labor. C. The overtime hours times the overtime premium would be charged to repair and maintenance expense, and the overtime hours times the straight-time wages would be treated as direct labor. D. The overtime hours times the overtime premium would be charged to manufacturing overhead, and the overtime hours times the straight-time wages would be treated as direct labor. Answer (D) is correct. Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Factory overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be treated as direct labor; however, because the overtime premium cost is a cost that should be borne by all production, the overtime hours times the overtime premium should be charged to manufacturing overhead.

Question: 22A cost incurred for the benefit of more than one cost objective is A. A variable cost. B. A conversion cost. C. A prime cost. D. A common cost. Answer (D) is correct. A cost incurred for the benefit of more than one cost objective is known as a common cost. Allocation of common costs is a persistent problem in responsibility accounting. For example, how should the costs of corporate headquarters be allocated to the segments of a conglomerate? Common cost is also a synonym for joint cost. In this sense, common costs are incurred in the production of two or more inseparable products (e.g., costs of refining petroleum into gasoline, diesel fuel, kerosene, lubricating oils, etc.) up to the point at which the products become separable (the split-off point).

Question: 23A cost that always can be directly traced to a cost object is A. A variable cost. B. An indirect cost. C. A conversion cost. D. A prime cost. Answer (D) is correct. Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product

Question: 24Conversion costs are A. Manufacturing costs incurred to produce units of output. B. All costs associated with manufacturing other than direct labor costs and raw material costs. C. The sum of direct labor costs and all factory overhead costs. Answer (C) is correct. Conversion costs are the direct labor, indirect materials, and factory overhead incurred to convert raw materials and transferred-in goods in a cost center to finished goods. D. The sum of raw materials costs and direct labor costs.

Question: 25The allocation of general overhead costs to operating departments can be least justified in determining A. Income of a product or functional unit. B. Costs for making management’s decisions. Answer (B) is correct. In the short run, management decisions are made in reference to incremental costs without regard to fixed overhead costs because fixed overhead cannot be changed in the short run. Thus, the emphasis in the short run should be on controllable costs. For example, service department costs allocated as a part of overhead may not be controllable in the short run. C. Costs for the federal government’s cost-plus contracts. D. Income tax payable.

Question: 26A computer company charges indirect manufacturing costs to a project at a fixed percentage of a cost pool. This project is covered by a cost-plus government contract. Which of the following is an appropriate guideline for determining how costs are assigned to the pool? A. Establish separate pools for variable and fixed costs. Answer (A) is correct. Cost pools are accounts in which a variety of similar costs are accumulated prior to allocation to cost objects. The overhead account is a cost pool into which various types of overhead are accumulated prior to their allocation. Indirect manufacturing costs are an element of overhead allocated to a cost pool. Ordinarily, different allocation methods are applied to variable and fixed costs, thus requiring them to be separated. Establishing separate pools allows the determination of dual overhead rates. As a result, the assessment of capacity costs, the charging of appropriate rates to user departments, and the isolation of variances are facilitated. B. Assign prime costs and variable administrative costs to the same pool

C. Establish a separate pool for each assembly line worker to account for wages D. Assign all manufacturing costs related to the project to the same pool.

Question: 27In a traditional manufacturing operation, direct costs would normally include A. Machine repairs in an automobile factory. B. Electricity in an electronics plant. C. Wood in a furniture factory. Answer (C) is correct. Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw material (a direct cost) of furniture. D. Commissions paid to sales personnel.

Question: 28In practice, items such as wood screws and glue used in the production of school desks and chairs would most likely be classified as A. Direct labor. B. Factory overhead. Answer (B) is correct. Those tangible inputs to the manufacturing process that cannot practicably be traced to the product, such as wood screws and glue used in the production of school desks and chairs, are referred to as indirect costs. Indirect costs are one of the three components of manufacturing overhead, the other two being indirect labor and factory operating costs. C. Direct materials. D. Period costs.

Question: 29A review of accounting records for last year disclosed the following selected information: Variable costs: Direct materials used $ 56,000 Direct labor 179,100 Manufacturing overhead 154,000 Selling costs 108,400 Fixed costs: Manufacturing overhead 267,000 Selling costs 121,000 Administrative costs 235,900

In addition, the company suffered a $27,700 uninsured factory fire loss during the year. Under absorption costing, what were the product costs and period costs for last year? Product

Period

A. $235,100 $914,000 B. $497,500 $651,600 C. $656,...