Fundamental Managerial Accounting Concepts 9th Edition By Thomas – Test Bank
Chapter 11 Product Costing in Service and Manufacturing Entities
1) Cost information for services or products produced by a company is needed for:
A) determining the company’s selling prices.
B) external reporting.
C) managerial decisions.
D) All of these answers are correct.
Answer: D
Difficulty: 2 Medium
Topic: Cost Flow in Manufacturing Companies; Flow of Overhead Costs
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.; 11-02 Allocate overhead cost between inventory and cost of goods sold.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
2) Which of the following is not an inventory account maintained by a manufacturing company?
A) Finished goods inventory
B) Work in process inventory
C) Raw materials inventory
D) Merchandise inventory
Answer: D
Explanation: Most manufacturing companies accumulate product costs in three distinct inventory accounts: (1) Raw Materials Inventory, which includes lumber, metals, paints, and chemicals that will be used to make the company’s products; (2) Work in Process Inventory, which includes partially completed products; and (3) Finished Goods Inventory, which includes completed products that are ready for sale.
Difficulty: 1 Easy
Topic: Cost Flow in Manufacturing Companies
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
3) Product costs are expensed as cost of goods sold:
A) when production is complete.
B) at the start of production.
C) when the related products are sold.
D) when the related revenue is collected.
Answer: C
Explanation: The cost of the goods that are sold during the accounting period is transferred from the Finished Goods Inventory account to the Cost of Goods Sold account.
Difficulty: 1 Easy
Topic: Cost Flow in Manufacturing Companies
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
4) All of the following costs are accumulated in the Work in Process Inventory account except:
A) depreciation on factory equipment.
B) direct labor costs.
C) manufacturing overhead costs.
D) direct material costs.
Answer: A
Explanation: When direct materials are placed in production, the cost is added to the Work in Process Inventory account. Because direct labor is also used to make products, the cost is added to the Work in Process Inventory account. Estimated overhead costs are applied (assigned) to the Work in Process Inventory account at the time goods are produced.
Difficulty: 2 Medium
Topic: Flow of Overhead Costs; Events Affecting Manufacturing Cost Flow in January
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.; 11-02 Allocate overhead cost between inventory and cost of goods sold.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
5) Select the response that indicates the correct sequence of product cost flows from production to sale.
A) Raw materials, finished goods, and cost of goods sold
B) Cost of goods sold, finished goods, work in process, and raw materials
C) Work in process, finished goods, and cost of goods sold
D) Raw materials, work in process, finished goods, and cost of goods sold
Answer: D
Difficulty: 1 Easy
Topic: Manufacturing Cost Flow Illustrated
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
6) Select the incorrect statement regarding service companies.
A) Service companies do not maintain a Finished Goods Inventory account.
B) Service companies accumulate their service costs in a Work in Process Inventory account similar to manufacturers.
C) Service companies may have raw material costs.
D) Understanding the cost of providing a service is just as important as knowing the cost of making a product.
Answer: B
Explanation: Service companies do not have Work in Process and Finished Goods Inventory accounts for collecting costs before transferring them to a Cost of Goods Sold account. However, even though service companies do not collect costs in inventory accounts for financial reporting purposes, they do accumulate cost information for decision making.
Difficulty: 1 Easy
Topic: Cost Flow in Service Companies
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
7) The cost of direct materials purchased on account is expensed at the time the:
A) goods made in the manufacturing process are sold.
B) cash is paid to settle the associated accounts payable.
C) manufacturing process is complete.
D) materials are purchased.
Answer: A
Explanation: The cost of materials is first recorded in the Raw Materials Inventory account. The cost of materials placed in production is then transferred from the Raw Materials Inventory account to the Work in Process Inventory account. The total cost of the goods completed during the period is transferred from the Work in Process Inventory account to the Finished Goods Inventory account. The cost of the goods that are sold during the accounting period is transferred from the Finished Goods Inventory account to the Cost of Goods Sold account. As such, the cost of direct materials is expensed at the time the manufactured goods are sold.
Difficulty: 2 Medium
Topic: Cost Flow in Manufacturing Companies
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
12) Purchasing production supplies for cash is a(n):
A) asset source transaction.
B) asset exchange transaction.
C) asset use transaction.
D) claims exchange transaction.
Answer: B
Explanation: This event is an asset exchange. The asset account Cash decreases, and the asset account Production Supplies increases.
Difficulty: 2 Medium
Topic: Events Affecting Manufacturing Cost Flow in January
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
15) Purchasing raw materials on account is a(n):
A) asset source transaction.
B) asset use transaction.
C) asset exchange transaction.
D) claims exchange transaction.
Answer: A
Explanation: The purchase of raw materials on account is an asset source transaction. The asset Raw Materials Inventory increases and the liability Accounts Payable also increases.
Difficulty: 2 Medium
Topic: Events Affecting Manufacturing Cost Flow in January
Learning Objective: 11-01 Compare the accounting treatment of material and labor costs for a manufacturing versus a service company.
Bloom’s: Understand
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
16) Which of the following statements is false?
A) Under variable costing, the income statement is prepared using a contribution margin approach.
B) Variable costing is not allowed for external financial reporting, but many companies find it useful for internal managerial reports.
C) Under variable costing, an increase in production increases the amount of profit reported on the income statement, even if the additional units are not sold.
D) Under variable costing, fixed manufacturing costs are expensed in the period incurred.
Answer: C
Explanation: Although managers may still overproduce under variable costing, at least they are not tempted to do so by the lure of reporting higher profits. Using variable costing, increases in production have no effect on the amount of reported profit (or net income) reported in the income statement. All of the other answer choices are correct statements.
Difficulty: 1 Easy
Topic: Variable Costing
Learning Objective: 11-04 Distinguish between absorption and variable costing.
Bloom’s: Remember
AACSB: Knowledge Application
AICPA: FN Measurement; BB Industry
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