Tanta University

Faculty of Commerce
Department of Cost Accounting ad Information systems
Cost Accounting I Dr. Samir Helal
___________________________________________________________________

Part I : TRUE/FALSE

a) Cost accounting measures and reports short-term, long-term, financial, and

nonfinancial information

b) Costs that are difficult to change over the short run are always variable over
the long run

c) When making decisions using fixed costs, the focus should be on total costs
and not unit costs.

d) Direct costs are traced the same way for actual costing and normal costing.
e) The Finished Goods Control account consists of actual manufacturing
overhead costs rather than allocated manufacturing overhead costs

f) One reason indirect costs may be underapplied is if actual indirect costs

exceed budgeted indirect costs

g) Generally a coefficient of determination (r2) that is less than 0.30 indicates a

goodness of fit.

h) Direct costing is a perfect way to describe the variable-costing inventory

method.

i) When the unit level of inventory increases during an accounting period,

operating income is greater under variable costing than absorption costing.

Part II : MULTIPLE CHOICE

1.Cost accounting provides all EXCEPT

a. information for management accounting and financial accounting.
b. pricing information from marketing studies.
c. financial information regarding the cost of acquiring resources.
d. nonfinancial information regarding the cost of operational
efficiencies.

2.____________ is/are when a firm compares itself with the best practice of
competitors or other comparable organizations.
a. Value chain
b. Supply chain
c. Key success factors
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d. Benchmarking

3. Place the four business functions in the order they appear along the value
chain:
A = Customer service
B = Design
C = Distribution
D = Production
a. ABDC
b. ACDB
c. BDCA
d. BADC

4. The value chain is the sequence of business functions in which

a. value is deducted from the products or services of an organization.
b. value is proportionately added to the products or services of an
organization.
c. products and services are evaluated with respect to their value to the
supply chain.
d. usefulness is added to the products or services of an organization.

5. The determination of a cost as being either direct or indirect depends upon

a. the accounting system.
b. the allocation system.
c. the cost tracing system.
d. the cost object chosen

6. Which one of the following items is a direct cost?

a. Customer-service costs of a multiproduct firm; Product A is the cost object.
b. Printing costs incurred for payroll check processing; payroll check
processing is the cost object.
c. The salary of a maintenance supervisor in a multiproduct manufacturing
plant; Product B is the cost object.
d. Utility costs of the administrative offices; the accounting department is the
cost object.

7. Which statement is TRUE?

a. All variable costs are direct costs.
b. Because of a cost-benefit tradeoff, some direct costs may be treated as
indirect costs.
c. All fixed costs are indirect costs.
d. All direct costs are variable costs.

8. Fixed costs depend on

a. the amount of resources used.
b. the amount of resources acquired.
c. the volume of production.
d. the volume of sales.
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9. If each furnace required a hose that costs $20 and 2,000 furnaces are produced for
the month, the total cost for hoses is
a. considered to be a direct fixed cost.
b. considered to be a direct variable cost.
c. considered to be an indirect fixed cost.
d. considered to be an indirect variable cost.

10. When 10,000 units are produced, variable costs are $6 per unit. Therefore, when
20,000 units are produced
a. variable costs will total $120,000.
b. variable costs will total $60,000.
c. variable unit costs will increase to $12 per unit.
d. variable unit costs will decrease to $3 per unit.

11. Christi Manufacturing provided the following information for last month.
Sales $10,000
Variable costs 3,000
Fixed costs 5,000
Operating income $2,000

12. If sales double next month, what is the projected operating income?
a. $4,000
b. $7,000
c. $9,000
d. $12,000

13. Tire and Spoke Manufacturing currently produces 1,000 bicycles per month. The
following per unit data apply for sales to regular customers:

Direct materials $50

Direct manufacturing labor 5
Variable manufacturing overhead 14
Fixed manufacturing overhead 10
Total manufacturing costs $79

14. The plant has capacity for 3,000 bicycles and is considering expanding
production to 2,000 bicycles. What is the per unit cost of producing 2,000
bicycles?
a. $79 per unit
b. $158 per unit
c. $74 per unit
d. $134 per unit

15. For a manufacturing company, direct material costs may be included in

a. direct materials inventory only.
b. merchandise inventory only.
c. both work-in-process inventory and finished goods inventory.
d. direct materials inventory, work-in-process inventory, and finished goods
inventory accounts
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16. Dougherty Company employs 20 individuals. Eight employees are paid $12 per
hour and the rest are salaried employees paid $3,000 a month. How would total
costs of personnel be classified?
a. Variable
b. Mixed
c. A variable cost within a relevant range
d. A fixed cost within a relevant range

17. For January, the cost components of a picture frame include $0.35 for the glass,
$.65 for the wooden frame, and $0.80 for assembly. The assembly desk and
tools cost $400. 1,000 frames are expected to be produced in the coming year.
What cost function best represents these costs?
a. y = 1.80 + 400X
b. y = 400 +1.80X
c. y = 2.20 + 1,000X
d. y = 1.00 + 400X

18. Put the following steps in order for using the high-low method of estimating a
cost function:
A = Identify the cost function
B = Calculate the constant

C = Calculate the slope coefficient

D = Identify the highest and lowest observed values
a. DCAB
b. CDAB
c. ADCB
d. DCBA

19. Regression analysis

a. is simple to compute.
b. measures the change in a dependent variable associated with one or more
independent variables.
c. is mathematical so it does not require an understanding of operations.
d. uses the constant to measure goodness of fit.

20. The Barnett Company has assembled the following data pertaining to certain
costs that cannot be easily identified as either fixed or variable. Barnett Company
has heard about a method of measuring cost functions called the high-low method
and has decided to use it in this situation.
Cost Hours
$24,900 5,250
24,000 5,500
36,400 7,500
44,160 9,750
45,000 9,500
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21. What is the cost function?

a. y = $43,191 + $0.19X
b. y = $4,875 + $5.25X
c. y = $41,900 + $0.23X
d. y = $2,430 + $4.28X

22. What is the estimated total cost at an operating level of 8,000 hours?
a. $43,740
b. $36,670
c. $46,875
d. $37,125

23.Absorption costing
a. expenses marketing costs as cost of goods sold.
b. treats direct manufacturing costs as a period cost.
c. includes fixed manufacturing overhead as an inventoriable cost.
d. is required for internal reports to managers.

24. The contribution-margin format of the income statement

a. is used with absorption costing.
b. highlights the lump sum of fixed manufacturing costs.
c. distinguishes manufacturing costs from nonmanufacturing costs.
d. calculates gross margin.

25. An unfavorable production-volume variance occurs when

a. production exceeds the denominator level.
b. the denominator level exceeds production.
c. production exceeds unit sales.
d. unit sales exceed production

26. One possible means of determining the difference between operating incomes for
absorption costing and variable costing is
a. by subtracting sales of the previous period from sales of this period.
b. by subtracting fixed manufacturing overhead in beginning inventory from
fixed manufacturing overhead in ending inventory.
c. by multiplying the number of units produced by the budgeted fixed
manufacturing cost rate.
d. by adding fixed manufacturing costs to the production-volume variance.

Part III: Short Problems

27. Moira Company has just finished its first year of operations and must decide
which method to use for adjusting cost of goods sold. Because the company used
a budgeted indirect-cost rate for its manufacturing operations, the amount that was
allocated ($435,000) to cost of goods sold was different from the actual amount
incurred ($425,000).
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Ending balances in the relevant accounts were:

Work-in-Process $ 40,000
Finished Goods 80,000
Cost of Goods Sold 680,000

Required:

a. Prepare a journal entry to write off the difference between allocated and
actual overhead directly to Cost of Goods Sold. Be sure your journal entry
closes the related overhead accounts.

b. Prepare a journal entry that prorates the write-off of the difference between
allocated and actual overhead using ending account balances. Be sure
your journal entry closes the related overhead accounts.

28. Johnson Realty bought a 2,000-acre island for $10,000,000 and divided it into 200
equal size lots.
As the lots are sold, they are cleared at an average cost of $5,000.
Storm drains and driveways are installed at an average cost of $8,000 per site.
Sales commissions are 10 % of selling price.
Administrative costs are $850,000 per year.
The average selling price was $160,000 per lot during 20x2 when 50 lots were
sold.
During 20x3, the company bought another 2,000-acre island and developed it
exactly the same way. Lot sales in 20x3 totaled 300 with an average selling
price of $160,000. All costs were the same as in 20x2.
Required:

Prepare income statements for both years using both absorption and variable
costing methods.

Cost Accounting I
Dr. Samir Helal
An Exercise on the preparation of the Cost Statements

The following data are obtained from a furniture factory at the end of February 2020.
All numbers are in dollars.
Balances at the beginning of the month:
Raw Materials 125000, Work-in-process 50000, finished goods 120,000
Balances at the end of the month:
Raw Materials 40000, Work-in-process 30000, finished goods 70,000
Transactions during the month:
Purchases of Raw Materials 240000, purchases Returns 20000, Purchases
transportation 15000. Materials issued for production is ????? including 10,000 of
indirect materials. Selling and packaging materials are 40000 and administrative
materials used was 30000.
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The Total payroll check amounted to 700,000. The manufacturing Wages and salaries
are 550,000 out of which 250000 were for the factory mangers and production
supervisors. The administrative salaries are 170000. The rest of the check covered the
selling and marketing salaries.
The factory overhead includes 70000 depreciation for the factory machines, 28000
electricity out of which 15000 power for the factory machines. The cleaning cost of
the factory amounted to 2000 and the insurance on the factory is 30000 per month.
The factory building depreciation per year is 180000, and the oil and fuel for the
machines is 3000 per month. Factory maintenance is 15000.
Required:
1. Using the total (Full) cost approach, prepare the cost statement for this
factory for the month of February 2020. Also prepare the income
statement if the sales amounted to 1.5 million.
2. Assume the company has defined the following items:
Indirect materials are 30% variable, and indirect labor is 40% variable.
Electricity for the machines is all variable, and the depreciation is
computed using the straight line method. The fixed monthly Maintenance
is 3000.
Prepare the Cost statement using the variable approach and the income
statement accordingly.
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TRUE/FALSE

1. Absorption costing is commonly used for external reporting.

ANS: T

2. Absorption costing is commonly used for internal reporting.

ANS: F

3. Variable costing is commonly used for internal reporting.

ANS: T

4. Variable costing is commonly used for external reporting.

ANS: F

5. In a actual cost system, factory overhead is assigned directly to products and

services.

ANS: T

6. In a normal cost system, factory overhead is assigned directly to products and

services.

ANS: F

7. In a normal cost system, factory overhead is assigned to an overhead control

account and then allocated to products and services.

ANS: T

8. In an actual cost system, factory overhead is assigned to an overhead control

account and then allocated to products and services.

ANS: F

9. A debit to the Factory Overhead account represents actual overhead costs.

ANS: T

10. A debit to the Factory Overhead account represents applied overhead costs.
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ANS: F

11. A credit to the Factory Overhead account represents actual overhead costs.

ANS: F

12. A credit to the Factory Overhead account represents applied overhead costs.

ANS: T PTS

13. If actual overhead exceeds applied overhead, factory overhead is said to be

overapplied.

ANS: F

14. If actual overhead exceeds applied overhead, factory overhead is said to be

underapplied.

ANS: T

15. If overapplied factory overhead is immaterial, the account is closed by a credit to

Cost of Goods Sold.

ANS: T

16. If overapplied factory overhead is material, the account is closed by a credit to

Cost of Goods Sold.

ANS: F

17. If overapplied factory overhead is immaterial, the account is closed by a debit to

Cost of Goods Sold.

ANS: F

18. If underapplied factory overhead is immaterial, the account is closed by a debit to

Cost of Goods Sold.

ANS: T

19. If underapplied factory overhead is immaterial, the account is closed by a credit

to Cost of Goods Sold.

ANS: F
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20. If underapplied factory overhead is material, it is prorated among Work in

Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.

ANS: T

21. The estimated maximum potential activity for a specified time is known as
theoretical capacity.

ANS: T

22. Practical capacity does not adjust for routine downtime in a production process.

ANS: F

23. Normal capacity considers present and future production levels and cyclical
fluctuations.

ANS: T

24. Expected capacity is a long-run measure of activity.

ANS: F

25. Practical capacity is the capacity that can be achieved during normal working
hours.

ANS: T

26. The regression equation y = a+ bX assumes that the function is curvilinear in

nature.

ANS: F

27. The regression equation y = a+ bX assumes that the function is linear in nature.

ANS: T

28. The slope of a regression line is determined by dividing the change in activity
level by the change in total cost.

ANS: F

29. The slope of a regression line is determined by dividing the change in total cost
by the change in activity level.

ANS: T
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30. The high-low method excludes outliers from the calculation of the slope of a
regression line.

ANS: T

31. When using the high-low method, fixed costs are computed before the variable
component is computed.

ANS: F

32. When using the high-low method, the variable component is computed before the
fixed component is.

ANS: T

33. A flexible budget is a planning document that presents expected variable and
fixed overhead costs at different activity levels.

ANS: T

34. A master budget is a planning document that presents expected variable and fixed
overhead costs at different activity levels.

ANS: F

35. Plantwide overhead rates provide a more accurate computation of factory

overhead than departmental overhead rates

ANS: F

36. Plantwide overhead rates provide a less accurate computation of factory overhead
than departmental overhead rates

ANS: T

37. Absorption costing conforms with generally accepted accounting principles.

ANS: T

38. Direct costing conforms with generally accepted accounting principles.

ANS: F

39. The Internal Revenue Service allows the use of both variable and absorption
costing.

ANS: F
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40. Sales minus cost of goods sold is referred to as variable contribution margin.

ANS: F

41. Phantom profits result when absorption costing is used and sales exceed
production.

ANS: F

42. Phantom profits result when absorption costing is used and production exceeds
sales.

ANS: T

43. If production exceeds sales, absorption costing net income exceeds variable
costing net income.

ANS: T

44. If production exceeds sales, absorption costing net income is less than variable
costing net income.

ANS: F

45. If sales exceed production, absorption costing net income is less than variable
costing net income.

ANS: T

46. If sales exceed production, absorption costing net income exceeds variable
costing net income.

ANS: F

COMPLETION Questions

1. In a(n) ____________________ cost system, factory overhead is assigned directly

to products and services.

ANS: actual

2. In a(n) ____________________ cost system, factory overhead is assigned to an

overhead control account and then allocated to products and services.

ANS: normal
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3. The dollar amount of overhead assigned to work-in-process inventory using a

predetermined rate is known as ____________________ overhead.

ANS: applied

4. If actual overhead exceeds applied overhead, factory overhead is said to be

____________________.

ANS: underapplied

5. If actual overhead is less than applied overhead, factory overhead is said to be

____________________.

ANS: overapplied

6. In a normal job-order costing system, factory overhead is applied using

ANS: predetermined; actual

7. In a standard job-order costing system, factory overhead is applied using

ANS: predetermined; standard

8. When a job is begun, the first document in the job-order process is the

ANS: materials requisition

9. When raw materials are placed into production, the

ANS: Work in process

10. When indirect materials are added to a job, the

ANS: manufacturing overhead

11. When manufacturing overhead is applied to a job in process, the

ANS: work in process

12. When manufacturing overhead is applied to a job in process, the

ANS: manufacturing overhead

13. When indirect labor is recorded for a job in process,

ANS: manufacturing overhead

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14. When production is completed on a job, finished goods are transferred to the

ANS: Finished Goods Inventory

15. The document that contains all information about the costs of a specific job is a

ANS: job-order cost sheet

16. The difference between a standard and an actual quantity, price, or rate is a(n)
ANS: variance

17. Underapplied factory overhead that is immaterial in amount is closed to

ANS: Cost of Goods Sold

18. Underapplied factory overhead that is material in amount is closed to

ANS: Work in Process, Finished Goods Inventory, Cost of Goods Sold

19. If a substandard product can be reworked, it is known as a

ANS: defect

20. If a substandard product cannot be reworked, it is known as

ANS: spoilage

MULTIPLE CHOICE

1. Which of the following organizations would be most likely to use a job-order

costing system? a. the loan department of a bank b. the check clearing department of a
bank c. a manufacturer of processed cheese food d. a manufacturer of video cassette
tapes

ANS: A

2. When job-order costing is used, the primary focal point of cost accumulation is the
a. department. b. supervisor. c. item. d. job.

ANS: D

3. In a job-order costing system, a. standards cannot be used. b. an average cost per

unit within a job cannot be computed. c. costs are accumulated by departments and
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averaged among all jobs. d. overhead is typically assigned to jobs on the basis of
some cost driver.

ANS: D

4. What is the best cost accumulation procedure to use when many batches, each
differing as to product specifications, are produced? a. job-order b. process c. actual d.
standard

ANS: A

5. Which of the following could not be used in job-order costing? a. standards b. an

average cost per unit for all jobs c. normal costing d. overhead allocation based on the
job's direct labor hours

ANS: B

6. Which of the following costing systems allows management to quickly recognize

materials, labor, and overhead variances and take measures to correct them?

Actual Cost System Normal Cost System

a. yes yes
b. yes no
c. no yes
d. no no

ANS: D

7. Which of the following costing methods of valuation are acceptable in a job-order

costing system?

Actual Material Cost

Standard Material Cost
Actual Labor Cost
Predetermined Overhead Cost

a. yes yes no yes

b. yes no yes no
c. no yes yes yes
d. yes yes yes yes

ANS: D
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8. In a normal cost system, a debit to Work in Process Inventory would not be made
for a. actual overhead. b. applied overhead. c. actual direct material. d. actual direct
labor.

ANS: A

9. After the completion of production, standard and actual costs are compared to
determine the ____ of the production process. a. effectiveness b. complexity c.
homogeneity d. efficiency

ANS: D

10. A company producing which of the following would be most likely to use a price
standard for material? a. furniture b. NFL-logo jackets c. custom-made picture frames
d. none of the above

ANS: B