Chapter 3 – Product Costing and Cost Accumulation in a Batch Production Environment
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Chapter 3
Product Costing and Cost Accumulation in a Batch Production
Environment
Answer Key
True / False Questions
1. Product or service cost is a very objective number that anyone could agree on.
2. Product costs provide crucial data for a variety of managerial purposes.
3. The final step in recognizing the completion of production requires a company to debit
Finished-Goods Inventory and credit Work-in-Process Inventory.
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4. As soon as products are completed, their product costs are transferred from Raw Materials
Inventory to Finished-Goods Inventory.
5. Manufacturing overhead is a pool of indirect production costs that must somehow be
attached to each unit manufactured.
6. In a public accounting firm, for example, costs are assigned to an audit engagement in
much the same way they are assigned to a single batch of tables by a furniture manufacturer.
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7. In traditional product-costing systems, the measure of productive activity is usually some
volume-based cost driver, like direct-labor hours.
8. A predetermined overhead rate is calculated by dividing actual overhead cost by the actual
amount of a cost driver used in the process.
9. Electricity costs that were incurred by a company’s production processes should be debited
to Utilities Expense.
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10. A production order for a job authorizes the release of material to production.
11. Under- or overapplied manufacturing overhead at year-end is most commonly charged or
credited to Work-in-Process Inventory.
12. The term “normal costing” refers to the use of job-costing systems.
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13. Actual costing avoids the profitability of cyclicality.
14. Two-stage cost allocation uses a first stage to assign all product costs to production
departments and then a second stage to apply different cost drivers to improve efficiency.
15. The two-stage cost allocation actually has three types of allocation involved.
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16. Job-order costing methods are used in a variety of service industry firms and nonprofit
organizations.
17. Nonmanufacturing firms typically refer to their service production processes as jobs.
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Multiple Choice Questions
18. Product costing in a manufacturing firm is the process of:
A. accumulating the company’s period costs.
19. Which of the following statements is true?
A. Service firms have little need for determining the cost of their services.
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20. Which of the following statements is true?
A. Product costing is not used in financial accounting.
21. If a company sells goods that cost $80,000 for $92,000, the firm will:
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22. As production takes place, all manufacturing costs are added to the:
23. Which of the following statements regarding work in process is not correct?
A. Work in process is partially completed inventory.
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24. Which of the following statements about manufacturing cost flows is false?
A. Direct materials, direct labor, and manufacturing overhead are entered in the Work-in–
Process Inventory account.
25. The final step in recognizing the completion of production requires a company to:
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26. Morgan Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The
journal entries to record this transaction would include:
27. Which of the following manufacturers would most likely use job-order costing?
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28. A custom-home builder would likely utilize:
29. Which of the following types of companies would most likely use process costing?
A. Aircraft manufacturers.
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30. A manufacturing firm produces goods in accordance with customer specifications,
commencing production upon receipt of a purchase order. To accumulate the cost of each
order, the company would use a:
31. A typical job-cost record would provide information about all of the following items
related to an order except:
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32. Which of the following statements about material requisitions is false?
A. Material requisitions are often computerized.
33. Gonzales Company has developed an integrated system that coordinates the flow of all
goods, services, and information into and out of the organization, working with raw material
vendors as well as customers to improve service and reduce costs. The firm is said to be
using:
A. participative management.
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34. The assignment of direct labor cost to individual jobs is based on:
A. an estimate of the total time spent on the job.
35. When using normal costing, the total production cost of a job is composed of:
A. direct material and direct labor, only.
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36. Manufacturing overhead:
A. includes direct materials, indirect materials, indirect labor, and factory depreciation.
37. The process of assigning overhead costs to the jobs that are worked on is commonly
called:
A. service department cost allocation.
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38. Which of the following is the correct method to calculate a predetermined overhead rate?
A. Budgeted total manufacturing cost budgeted amount of cost driver.
39. Norwood Corporation uses a predetermined overhead rate of $20 per machine hour. In
deriving this figure, the company’s accountant used:
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40. Metalica Company applies overhead based on machine hours. At the beginning of 20×1,
the company estimated that manufacturing overhead would be $500,000, and machine hours
would total 20,000. By 20×1 year-end, actual overhead totaled $525,000, and actual machine
hours were 25,000. On the basis of this information, the 20×1 predetermined overhead rate
was:
41. Osgood Company, which applies overhead at the rate of 190% of direct material cost,
began work on job no. 101 during June. The job was completed in July and sold during
August, having accumulated direct material and labor charges of $27,000 and $15,000,
respectively. On the basis of this information, the total overhead applied to job no. 101
amounted to:
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42. Blakely charges manufacturing overhead to products by using a predetermined application
rate, computed on the basis of machine hours. The following data pertain to the current year:
Budgeted manufacturing overhead: $480,000
Actual manufacturing overhead: $440,000
Budgeted machine hours: 20,000
Actual machine hours: 16,000
Overhead applied to production totaled:
43. Farrina Manufacturing uses a predetermined overhead application rate of $8 per direct
labor hour. A review of the company’s accounting records for the year just ended discovered
the following:
Underapplied manufacturing overhead: $7,200
Actual manufacturing overhead: $392,000
Budgeted labor hours: 50,000
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44. Boxer Industries worked on four jobs during its first year of operation: nos. 401, 402, 403,
and 404. A review of job no. 403’s cost record revealed direct material charges of $40,000 and
total manufacturing costs of $50,000. If Boxer applies overhead at 150% of direct labor cost,
the overhead applied to job no. 403 must have been:
45. Which of the following statements about materials is false?