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Chapter 2
Product Costing: Manufacturing Processes,
Cost Terminology, and Cost Flows
Concept Questions
1. (LO1—Inventory accounts—raw materials, WIP, and finished goods)
Raw materials inventory is the inventory of materials needed for the
2. (LO1, 2—Comparison of traditional manufacturing environment and JIT)
JIT systems are called pull systems because they start with the customer order
3. (LO2—Description of JIT system)
4. (LO2—JIT and lean production benefits)
Advantages of JIT and lean production manufacturing are likely to include the
following:
1. A reduction in waste and scrap
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5. (LO2—Applying lean production to a service company)
A bank might apply lean production techniques in an effort to reduce the time that
customers wait in line to make deposits or conduct other business with a bank
6. (LO3—Direct versus indirect costs)
Direct costs, such as the costs of direct materials and direct labor, can be directly
7. (LO3—Manufacturing costs)
The three components of manufacturing costs are direct materials, direct labor,
8. (LO3—Nonmanufacturing costs)
Nonmanufacturing costs include all costs incurred outside the factory and are
9. (LO4—Cost flows in a manufacturing environment)
Manufacturing costs (that is, the costs of direct materials, direct labor, and
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10. (LO5—Cost versus expense)
Although often used interchangeably, cost and expense are not synonymous
terms. Costs can be classified in a number of ways, including manufacturing
11. (LO5—Product versus period costs)
Manufacturing costs are called product costs because they attach to the product
12. (LO5—The need for product costing)
Companies need to identify accurate product costs in order to determine whether
Brief Exercises
1. (LO1—Understanding the production process)
a. False
2. (LO2—JIT and lean production)
a. decrease
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3. (LO3—Manufacturing versus nonmanufacturing costs)
a. manufacturing
4. (LO2—Features of lean production)
a. True
5. (LO3—Types of manufacturing costs)
a. IL
6. (LO3—Product costs)
A. Total product costs are $90,000 and include direct materials used of
Exercises
7. (LO3—Product costs)
A. The cost of direct labor for each desk is $60 (4 direct labor hours per
desk × $15 per hour).
Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
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8. (LO3—Direct and indirect labor)
Machine operators and fabric cutters would be considered direct labor. Total
9. (LO3—Raw material used)
10. (LO4—Cost flows: Raw materials used)
Beginning raw materials inventory $ 25,000
11. (LO4—Cost of goods manufactured)
The cost of goods manufactured is broken down as follows:
Beginning inventory of work in process $ 25,000
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12. (LO4—Cost of goods manufactured)
The cost of goods manufactured is $185,000, broken down as follows:
Beginning inventory of work in process $ 20,000
Plus: Raw materials used in production 90,000 **
13. (LO4—Cost of goods sold)
The manufacturing cost per unit is $2.38, calculated as follows:
Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
14. (LO4—Basic cost flows: Raw materials used)
Chateo, Inc., started the month with raw materials of $54,000 and purchased an
15. (LO5—Calculation of net income)
Sales (5,300 units × $25 per unit) $132,500
16. (LO4—Basic cost flows: Raw materials used)
Beginning raw materials inventory $ 20,000
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17. (LO4—Cost of goods sold)
18. (LO4—Cost of goods sold and merchandise available for sale in a
merchandising company)
A. The cost of goods sold is $489,000, calculated as follows:
19. (LO4—Cost of goods sold and sales for a merchandising company)
A. The cost of goods sold is calculated as follows:
Beginning inventory $ 155,000
20. (LO5—Calculation of net income)
The corrected income statement is as follows:
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21. (LO5—Product versus period cost)
Problems
22. (LO3, 4, and 5—Cost of goods manufactured, cost of goods sold, and impact on
financial statements)
A. The cost of goods manufactured is $305,000, broken down as follows:
Beginning inventory of work in process $ 20,000
Plus: Raw materials used in production 118,0001
B. The cost of goods sold is equal to $310,000, calculated as follows:
Cost of goods sold equals:
Cost of goods sold $310,000
C. Advertising, selling, and administrative expenses are period or
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D. If raw materials and work in process inventories had decreased during the
23. (LO3, 4—Cost of goods manufactured and cost of goods sold)
A. The cost of goods manufactured is $265,000, broken down as follows:
Beginning inventory of work in process $ 20,000
Plus: Raw materials used in production 97,0001
Plus: Direct labor 50,000
B. The cost of goods sold is equal to $270,000, calculated as follows:
Cost of goods sold equals:
Beginning finished goods inventory $ 35,000
C. Gross margin is equal to $80,000, and operating income is equal to
$37,000, calculated as follows:
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24. (LO3, 4, and 5—Decision focus: Impact on financial statements)
B&B Manufacturing
Income Statement
For the Month Ended May 31
Sales $ 325,000
Less: Cost of goods sold 239,5001
Net Operating Income $ 10,000
1B&B Manufacturing
Statement of Cost of Goods Sold
For the Month Ended May 31
Beginning finished-goods
inventory $ 50,000
Add: Cost of goods manufactured 259,5003
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3B&B Manufacturing
Statement of Cost of Goods Manufactured
For the Month Ended May 31
Beginning inventory of work in process $ 15,000
Plus: Raw materials used in production 120,0001
Plus: Direct labor 75,000
B. No. The company is profitable. The investors should be willing to continue
financing the company.
C. The previous controller incorrectly expensed all manufacturing costs even
25. (LO3, 5—Decision focus: Service company)
B. Cost reduction could be achieved by hiring lower paid preparers or by
delegating more of the work to clerical staff. It could also be achieved by
hiring more efficient preparers who complete the returns in less time. A
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C. Labor costs would be reduced to $153 per return:
D. Yes. The firm would save $221 in direct labor cost per return. The $5,000
E. The primary qualitative consideration is likely to be one of tax return
quality. Returns prepared with the use of computer software are likely to
26. (LO4, 5—Basic cost flows, income statement)
A. Company #1:
Direct materials used $ 9,000
Direct labor 4,000
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Company #2
DM + DL + MOH = TMC
Let x = Manufacturing overhead:
Chapter 2: Product Costing: Manufacturing Processes, Cost Terminology, and Cost Flows
B. Company #1:
Company #1
Income Statement
For the Period Ended December 31
Sales $35,000
Less: Cost of goods sold 18,000
Company #2:
Company #2
Income Statement
For the Period Ended December 31
Sales $50,000
27. (LO4, 5—Basic cost flows)
A. Direct materials transferred to work in process:
B. Total manufacturing costs (TMC) for the year:
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C. Cost of goods manufactured:
D. Cost of goods sold:
28. (LO4, 5—Basic cost flows, income statement)
A. Company #1:
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Company #2
CGM = Beginning WIP + Total manufacturing costs – Ending WIP
Let x = Cost of goods manufactured (CGM):
x = $15,000 + $35,000 – $17,500
x = $32,500
Goods available for sale = Beginning FG inventory + CGM:
Goods available for sale = $8,500 + $32,500
Goods available for sale = $41,000
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B. Company #1:
Company #1
Income Statement
For the period ended December 31
Sales $ 35,000
Company #2:
Company #2
Income Statement
For the Period Ended December 31
Sales $ 50,000
29. (LO4, 5—Basic cost flows, income statement)
Cost of goods manufactured $275,650
B. Venus Corporation
Income Statement
For the month ended December 31, 2011
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30. (LO4, 5—Cost flows and financial statements)
A. As follows:
a. $6,250: Of the 30,000 mouse pads, 2,500 are given away as an
advertising gimmick and 25,000 are used in production,
leaving 2,500 pads in ending raw materials inventory at a
cost of $2.50 each.
B. Raw materials, work in process, and finished goods appear on the
balance sheet. Cost of goods sold and advertising expense appear on the
Cases
31. (LO2, 5—JIT implementation, financial statements)
A. Reducing inventory by such a significant amount may diminish the
company’s ability to deliver its products to its customers. The company will
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C. The total inventory is currently valued at $722,505. Given an interest rate
of just 3.5%, the annual interest received on 80% of this balance is
$20,230.14.
cash.
32. (LO3, 5—Manufacturing costs versus nonmanufacturing costs, income statement)
A. Advertising expense is a period expense and should be included in
“selling and administrative expenses.” By including the advertising in
overhead, the company is able to increase product costs. Only when
products are sold are their costs shown on the income statement as cost
of goods sold. By including a portion of advertising expense in overhead,