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ACCT 226 Review & Practice Problems (with Solutions) - Test One – Chapters 1-3

NOTE TO EACH STUDENT:  

This review listing is intended to be a guide only.  You are/were responsible for reading/studying your text for the Chapters covered on this exam; you are responsible for material covered in the recorded lectures; and to be successful you should have worked all assignments (graded and non-graded) to have an understanding of the content and so you are prepared for this exam.

REVIEW INFO:

Understand not only the definition but how to apply the related concepts for:

· Prime costs = Direct Materials + Direct Labor … both direct materials and direct labor are variable costs

· Conversion costs = Direct Labor + Manufacturing Overhead … be able to identify which accounts are MOH

· Total Manufacturing Costs = Direct Materials + Direct Labor + Manufactured Overhead

· Total Non-Manufacturing Costs = Selling + General & Administrative Expenses

· Product Costs = Total Manufacturing Costs

· Period Costs = Total Non-Manufacturing Costs

· Total Costs = Fixed Costs + (Variable Cost Rate per unit * # units)

· Y = a + b(X)      formula for a line … use to solve for Fixed Costs or for Variable Costs…where

               Y = total costs;

               a = total fixed costs;

               b = variable cost rate  

                          X = number of units

· Manufacturing Overhead … consists of indirect labor; indirect materials; and general factory overhead expenses like depreciation on factory equipment or wages of maintenance employees, etc…understand that Manufacturing Overhead consists of FACTORY costs but not Direct Material and not Direct Labor…

· Understand how costs behave or react within the Relevant Range when activity levels of production change….

o Fixed costs remain the same in total…regardless of the number of units produced or the activity level

o Average Fixed cost per unit decreases as the activity level increases

o Average Fixed cost per unit increases as the activity level decreases

o Variable costs remain the same per unit; know what types of cost categories are variable…for example direct materials, direct labor, sales commissions, etc….are all examples of variable costs…

o Total Variable Costs changes in direct proportion with changes in the level of activity 

· Be able to calculate Total Costs = Fixed Costs + Variable Costs

· Be able to provide or identify examples of Variable Cost items…like direct materials; direct labor; any other expenses that will stay the same per unit but vary in total because level of activity varies

· Be able to provide or identify examples of Fixed Costs items…like Rent on the Factory; or Depreciation on Equipment, or Salaries of Executives, etc…

· Gross Margin = Sales Revenue – Cost of Goods Sold    (Note:  Used with traditional format of income statement)

· Contribution Margin = Sales Revenue – All Variable Expenses

(Note: Used with Contribution Format of income statement)

· Over applied Overhead means amount of overhead applied to a job(s) exceeds actual overhead expenses incurred

· Under applied Overhead means amount applied to a job(s) is less than actual overhead expenses incurred

· Understand the T accounts and journal entries for Raw Materials, Work in Process, Finished Goods, Cost of Goods Sold…and what causes each account to increase or decrease.

· Predetermined Overhead Rate  (POHR) = Estimated Manufacturing Overhead Costs

                                                                              Estimated Units of the Activity Base

· Understand that the Estimated Manufacturing Overhead Costs is the total of the Estimated Fixed MOH costs plus the Estimated Total Variable MOH costs

· Understand the types of Activity Bases that can be used when calculating POHR…Estimated Total Direct Labor Hours; Estimated Total Machine Hours; Estimated Total Direct Labor Dollars, etc.

· Know how to record in journal Entries ---job order costing activities.  

For example:

o Purchase of Raw Materials

                     Debit Raw Materials

                                                  Credit         Accounts Payable (if on account…Cash if paid)

o Issuing Direct Materials to production areas (record to WIP)

                            Debit     Work In Process

                                                     Credit     Raw Materials

o Issuing Indirect Materials to production areas (record to MOH)

                   Debit   Manufacturing Overhead

                          Credit      Raw Materials

o Direct Labor and Indirect Labor

            Debit        Work In Process (for Direct Labor)

            Debit        Manufacturing Overhead (for Indirect Labor)

                     Credit        Salaries or Wages Payable (if accrued…Cash if Paid)

 

o Applying Overhead to a specific job  (use the POHR * actual number of activity units)

                             Debit Work in Process

                                                                  Credit Manufacturing Overhead  (NOTE:  Credit MOH when APPLYING MOH)

o Transfer of Completed Goods from Work In Process to Finished Goods (Cost of Goods Manufactured)

                Debit             Finished Goods

                                                   Credit                    Work In Process

o Record expense portion & reduction of inventory when units are sold (Cost of Goods Sold)

                  Debit              Cost of Goods Sold

              Credit                    Finished Goods

o Record the revenue portion of the entry when units are sold

   Debit                Accounts Receivable    (if sold on account)

               Credit                   Sales Revenue

· Be able to differentiate between Product and Period expenses; manufacturing and non-manufacturing expenses

Sample Problems:

1. USC Corporation bases its predetermined overhead rate on the estimated machine-hours for the upcoming year. At the beginning of the most recently completed year, the Corporation estimated the machine-hours for the upcoming year at 10,000 machine-hours. The estimated variable manufacturing overhead was $6.82 per machine-hour and the estimated total fixed manufacturing overhead was $230,200.

The predetermined overhead rate for the recently completed year was closest to: 
A. $29.84 per machine-hour
B. $23.15 per machine-hour
C. $23.02 per machine-hour
D. $6.82 per machine-hour

Answer:  A ----   Estimated MOH Costs/Estimated # of Units of the Activity Driver

                         Estimated MOH Costs = Estimated Fixed MOH costs + Estimated Variable MOH Costs

      = 230,200 + ($6.82*10,000)

       =230,200+ $68,200

`        =$298,400

    POHR = Estimated MOH Costs/Estimated # of Units of the activity driver

    POHR = $298,400/10,000 machine hours = $29.84 per machine hour

2. At the beginning of May, Cocky Corporation had $3,000 of raw materials on hand. During the month, the Corporation purchased an additional $15,000 of raw materials. During May, $5,000 of raw materials were requisitioned from the storeroom for use in production.

The credits entered in the Raw Materials account during the month of May total: 
A. $13,000
B. $15,000
C. $  5,000
D. $  3,000

Answer: C

              Raw Materials

                                              Beg. Bal   3,000   

                                                                            

                                           Purchases   15,000

 

                                                                             5,000 Sent to Production

                                          

3. Carolina Corporation applies manufacturing overhead on the basis of direct labor-hours. At the beginning of the most recent year, the company based its predetermined overhead rate on total estimated overhead of $210,600 and 6,000 estimated direct labor-hours. Actual manufacturing overhead for the year amounted to $209,000 and actual direct labor-hours were 5,980.

The predetermined overhead rate for the year was closest to: 
A. $34.95
B. $34.83
C. $34.98
D. $35.10

Answer:         “D”

POHR = 210,600/6000 DL hrs = $35.10/DL hr

What if you were asked for the over or under applied amount in this problem?                   

        Actual MOH for Year = $209,000

                           Applied MOH for Year = $35.10 * 5,980 hours = 209,898

                Over/Under Applied?   =   OVER APPLIED $898

4.

 

If USC Company reports the following activity levels for October and November (all within the relevant range), what would be the total product costs to make the 2,000 units in November?

            October                         November

Activity Level in Units           1,000 units              2,000 units

Direct Materials                                    $5.00                          

Direct Labor   $3.00

Variable Manufacturing OH                 $1.00

Fixed Manufacturing Overhead            $2.00                              

Fixed Selling Expenses                         $1.00

Fixed Administrative Expenses             $4.00

Sales Commissions                $2.60

Variable Administrative Expenses        $1.40

           

ANSWER:   $20,000 (Product Costs are DM + DL + VMOH + FMOH)

 

Activity Level in Units        1,000 units                   2,000 units

          Cost/Unit                           Costs

Direct Materials                                    $5.00                $5.00*2,000 units =$10,000 (prod)

Direct Labor        $3.00                $3.00*2,000 units =$ 6,000 (prod)

Variable Manufacturing OH                 $1.00                $1.00*2,000 units =$ 2,000 (prod)

Fixed Manufacturing Overhead           $2.00                $1.00*2,000 units =$ 2,000 (prod)

                                                          Total Product Costs @ 2,000 units =$20,000

Concepts to Understand:  

· Variable costs per unit stayed the same …

· Fixed costs per unit decreased in direct proportion to the change in activity…but

· Fixed costs in total stayed the same at both levels of activity…within relevant range

· Above points demonstrate how costs behave within the relevant range

PERIOD COSTS ARE IGNORED WHEN CALCULATING PRODUCT COSTS:

Fixed Selling Expenses                         $1.00      $0.50*2,000 units =$ 1,000 (period)

Fixed Administrative Expenses            $4.00      $2.00*2,000 units=$ 4,000 (period)

Sales Commissions               $2.60      $2.60*2,000 units =$ 5,200 (period)

Variable Administrative Expenses       $1.40      $1.40*2,000 units =$ 2,800 (period)

5.

If USC Company reports the following activity levels for October (1,000 units) and November (2,000 units) … both within the relevant range…what would be the total direct product costs to make the 2,000 units in November?

            October                         November

Activity Level in Units                  1,000 units        2,000 units

                                                        Avg Cost/Unit                        

Direct Materials                                                  $5.00                            

Direct Labor                 $3.00

Variable Manufacturing OH                               $1.00

Fixed Manufacturing Overhead                          $2.00                              

Fixed Selling Expenses                                       $1.00

Fixed Administrative Expenses                          $4.00

Sales Commissions                              $2.60

Variable Administrative Expenses                      $1.40

ANSWER:

Direct Materials = $5.00/unit * 2,000 units = $10,000

+Direct Labor = $3.00/unit * 2,000 units =        6,000

TOTAL DIRECT PRODUCT COSTS           $16,000

6.

List of Accounts and Costs:

Direct Materials	$5,000
Direct Labor	$2,000
Factory Rent on Building	$6,000
Advertising Costs	$9,000
Sales Salaries	$4,000
Depreciation on Factory Equipment	$3,000
Indirect Maintenance Labor in factory	$8,000
Production Supervisor’s Salary	$7,000
Office Rent - Building	$1,000

Prime Costs = $____________

 

Period Costs = $____________

 

MOH = $ _____________________

 

Product Costs = $ ____________

 

 

SOLUTION TO PROBLEM B:

 

List of Accounts and Costs:

Direct Materials	$5,000
Direct Labor	$2,000
Factory Rent on Building	$6,000
Advertising	$9,000
Sales Salaries	$4,000
Depreciation on Factory Equipment	$3,000
Indirect Maintenance Labor in factory	$8,000
Production Supervisor’s Salary	$7,000
Office Rent  - Building	$1,000

 

Prime Costs = $ 7,000  (DM + DL)

 

Period Costs = $ 14,000 (Advertising + Sales Salaries+ Office Rent)

 

MOH = $ 24,000__   

(Factory Rent + Deprec on Factory Equipment + Indirect Maint. Labor in Factory + Production Supervisor Salary)

 

Product Costs = $ 31,000    DM+DL+MOH = Total Product Cost

 

7.

SC Corporation uses a POHR based on estimated DL hours of 4,000 hours and based on estimated manufacturing overhead costs of $28,000…

 

During the year, actual overhead costs incurred were $30,000 and actual direct labor hours were 5,000.

 

What is the POHR?

 

What was the applied overhead?

 

What amount is this job over/under applied?

 

Answers:    

 

POHR =      $28,000/4,000 DL Hours = $7/dl hour

 

APPLIED = $7/DL Hr x 5,000 actual DL Hours = $35,000 Applied MOH

 

OVER OR UNDER APPLIED?

If applied $35,000 and had actually incurred $30,000 then we have over-applied by $5,000

                                                 

Manufacturing Overhead

 

                                                           Debit                                 Credit

                                                      Actual Amts.                Applied Amounts

                                                                       

                         $30,000                              $35,000

      $  5,000  (OVER APPLIED)

 

8.

 

Gamecock Country Corporation operated at a volume of 10,000 units and incurred $50,000 in total manufacturing overhead costs, which included $15,000 in fixed manufacturing overhead costs.

 

If volume increases to 12,000 units, the company would expect to incur total manufacturing overhead of (assume activity is within the relevant range):

 

 

Total Manufacturing Overhead @ 12,000 units would be ____________________

 

ANSWER:     

 

Total Cost = Total Fixed Costs + Total Variable Costs

Total MOH Cost = Total Fixed MOH Costs + Total Variable MOH Costs

  $50,000   =  $15,000 Total Fixed MOH Costs + Total Variable MOH Cost

  $50,000-$15,000 = Total Variable MOH Cost

  $35,000 =    Total Variable MOH Cost

 

VMOH Costs/# of Units = $35,000/10,000 units = $3.50/unit VC

 

VMOH Cost per unit stays the same….FMOH Cost in Total stays the same…within the relevant range…so

Y = a + bX

Y = $15,000 + $3.50 (12,000)

Y = $15,000 +42,000

                        Y = $57,000

 

9.

At an activity level of 10,000 machine-hours in a month, ABC Corporation's total variable production cost is $150,000 and its total fixed production cost is $361,000.

 

What would be the total production cost per machine-hour, both fixed and variable, at an activity level of 11,000 machine-hours in a month? Assume that this level of activity is within the relevant range. (Round answer to 2 decimal places.)

 

A) $ 49.60

B) $ 46.45

C) $ 51.10

D) $ 47.82

 

ANSWER: “D”

 

VARIABLE COST PER UNIT STAYS THE SAME within relevant range:

     $150,000/10,000 =$15 variable cost per machine hour at all levels of activity (in relevant range)

 

TOTAL FIXED COST STAYS THE SAME IN TOTAL within relevant range…but is spread over more units if machine hours goes from 10,000 machine hours to 11,000 machine hours:

     $361,000/11,000 = $32.82 per machine hour…

 

ANSWER:  VC per machine hour + FC per machine hour

                    = 15             +      $32.82

                    = $47.82 total cost per machine hour

 

OR

Y = a + b(x)

Y = 361,000 + 15(11,000)
Y = 361,000 + 165,000

Y = $526,000 total production cost and UNIT production cost =$526,000/11,000 =$47.82

 

 

Could be asked….

· What would Total Production Cost be when 11,000 units produced?    Answer $526,000

· What would average Fixed cost per unit be when 11,000 units produced? Answer $32.82

361,000/11,000 units = $32.82 average FC per unit

· What would Variable Cost per unit be when 11,000 units produced?  Answer $15.00

Variable cost per unit stays the same…it was $15 per unit at 10,000 machine hours so it will be $15 per unit at 11,000 machine hours