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LESSON 1

Assignment

Note:
For multiple-choice questions, identify the best response. Answer each item by giving the letter of your
choice. For example, if (4) is the best answer for (a), write a(4) as your answer. Select only one answer for
each item. If more than one answer is given, it will not be marked. Incorrect answers will be marked as zero.
No marks will be given to any explanation you offer.

Question 1 (42 marks)


Multiple choice (2 mark each)
a. Which of the following statements about managerial accounting is true?
1) Managerial accounting information is prepared for external users.
2) Managerial accounting information is a legal requirement.
3) The structure of managerial accounting practice is relatively flexible.
4) There are structured standards of acceptability for managerial accounting.

b. Which of the following statements is incorrect with regard to a manufacturing firm?


1) Inventoriable costs include only prime costs.
2) Inventoriable costs include prime costs and manufacturing overhead costs.
3) Inventoriable costs include both variable manufacturing and fixed
manufacturing costs.
4) Inventoriable costs will never include any period costs.

c. Crandall Company manufactures a variety of products. The controller is considering


how to account for labour fringe benefits. Which of the following methods provides
the best measure of the relative cost of manufacturing Crandalls different products?
1) Treat all labour fringe benefits as indirect labour by adding the total to
manufacturing overhead.
2) Treat all labour fringe benefits as direct labour.
3) Treat labour fringe benefits that relate to direct labour as additional direct
labour cost and treat fringe benefits that relate to indirect labour as part of
manufacturing overhead.
4) Treat labour fringe benefits as period expenses and expense these costs as
incurred.

d. In the context of making a decision, which of the following statements regarding


relevant costs is incorrect?
1) An opportunity cost is a relevant cost.
2) A traceable fixed cost is a relevant cost.
3) A variable cost is a relevant cost.
4) A sunk cost is a relevant cost.

Introductory Management Accounting Assignment 1 1


e. Which of the following functions of management compares planned results with
actual results?
1) Planning
2) Directing and motivating
3) Controlling
4) Decision making

f. When distinguishing between fixed costs and variable costs, which of the following
statements is true?
1) As production rises, variable costs per unit will fall.
2) As production rises, total fixed costs will rise.
3) As production falls, fixed costs per unit will rise.
4) As production falls, variable costs per unit will fall.

g. Which of the following are included in manufacturing overhead?


1) All direct material, direct labour, and administrative costs
2) All manufacturing costs except direct labour
3) All manufacturing costs except direct labour and direct materials
4) All selling and administrative costs

h. Which of the following statements describes the treatment of period costs?


1) They will never constitute part of the cost of goods manufactured statement
but will always be part of the income statement.
2) They will always be part of the cost of goods manufactured statement.
3) They will never constitute part of the cost of goods manufactured statement or
be part of the income statement.
4) They will only be incurred if the product is made in the current period.

i. What criterion is used in making the distinction between indirect and direct costs?
1) Whether a cost differs between alternatives
2) Whether a cost is variable or fixed
3) Whether a cost is a product or a period cost
4) Whether a cost can be easily traced to the cost object under consideration

j. Buford Company rents out a small unused portion of its factory to another company
for 1,000 per month. The rental agreement will expire next month, and rather than
renew the agreement, Buford Company is thinking about using the space itself to
store materials. What term is used to describe the 1,000 per month?
1) Sunk cost
2) Period cost
3) Variable cost
4) Opportunity cost

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k. A machine was purchased in 20X6 to make experimental boards. The machine is still
being used in the manufacture of the new board. What term is used to describe the
cost of this machine in 20X9?
1) Opportunity cost
2) Sunk cost
3) Differential cost
4) Period cost

Note:
Questions (l) through (n) are based on the following information pertaining to Haileys manufacturing
operations:

Inventories January 1, 20X6 December 31, 20X7


Direct materials 30,000 20,000
Work in progress 30,000 25,000
Finished goods 28,000 35,000

Additional information for 20X6:


Direct materials purchased 110,000
Direct manufacturing labour payroll 90,000
Direct manufacturing labour rate per hour 10
Factory overhead rate per direct manufacturing labour-hour 7

l. For 20X6, what was the prime cost?


1) 90,000
2) 120,000
3) 170,000
4) 210,000

m. For 20X6, what was the conversion cost?


1) 90,000
2) 153,000
3) 183,000
4) 200,000

n. For 20X6, what was the cost of goods manufactured?


1) 35,000
2) 268,000
3) 273,000
4) 278,000

Introductory Management Accounting Assignment 1 3


o. In the preparation of the schedule of cost of goods manufactured, the accountant
incorrectly excluded as part of manufacturing overhead the janitorial expense of the
firms factory. What impact will this error have on the financial statements?
1) It will overstate period expenses on the income statement.
2) It will overstate the cost of goods sold on the income statement.
3) It will understate the cost of goods manufactured.
4) It will have no effect on the cost of goods manufactured.

Note:
Answer Questions (p) and (q) using the following selected data for March, taken from Ryker Companys
financial statements:

Cost of goods available for sale 61,000


Manufacturing overhead 25,000
Cost of goods manufactured 51,000
Finished goods inventory ending 10,000
Direct materials used 20,000
Sales 115,000
Selling and administrative expenses 30,000
Direct labour 15,000
Work-in-progress inventory beginning 8,000

p. What was the gross margin for March?


1) 20,000
2) 34,000
3) 50,000
4) 64,000

q. What was the work-in-progress inventory at the end of March?


1) 0
2) 9,000
3) 17,000
4) 60,000

r. Done and Bradsweet, LLC, is a professional accounting services company. In 20X7,


the firm incurred $76,000 in promotion expenses. Of this, $61,000 was for activities
related to entertaining potential clients and included charges for hotel stays and
transportation for clients and management to corporate head office to promote the
firm and its services. Some, but not all, of these clients subsequently engaged the
services of the company during the year. The remaining $15,000 was spent on
advertising the firm in print and television media in Europe.

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Which of the following statements is correct?
1) $76,000 represents a period cost.
2) $76,000 represents a product cost.
3) $61,000 is a product cost and $15,000 is a period cost.
4) $61,000 is a direct cost and $15,000 is an indirect cost.

Note:
Answer Questions (s) and (t) using the following data from the Bonnie Company for the month of November
20X7:

Inventories 11/1/20X7 11/30/20X7


Raw materials 19,000 ?
Work in progress 12,000 14,000
Finished goods ? 9,000

Additional data:
Sales revenue 106,000
Direct labour costs 10,000
Manufacturing overhead costs 11,000
Selling expenses 12,000
Administrative expenses 18,000

s. If the cost of raw materials purchased in November was 14,000 and the cost of
goods manufactured was 40,000, what was the inventory of raw materials on
November 30?
1) 12,000
2) 14,000
3) 16,000
4) 19,000

t. If the cost of goods manufactured for November was 40,000 and net income was
41,000, what was the finished goods inventory on November 1?
1) 1,000
2) 4,000
3) 32,000
4) 35,000

Introductory Management Accounting Assignment 1 5


u. At a sales volume of 40,000 units, Carne Companys total fixed costs are 40,000 and
total variable costs are 40,000. The relevant range for the product is 30,000 to
50,000 units.
If the company were to sell 42,000 units, what would be the total expected cost?
1) 73,600
2) 80,000
3) 82,000
4) 90,000

Question 2 (12 marks)


What is the major intention of the IFAC Code of Ethics for Professional Accountants?
Describe the Codes five fundamental principles.

Question 3 (20 marks)


Several years ago, 4R Company purchased a small building adjacent to its manufacturing
plant in order to have room for expansion when needed. Since the company had no
immediate need for the extra space, the building was rented out to another company for a
rental revenue of $40,000 per year. The renters lease will expire next month and, rather
than renewing the lease, 4R Company has decided to use the building itself to
manufacture a new product.

Direct materials cost for the new product will total $40 per unit. It will be necessary to
hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers
will be hired to manufacture the new product, with direct labour cost amounting to $18
per unit. Manufacturing operations will occupy all of the building space, so it will be
necessary to rent space in a warehouse nearby in order to store finished units of product.
The rental cost will be $1,000 per month. In addition, the company will need to rent
equipment for use in producing the new product; the rental cost will be $3,000 per
month. The company will continue to depreciate the building on a straight-line basis, as
in past years. Depreciation on the building is $10,000 per year.

Advertising costs for the new product will total $50,000 per year. Costs of shipping the
new product will be $10 per unit. Electrical costs of operating machines will be $2 per
unit.

To have funds to purchase materials, meet payrolls, and so forth, the company will have
to liquidate some temporary investments. These investments are presently yielding a
return of $6,000 per year.

Required
Prepare an answer sheet with the following column headings:
Product cost
Cost item Variable Fixed Period Opportunity Sunk
cost cost Direct Direct Manufacturing cost cost cost
materials labour overhead

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List the different costs associated with the new product decision down the extreme left
column (under Cost item). Then place an X under each heading that helps to describe
the type of cost involved. There may be Xs under several column headings for a single
cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would
place an X under each of these column headings opposite the cost.)

Question 4 (11 marks)


Calistas Pasta is a pasta company in Cecilia, Italy. The owner, Andrew Calista, wants to
identify the various costs incurred each year in order to plan and control the business
costs. The companys costs for the last year are as follows ( 000s):

Utilities for the plant 1,000


Salaries direct labour 11,000
Pasta equipment maintenance 800
Depreciation property, plant and equipment 1,000
Uniforms 400
Direct materials 9,500
Insurance for the plant 300
Presidents salary 15,000
Rent administrative offices 4,000
Administrative costs 9,000
Advertising and selling expenses 6,500
Boxes and bags used in pasta packaging 6,000
Idle time 600
Overtime premiums direct labour 3,500
Fringe benefits direct 2,000
Fringe benefits indirect labour 1,400
Total costs 72,000

Required
a. (4 marks)
Divide the total expenses of 72,000,000 into two categories: product and period cost.

b. (7 marks in total)
The president, Andrew Calista, is planning to expand his business into Greece and Spain.
This expansion will not require additional pasta facilities, but direct materials and labour
will increase significantly. Both Greek and Spanish authorities will require specific
documentation and inspections for the goods to get entry approval. This will be an
additional cost to take into consideration.
(i) (3 marks)
Are these additional costs product or period costs?

(ii) (4 marks)
Explain to Andrew Calista whether all these additional costs are relevant to the decision
to expand his business to Greece and Spain.

Introductory Management Accounting Assignment 1 7


Question 5 (15 marks)
International Beans Inc. has just completed a year of operations and the controller has
called a meeting for tomorrow morning. As the assistant controller you are asked to
prepare the following:
schedule of cost of goods manufactured
income statement
These will be presented to the executive committee at the meeting. Unfortunately, you
cannot get access to the companys general ledger system. However, you were able to
find information on ending inventories from last years reports, and you have paper
copies of inventory counts taken at the end of this year. Here is what you found:

Beginning Ending

Direct materials $65,000 $60,000


Work in progress 80,000 90,000
Finished goods 130,000 160,000

You were also able to gather the following additional information:

Purchase of raw materials (all direct materials) $ 6,720,000


Utility bills incurred in the factory 400,000
Direct labour 793,000
Indirect labour 190,000
Selling and administrative salaries 190,000
Maintenance costs incurred in the factory 350,000
Indirect materials used in manufacturing 120,000
Advertising costs incurred 230,000
Miscellaneous selling and administrative costs incurred 150,000
Sales for the year 13,020,000
Depreciation expense (Note 1) 850,000
Rental costs on the buildings (Note 2) $ 1,020,000

Note 1: Depreciation expense: 90% relates to factory assets, and the remainder relates to
selling and administrative assets.
Note 2: Rental costs on the buildings: 85% of the space is occupied by the factory and
15% is occupied by sales and administration.

Required
a. (8 marks)
Prepare a schedule of cost of goods manufactured for the year.

b. (7 marks)
Prepare an income statement for the year.
100

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