Colt Company uses a first-in, first-out (FIFO) process cost system to account for the cost of
producing a chemical compound. As part of production, Material B is added when the goods
are 80% complete. Beginning work-in-process inventory for the current month was 20,000
units, 90% complete. During the month, 70,000 units were started in process, and 65,000 of
these units were completed. There were no lost or spoiled units. If the ending inventory was
60% complete, the total equivalent units for Material B for the month was
Answer (A) is correct.
Beginning work-in-process, being 90% complete, already had Material B
added, so it is not counted in the EUP calculation for Material B for the
month. By the same token, ending work-in-process, being only 60%
complete, had not yet had Material B added, and thus it is also not counted in the EUP calculation for Material B. The EUP for Material B
is therefore only the 65,000 units started and completed during the
San Jose, Inc., uses a weighted-average process costing system. All materials are introduced at the start of manufacturing, and conversion cost is incurred evenly throughout production. The company started 70,000 units during May and had the following work-in-process inventories at the beginning and end of the month:
May 1 30,000 units, 40% complete
May 31 24,000 units, 25% complete
Assuming no spoilage or defective units, the total equivalent units used to assign costs for May are
Materials.... Conversion Cost
Answer (D) is correct.
San Jose had 30,000 units in beginning work-in-process inventory and
started 70,000 during the month, for a total of 100,000 units to be
accounted for. Since all materials are introduced at the start of
manufacturing, all 100,000 units are 100% complete with respect to
materials costs. Equivalent units of production for conversion costs can
be determined as follows:
Beginning WIP 30,000 units × 100% = 30,000
Started and completed 46,000 units × 100% = 46,000
Ending WIP 24,000 units × 25% = 6,000
Totals 100,000 units 82,000
Waller Co. uses a weighted-average process-costing system. Material B is added at two
different points in the production of shirms, 40% is added when the units are 20%
completed, and the remaining 60% of Material B is added when the units are 80%
completed. At the end of the quarter, there are 22,000 shirms in process, all of which are
50% completed. With respect to Material B, the ending shirms in process represent how
many equivalent units?
Answer (B) is correct.
All 22,000 units in ending work-in-process have had 40% of Material B
added, since they have all passed the 20% completion point and none
have reached the 80% completion point. Equivalent units of production
for Material B are thus 8,800 (22,000 × 40%).
A company uses a process cost system in accounting for its single product. The cost of
units failing final inspection, termed normal spoilage, is added to the inventory cost of the
good units produced. Units spoiled during production are termed abnormal spoilage, and
their cost is immediately written off to cost of goods sold. During the previous month, the
entire inventory of spoiled units (both normal and abnormal spoilage) was sold at a price
lower than it had cost to produce them. How would this sale affect the reported net income
of the company?
Answer (A) is correct.
Since the entire inventory of spoiled units was sold and the costs of those
spoiled units were already included in the inventory cost of good units
produced and written off to cost of goods sold, the sale of these spoile
units would increase net income from the sale of the abnormal spoilage and increase the net income from the sale of the normal spoilage. In other words, the spoiled units have already been expensed and are valued for book purposes at zero, so any money received will increase profits.
Morris Metal Fabricators specializes in the production of metal antennae. The fabrication process includes three steps: cutting, bending, and assembly. Cutting and bending processes are completed together, and then units are sent to the assembly department for completion. Direct materials and conversion costs are added proportionately throughout the process. Units are 50% complete for both direct materials and conversion costs when the units are transferred from the cutting and bending process to assembly. Morris uses the FIFO (first in, first out) inventory method. The activity report for the assembly department for the current month is shown below.
Beginning inventory (60% complete)
Transferred in from cutting-bending department
Units completed and transferred out
Ending inventory (75% complete)
What is the assembly department’s equivalent units produced for the current month?
Answer (B) is correct. Total units to account for include beginning inventory and units transferred in from the cutting-bending department. To account for these units, they are either completed and transferred out or in ending inventory, so ending inventory is calculated by subtracting the units transferred out from the units to account for. The number of units started and completed this period is calculated by subtracting beginning inventory and ending inventory from the units to account for. Under FIFO, only the percentage of beginning inventory that was completed this period is included in equivalent units. The number of units started and completed are always completely included, and ending inventory is included to the extent of its completion. Total units to account for include beginning inventory and units transferred in from the cutting-bending department, which yields 920 + 680). To account for these units, they are either completed and transferred out or in ending inventory, so ending inventory has 120 units (920 to account for – 800 completed and transferred out). The number of units started and completed this period are 560 (920 to account for – 240 beginning inventory – 120 ending inventory). Under FIFO, only the percentage of beginning inventory that was completed this period is included in equivalent units, which is 96 [240 units × (1 – 60%)]. The number of units started and completed are always completely included, and ending inventory is included to
the extent of its completion, which is 90 (120 × 75%). Total equivalent units are 746
(96 beginning inventory + 560 started and completed + 90 ending inventory).
A profitable company with five departments uses plantwide overhead rates for its highly
diversified operation. The firm is studying a change to either allocating overhead by using
departmental rates or using activity-based costing (ABC). Which one of these two methods
will likely result in the use of a greater number of cost allocation bases and more accurate
Greater Number of More Accurate
Allocation Bases... Costing Results
Answer (D) is correct.
Under activity-based costing (ABC), the number of allocation bases
increases dramatically over those of a traditional (volume-based) costing
accumulation system. First, every activity must be allocated to an
indirect cost pool using resource drivers (“1st-stage allocations”), and
every indirect cost pool must be allocated to final products using activity
drivers (“2nd-stage allocations”). This use of a larger number of
allocation pools and bases leads to more accurate costing results.
Young Company is beginning operations and is considering three alternative ways in which
to allocate manufacturing overhead to individual units produced. Young can use a plantwide
rate, departmental rates, or activity-based costing. Young will produce many types of
products in its single plant, and not all products will be processed through all departments.
In which one of the following independent situations would reported net income for the first
year be the same regardless of which overhead allocation method had been selected?
Answer (D) is correct.
When there is no beginning finished goods inventory, the only difference
in net income arising from the use of variant costing methods is the
treatment of costs that show up on the balance sheet because they are
buried in the various ending inventories. In Young’s case, therefore, an
identical net income figure across the three different costing system options can only be guaranteed when there are no ending inventories.
Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed to allocate a homogeneous cost pool should
Answer (A) is correct. A cost allocation base is the common denominator for systematically correlating indirect costs and a cost object. The cost driver of the indirect costs is ordinarily the allocation base. In a homogeneous cost pool, all costs should have the same or a similar cause-and-effect relationship with the cost allocation base.
A company with three products classifies its costs as belonging to five functions: design, production, marketing, distribution, and customer services. For pricing purposes, all company costs are assigned to the three products. The direct costs of each of the five functions are traced directly to the three products. The indirect costs of each of the five business functions are collected into five separate cost pools and then assigned to the three products using appropriate allocation bases. The allocation base that will most likely be the best for allocating the indirect costs of the distribution function is
Answer (B) is correct. The number of shipments is an appropriate cost driver. A cause-and-effect relationship may exist between the number of shipments and distribution costs.
Activities, their drivers, and their costs may be classified as unit-level, batch-level, product-level, and facility-level. If activity-based costing (ABC) information is prepared for internal purposes, which costs are most likely to be treated as period costs?
Answer (D) is correct.
A difficulty in applying ABC is that, although the first three levels of
activities pertain to specific products or services, facility-level activities
do not. Thus, facility-level costs are not accurately assignable to
products. The theoretically sound solution may be to treat these costs as
period costs. Nevertheless, organizations that apply ABC ordinarily
assign them to products to obtain a full absorption cost suitable for
external financial reporting in accordance with GAAP. However, for
internal purposes, facility-level costs should be treated as period costs to
avoid distorting decisions about cost efficiency, pricing, and profitability.