Cost Accumulation Systems Paper 2

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 month.

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

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%).

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.

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 x (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 x 75%). Total equivalent units are 746 (96 beginning inventory + 560 started and completed + 90 ending inventory).

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.

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.

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.

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.

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.