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Practice Exam Chapter 2

1. (LO1,2,3,4) The following data (in thousands of dollars) have been taken
from the accounting records of Davis Corporation for the just completed year:

Direct labor 800
Finished goods inventory, beginning 480
Finished goods inventory, ending 640
Purchases of raw materials 480
Raw materials inventory, beginning 160
Raw materials inventory, ending 280
Sales 3,960
Selling expenses 560
Work in process inventory, beginning 280
Work in process inventory, ending 200

a. What was the cost of the raw materials used in production during the year (in
thousands of dollars)?

Solution:

Raw materials inventory, beginning \$ 160

Purchases of raw materials 480
Less raw materials inventory, ending (280)

Raw materials used in production \$ 360

b). What was the cost of goods manufactured (finished) for the year (in
thousands of dollars)?

Solution:

Work in process inventory, beginning \$ 280

Raw materials used in production
(calculated above) 360
Direct labor 800
Total manufacturing costs 2,360
Less: work in process inventory, ending (200)

Cost of goods manufactured \$2,160

c). What was the cost of goods sold for the year (in thousands of dollars)?

Solution:

Finished goods inventory, beginning \$ 480

Cost of goods manufactured
(calculated above) 2,160
Less finished goods inventory, ending (640)

Cost of goods sold \$2,000

d). What was the net income for the year (in thousands of dollars)?

Solution:

Sales \$3,960
Cost of goods sold (calculated above) 2,000
Gross profit 1,960
Operating expenses:
Selling expenses 560 (1,160)

Net income \$ 800

e). Which costs listed above for the Davis Company are product costs? Period
costs?

Solution:

Product costs include all costs included in inventories and the cost of goods sold,
including the three manufacturing cost categories (direct materials, direct labor
and manufacturing overhead costs). (Note, the manufacturing costs for products
not yet sold will appear in the balance sheet in raw materials, work in process,
and finished goods inventories. The manufacturing costs for products that have
been sold are reported in cost of goods sold.)

Period costs include all costs that are not product costs, including administrative
and selling costs.

2. (LO5) For each of the following, indicate whether the cost would typically be
variable (V) or fixed (F).

Solution:

a. fixed b. variable c. fixed d. variable e. variable

3. (LO6) For each of the following, indicate whether the cost would typically be
considered direct or indirect cost for the cost object given.

a. The direct labor factory costs for the manufacturing division.

b. The factory supervisors salary for the product produced.
c. The factory supervisors salary for the manufacturing division.
d. The manufacturing overhead costs for the products produced.
e. The manufacturing overhead costs for the manufacturing division.

Solution:

a. direct b. indirect c. direct d. indirect e. direct

4. (LO7) For each of the following, indicate whether the cost or example would
typically be considered an example of a differential cost, an opportunity cost,
or a sunk cost.

a. the cost of equipment purchased five years ago which is no longer usable.
b. The cost of making a part compared with the cost of buying the part from a
supplier.
c. The use of factory equipment to produce an item when it could be used to
produce another item that sells for a profit.
d. The decision to go to graduate school to earn an MBA versus taking a second
part-time job.
e. The cost of accepting a special order from a customer at a reduced selling
price due to reduced packaging and delivery services.

Solution:

a. sunk cost b. differential costs

c. opportunity cost (the foregone profits from the product that is not produced.)
d. opportunity cost (the forgone profits from the part-time job wages not earned.)
e. differential costs (and differential revenues)

5. (LO8) (Appendix 2A) Describe how the following product costs should be
classifiedas direct labor or indirect labor (mfg. Overhead) costs:

a. costs of premium paid for overtime factory workers

b. costs of idle time when factory production lines are shut down for repairs
c. costs of fringe benefits associated with direct labor workers
d. costs of fringe benefits associated with indirect labor workers
Solution:
c. direct labor costs

6. (LO9 and 10) (Appendix 2B)Based on the following information, prepare a

quality cost report for the Handy Company, using the four categories of quality
costs, for the year ended December 31. Also comment on the report.

Disposal of defective units \$ 200

Maintenance/Deprec. of inspection eqpt. 500
Quality training costs 800
Warranty repairs and replacement costs 900
Product recall costs 300
Quality circles costs 700
Testing supplies 800
Total quality costs \$ 4200
Solution:
Handy Company
Quality Cost Report
For the Year Ended December 31
Prevention costs:
Quality training costs \$ 800
Quality circles costs 700 \$1500

Appraisal costs:
Maint./Depr. of inspection eqpt. \$ 500
Testing supplies 800 1300

Internal failure costs:

Disposal of defective units 200

External failure costs:

Warranty repairs/
replacement costs \$ 900
Product recall costs 300 1200
Total Quality Costs \$4200

Based on the companys quality cost report, the company is emphasizing

prevention of failure costs by spending relatively more of its resources on
prevention and appraisal costs (\$2800) versus failure costs (\$1400). It appears
the company may want to study the causes of the warranty repairs and
replacements (and recalls) to hopefully take steps to reduce and prevent such
costs in the future.