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Exam 2: Cost Terms, Concepts, and Classifications

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Question 41

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Geneva Steel Corporation produces large sheets of heavy gauge steel. The company showed the following amounts relating to its production for the year just completed: $\begin{array} { l r } \text { Direct materials used in production } & \$ 110,000 \\\text { Direct labour costs for the year } & \$ 55,000 \\\text { Work in process, beginning } & \$ 22,000 \\\text { Finished goods, beginning } & \$ 45,000 \\\text { Cost of goods available for sale } & \$ 288,000 \\\text { Cost of goods sold } & \$ 238,000 \\\text { Work in process, ending } & \$ 16,000\end{array}$ -What was the balance of the finished goods inventory at the end of the year?

A) $95,000.
B) $50,000.
C) $193,000.
D) $45,000.

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Question 42

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Manufacturing overhead combined with direct materials is known as conversion cost.

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Question 43

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What would be the classification of the transportation costs incurred by a manufacturing company to ship its product to its customers?

Mary Tappin,an assistant Vice President at Galaxy Toys,was disturbed to find on her desk a memo from her boss,Gary Resnick,to the controller of the company.The memo appears below: Galaxy Toys Internal Memo Sept 15 To: Harry Wilson,Controller Fm: Gary Resnick,Executive Vice President As you know,we won't start recording many sales until October when stores start accepting shipments from us for the Christmas season.Meanwhile,we are producing flat-out and are building up our finished goods inventories so that we will be ready to ship next month.Unfortunately,we are in a bind right now since it looks like the net income for the quarter ending on Sept 30 is going to be pretty awful.This may get us in trouble with the bank since they always review the quarterly financial reports and may call in our loan if they don't like what they see.Is there any possibility that we could change the classification of some of our period costs to product costs--such as the rent on the finished goods warehouse? Please let me know as soon as possible.The President is pushing for results. Mary didn't know what to do about the memo.It wasn't intended for her,but its contents were alarming. Required: a.Why has Gary Resnick suggested reclassifying some period costs as product costs? b.Why do you think Mary was alarmed about the memo?

Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture?

Which of the following would not be treated as a product cost for external financial reporting purposes?

How would the cost of rent for a manufacturing plant generally be classified?

Use the following information to determine the gross margin for Pacific States Manufacturing for the year just ended (all amounts are in thousands of dollars): $\begin{array} { l r } \text { Sales } & \$ 31,800 \\\text { Purchases of direct materials } & \$ 7,000 \\\text { Direct labour } & \$ 5,000 \\\text { Work-in-process inventory, 1/1 } & \$ 800 \\\text { Work-in-process inventory, 12/31 } & \$ 3,000 \\\text { Finished goods inventory, 1/1 } & \$ 4,000 \\\text { Finished goods inventory, 12/31 } & \$ 5,300 \\\text { Accounts payable, 1/1 } & \$ 1,700 \\\text { Accounts payable, 12/31 } & \$ 1,500 \\\text { Direct materials inventory, 1/1 } & \$ 6,000 \\\text { Direct materials inventory, 12/31 } & \$ 1,000 \\\text { Indirect labour } & \$ 600 \\\text { Indirect materials used } & \$ 500 \\\text { Utilities factory } & \$ 1,900 \\\text { Depreciation on factory equipment } & \$ 3,500\end{array}$

Which of the following costs is often important in decision making,but is omitted from conventional accounting records?

The following costs should be considered by a law firm to be indirect costs of defending a particular client in court: rent on the law firm's offices,the law firm's receptionist's wages,the costs of heating the law firm's offices,and the depreciation on the personal computer in the office of the attorney who has been assigned the client.

To what does the term differential cost refer?

The following data pertain to Harriman Company's operations during July: $\begin{array} { l r r } & \underline { \text { July 1 } } & \underline { \text { July 31 } } \\\text { Raw materials inventory } & &\$5,000 \\\text { Work-in-process inventory } &? & \$ 4,000 \\\text { Finished goods inventory } & \$ 12,000&?\end{array}$ $\begin{array}{l}\text { Other data: }\\\begin{array} { l r } \text { Cost of goods manufactured } & \$ 105,000 \\\text { Rav materials used } & \$ 40,000 \\\text { Manufacturing overhead costs } & \$ 20,000 \\\text { Direct labour costs } & \$ 39,000 \\\text { Gross Margin } & \$ 100,000 \\\text { Sales } & \$ 210,000\end{array}\end{array}$ -What was the ending finished goods inventory?

Manufacturing overhead is one of the three elements of manufacturing costs.Unlike direct materials and direct labour costs,assigning manufacturing overhead cost to products can be a very difficult task. Required: Do you agree with this aspect of manufacturing overhead? Why or why not?

Variable costs are costs whose per unit costs vary as the activity level rises and falls.

A cost that differs from one month to another is known as a differential cost.

In a manufacturing company,goods available for sale equals the sum of the cost of goods manufactured and the beginning finished goods inventory.

What does conversion cost consist of?

The following data pertain to Harriman Company's operations during July: $\begin{array} { l r r } & \underline { \text { July 1 } } & \underline { \text { July 31 } } \\\text { Raw materials inventory } & &\$5,000 \\\text { Work-in-process inventory } &? & \$ 4,000 \\\text { Finished goods inventory } & \$ 12,000&?\end{array}$ $\begin{array}{l}\text { Other data: }\\\begin{array} { l r } \text { Cost of goods manufactured } & \$ 105,000 \\\text { Rav materials used } & \$ 40,000 \\\text { Manufacturing overhead costs } & \$ 20,000 \\\text { Direct labour costs } & \$ 39,000 \\\text { Gross Margin } & \$ 100,000 \\\text { Sales } & \$ 210,000\end{array}\end{array}$ -What was the beginning work-in-process inventory?

A manufacturing company prepays its insurance coverage for a three-year period.The premium for the three years is $2,700 and is paid at the beginning of the first year.Eighty percent of the premium applies to manufacturing operations and 20% applies to selling and administrative activities.What amounts should be considered product costs and period costs respectively for the first year of coverage? $\begin{array} { l cc } & \underline { \text { Product Costs } } & { \text { Period Costs } } \\\text { A) } & \$ 2,700 & \$ 0 \\\text { B) } & \$ 2,160 & \$ 540 \\\text { C) } & \$ 1,440 & \$ 360 \\\text { D) } & \$ 720 & \$ 180\end{array}$

How should the cost of the fire insurance for a manufacturing plant be classified?