Concepts of Managerial Accounting

1. When a company recognizes depreciation on manufacturing equipment:

a. Total assets increase.
b. Total assets, equity, and net income decrease.
c. Total assets, equity, and net income are not affected.
d. None of the above.

Key (B) Total assets, equity, and net income decrease.
Reason- Deprecation is a non-cash expense which reduce the value of asset and it is debited to profit and loss account which deceases the net income.

2. Western Company purchased direct materials on account. The materials cost will be recognized as an expense when:

a. The materials are purchased.
b. The goods made with the material are sold.
c. The cash is paid to settle the associated accounts payable.
d. The manufacturing process is complete.

Key (B) the goods made with the material are sold.
Reason- If the cost can be tied to a revenue generating activity, it will not be recognized as an expense until the associated good or service is sold.

3. If manufacturing overhead is underapplied, the entry to close the overhead account at the end of the accounting will act to:

a. Increase net income.
b. Decrease net income.
c. Not affect net income.
d. Increase cash flow from operating activities

Key (C) not affect net income.
Reason- If overhead is under applied it will show increase in net income because of low cost (Applied overhead < Actual overhead). As at the end of the accounting the entry is made to dispose off an under-applied overhead i.e

Work in process xxxx
Finished goods xxxx
Cost of goods sold xxxx
Manufacturing overhead xxxx

4. In which account is the actual amount of depreciation on manufacturing equipment initially recorded:

a. Depreciation expense.
b. Work in process inventory.
c. Manufacturing overhead.
d. Cost of goods sold.

Key (B) Work in process inventory.
Reason-As per Generally Accepted Accounting Principles, manufacturer records depreciation for the period in the Manufacturing Overhead account. As items are produced, depreciation related to the manufactured items is transferred from Manufacturing Overhead to Inventory—Work-In- Process. As work in process is completed and sold, a proportional amount of the depreciation expense will be transferred to Finished Goods Inventory and then to Cost Of Goods Sold.

Use the following information to answer the next two questions

Martin Manufacturing Company (MMC) produced 1000 units of product during 2003. The Company incurred variable production cost amounting to $380 per unit. Fixed manufacturing overhead costs amounted to $130,000. MMC sold 900 units of product at a price of $800 per unit.

5. Assuming MMC uses variable costing, the amount of income recognized on the income statement would be:

a. $248,000.
b. $210,000.
c. $261,000.
d. None of the above

Key (A) $248,000
Reason:
Sales = 900 units * $800 per unit = $720,000
Less-Variable Cost = 900 units * $380 per unit = ($342,000)
Less - Fixed Cost ($130,000)
Net income = $248,000

6. Assuming MMC uses absorption costing, the amount of inventory shown on the balance sheet would be:

a. $38,000.
b. $51,000.
c. $13,000.
d. None of the above.

Key (B) $51,000
Reason:
Absorption cost per unit:

Variable Cost $380
Fixed Cost $130 (= $1,30,000/1000 units = $130)
Total absorption cost = $510

Inventory under absorption costing:
$510 per unit * 100 units = $51,000

7. Which of the following businesses are most likely to use a job order cost system?

a. A hospital.
b. An auto manufacturing company.
c. A paint manufacturer.
d. The bank.

Key: (A) A hospital
Reason-Can use job order costing to consider each patient or bill as an individual job.

8. The cost of goods transferred from one department to another is called:

a. Transportation cost.
b. Transfer-in cost.
c. Finished goods cost.
d. None of the above.

Key: (B) Transfer-in cost

Use the following information to answer the next two questions.

The following information was drawn from the accounting records of Glide Manufacturing Company (GMC). As the data suggest, GMC uses a job-order costing system:

Job 101 Job 102 Job 103
Direct Materials $3,500 $4,200 $3,300
Direct Labor $2,800 $3,600 $1900

9. The predetermined overhead rate is set at 120% of the direct labor costs. At the end of the accounting period, Jobs 101 and 102 had been completed and sold. Job 103 was still under construction. The balance in the work in process inventory is:

a. $7,480.
b. $5,200. c. $7,100. d. None of the above.

Key: (A) $7,480
Reason- as Job 103 was still under construction the balance in the work in process inventory is:

Direct Materials $3,300
Direct Labour $1,900
Overheads (120% of Direct Labour) $2,280
Total Cost = $7,480

10. Determine the gross margin recognized on job 102 assuming it is sold for $18,000. (Ignore any overapplied or underapplied overhead).

a. $250.
b. $50.
c. $150.
d. None of the above.

Key: (D) None of the above
Reason:
Direct Materials $ 4,200
Direct Labour $ 3,600
Overheads (120% of Direct Labour) $ 4,320
Total Cost = $12,120
Profit $ 5,880
Sales $18,000