INTRODUCTION TO COST ACCOUNTING

I. FILL IN THE BLANK

1. The branch of accounting that is most concerned with addressing the

needs of the firm as a whole is accounting

2. The branch of accounting that is most concerned with addressing the

needs of specific departments of the firm is accounting

3. The branch of accounting that serves as a bridge between financial and

managerial accounting is accounting.

4. The balanced scorecard perspective that focuses on using a

firm’s intellectual capital to adapt to customer needs through
product or service innovations is the ______
perspective.

5. The balanced scorecard perspective that addresses things that an

organization needs to do well to meet customer needs and expectations
is the
perspective.

6. The restates an organization’s strategy

into clear and objective performance measures.

7. The expression of what an organization wishes to accomplish and

how it will serve its customers is contained in the .

8. The plan in which an organization indicates how it will fulfill its

goals is referred to as a
.

9. A function or activity in which an organization seeks to excel above

its competitors is a ________ .

10. The way in which authority and responsibility are distributed in an

organization is ________
II. MULTIPLE CHOICE

1. In comparing financial and management accounting, which of the following

more accurately describes management accounting information?
a. historical, precise, useful
b. required, estimated, internal
c. budgeted, informative, adaptable
d. comparable, verifiable, monetary

2. Management and financial accounting are used for which of the following
purposes?

Management accounting Financial accounting

a. internal external
b. external internal
c. internal internal
d. external external

3. One major difference between financial and management accounting is that

a. financial accounting reports are prepared primarily for users external to
the company.
b. management accounting is not under the jurisdiction of the
Securities and Exchange Commission.
c. government regulations do not apply to management accounting.
d. all of the above are true.

4. Which of the following statements about management or financial accounting is

false?
a. Financial accounting must follow GAAP.
b. Management accounting is not subject to regulatory reporting standards.
c. Both management and financial accounting are subject to
mandatory recordkeeping requirements.
d. Management accounting should be flexible.

5. Management accounting
a. is more concerned with the future than is financial accounting.
b. is less concerned with segments of a company than is financial accounting.
c. is more constrained by rules and regulations than is financial accounting.
d. all of the above are true.

6. Modern management accounting can be characterized by its

a. flexibility.
b. standardization.
c. precision.
d. complexity.

7. Broadly speaking, cost accounting can be defined as a(n)

a. external reporting system that is based on activity-based costs.
b. system used for providing the government and creditors with
information about a company's internal operations.
c. internal reporting system that provides product costing and
other information used by managers in performing their
functions.
d. internal reporting system needed by manufacturers to be in
compliance with Cost Accounting Standards Board
pronouncements.
8. Cost accounting is directed toward the needs of
a. regulatory agencies.
b. external users.
c. internal users.
d. stockholders.

9. The process of causes the need for cost accounting.

a. conversion
b. sales
c. controlling
d. allocating

10. Financial accounting

a. is primarily concerned with internal reporting.
b. is more concerned with verifiable, historical information than is cost
accounting.
c. focuses on the parts of the organization rather than the whole.
d. is specifically directed at management decision-making needs.

11. Financial accounting and cost accounting are both highly concerned with
a. preparing budgets.
b. determining product cost.
c. providing managers with information necessary for control purposes.
d. determining performance standards.

12. Which of the following topics is of more concern to management accounting

than to cost accounting?
a. generally accepted accounting principles
b. inventory valuation
c. cost of goods sold valuation
d. impact of economic conditions on company operations

13. Cost and management accounting

a. require an entirely separate group of accounts than financial accounting
uses.
b. focus solely on determining how much it costs to manufacture a
product or provide a service.
c. provide product/service cost information as well as
information for internal decision making.
d. are required for business recordkeeping as are financial and tax accounting.

14. Which of the following statements is true?

a. Management accounting is a subset of cost accounting.
b. Cost accounting is a subset of both management and financial accounting.
c. Management accounting is a subset of both cost and financial accounting.
d. Financial accounting is a subset of cost accounting.

15. Which of the following statements is false?

a. A primary purpose of cost accounting is to determine
valuations needed for external financial statements.
b. A primary purpose of management accounting is to provide
information to managers for use in planning, controlling, and
decision making.
c. The act of converting production inputs into finished products or
services necessitates cost accounting.
d. Two primary hallmarks of cost and management accounting are
standardization of procedures and use of generally accepted
accounting principles.

16. A long-term plan that fulfills the goals and objectives of an organization is
known as a(n)
a. management style.
b. strategy.
c. mission statement.
d. operational mission.

17. Core competencies are not

a. internal functions crucial to the success and survival of a company
b. attributes that keep a firm from competing.
c. different for every organization.
d. considered influences on corporate strategies.

18. The set of processes that convert inputs into services and products that
consumers use is called
a. a core competency.
b. an operational plan.
c. the value chain.
d. the product life cycle.

19. The balanced scorecard perspective that addresses things that an

organization needs to do well to meet customer needs and expectations:
a. learning and growth perspective c. customer value perspective
b. internal business perspective d. financial
perspective

20. The balanced scorecard perspective that addresses how well the
organization is meeting specific customer-based criteria is the:
a. learning and growth perspective c. customer value perspective
b. internal business perspective d. financial perspective

21. The world has essentially become smaller because of

a. improved technology.
b. trade agreements.
c. better communications systems.
d. all of the above.

22. The value chain

a. reflects the production of goods within an organizational context.
b. is concerned with upstream suppliers, but not downstream customers.
c. results when all non-value-added activities are eliminated from a
production process.
d. is the foundation of strategic resource management.

23. The Institute of Management Accountants issues

a. Statements on Accounting Research for Managers.
b. Statements on Management Accounting.
c. Statements on Managerial and Cost Accounting.
d. Cost Accounting Standards.
24. The Institute of Management Accountants' Code of Ethics
a. is a legally enforceable contract with all management accountants.
b. should be viewed as a goal for professional behavior.
c. is a legally enforceable contract with all CPAs.
d. provides ways to measure departures from ethical behavior.

25. The ethical standards established for management accountants are in the areas
of
a. competence, licensing, reporting, and education.
b. budgeting, cost allocation, product costing, and insider trading.
c. competence, confidentiality, integrity, and objectivity.
d. disclosure, communication, decision making and planning..

COST CONCEPTS AND COST CLASSIFICATIONS

1. In a decision-making situation involving an asset, which of the following costs

is generally NOT considered relevant to the decision and should be ignored?
A) Incremental cost of selecting one alternative over another.
B) Opportunity cost of using the asset in an alternative.
C) Differential cost between two alternatives.
D) The original cost of the asset.

2. The potential benefit that is given up when one alternative is selected over
another is called:
A) A sunk cost.
B) An opportunity cost.
C) Both a sunk cost and an opportunity cost.
D) Neither a sunk cost nor an opportunity cost.

3. A direct labor overtime premium should be charged to a specific job when the
overtime is caused by the:
A) increased overall level of activity in the factory.
B) customer's requirement for early completion of the job.
C) management's failure to include the job in the production schedule.
D) management's requirement that the job be completed before the annual
factory closure due to vacation.
4. The idle time cost of assembly line workers in a manufacturing company is
usually included as a part of:
A) selling cost.
B) direct labor cost.
C) administrative cost.
D) manufacturing overhead cost.

5. The following costs were incurred in July: Direct materials$35,000

Direct labor..................$13,000
Manufacturing overhead........$15,000
Selling expenses..............$14,000
Administrative expenses.......$30,000
Prime costs during the month totaled:

A) $48,000
B) $28,000
C) $107,000
D) $63,000
6. Abel Company's manufacturing overhead is 20% of its total conversion costs. If
direct labor is $38,000 and if direct materials are $47,000, the manufacturing
overhead is:
A) $152,000
B) $11,750
C) $21,250
D) $9,500

7. During the month of July, direct labor cost totaled $12,000 and direct labor
cost was 30% of prime cost. If total manufacturing costs during July were
$86,000, the manufacturing overhead was:
A) $46,000
B) $40,000
C) $28,000
D) $74,000

8. In July direct labor was 40% of conversion cost. If the manufacturing overhead
cost for the month was $34,000 and the direct materials cost was $23,000, the
direct labor cost was:
A) $22,667
B) $15,333
C) $51,000
D) $34,500

9. Shown below are a number of costs incurred last year at Mecca Publishing Co., a
manufacturer of elementary school textbooks:

Solvents and cleaners used by the custodians to clean

the textbook printing presses...........................................
$500 Depreciation on the automobiles used by sales representatives
..............................................$4,200
Fire insurance on factory building............$2,000
Shipping costs on textbooks sold..............$3,700

What is the total of the manufacturing overhead costs above?

A) $500
B) $2,500
C) $6,200
D) $6,700

10. Mammoser Manufacturing Corporation rents a building for $8,000 per month and
uses it for a number of different purposes. The building space is utilized by
the various activities as follows:

Receiving and storing raw materials.......... 5%

Production operations................................ 70%
Sales offices............................................... 15%
Administrative offices................................ 10%

How much of the $8,000 monthly rent cost should be classified as manufacturing
overhead?
A) $5,600
B) $6,000
C) $6,800
D) $7,200

11. The term "relevant range" as used in cost accounting means the range over
which
A) costs may fluctuate.
B) cost relationships are valid.
C) production may vary.
D) relevant costs are incurred.

12. Octopops Company’s average cost per unit is the same at all levels of
volume.
Which of the following is true?
A) Octopops must have only variable costs.
B) Octopops must have only fixed costs.
C) Octopops must have some fixed costs and some variable costs.
D) Octopops cost structure cannot be determined from this information.

13. Which of the following always has a direct cause-effect relationship to a cost?
Predictor Cost driver
A) yes yes
B) yes no
C) no yes
D) no no

14. Which statement is incorrect?

A) Fixed cost per unit varies with volume
B) Net loss is unrecovered fixed costs.
C) Fixed costs are always constant
D) At breakeven, fixed cost is simply recovered
.
15. Which of the following statements concerning direct and indirect costs is NOT
true?
A) Whether a particular cost is classified as direct or indirect does not
depend on the cost object.
B) A direct cost is one that can be easily traced to the particular cost
object.
C) The factory manager's salary would be classified as an indirect cost of
producing one unit of product.
D) A particular cost may be direct or indirect, depending on the cost object.

16. All of the cost categories listed below are usually found in a company's
accounting records, except for:
A) sunk costs.
B) inventoriable costs.
C) opportunity costs.
D) marketing costs.

17. Cobra Mining Company spent $200 million five years ago to develop underground
mining and milling operations in a remote area of a western state. Metals prices
have since declined precipitously and the company is considering abandoning the
operation. The term that would best describe the $200 million expenditure when
considering the abandonment decision is:
A) sunk cost.
B) variable cost.
C) differential cost.
D) opportunity cost.
For the next 3 items: In Dr. Stone Manufacturing Company, at an activity level of
80,000 machine hours, total overhead costs were P446,000. Of this amount, utilities
were P96,000 (all variable) and depreciation was P120,000 (all fixed). The balance
of the overhead cost consisted of maintenance cost (mixed). At 100,000 machine
hours, maintenance costs were P260,000.

Assume that all of the activity levels mentioned in this problem are within the
relevant range.

18. The variable cost for maintenance per machine hour is

19. The total fixed overhead cost for Dr. Stone is
20. If 110,000 machine hours of activity are projected for the next
period,
total expected overhead cost would be:

IDENTIFICATION

1. Cost Classification (By Function): Classify the following costs for an auto
manufacturer as either as manufacturing cost or p eriod cost.
a. Steel used in motorcycles
b. Assembly workers’ wages
c. Utility costs used in executive building
d. Travel costs used by sales personnel
e. Shipping costs to customers
f. Property taxes on assembly plant
g. Magazine subscription for factory lunchroom
h. Maintenance supplies
i. Depreciation on assembly plant
j. Plant manager's salary

2. Cost Behavior (Variable, Fixed and Mixed) – The management of Viscenzo Company
has gathered the following information for the past two months of its
operations. Determine the cost behavior of these costs

Jan Feb
Cost Behavior (V, F, or M)
Units 1,000 1,200
Cost A P20,000 P24,000
Cost B 40,000 40,000
Cost C 25,000 26,000
Cost D 5,000 6,000
Cost E 5,000 5,000

3. Cost Classification (By Behavior) – Classify the following costs for a

manufacturer as either variable or fixed.
a. Taxes, factory building.
b. Boxes used for Mc Donald’s French Fries.
c. Commission of salesperson
d. Depreciation, salesman autos.
e. Wages of factory workers
f. Insurance, finished goods warehouses.
g. Oil for production equipment.
h. Advertising costs.
i. Microchips used in producing computers
j. Salary of factory supervisor
SEPARATION OF MIXED COSTS
1. These are among the methods of segregating fixed cost and variable costs
except:
A. Simple regression analysis
B. Scattergraph
C. Breakeven method
D. High-low method

2. All of the following are assumptions underlying the validity of linear

regression output except
A. The errors are normally distributed and their mean is zero.
B. Certainty.
C. The variance of the errors is constant.
D. The independent variables are not correlated with each other.

3. In determining the cost behavior in business, the cost function is often

expressed as Y= a + bx. Which one of the following cost estimation methods
should not be used in estimating fixed and variable costs for the
equation?
A. Graphic method.
B. High-and-low-point method.
C. Simple regression
D. Multiple regressions.

4. The segregation of fixed costs and variable costs is key to proper

cost analysis. Regression analysis is a technique used for this
purpose. Identify the appropriate statements below on regression
analysis:
1. It assumes that a change in value of a dependent variable is related to
the change in the value of an independent variable.
2. A linear relationship between direct cost and production volume can
cause a problem when using accounting data for regression analysis.
3. It attempts to find an equation for the linear relationship among variable
4. It establishes a cause and effect relationship.
A. All four statements are appropriate.
B. Statements 1,3 and 4 only.
C. Statements 1 and 3 only
D. Statements 2 and 4 only

5. Simple regression analysis involves the use of

Dependent variables Independent variables
A. One None
B. One One
C. One Two
D. None Two

6. When the relationship between the independent and dependent variable is

not expected to remain constant, an appropriate method analysis is
A. Cluster analysis
B. Curvilinear regression
C. Simple linear regression
D. Simplex linear programming

7. A division uses a regression in which monthly advertising expenditures

are used to predict monthly product sales (both in millions of dollars).
The results show a regression coefficient for the independent variable
equal to 0.8. This coefficient value indicates that
A. The average monthly advertising expenditure in the sample of P800,000
B. When monthly advertising is at its average level, product sales will be
P800,000
C. On average, for every additional dollar in advertising, sales increase by
P.80
D. Advertising is not good predictor of sales because the coefficient is so
small.
8. Quality control program employs many tools for problem definition and
analysis. A scatter diagram is one of these tools. The objective of a
scatter diagram is to
A. Display a population of items for analysis.
B. Show frequency distribution in graphic form
C. Divide a universe of data into homogenous groups
D. Show the vital trend and separate trivial items

9. In regression analysis, the coefficient of determination is a measure of

A. The amount of variation in the dependent variable explained by the
independent variables.
B. The amount of variation in the dependent variable unexplained by
the independent variables.
C. The slope of the regression line.
D. The predicted value of the independent variable.

10. Using the regression analysis, Thump Company graphed the following
relationship of its cheapest product line’s sales with its customers’ income
levels:

Sales
(P)

Income levels increasing

If there is a strong statistical relationship between the sales and the

customers’ income levels, which of the following equation bet represents the
correlation coefficient for this relationship?
A. -9.00
B. -0.93
C. +0.93
D. +9.00

TEST II:
4. High-Low Method (Separating Mixed Costs): The management of Monica
Corporation would like to have a better understanding of the behavior of
its assembly costs. The company has provided the following data: (2
points each)
Labor Hours Assembly Cost
x y

January 2,500 P 36,800

February 2,900 42,000
March 1,900LP 27,000
April 3,100 46,000
May 23,800 156,500
OUTLIR
June 4,700 HP 62,000

The maximum capacity in terms of labor hours is 10,000 hrs. Management believes
that inspection cost is a mixed cost that depends on direct labor-hours.

Required: Using the high low method, answer the following:

a. What is the highest point? 4700 HP bc 23,800 cant be considered as HP
bc it is an outlier
b. Estimate the variable cost per direct labor-hour. P12.50 VC/DL HR
c. Estimate the fixed cost per month P3,250.00 FC/MONTH
d. Write the cost formula y =a + bx , y = 3,250 + 12.5x
e. Estimate the cost for 5,000 direct labor hours.P65,750 TOTAL COST FOR
5,000 DL HRS
f. Use the cost formula using the date in the month of February VC
P36,250, FC P3250

5. Least Squares Regression (Separating Mixed Costs): Phoebe Corporation

would like to have a better understanding of the behavior of its costs.
The company has provided the following data: (3 points each)
Cost Labor Hours
January 56,500 3,800
February 44,000 3,300
March 49,500 4,100
April 45,500 3,500
May 31,000 2,000
June 52,000 3,700
July 62,000 4,700
August 55,500 4,200

Required: Using the least squares regression:

a. How much is the ∑x2 = P111,810,000 / 111,810,000
b. How much is the ∑xy = P1501,000,000 / 1501,000,000
c. Estimate the variable cost per direct labor-hour. P11.26 VC/DL HR
d. Estimate the fixed cost per month P8,260.25 FC/MONTH , P8,265.07
FC/MONTH
e. Write the cost formula = Y = A+BX , Y = P8,260.25 + P11.26X OR Y =
P8265.07 +P11.26X
f. Estimate the cost for 3,500 labor hours. P47,670.25 TOTAL COST FOR 3500
LABOR HOURS or P47,675.07 TOTAL COST FOR 3500 DL HRS.
ACTIVITY BASED COSTING
1. This pertains to any event, action, transaction, or work sequence that
incurs costs when producing a product or providing a service?
a. Economic transaction
b. Production
c. Activity
d. Leveraging

2. A cost accounting system that collects financial and operating information

based on the underlying nature and extent of the cost drivers is
a. Direct costing
b. Throughput costing
c. Conventional costing
d. Activity-based costing

3. Which of the following is not a trait of a traditional cost management system?

a. Focus on managing activities
b. Allocation intensive
c. Narrow and rigid product cost allocation and assignment
d. Unit-based drivers

4. An objective of activity-based management is to

a. Eliminate the majority of centralized activities in an organization
b. Reduce or eliminate non-value-added activities in the value-chain
c. Institute responsibility accounting systems towards decentralization
d. All of the above

5. All of the following pertain to the advantages of ABC, except

a. Logical cost allocation and assignment
b. Enhanced costs control
c. Better tool in management decisions
d. Arbitrary allocations continue

6. ABC is effective in allocating overhead costs logically and provides better

cost information for decision-making purposes. However, not all companies
apply the same due to which reason?
a. ABC usually does not result to elimination of costs
b. ABC is subject to cost-benefit limitation
c. ABC is only required by the regulators for listed entities
d. ABC still allows some arbitrary allocation to continue

7. All of the following are relevant decisions where ABC are most likely useful,
except
a. Pricing decisions
b. Cost reduction and process improvement decisions
c. Product design decisions
d. Implementing quality control in the operations

8. Which level of costs is most likely excluded in the product costing for
internal management reports that are used for decision making?
a. Unit level activities
b. Cell level activities
c. Product level activities
d. Organizational sustaining activities
9. An entity employing activity-based costing system
a. Will usually have higher budget variances than one using a uniform rate
b. Will usually have lower spending variances than one using a uniform rate
c. Should have better information for planning and control than one using a
uniform rate
d. Cannot compute fixed and variable components of overhead costs

10. All of the following represent a symptom of an outdated cost systems, except
a. Product costs change because of changes in financial reporting
b. Competitor’s prices appear unrealistically low
c. Products that are difficult to produce show little profit
d. The company has a highly profitable niche all to itself

11. If activity-based costing is implemented in an organization without any other

changes being effected, total overhead costs will
a. be reduced because of the elimination of non-value-added activities
b. be reduced because organizational costs will not be assigned to products or
services
c. be increased because of the need for additional people to gather information
on cost drivers and cost pools
d. remain unchanged

12. The implementation of activity-based costing normally results to

a. Substantially greater unit costs for low-volume products than is reported
by traditional product costing
b. Decreased setup costs being charged to low-volume products
c. Substantially lower unit costs for low-volume products than is reported
by traditional product costing.
d. Equalizing setup costs for all product lines

13. All of the following describe activity-based management, except

a. the ideal standard quantity for non-value-added activities is zero
b. application of activity-based costing and value-chain analysis in analyzing
and evaluating business activities
c. an approach used by an entity to achieve competitive advantage
d. consists of organization-wide efforts to install and make permanent
climate where employees continuously improve their ability to achieve
customer satisfaction.

14. Which of the following statements about activity-based costing is not true?
a. Activity-based costing is useful for allocating marketing and distribution
costs.
b. Activity-based costing is more likely to result in minor differences from
traditional costing systems if the firm manufactures only one product
rather than multiple products.
c. In activity-based costing, cost drivers are what cause costs to be incurred.
d. Activity-based costing differs from traditional costing systems in that
products are cross-subsidized

Test II.

II.1 – Pinkblack, Inc. manufactures two types of dolls, Jisoo and Lisa, and
applies overhead on the basis of direct-labor hours. Anticipated overhead and
direct-labor time for the upcoming accounting period are P710,000 and 20,000
hours, respectively. Information about the company’s products follows.

Jisoo:
Estimated production volume, 2,500
units Direct-material cost, P30 per
unit
Direct labor per unit, 3 hours at P15 per hour

Lisa:
Estimated production volume, 3,125 units
Direct-material cost, P45 per unit
Direct labor per unit, 4 hours at P15 per hour

Pinkblack’s overhead of P710,000 can be identified with three major activities:

order processing (P120,000), machine processing (P500,000), and product
inspection (P90,000). These activities are driven by number of orders
processed, machine hours worked, and inspection hours, respectively. Data
relevant to these activities follow.

Orders Machine Inspectio

Processed Hours n
Worked Hours
Jisoo 350 23,000 4,000
Lisa 250 27,000 11,000
Total 600 50,000 15,000

Management is very concerned about declining profitability despite a healthy

increase in sales volume. The decrease in income is especially puzzling
because the company recently undertook a massive plant renovation during which
new, highly automated machinery was installed— machinery that was expected to
produce significant operating efficiencies.

REQUIRED: 2 points each

1. Assuming use of direct-labor hours to apply overhead to production
(traditional costing), compute the following if the expected
manufacturing volume is attained:
a. Jisoo, manufacturing cost per unit
b. Lisa, manufacturing cost per unit
c. Jisoo, total manufacturing cost
d. Lisa, total manufacturing cost

2. Assuming use of activity-based costing to apply overhead to production

compute the following if the expected manufacturing volume is attained:
a. Jisoo, manufacturing cost per unit
b. Lisa, manufacturing cost per unit
c. Jisoo, total manufacturing cost
d. Lisa, total manufacturing cost

3. Compute the under/over costing per unit of the dolls

a. Jisso
b. Lisa

II.2 - Super Cool Inc. manufactures cooling units for commercial buildings. The
price and cost of goods sold for each unit are as follows:
Price P40,500 per unit
Cost of goods sold 25,500
Gross profit P15,000 per unit

In addition, the company incurs selling and administrative expenses of

P160,400. The company wishes to assign these costs to its three major
customers, Goljes University, Biggest Arena, and NE Hospital. These expenses
are related to three major nonmanufacturing activities: customer service,
project bidding, and engineering support. The engineering support is in the form
of engineering changes that are placed by the customer to change the design of
a product. The activity cost pool and activity bases associated with these
activities are:
Activity Activity Cost Activity Base
Pool
Customer service P 66,500 Number of service requests
Project bidding 34,500 Number of bids
Engineering support 59,400 Number of customer design
changes
Total costs P160,400

Activity-base usage and unit volume information for the three customers is as
follows:

Goljes University Biggest Nail Total

Arena Hospital
Number of service requests 110 35 45 190
Number of bids 14 12 20 46
Number of customer design changes 75 25 35 135
Unit volume 5 10 15 30

REQUIRED: 2 points each

1. Determine the activity rates for each of the following activity pools.
A. Customer Service
B. Project Bidding
C. Engineering support

2. Determine the activity costs allocated to the following customers, using

the activity rates in (1).
A. Golies University
B. Biggest Arena
C. Nail Hospital

3. Construct customer profitability reports for the three customers, using

the activity costs in (2). How much is the net income from operations
associated with each customer.
A. Golies University
B. Biggest Arena

“I’m not telling you it is going to be easy — I’m telling you it’s going to be
worth it.” ― Art Williams