Determine the Cost to Make One Product

Medium to Hard Practice Test

Introduction to Accounting

Medium Practice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. Total estimated activity used in the pre-determined manufacturing overhead rate will change with

a. a change in sales
b. a change in estimated units manufactured
c. both a. and b.
d. neither a. nor b.

Answer

B. The total quantity of activity is computed as the estimated quantity required for one x total estimated annual units manufactured.When the estimated units manufactured changes the total changes also.

2. Which type of cost is always the highest cost to the company when making a product?

a. manufacturing overhead
b. selling expenses
c. direct labor
d. none of the above

Answer

D. The highest cost depends on the types of products the company is manufacturing.Some products are more direct labor intensive and some require more machines or larger facilities (manufacturing overhead).Selling expenses is a period cost and is not related to making the product.

3. The activity used to allocate manufacturing overhead

a. is always units produced
b. is always units sold
c. is any activity required to sell the product
d. is the activity that causes the majority of the manufacturing facility and management costs

Answer

D. The activity used to allocate manufacturing overhead should be the activity that causes the majority of manufacturing overhead costs to be incurred.Products that are made by hand would most likely use direct labor hours.Products that are made by machine would most likely use machine hours. Units sold are never a factor in how much it costs to make the product.Units produced does not give enough information to analyze what caused manufacturing overhead to be different than expected and should not be used.

4. Which manager will the managerial accountant work most closely with when developing the cost sheet?

a. the human resource manager
b. the information systems manager
c. the chief executive officer
d. the production manager

Answer

D. The production manager is responsible for all costs incurred when making the product and will be the most knowledgeable about what is required to make the product.

5. The standard cost for direct materials is determined by

a. measuring the quantity of materials required
b. looking at current invoices and discussing cost trends with suppliers
c. looking at the product to see what is required to make the product
d. all of the above

Answer

B. The standard cost is the cost for one quantity of each direct material.The current cost is a good starting point for estimating future costs.The trend of the cost, increasing or decreasing, should be considered along with what is currently paid.Both a. and c. have to do with quantity and not cost.

6. The standard cost per direct labor hour is determined by

a. watching the employee make the product
b. labor market trends and forecasts
c. the production manager
d. all of the above

Answer

B. The standard cost is the cost for one hour worked.It is determined by discussing the local labor market and trends with the human resource manager.Watching the employee make the product is related to quantity and not cost per hour.

7. The pre-determined manufacturing overhead rate is

a. the actual amount required to make the product
b. an estimate of the total dollars that will be spent during the current year
c. an estimate of the cost to make one unit
d. an estimate of the cost for one activity that occurs

Answer

D. The pre-determined manufacturing overhead rate is an estimate of what it costs in manufacturing overhead every time the activity occurs.A rate of $1.50 per direct labor hour means that the company incurs $1.50 in manufacturing overhead costs every time a direct labor employee works one hour.The company incurs the cost of the manufacturing overhead and must also pay the employee per hour.Total estimated MOH dollars is known and used to determine the rate.The activity should not be units; therefore, the rate is not a cost to make one unit.

8. The cost sheet is used

a. to determine the exact cost of making one product
b. to determine the estimated cost of making one product
c. determine the actual quantity required for all products
d. determine the total dollars the company incurred to make products during the current year

Answer

B. The cost sheet is used to determine an estimated cost to make one unit of product.It is an estimate made before the year begins.Actual data is not shown on the cost sheet.

9. The production manager would use a cost sheet to

a. determine how much material must be purchased
b. hire employees
c. determine the quantity of materials that should be on the production line at any given time
d. price the product competitively

Answer

C. The production manager is responsible for making the products.The correct amount of materials must be on the production line at all times in order for products to be made.The purchasing manager determines purchases (a.).The human resource manager hires employees (b.).The sales manager is responsible for pricing the product competitively.

10. The managerial accountant would use the cost sheet to

a. monitor the efficiency of direct labor
b. monitor the cost of materials used
c. compare actual costs to budget
d. all of the above

Answer

D. The managerial accountant uses the cost sheet to do all of the above.It is used as a tool to determine how actual compares to expectations for all product costs.Product costs consist of two parts, a cost for one quantity and how much quantity is used.

11. A company sells packages of high quality photo paper consisting of 500 sheets of 8 x 10 paper. The company expects to manufacture 800,000 packages of 500 sheets of paper this year.

The paper is purchased in large sheets and the large sheets are cut by a machine into 8 x 10 paper. The sheets of paper are placed in another machine that counts out 500 and packages them in printed plastic wrap as the final product.

The paper cutting machine cuts 1200 pieces of paper per hour. The paper packaging machine does 100 packages per hour. The machine operators are paid $20 per hour.

The large sheets of paper are expected to cost $0.55 each and each large sheet can be cut into 100 8×10 sheets of paper. The printed plastic wrap is expected to cost $0.20 for one package of 500 sheets.

The estimated annual manufacturing overhead costs for the company are as follows:
Variable:   $85,000               Fixed $350,000

Prepare a cost sheet for one package of 500 sheets of photo paper in proper format.

Answer

First, determine the manufacturing overhead activity and the rate

   The entire manufacturing process is done by machine.  It is reasonable to assume that machine hours is the activity that causes the company to incur manufacturing overhead because if the machines are not operating the MOH costs would not be incurred.

     Determine the total machine hours that are required to make all products:

       The company is manufacturing and selling packages and the quantity must
         be for one package.

                                    Cutting machine 1/1200   = .00083 hours for one sheet
                                                                                    x   500 sheets in a package
                                                                                    =  0.415 hours per package

                                    Cut machine hours             0.415  see above
                                    Packing machine hours     0.01     1 / 100 per hour
                                       Total machine hours        0.425 for one package of paper

              Quantity of machine hours required to make 1                                  0.425
            x Estimated total units to manufacture during the year              x   800,000
            = Total estimated annual machine hours                                    =   340,000

 Compute the pre-determined manufacturing overhead rates.  You must do two rates when separate information is given for fixed and variable because the costs behave differently.                                                                                                

      Variable MOH

             Rate  =  Total Estimated Annual M O/H Dollars             $85,000  =  $0.25
                            Total Estimated Annual M O/H Activity            340,000          

      Fixed MOH

             Rate  =  Total Estimated Annual M O/H Dollars            $350,000  =  $1.03
                            Total Estimated Annual M O/H Activity              340,000

Then, Prepare the cost sheet in proper format

            Make sure the cost sheet is in proper format.  Do not put any extra
               calculations on the cost sheet.

 

Cost Sheet for One Package of 500 sheets of Photo Paper
  Quantity
x
Cost for One
=
Total Cost
Direct Material  
     
 
     
 
   Large paper sheets 5
x
$0.55
=
$2.75
   Plastic Wrap – Packaging 1
x
$0.20
=
$0.20
      Total Direct Materials  
 
$2.95
   
 
 
Direct Labor  
 
 
   Paper Cutting .415 hours
x
$20.00
=
$8.30
   Packaging .01 hours
x
$20.00
=
$0.20
      Total Direct Labor  
 
$8.50
   
 
 
Manufacturing O/H  
 
 
   Variable .425 mach hrs
x
$0.25
=
$0.11
    Fixed .425 mach hrs
x
$1.03
=
$0.44
   
 
 
      Total Cost   
 
$12.00
   
 
=====

12. The company manufactures aluminum tables. The table top is 6 feet long and 4 feet wide. The company expects to make 100,000 tables this year.
The cost for aluminum is expected to be $2.40 per square foot. Aluminum used for all the table legs is 16 square feet. It takes one worker 9 minutes to cut, bend and mold the aluminum for the table top and table legs. Workers then assemble the tables using bolts and nuts. The expected cost of bolts and nuts is $0.06 and $0.02 respectively. It is expected to take 2 workers 15 minutes each to assemble the table set. Workers use 24 nuts and 24 bolts to assemble the table. After the table is assembled, workers wrap the table in plastic and put the finished table in a box. It is expected to take two workers 6 minutes each to wrap and box the table. The cost for plastic, which is not measured as it is used, is estimated to be $3 per table.

 

Workers are expected to be paid:
Workers were actually paid:
Molding $18 per hour
Molding $17.50 per hour
Assembly $12 per hour
Assembly $12.50 per hour
Wrap and Box $8 per hour
Wrap & Box $7.50 per hour

 

Warehouse workers are expected to be paid $11 per hour and they spend approximately 30 minutes supporting the manufacturing process for each table set. Total fixed manufacturing overhead is expected to be $480,000. Total variable manufacturing overhead is expected to be $170,000.

Prepare a cost sheet in proper format for 1 table.

Answer

Direct Material:
Aluminum is paid for in square feet and the quantity must be square feet also.

     6 x 4 = 24 square feet for the table top + 16 square feet for the legs = 40

Plastic wrap is an indirect material since it is not tracked how much is used.  The cost is included in manufacturing overhead.

Direct Labor:

            Bend/Mold:   9 minutes / 60 minutes = .15 hours x 1 worker   =  0.15 hours
            Assemble:  15 minutes / 60 minutes = .25 hours x 2 workers  =  0.50 hours
           Wrap:             6 minutes / 60 minutes = .10 hours x 2 workers   =  0.20 hours              

             Total direct labor hours required to manufacture the table:       0.85 hours

            Warehouse labor is a period cost and is not direct labor

Manufacturing Overhead: 

     The tables are made by workers.  It is reasonable to assume that
      manufacturing costs are incurred because workers are working.  If no direct
      labor was working there would be no need for a facility and management.
      As more products are made, more direct labor will be required, and a larger
         facility and more management will be necessary.

         Compute the total direct labor hours required to make all tables:

                             0.85  hours for one table
                 x   100,000  tables to be made this year
                 =    85,000   total hours to make all tables this year

      Variable MOH

             Rate  =  Total Estimated Annual M O/H Dollars          $170,000  =  $2.00|
                            Total Estimated Annual M O/H Activity              85,000          

      Fixed MOH

             Rate  =  Total Estimated Annual M O/H Dollars           $480,000  =  $5.65
                            Total Estimated Annual M O/H Activity               85,000

Important:  Ignore any actual data.  The cost sheet is an estimate.

Then, prepare the cost sheet in proper format

            Make sure the cost sheet is in proper format.  Do not put any extra
               calculations on the cost sheet.

 

Cost Sheet for One Table
  Quantity
x
Cost for One
=
Total Cost
Direct Material  
     
 
     
 
   Aluminum 40
x
$2.40
=
$96.00
   Nuts 24
x
$0.02 
=
$0.48
   Bolts 24
x
$0.06
=
$1.44
      Total Direct Materials  
 
$97.92
   
 
 
Direct Labor  
 
 
   Bend/Mold 0.15 hours
x
$18.00
=
$2.70
   Assemble 0.50 hours
x
$12.00
=
$6.00
   Wrap 0.20 hours
x
$  8.00
=
$1.60
      Total Direct Labor 0.85 hours
 
$10.30
   
 
 
Manufacturing O/H  
 
 
   Variable 0.85 DL hrs
x
$2.00
=
$1.70
    Fixed 0.85 DL hrs
x
$5.65
=
$4.80
   
 
 
      Total Cost  
 
$114.72
   
 
=======

13.  The company sells sweatshirts with monogrammed logos on them according to special customer order.  Approximately 200,000 sweatshirts are sold to customers per year.  The sweatshirts are purchased from a Korean supplier at a cost of $12 for the sweatshirt and $15 to ship 10 sweatshirts to the company. The monogramming is done on a special sewing machine.  It is expected to take the sewing machine operators an average of 12 minutes to sew a logo on the sweatshirt.  Worker that operate the logo sewing machine are estimated to be paid $15 per hour.  The cost of thread is estimated to be $2.50 per yard and the number of yards used to sew each logo varies and is difficult to determine.  The cost for thread for the year is expected to total $15,000.  2 Warehouse workers are each expected to be paid $14 per hour and work 2,000 hours each per year.  The cost to ship sweatshirts with the logo to the customer averages $10 for a box of 10 sweatshirts. 

Total manufacturing overhead costs for the year are expected to be:
            Variable:  $80,000                Fixed:   $102,000

The following actual information was gathered from the accounting records:
Sewing machine workers were paid $11.95 per hours and took 13.1 hours to sew one logo.  The actual cost of each sweatshirt, including shipping, was $12.90.  194,935 sweatshirts were sold and 167 were wasted in the monogram process.  The total cost of thread was $11,272.  Warehouse workers were paid $15 per hour for 3,854 total hours worked.  The total cost to ship sweatshirts to customers was $26,893.

Prepare a cost sheet in proper format for one monogrammed sweatshirt.

Answer

Ignore actual information.  The cost sheet uses only estimated data.
Direct Material:

            The sweatshirt is the primary direct material

            The cost of receiving direct materials is also a direct material cost
                        $15 / 10 sweatshirts = $1.50 per sweatshirt

               You may show the sweatshirt and shipping separate or together on
                   the cost sheet.  I will show it separately.

           Thread is an indirect material since the quantity used for one sweatshirt
             is not tracked.  It is already included in total manufacturing overhead
              and you should not add it again.

            Shipping to the customer is a period cost and is not part of the cost sheet.

Direct Labor:

            Sewing direct labor is paid by the hour and the quantity must be per hour.
                   12 minutes / 60 minutes = 0.20 hours for one sweatshirt

            Warehouse workers are a period cost and are not included on the
             cost sheet.

Manufacturing Overhead: 

      The manufacturing process consists of sewing on the logo.  It is reasonable to assume that sewing hours is what causes the company to incur manufacturing overhead.  An activity must be used that is part of the manufacturing process.

Compute the total manufacturing activity, sewing hours, estimated for the year.

                             0.20    sewing hours for one sweatshirt
                 x   200,000    sweatshirts to be made this year
                 =    40,000     total sewing hours to make all sweatshirts this year

      Variable MOH

             Rate  =  Total Estimated Annual M O/H Dollars            $80,000  =  $2.00
                            Total Estimated Annual M O/H Activity              40,000          

      Fixed MOH

             Rate  =  Total Estimated Annual M O/H Dollars           $102,000  = $2.55
                            Total Estimated Annual M O/H Activity               40,000

Then, prepare the cost sheet in proper format

            Make sure the cost sheet is in proper format.  Do not put any extra
               calculations on the cost sheet.

 

Cost Sheet for One Sweatshirt
  Quantity
x
Cost for One
=
Total Cost
Direct Material  
     
 
     
 
   Sweatshirt 1
x
$12.00
=
$12.00
   Receipt of material  1
x
$  1.50
=
$  1.50
      Total Direct Materials  
 
$13.50
   
 
 
Direct Labor  
 
 
   Sewing 0.20 hours
x
$15.00
=
$3.00
   
 
 
Manufacturing O/H  
 
 
  Variable 0.20 DL hrs
x
$2.00
=
$0.40
    Fixed 0.20 DL hrs
x
$2.55
=
$0.51
   
 
 
      Total Cost  
 
$17.41
   
 
======