MANAGERIAL ACCOUNTING 1 EXERCISES

CHAPTER 1

EX1: Indicate whether each of the statements is T or F

1. Raw materials consist of basis natural resources, such as crude oil
2. A supervisor’s salary would be considered direct labor
3. Non manufacturing costs consist of selling costs and administrative costs
4. All selling and administrative costs are period costs
5. The term product cost and manufacturing cost are synonymous.
6. The cost of goods manufactured is an expense in a manufacturing company
7. A cost such as factory depreciation may be on the balance sheet as an asset if
goods are uncompleted or unsold at the end of a period
8. Total variable cost will change in the level of activity
9. A fixed cost is constant per unit of product
10. Manufacturing overhead is an indirect cost with respect to units of product
11. Sunk costs can be either variable or fixed
12. Property taxes and insurance on the factory building are examples of
manufacturing overhead
EX2: Choose the best answer for each following question.
1. If the activity level increases, one would expect the fixed cost per unit to
a. Increase
b. Decrease
c. Remain unchanged
d. None of them
2. Which of following cost costs would not be a period cost?
a. Indirect material
b. Advertising
c. Administrative salaries
d. Shipping cost
e. Sales commission
3. The term used to describe the cost of goods transferred from work in process
inventory to finished goods inventory is
a. Cost of goods sold
b. Raw material
c. Period cost
d. Cost of goods manufactured
 4. Manufacturing cost is synonymous with all of the following term except
a. Product cost
b. Inventorial cost
c. Period cost
5. If the activity level drops by 5% one expect the variable costs
a. To increase per unit of product
b. To drops in total by 5%
c. To remain constant in total
d. To decrease per unit of product
6. All of the following are considered to be product costs for financial reporting
except:
a. Indirect material
b. Advertising
c. Rent on factory space
d. Idle time
7. A business has ascertained that its total costs (TC) can be estimated for any level of
product (P) and sales (S) according to the following equation:
TC= 5xP + 1000 + 2xS +500
If the production level was 500 unit and sales were 400 units, what would be the
company’s fixed costs?
a. 1,500
b. 4,800
c. 3,500
d. 3,300
8. Which of the following cost are fixed per unit, but change in total, as production
level change?
a. Fixed cost
b. Variable cost
c. Direct cost
d. Step variable cost
9. A hospital has total cost of 1milion for 202X. During 202X+1, 200,000 actions were
treated and doctors were paid 500,000
What is the most appropriate cost per patient for the hospital to use:
a. 0.2
b. 2.5
c. 5
 d. 7.5
10. The annual salary paid to a business’s financial accountant would be best
description as:
a. A variable administrative cost
b. A fixed production cost
c. A part of prime cost
d. A fixed administrative cost
11. A company’s telephone bill consists of two parts:
- a charge of 40 per month for line rental
- a charge of 0.01 per minute of call time.
Which of the following equations describes the total annual telephone cost (C) if the
company uses T minutes of call time in year?
a. C = 480 + 0.01T
b. C = 40 + 0.01T
c. C = 480 + 0.12T
d. C = 40 + 0.01T/12
12. Select the cost classification that is the best description each of the following:
Labor paid per hour worked
a. Fixed
b. Variable
c. Semi- variable
Rent of a factory
d. Fixed
e. Variable
f. Semi- variable
Salary plus profit- related pay
g. Fixed
h. Variable
i. Semi- variable
13. Which of the following would be classified as indirect costs for food product
manufacturer?
(I): Food label on a tin of beans
(II): Maintenance materials used to repair production machinery
(III). Cleaner’s wages in the factory
A. (I) only
B. (II) and (III) only
 C. All of them
D. None of them
14. Which of the following statements about a direct cost are correct?
(i) a direct cost can be traced in full to the produce or department that is being cost
(ii) a cost that is a direct cost of cost object might be an indirect cost of a different cost
object
(iii) a direct cost might also be referred to as an overhead cost
(iv) expenditure on direct costs will probably vary every period
a. (i) and (ii) only
b. (i) and (iii) only
c. (i), (ii) and (iv) only
d. All of them
15. Which of the statements is true?
a. Total direct costs are always greater than total indirect costs
b. Indirect costs are alternatively called overheads
c. Fixed cost per unit is the same at all levels of production
d. A direct cost will always be a variable cost.
16. A factory making toys uses a particular machine on each production line. Each
machine costs £1,000 per month to hire. Each production line can make up to 100 toys per
month. Which of the following best describes the cost of hiring the machines?
a. A step cost
b. A variable cost
c. A fixed cost
d. A semi –variable cost
17. Rebecca is responsible for preparing the management accounts of ABC. All ABC
employees receive a bonus each time monthly sales revenue exceeds forecast. Rebecca is
tempted to overstate monthly sales revenue in the latest set of management accounts to
ensure that employees receive a bonus. What threat does this represent?
a. Intimidation
b. Self-interest
c. Familiarity
d. Advocacy
EX3. Classify each of the following costs as either period costs or product costs. Also
indicate whether the cost is fixed or variable with respect to changes in the amount of
output produced or sold:
Cost Period cost Product cost Variable cost Fixed cost
 Rent on sale office
Direct material
Sales commission
Rent on factory building
Headquarters secretarial
salaries
Assembly line workers
Product advertising
Cherries in a cannery
Top management
salaries
Lubricants for machines
Shipping cost via
express service
Executive training
program
Factory supervisory
salaries

EX4: Northeast Hospital is considering replacing an old inefficient X-ray machine with a
state-of-the-art digital X-ray machine. The new machine would provide higher quality X-
rays in less time and at a lower cost per X-ray. It would also require less power and would
use a color laser printer to produce easily readable X-ray images. Instead of investing the
funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s
management to buy a new DNA analyzer.
Required:
For each of the items below, indicate by placing an X in the appropriate column whether it
should be considered a differential cost, a sunk cost, or an opportunity cost in the
decision to replace the old X-ray machine with a new machine. If none of the categories
apply for a particular item, leave all columns blank.
1. Cost of X-ray film used in the old machine
2. Cost of the old X-ray machine . . . . . . . . . . . . . . . . . . . . . . .
3. The salary of the head of the Radiology Department. . . .
4. The salary of the head of the Laboratory Department . . .
5. Cost of the new color laser printer. . . . . . . . . . . . . . . . . . . .
6. Rent on the space occupied by Radiology. . . . . . . . . . . . .
7. The cost of maintaining the old machine . . . . . . . . . . . . . .
8. Benefits from a new DNA analyzer . . . . . . . . . . . . . . . . . . .
9. Cost of electricity to run the X-ray machines . . . . . . . . . . .
EX5. ITY is a company produces and sells a single product (A). Data concerning the
product as follows (£):
- variable cost per unit: 17,500
- Total fixed cost: 720,000,000
- Price per unit: 36,000
- Sales units: 48,000
The company gets a new order that requires 5,000 units. Data concerning the order
following:
- Variable cost per unit: 18,500
- Adding 50,000,000 of fixed cost
- Remain the price unit
Required
1. Compute the manufacturing costs and result of producing and selling 48,000 units?
2. Compute the costs for the added units?
3. Compute the following costs:
- Cost per unit basing on plan/budget
- Cost per added unit
EX6: The costs of operating the maintenance department of a computer manufacturer,
Crayon Ltd for the last 5 months have been as follows:
Month Production Volume (units) Cost (£)
1 4,000 15,200
2 5,000 17,000
3 6,500 19,400
4 8,000 21,800
5 5,500 18,200
Required:
1. Determine the equation to predict the cost using the high – low method?
2. Calculate the costs that should be expected in month 6 when output is expected to
be 7,200 units?
3. Determine the equation to predict the cost using the least – square regression
method?
EX7: Fill the blanks (Figure in: £)
Content Work shop 1 Work shop 2 Work shop 3
Sales 75,000
Raw material inventory beginning 15,000 19,500
Raw material purchase 34,500 19,500 3,750
Raw material inventory ending 12,000 ? 750
Direct material cost ? 30,000 3,000
Direct labor cost 30,000 37,500 9,000
Overhead cost 15,000 12,000 ?
Manufacturing cost 82,500 ? 18,000
Units of Beginning work in process ? 12,000 12,000
(units partially complete)
Units of ending work in process (units 7,500 10,500 ?
still incomplete)
Total cost of completed units 82,500 ? 28,500
Units of beginning Finished goods ? 9,000 2,250
Units of ending Finished goods 37,500 ? 750
Cost of goods sold 60,000 82,500 ?
Net come (gross profit) ? 13,500 ?
Selling and administrative costs 12,000 ? 7,500
Net profit ? (6,000) 1,500

CHAPTER 2: CALCULATING UNIT COSTS ( PART 1)

EX1: Choose the best answer:

1. Gross wages for a manufacturing company in October were £108,000 and were
analysed as follows:

Direct labour Indirect labour

£ £
Ordinary time 50,370 23,800
Overtime – basic pay 10,880 7,000
Overtime – premium 2,720 1,750
Shift allowance 5,400 2,720
Sick pay 2,760 600
Total 72,130 35,870
The cost of direct wages is:
 A £72,130

B £69,370
C ££61,250

D £50,370

2. Which of the following statements is true?

A Total indirect costs are always greater than total direct costs.
B Direct costs are usually overheads.
C Variable costs per unit decrease as production levels increase.
D Fixed costs per unit decrease as production levels increase.
3. A designer receives £2 per unit as a royalty from the manufacturer of a product which
he designed. In the accounts of the manufacturer the royalty charge would be treated as a:
A dividend payment
B production overhead
C selling overhead
D prime cost

4. Newton Brewert had the following entries in its materials control account:
£
Opening inventory 31,200
Closing inventory 43,200
Deliveries from suppliers 600,000
Returns to suppliers 60,000

The value of the issue of materials to production is:

A £648,000
B £552,000

C £540,000
D £528,000
5. Which two of the following are appropriate methods of valuing inventory?
A First in, Last out (FILO)
B First in, First out (FIFO)
C Future anticipated cost
 D Standard cost
6. At the beginning of June there were 500 Widgets held in the stores. 200 of these
Widgets had been purchased for £12.50 each in May and 300 had been purchased for
£13 each in April.
On 15 June a further 150 Widgets were received into stores at a purchase cost of
£13.20 each.
The only issue of Widgets in June occurred on the 25th, when 90 units were issued to
production.
Using the FIFO valuation method, what was the value of the opening inventory of
Widgets on 1 July?
A £1,070
B £1,188
C £7,192
D £7,210
7. Bushind plc makes the following purchases and sales:

1 July Purchases 4,000 units for £24,000

31 July Purchases 1,000 units for £4,800
15 August Sales 3,000 units for £31,200
28 August Purchases 1,500 units for £9,000
14 September Sales 500 units for £2,880

At 30 September which of the following closing inventory valuations using FIFO is

correct?
A £15,600
B £16,800
C £18,000
D £19,200
8. Mosquito Ltd uses the Merlin to manufacture one of its products. The following
information on receipts and issues of Merlins has been recorded for June:
Receipts
Price per
Date Units unit Value
£ £
1 June Opening inventory 100 12.00 1,200
3 June Receipts 300 11.52 3,456
5 June Issues (220)
12 June Receipts 170 12.48 2,122
24 June Issues (300)

Using the cumulative weighted average price method of inventory valuation, the value
of closing inventory on 30 June was:

A £624
B £602

C £600
D £595
9. A distributor buys and resells a range of electrical items, one of which is a Fusebox.
Each Fusebox is resold for £1.50 per unit and opening inventory for April was 400
units valued at £0.90 per unit. The distributor purchased a further 600 units on 10
April for £1.05 per unit, and sold 800 units on 25 April.
What gross profit would be recorded for the sale of Fuseboxes during April, using the
FIFO method of inventory valuation?
A £390

B £420
C £480

D £780
10. With all average price systems where it is required to keep prices up to date, in which
of the following situations is it not necessary to recalculate the average price?
A Each time an issue is made

B Each time excess material is returned from the factory floor to the stores
 C Each time a purchase is made

D Each time an item istransferred into inventory from work in progress

Chapter 3: Calculating unit costs (Part 2)

EX1: Choose the best answer:
1. The following information is available for the two production departments (machining
and assembly) and one service department (the canteen) at a manufacturing company.
Machining Assembly Canteen
Budgeted overheads £25,000 £20,000 £11,000
Number of staff 30 20 5

After reapportionment of the service cost centre costs, what will be the overhead cost
of the assembly department cost centre?

A £25,500
B £24,400

C £24,000
D £4,400
2. Which of the following bases of apportionment would be most appropriate for
apportioning property rental costs to production cost centres?

A Floor space occupied in square metres

B Volume of space occupied in cubic metres

C Number of employees
D Labour hours worked
3. A company makes three products in a period.
Quantity Labour hours
(units) per unit
Product A 1,000 8
Product B 2,000 12
Product C 3,000 6
Total 6,000

Overheads for the period are £100,000 and they are absorbed on the basis of labour
hours. What is the fixed overhead cost absorbed by a unit of Product A?
 A £16.67

B £16.00
C £12.00

D £2.00
4. A product requires 4 hours of direct labour at £12.60 per hour, and includes direct
expenses of £128.40. In its production, it requires 24 minutes of finishing.
Possible overhead absorption rates have been calculated to be £17.04 per direct labour
hour or £99.60 per finishing machine hour.

Using the direct labour hour basis of overhead absorption, calculate to the nearest
penny the total product cost.

A £286.80
B £246.96

C £218.64
D £196.56
5. A company's packing department has budgeted labour hours of 3,250 and budgeted
overhead costs of £35,880.

The actual labour hours were 3,175 and actual overheads were £35,544.
The overheads for the period were:

A under-absorbed by £336
B over-absorbed by £336

C under-absorbed by £492
D over-absorbed by £492
Ex2: Sunrise Ltd makes blended tropical fruit drinks in two stages. Fruit juice are
extracted from fresh fruit and then blended in the Blending Department. The
following information pertains to the operations of the Blending Department for
June:
Percent Complete
Units Materials Conversion
1.WIP, beginning 20,000 100% 75%
2. Started into production 180,000
3. Completed and transferred out 160,000
4. WIP, ending 40,000 100% 25%
5. WIP, beginning $25,200 $24,800
6. Cost added during June $334,800 $238,700
Required: Prepare a production report for the Blending Department for June, using 2
methods.
EX3: Jarvene Corporation uses the FIFO method in its process costing system. The
following data are for the most recent month of operations in one of the company’s
processing departments:
Units in beginning inventory . . . . . . . . . . . . . . . . . . 400
Units started into production . . . . . . . . . . . . . . . . . . 3,000
Units in ending inventory . . . . . . . . . . . . . . . . . . . . . 300
Units transferred to the next department . . . . . . . 3,100
Materials Conversion
Percentage completion of beginning inventory . . . . . . . 80% 40%
Percentage completion of ending inventory . . . . . . . . . 70% 60%
The cost of beginning inventory according to the company’s costing system was £11,040
of which $8,120 was for materials and the remainder was for conversion cost. The costs
added during the month amounted to £132,730. The costs per equivalent unit for the month
were:
Materials Conversion
Cost per equivalent unit . . . . . . . . . . . . . . . . . . £25.40 £18.20
Required:
1. Compute the total cost per equivalent unit for the month.
2. Compute the equivalent units of material and conversion in the ending inventory.
3. Compute the equivalent units of material and conversion that were required to complete
the beginning inventory.
4. Compute the number of units started and completed during the month.
5. Compute the cost of ending work in process inventory for materials, conversion, and in
total for the month.
6. Compute the cost of the units transferred to the next department for materials,
conversion, and in total for the month.
EX4: High Desert Pottery makes a variety of pottery products that it sells to retailers
such as Home Depot. The company uses a job order costing system in which
predetermined overhead rates are used to apply manufacturing overhead cost to jobs.
The predetermined overhead rate in the Molding Department is based on machined
hours, and the rate in the Painting Department is based on direct labor cost. At the
beginning of the year, the company’s management made the following estimates:
Department
Molding Painting
Direct labor hour 12,000 60,000
Machine hours 70,000 8,000
Direct material cost ($) 510,000 650,000
Direct labor cost ($) 130,000 420,000
Manufacturing Overhead ($) 602,000 735,000
Job 205 was started on August 1st and completed on August 10. The company’s
cost records show the following information concerning the job:
Department
Molding Painting
Direct labor hour 30 85
Machine hours 110 20
material placed into production($) 470 332
Direct labor cost ($) 290 680
Required:
1. Compute the predetermined overhead rate used during the year in the Molding Dep.
Compute the rate used in the Painting Department?
2. Compute the total overhead cost applied to Job 205?
3. What would be the cost recorded for job 205? If the job contained 50 units, what would
be the unit product cost? Make a job cost sheet for 205?
4. At the end of the year, the records of High Desert Pottery works revealed the following
actual cost and operating data for all jobs worked on during the year:
Department
Molding Painting
Direct labor hour 10,000 62,000
Machine hours 65,000 9,000
Direct material cost ($) 430,000 680,000
Direct labor cost ($) 108,000 436,000
Manufacturing Overhead ($) 570,000 750,000
What was the amount of under-applied or over-applied overhead in each department at the
end of the year?
EX5: Ginato Products operates a job order costing system and applies overhead cost
to jobs on the basis of direct materials used in production (not on the basis of raw
materials purchased). In computing a predetermined overhead rate at the beginning
of the year, the company’s estimates were: manufacturing overhead cost $800,000;
direct materials to be used in production $500,000. The company has provided the
following data: (£)
Beginning Ending
Raw materials 20,000 80,000
Work in process 150,000 70,000
Finished Goods 260,000 400,000
The following actual costs were incurred during the year: ($)
Purchase of raw materials (all direct) 510,000
Direct labor cost 90,000
Manufacturing Overhead:
Indirect labor 170,000
Property Taxes 48,000
Depreciation of equipment 260,000
Maintenance 95,000
Insurance 7,000
Rent, building 180,000
Required:
1. Compute the predetermined overhead rate for the year
2. Compute the amount of underapplied or overapplied overhead for the year?
3. Prepare a schedule of cost of goods manufactured for the year?
4. Compute the cost of goods sold for the year (do not include any under- applied or
over-applied overhead in your cost of goods sold figure)
EX6: Osborn Manufacturing uses a predetermined overhead rate of $18.20 per direct
labor-hour. This predetermined rate was based on a cost formula that estimates
$218,400 of total manufacturing overhead for an estimated activity level of 12,000
direct labor-hours. The company actually incurred $215,000 of manufacturing
overhead and 11,500 direct labor hours during the period.
Required:
1. Determine the amount of under-applied or over-applied manufacturing overhead for the
period.
2. Assume that the company’s underapplied or overapplied overhead is closed to Cost of
Goods Sold. Would the journal entry to dispose of the under applied or over applied
overhead increase or decrease the company’s gross margin? By how much?
EX7: Ferris Corporation makes a single product—a fire-resistant commercial filing
cabinet—that it sells to office furniture distributors. The company has a simple ABC
system that it uses for internal decision making. The company has two overhead
departments whose costs are as follows:
Manufacturing overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $500,000
Selling and administrative overhead . . . . . . . . . . . . . . . . . . . . $300,000
Total overhead costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000
The company’s ABC system has the following activity cost pools and activity measures:
Activity Cost Pool Activity Measure
Assembling units . . . . . . . . . . . . . . . . . . . Number of units
Processing orders . . . . . . . . . . . . . . . . . . Number of orders
Supporting customers . . . . . . . . . . . . . . . Number of customers
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Not applicable
Costs assigned to the “Other” activity cost pool have no activity measure; they consist of
organization-sustaining costs and unused capacity costs—neither of which are assigned to
orders, customers, or the product.
Ferris Corporation distributes the costs of manufacturing overhead and selling and
administrative overhead to the activity cost pools based on employee interviews, the results
of which are reported below:
Distribution of Resource Consumption Across Activity Cost Pools
Assembling Processing Supporting other total
units orders customers
Manufacturing 50% 35% 5% 10% 100%
overhead
Selling and 10% 45% 25% 20% 100%
administrative cost
Total activity 1000 units 250 orders 100 customers

Required:
1. Perform the first-stage allocation of overhead costs to the activity cost pools?
2. Compute activity rates for the activity cost pools ?
3. Office Mart is one of Ferris Corporation’s customers. Last year, Office Mart
ordered filing cabinets four different times. Office Mart ordered a total of 80 filing cabinets
during the year. Construct a table showing the overhead costs attributable to Office Mart.
4. The selling price of a filing cabinet is $595. The cost of direct materials is $180
per filing cabinet, and direct labor is $50 per filing cabinet. What is the customer margin of
Office Mart?
 Chapter 4: Marginal costing and absorption costing

1 The following cost details relate to one unit of product Alphatron.

£ per unit
Variable materials 23.52
Variable labour 20.88
Production overheads
Variable 3.24
Fixed 22.46
Selling and distribution overheads
Variable 17.98
Fixed 8.16
Total cost 96.24

In a marginal costing system the value of a closing inventory of 3,400 units of

Alphatron will be:

A £327,216
B £238,339

C £223,107
D £161,976
2. GardenRite Ltd manufactures wheelbarrows with a selling price of £100 per
wheelbarrow. Budgeted production and sales volume is 2,000 wheelbarrows per
month. During January 20X8 2,000 wheelbarrows were made of which 1,400 were
sold. There was no opening inventory.

The variable cost per wheelbarrow is £55. Fixed costs in January were, as budgeted,
£50,000.

Using marginal costing calculate the contribution and profit for January.
A Contribution: £63,000, Profit £13,000

B Contribution: £63,000, Profit £28,000

C Contribution: £90,000, Profit £13,000

D Contribution: £90,000, Profit £28,000

3. Which two of the following statements concerning marginal costing are true?
 A Contribution is calculated as sales revenue plus all variable costs.

B Closing inventories are valued at full production cost.

C Fixed costs are treated as a period cost and are charged in full to the income
statement of the accounting period in which they are incurred.
D Marginal cost is the cost of a unit which would be avoided if that unit were not
produced.
4. Eve Ltd's production budget for its first year of trading, during which 2,500 units are
expected to be maunfactured is as follows:

£
Variable production costs 229,200
Fixed production costs 61,920
The unit selling price is £300 and budgeted sales are 2,200 units.

Eve's profit for its first year of trading calculated on the absorption cost basis
compared with the profit calculated on the marginal cost basis is:

A £34,934 lower
B £34,934 higher

C £7,430 lower
D £7,430 higher
5. Graundene Ltd manufactures a single product with the following cost and selling price
details:
£ per £ per
unit unit
Selling price 40
Variable material 12
Variable labour 4
Variable overhead 4
Fixed overhead 10
30
Profit per unit 10

In July 20X8 Graudene produced 22,000 units and sold 24,000 units. The opening
inventory was 5,000 units. Graudene's profits reported using marginal costing were
£275,000.
The profits reported using an absorption costing system would be:

A £240,000
B £245,000

C £255,000
D £295,000
6. When comparing the profits reported under marginal and absorption costing when the
levels of inventories decreased, and assuming that unit variable costs and fixed costs
are constant:
A absorption costing profits will be lower and closing inventory valuations higher
than those under marginal costing
B absorption costing profits will be lower and closing inventory valuations lower
than those under marginal costing
C absorption costing profits will be higher and closing inventory valuations lower
than those under marginal costing
D absorption costing profits will be higher and closing inventory valuations higher
than those under marginal costing