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Part I. Multiple-Choice: Select the best answer for each question.
1) A cost function is a ________.
A) process of calculating present value of projected cash flows
B) process of allocating costs to cost centers or cost objects
C) mathematical description of how a cost changes with changes in the level of an activity relating to that cost
D) is a very thorough and detailed way to identifying a cost object when there is a physical relationship between inputs and outputs
2) Bennet Company employs 20 individuals. Eighteen employees are paid $18 per hour and the rest are salaried employees paid $3,000 a month. Which of the following is the total cost function of personnel?
A) y = a + bX
B) y = b
C) y = bX
D) y = a
3) Crimson Services, Inc., employs 8 individuals. They are all paid $16.50 per hour. How would total costs of personnel be classified?
A) variable cost
B) mixed cost
C) irrelevant cost
D) fixed cost
4) For February, the cost components of a picture frame include $0.30 for the glass, $0.75 for the wooden frame, and $0.80 for assembly. The assembly desk and tools cost $500. Two hundred fifty frames are expected to be produced in the coming year. What cost function best represents these costs?
A) y = 1.85 + 500X
B) y = 500 + 1.85X
C) y = 3.85 + 600X
D) y = 1.05 + 500X
5) If the total cost function is y = 5,000 + 7X, calculate the variable cost for 4,000 units.
A) $33,000
B) $28,000
C) $20,000
D) $5,000
6) An analysis of the processing costs of the billing department of Craig Company revealed that total (variable and fixed) processing costs were $36,800 at an activity level of 16,000 accounts. When only 10,000 accounts were processed, the average processing cost per unit was $2.90. Assuming that this activity is within the relevant range, at a budgeted level of 12,000 accounts processed:
A) processing costs are expected to total $34,800.
B) the fixed processing costs are expected to be $16,000.
C) processing costs are expected to total $15,600.
D) the variable processing costs are expected to be $2.63 per account processed.
7) ________ identifies an estimated price customers are willing to pay and then computes the cost to be achieved to earn the desired profit.
A) Cost-plus pricing
B) Target costing
C) Kaizen costing
D) Peak-load costing
8) In relation to target costing, which of the following best describes target cost per unit?
A) It is the targeted cost of producing one unit to achieve the current year’s budgeted profit.
B) It is the estimated long-run cost of a product that enables the company to achieve its target operating income.
C) It is the cost that can be achieved by ensuring that the company produced its products at maximum efficiency.
D) It is the budgeted cost that the company estimates in producing a unit in the current budget period.
9) The product strategy in which companies first determine the price at which they can sell a new product and then design a product that can be produced at a low enough cost to provide adequate operating income is referred to as
A) cost-plus pricing
B) target costing
C) kaizen costing
D) full costing
10) ________ is a method of inventory costing in which all variable manufacturing costs (direct and indirect) are included as inventoriable costs and all fixed manufacturing costs are excluded.
A) Variable costing
B) Mixed costing
C) Absorption costing
D) Standard costing
11) ________ is a method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are included as inventoriable costs.
A) Variable costing
B) Mixed costing
C) Absorption costing
D) Standard costing
12) The only difference between variable and absorption costing is the expensing of ________.
A) direct manufacturing costs
B) variable marketing costs
C) fixed manufacturing costs
D) variable administrative costs
13) Which of the following costs is inventoried when using variable costing?
A) rent on factory building
B) electricity consumed in manufacturing process
C) sales commission paid on each sale
D) advertising costs incurred for the product
14) Which of the following costs is inventoried when using absorption costing?
A) variable selling costs
B) fixed administrative costs
C) variable manufacturing costs
D) fixed selling costs
15) Which of the following costs will be treated as period costs under absorption costing?
A) raw materials used in the production
B) sales commission paid on sale of product
C) depreciation on factory equipment
D) rent for factory building
16) If the number of units produced exceeds the number of units sold, then net operating income under absorption costing will:
A) be equal to the net operating income under variable costing.
B) be greater than net operating income under variable costing.
C) be equal to the net operating income under variable costing plus total fixed manufacturing costs.
D) be equal to the net operating income under variable costing less total fixed manufacturing costs.
17) A company using Just-in-Time (JIT) methods likely would show approximately the same net operating income under both absorption and variable costing because:
A) ending inventory would be valued in the same manner for both methods under JIT.
B) production is geared to sales under JIT and thus there would be little or no ending inventory.
C) under JIT fixed manufacturing overhead costs are charged to the period incurred rather than to the product produced.
D) there is no distinction made under JIT between fixed and variable costs.
Part Two: Problems
Data for the next 2 questions: Stewart Company is attempting to classify costs according to their cost behavior. Data concerning activity and costs are listed below:
| January | February | |
| Sales in units | 1,200 | 1,400 |
| Maintenance | $600 | $700 |
| Supplies | 750 | 790 |
| Insurance | 800 | 800 |
| Utilities | 888 | 1,036 |
| Lubrication | 560 | 576 |
| Advertising | 900 | 1,050 |
| Total | $4,498 | $4,952 |
1) Assume Stewart Company sells 1,150 units in March and this activity is within the relevant range. Compute the expected total costs. (Hint: First, using High Low method determine the behavior of total costs, then, using the cost function estimate total costs for March).
2) The costs that Stewart Company would classify as variable would be:
A) maintenance and supplies. B) maintenance, supplies, utilities, lubrication and advertising.
C) supplies and advertising. D) maintenance, utilities and advertising.
Data for the next 4 questions: Presented below are the production data for the first six months of the year for the mixed costs incurred by Lora Company.
| Month | Production Cost | Units |
| January | $4,890 | 4,100 |
| February | 4,426 | 3,520 |
| March | 6,730 | 5,200 |
| April | 9,724 | 8,250 |
| May | 5,900 | 4,900 |
| June | 7,336 | 6,600 |
Assume Lora Company uses the high-low method to analyze mixed costs.
3) What would be the cost function for Production Costs?
4) What would be the estimated total cost at an operating level of 6,500 units?
Assume Lora Company uses the Regression method to analyze mixed costs.
5) What would be the cost function for Production Costs?
6) What would be the estimated total cost at an operating level of 6,500 units?
Data for the next 3 questions: After conducting a market research study, Ed Manufacturing decided to produce a new interior door to complement its exterior door line. It is estimated that the new interior door can be sold at a target price of $240. The annual target sales volume for interior doors is 20,000. Ed has target operating income of 20% of sales.
7) What is total target sales revenues?
8) What is total target operating income?
9) What is the target cost for each interior door?
Data for the next 2 questions: Silicon Technologies, currently sells 17″ monitors for $270. It has costs of $210. A competitor is bringing a new 17″ monitor to market that will sell for $230. Management believes it must lower the price to $230 to compete in the market for 17″ monitors. Silicon believes that the new price will cause sales to increase by 10%, even with a new competitor in the market. Silicon’s sales are currently 5,000 monitors per year.
10) What is the target cost if the target operating income is 25% of sales?
11) What is the change in operating income if marketing manager is correct and only the sales price is changed?
Data for the next 2 questions: Moon Manufacturing Company is in the process of developing and implementing Activity Based Costing for the assignment of factory overhead costs to jobs. For one of the activities, Materials Ordering and Stocking, company is confronted with selection of an appropriate allocation base. Company believes that Materials Ordering and Stocking Costs are derived by “Number of Orders” and “Hours of Stocking”. Certainly, number of orders could be a reasonable allocation base, because if a job requires higher number of materials orders, more resources would be consumed by the job for the initiation of orders. On the other hand, hours of receiving and stocking of the materials upon delivery could be a reasonable allocation base as well because the higher receiving and stocking hours, the higher consumption of resources such as labor.
To assist the selection of appropriate allocation base, company has compiled data on actual materials ordering and receiving costs for the recent 12 months.
| Month | Materials Ordering | Number of | Hours of |
| and Stocking Costs | Orders | Stocking | |
| January | $167,376 | 15,246 | 86,904 |
| February | 164,056 | 13,149 | 92,820 |
| March | 177,335 | 14,940 | 100,300 |
| April | 157,416 | 13,149 | 83,742 |
| May | 160,736 | 14,148 | 85,374 |
| June | 170,695 | 13,077 | 95,506 |
| July | 144,137 | 12,321 | 86,904 |
| August | 187,295 | 13,905 | 121,074 |
| September | 150,776 | 11,529 | 85,374 |
| October | 160,736 | 13,203 | 94,656 |
| November | 154,096 | 12,186 | 86,088 |
| December | 174,015 | 13,230 | 100,674 |
Jobs 101 and 102 were among the jobs in upcoming year.
| Job 101 | Job 102 | |
| Number of Orders | 8 | 4 |
| Hours of Stocking | 20 | 54 |
Compute the amount of Materials Ordering and Stocking costs that would be assigned the two jobs:
12) If company desires to use an overhead rate based on only a single allocation base
13) If company desires to use an overhead rate based on multi-allocation bases
Developing OH Rate with Multi-Allocation Base (7 minutes):
http://cidmedia.clayton.edu/COB/-AY17-18/Multi-allocation_base_-_20180423_173634_7.html
Data for the next 2 questions: United Auto produces and sells an auto part for $60.00 per unit. In 2017, 100,000 parts were produced, and 75,000 units were sold. Other information for the year includes:
Direct materials $20.00 per unit
Direct manufacturing labor $ 4.00 per unit
Variable manufacturing costs $ 1.00 per unit
Sales commissions $ 6.00 per part
Fixed manufacturing costs $750,000 per year
Administrative expenses, all fixed $270,000 per year
14) What is the inventoriable cost per unit (cost of production per unit) under variable costing?
15) What is the inventoriable cost per unit (cost of production per unit) under absorption costing?
Data for the next 4 questions: For 2017, Nichols, Inc., had sales of 150,000 units and production of 200,000 units. Other information for the year included:
Direct manufacturing labor $187,500
Variable manufacturing overhead 100,000
Direct materials 150,000
Variable selling expenses 100,000
Fixed administrative expenses 100,000
Fixed manufacturing overhead 200,000
There was no beginning inventory.
16) Compute ending finished goods inventory under absorption costing.
17) Compute ending finished goods inventory under variable costing.
18) Compute Cost of Goods Sold under absorption costing.
19) Compute Cost of Goods Sold under variable costing.