ACCT200 Chapter Notes - Chapter 3: Perpetual Inventory, Cash Flow, Income Statement

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taupelion650

19 May 2016

School

University of Delaware

Department

Accounting

Course

ACCT200

Professor

Debessay Araya

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Document Summary

Answers to questions - chapter 3: merchandise inventory is finished goods that are held for sale to customers. Costs that are included in merchandise inventory include the cost of the product, transportation-in costs, packaging costs, transit insurance, etc. Product costs are costs associated with goods for resale, usually inventory costs. Selling and administrative expenses, called period costs, are costs that are not directly traceable to products, for example, operating expenses. Cost of goods available for sale is the total of inventory on hand at the beginning of the period plus inventory purchased during the period. The cost of the items that have not been sold are allocated to merchandise inventory (asset) and are shown on the balance sheet. The cost of the items that have been sold are allocated to cost of goods sold (expense) and are shown on the income statement. Period costs are expensed in the period they are incurred or used.

Related Questions

TRUE OR FALSE

1. Selling and administrative costs are always period costs on any type of companyâs income statement

2. Costs that a manager can influence significantly are classified as uncontrollable costs of that manager

3. When goods are sold, their costs are transferred to Finished Goods Inventory

4. Equivalent-unit calculations are necessary to allocate manufacturing costs between units sold and ending work in process

5 Engineering design costs are typically known as batch-level activities

6 Activity-based costing systems have a tendency to distort product costs

7 There are six important factors when selecting appropriate cost drivers

8 Total contribution margin is defined as total sales revenue plus total variable expenses

1.) When products held in inventory are sold:

A.)Cost of Goods Sold is credited.

B.)Work in Process Inventory is credited.

C.)Finished Goods Inventory is credited.

D.)Finished Goods Inventory is debited.

2.)Since manufacturing costs (direct materials, direct labor,and overhead) are incurred in the process of manufacturing units ofproduct, these costs are credited t

A.)	The Direct Materials Inventory, Direct Labor, and ManufacturingOverhead accounts respectively.
B.)	Liability accounts.
C.)	The Work in Process Inventory account.
D.)	The Cost of Goods Sold account.

3.)Management accounting systems are designed to assistorganizations in the performance of all of the following functionsexcept:

A.)	The assignment of decision-making authority over companyassets.
B.)	Planning and decision-making.
C.)	Monitoring, evaluating, and rewarding performance.
D.)	The preparation of income tax returns.

4.)In a schedule of cost of finished goods manufactured, thefigure for total manufacturing costs:

	A.) May be less than the cost of direct materials used.
	B.) May be less than the direct labor costs assigned toproduction.
	C.) May be less than the manufacturing overhead applied toproduction.
	D.) May be less than the cost of finished goodsmanufactured.

5.) When a manufacturing company purchases raw materials orcomponent parts to be used in manufacturing finished goods, thesecosts are initially debited to:

	A.) Expense accounts.
	B.) Raw Materials Inventory.
	C.) Finished Goods Inventory.
	D.) Manufacturing Overhead.

6.) The wages paid to employees working directly on a company'sproducts would be shown as a:

	A.) Credit to Direct Labor.
	B.) Debit to Direct Labor.
	C.) Credit to Work in Process.
	D.) Debit to Manufacturing Overhead.

7.) Amounts credited to the Work in Process inventory accountmay best be described as:

	A.) The cost of finished goods manufactured.
	B.) Total manufacturing costs charged to production.
	C.) The cost of goods sold.
	D.) Direct materials purchased, direct labor costs paid, andpayments for items classified as manufacturing overhead.

chocolatetiger413

Scott Hewitt, the new plant manager of Old World Manufacturing plant Number 7, has just reviewed a draft of his year-end financial statements. Hewitt receives a year-end bonus of 10% of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, Hewitt demanded that his controller go back and "work the numbers" again. Hewitt insisted that if he didn't see a better operating income the next time he would be forced to look for a new controller. Old World manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished goods warehousing costs of $3250000 are classified as period expenses. Hewitt had suggested that warehousing costs be included as product costs because they are "definitely related to our product". The company produced 200,000 units during the period and sold 180,000 units.

As the controller reworked the numbers he discovered that if he included warehousing costs as product costs, he could improve operating income by $325,000. He was also sure that these new numbers would make Hewitt happy.

Required:

1. What are the ethical issues involved?

2. Show numerically how operating income would improve by $325,000 just by classifying the preceding costs as product costs instead of period expense?

3. Is Hewitt correct in his justification that these costs "are definitely related to our product"

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ACCT200 Chapter Notes - Chapter 3: Perpetual Inventory, Cash Flow, Income Statement

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