- How much of the annual IT department cost should be allocated to Manufacturing Overhead?
Answer: $480,000
The portion of shared services costs (like IT) that supports manufacturing activities is allocated to Manufacturing Overhead (a product cost). The portion supporting non-manufacturing activities is a period cost.
- Total employees = 300 (factory) + 200 (sales/admin) = 500.
- Factory employee proportion = 300 / 500 = 60%.
- MOH allocation = Total IT Cost Factory proportion = $800,000 60% = $480,000.
- For external financial reporting under U.S. GAAP, the $1,000,000 cost of headquarters' services should be classified as:
Answer: Entirely as an administrative expense.
For external financial reporting, costs associated with the overall management of the company (like centralized accounting and HR at headquarters) are treated as administrative costs. These are period costs and are not allocated to inventory, even though they may provide some benefit to the manufacturing function. Allocating these costs is a common practice for internal decision-making but not for GAAP-based external financial statements.
- Based on the information provided, what are the total product costs for the month?
Answer: $195,000
Product costs (or inventoriable costs) consist of Direct Materials (DM), Direct Labor (DL), and Manufacturing Overhead (MOH).
- DM = $85,000
- DL = $60,000
- MOH = Factory supervisor salaries ($25,000) + Depreciation on factory equipment ($15,000) + Indirect materials ($10,000) = $50,000.
Total Product Costs = DM + DL + MOH = $85,000 + $60,000 + $50,000 = $195,000. The other costs (sales commissions, advertising, corporate office rent) are period costs.
- An employee at a manufacturing plant is responsible for fixing production equipment when it breaks down. The cost of this employee's wages, when incurred due to a normal level of equipment failure, is properly classified as:
Answer: Manufacturing overhead.
The wages of a maintenance employee are an example of indirect labor. The work is essential for production to occur, but the cost cannot be conveniently traced to specific units of product. Therefore, it is classified as manufacturing overhead. It is not direct labor because the employee does not physically work on the product itself. It is not an administrative or selling expense because the cost is incurred within the factory.
- Global Electronics assembles smartphones and tablets. September costs included: microprocessors ($180,000), assembly line worker wages ($95,000), quality control inspector wages ($28,000), shipping costs to retailers ($22,000), executive salaries ($45,000), and factory utilities ($16,000). Assembly workers spend 5% of their time moving materials between workstations. Quality inspectors spend 75% of their time testing products during production and 25% investigating customer complaints about defective units. Microprocessor usage records show $175,000 used in production, $3,000 damaged during handling, and $2,000 in inventory. How should the $3,000 of damaged microprocessors be classified?
Answer: $3,000 as manufacturing overhead, since handling damage is a normal cost of the production process that cannot be traced to specific units
When you encounter questions about classifying unusual manufacturing costs like damaged materials, focus on whether the cost is a normal, expected part of the production process that benefits all products rather than specific units.
The $3,000 in damaged microprocessors should be classified as manufacturing overhead because material handling damage is an inevitable cost of running a production facility. Even with careful procedures, some materials will be damaged during storage, movement, and handling—this is a normal cost of doing business that cannot be traced to specific products. Since this cost supports the overall manufacturing process and benefits all units produced, it belongs in overhead and will be allocated across all products.
Choice A is incorrect because direct materials must be traceable to specific products. Once damaged, these microprocessors cannot be assigned to particular smartphones or tablets, eliminating them from direct material classification. Choice B misclassifies this as a selling expense, but selling expenses occur after production is complete and relate to marketing and distribution activities. The damage happened during the manufacturing process, not during sales activities. Choice C incorrectly suggests this is an administrative expense, but administrative costs support general company operations like accounting and human resources, not manufacturing activities.
Remember this pattern: when materials are damaged during normal production activities, treat the loss as manufacturing overhead. The key test is whether the cost is incurred during manufacturing (overhead) versus during selling (selling expense) or general company operations (administrative expense).
- A lathe operator's regular pay is direct labor. Without a rush order, the overtime premium is classified as:
Answer: Factory overhead
Overtime premium is the extra amount paid above the regular wage rate. When overtime is not caused by a rush order, it cannot be traced to a specific job, so it is classified as factory overhead. The tempting wrong answer is direct labor cost, but direct labor includes only regular pay and overtime premium caused by a rush order; general overtime premium is overhead.
- How much of the annual property tax should be classified as a period cost?
Answer: $30,000
Property taxes on manufacturing facilities are product costs (MOH). Property taxes on non-manufacturing facilities are period costs (administrative). The allocation should be based on the assessed values.
- Total assessed value = $2,100,000 + $900,000 + $1,000,000 = $4,000,000.
- Proportion related to corporate office = $1,000,000 / $4,000,000 = 25%.
- Period cost portion = Total tax Corporate office proportion = $120,000 25% = $30,000.
- Factory janitorial wages are classified as:
Answer: Manufacturing overhead
Factory janitorial wages support the production area but cannot be traced to a specific product, so they are indirect labor. Indirect labor is included in manufacturing overhead. The tempting mistake is to call this direct labor cost, but direct labor covers only workers who directly transform materials into finished goods.
- A manufacturer's internal audit department reviews factory and sales records. Its costs are classified as:
Answer: Administrative
An internal audit department supports management and control across the company, so its costs are administrative expenses rather than costs of production or selling. The tempting wrong answer is factory overhead, but reviewing factory records does not turn the audit department into a manufacturing cost.
- Which of the following costs is LEAST likely to be classified as a product cost?
Answer: Depreciation on the company president's automobile.
Product costs are costs associated with the manufacturing process (DM, DL, MOH). The production supervisor's salary (indirect labor), factory electricity (MOH), and factory property taxes (MOH) are all product costs. Depreciation on the president's car is an administrative expense, which is a period cost, as it relates to the general management of the company, not the manufacturing of products.
- What is the sum of the direct materials component of cost of goods sold and total period costs?
Answer: $141,000
This is a multi-step calculation.
1. Calculate the direct materials cost per unit produced: $90,000 / 10,000 units = $9.00 per unit.
2. Calculate the direct materials component of COGS for the units sold: 9,000 units * $9.00/unit = $81,000.
3. Identify total period costs, which are the selling and administrative expenses: $60,000.
4. Sum the two amounts: $81,000 + $60,000 = $141,000.
- Preparing annual shareholder reports is classified as:
Answer: Administrative expense
Annual shareholder reports support corporate governance and general management, not production or selling activities. Therefore they are classified as administrative expense. Manufacturing overhead is the most tempting wrong choice, but it covers factory-related costs such as indirect labor and utilities, not investor reporting.
- Legal staff work on factory contracts is classified as:
Answer: Administrative expense
Legal staff provide company-wide legal support, including work on factory contracts, rather than directly producing goods or running factory operations. Their wages are therefore administrative expenses. Manufacturing overhead is tempting because the contracts involve the factory, but overhead covers production-related costs such as supervision and utilities, not legal services.
- Freight to bring raw materials into the factory is:
Answer: Direct material cost
Freight paid to bring raw materials into the factory attaches to the materials, so it becomes part of their inventory cost and thus included in direct material cost when used. Manufacturing overhead is the tempting wrong answer because freight feels like a factory support expense, but it is directly traceable to the raw materials, not an overhead cost.
- Direct workers paid while a machine is idle are:
Answer: Manufacturing overhead
Pay for direct workers during machine idle time is idle time cost, not traceable to specific units of product. Since it is indirect labor incurred in the factory, it is part of manufacturing overhead. The tempting wrong answer is direct labor cost, but direct labor applies only to time spent actively producing the product.
- Premier Furniture produces custom dining sets. In April, the company purchased $45,000 of oak lumber, $12,000 of hardware (hinges, screws, handles), and $8,000 of wood stain. Production records show that $38,000 of lumber was used in completed furniture, $3,000 of lumber was wasted due to cutting errors, $10,500 of hardware was installed in furniture, and $7,200 of stain was applied to finished pieces. The remaining materials are in inventory. Normal waste on lumber cutting averages 8% of lumber used, but this month waste was 7.9%. How should the $3,000 of wasted lumber be classified?
Answer: $3,000 as manufacturing overhead, since the waste level was within normal expectations for the production process
Since the actual waste rate (7.9%) was within normal expectations (8%), the entire $3,000 should be classified as manufacturing overhead. Normal waste is considered part of the cost of production and is included in overhead rather than charged directly to specific jobs or treated as an abnormal loss.
- Forklift wages to move raw materials in a factory are:
Answer: Manufacturing overhead
Moving raw materials supports production but does not directly transform or attach to a product, so forklift wages are indirect labor and belong in manufacturing overhead. The tempting wrong answer is direct labor, but direct labor is only work performed directly on the product itself.
- What is the total amount of expense reported on the income statement for the month?
Answer: $280,000
The income statement includes Cost of Goods Sold (COGS) and period costs (selling and administrative expenses).
1. Calculate total product cost: $100,000 (DM) + $60,000 (DL) + $90,000 (MOH) = $250,000.
2. Calculate product cost per unit: $250,000 / 20,000 units produced = $12.50 per unit.
3. Calculate COGS for units sold: 16,000 units sold * $12.50/unit = $200,000.
4. Identify total period costs: $80,000.
5. Calculate total expense: COGS + Period Costs = $200,000 + $80,000 = $280,000.
The cost of the 4,000 unsold units ($50,000) remains in ending inventory on the balance sheet.
- Artisan Pottery creates handmade ceramics. In August, the company incurred: clay and glazes ($22,000), kiln fuel costs ($9,500), wages for potters who shape ceramics ($45,000), wages for artists who paint designs ($18,000), studio rent ($6,000), gallery rent for retail showroom ($4,200), and salaries for gallery staff who assist customers ($12,000). The artists who paint designs spend 90% of their time on custom pieces and 10% creating standard display samples for the gallery. Kiln fuel is consumed 80% for firing custom orders and 20% for firing display samples. How should the fuel costs for firing display samples be classified?
Answer: $1,900 as selling expense, since display samples are created specifically to help customers visualize products and generate sales
The fuel costs for firing display samples (20% × $9,500 = $1,900) should be classified as selling expense because display samples are created specifically to help customers visualize products and generate sales, not for sale themselves. This cost supports the sales function rather than production of saleable inventory.
- A manufacturer rents a warehouse for finished goods awaiting shipment. The rent is classified as:
Answer: Selling expense
Rent for a warehouse holding finished goods awaiting shipment is part of distribution, so you classify it as a selling expense. The tempting wrong answer is factory overhead, but factory overhead covers production-related costs such as manufacturing sites or storing raw materials and work in process, not the cost of holding goods after they are ready to sell.
