ACCOUNTING FOR FACTORY OVERHEAD

MULTIPLE CHOICE

1. Factory overhead includes:

a. Indirect labor but not indirect materials.
b. All manufacturing costs except direct materials and direct labor.
c. All manufacturing costs.
d. Indirect materials but not indirect labor.
2. Which of the following costs would be included in factory overhead in the manufacture of a student’s
desk?
a. The wages of the operator of the machine that bends the metal legs of the desk into shape.
b. The wages of the forklift operator who moves desks from one manufacturing station to the
next.
c. The cost of the plastic used to form the writing surface.
d. The wages of the worker who assembles the components.
3. Which of the following costs would not be included in factory overhead in the manufacture of a
student’s desk?
a. The oil used to maintain the machinery.
b. The salary of the supervisor of the Assembly department.
c. The metal used to form the legs of the desk.
d. The wages of personnel who perform inspections of incoming materials.
4. Costs that vary in direct proportion to volume changes are:
a. variable costs.
b. factory overhead costs.
c. semivariable costs.
d. personnel costs.
5. Costs that remain the same, in total, when production levels change are:
a. fixed costs.
b. semivariable costs.
c. direct labor costs.
d. factory burden costs.
6. The following cost is an example of a variable factory overhead cost:
a. Plant utilities.
b. Insurance on the factory building.
c. Salary of the plant manager.
d. Factory supplies.
7. Variable overhead costs include all of the following except:
a. Electricity to power machinery.
b. Factory supplies.
c. Rental of factory building.
d. Small tools.
8. Fixed factory overhead costs include:
a. Property taxes.
b. Plant manager’s salary.
c. Factory insurance.
d. All of the these are correct.
9. Fixed overhead cost includes all of the following except:
 a. Electricity to heat and light the factory.
b. Depreciation on machinery computed based on the units of production basis.
c. The plant manager’s salary.
d. The salary of the security guard at the front door.
10. Factory overhead:
a. Can be a variable cost or a fixed cost.
b. Is a prime cost.
c. Can only be a fixed cost.
d. Includes all factory labor.
11. Costs that remain constant over a range of production and then abruptly change include:
a. unexpected costs.
b. step-variable costs.
c. semifixed costs.
d. curvilinear costs.
12. An example of a step-fixed cost would be:
a. the cost of factory insurance because the insurance company increased the premium.
b. the cost of supervision since a second supervisor was added to oversee the new second
shift.
c. depreciation of equipment because it is computed on the units of production method.
d. utility costs because it costs more to heat the building in the winter.
13. Costs that change in relation to volume changes, but not in direct proportion to those changes, are
known as:
a. Variable costs.
b. Semivariable costs.
c. Fixed costs.
d. Curvilinear costs.
14. Consider the following costs:
I. The cost of electricity which is used to power machinery and light the plant.
II. Depreciation on the building which houses both the factory and the sales office.

Which of the following statements is true?

a. Only statement I is an example of a semivariable cost.
b. Only statement II is an example of a semivariable cost.
c. Both statements I and I are examples of semivariable costs.
d. Neither statement I nor II is an example of a semivariable cost.
15. Which of the following statements about semivariable costs is not true?
a. They first have to be broken down into their fixed and variable components before they
can be used to predict costs at different levels of volume.
b. They are sometimes called mixed costs.
c. They vary in direct proportion to volume changes.
d. They may remain constant over a range of production, then abruptly change.
16. Methods for separating semivariable costs into their fixed and variable components include all of the
following except the:
a. High-low method.
b. Allocation method.
c. Scattergraph method.
d. Observation method.
17. The method of analyzing the behavior of semivariable costs that relies heavily on the ability of an
observer to detect a pattern of cost behavior by reviewing past cost and volume data is the:
a. High-low method.
b. Method of least squares.
c. Scattergraph method.
d. Observation method.
18. The method of analyzing cost behavior that uses two data points to first determine the variable cost per
unit and then the total fixed cost is the:
a. Method of least squares.
b. Scattergraph method.
c. High-low method.
d. Observation method.
19. Bellisimo Industries’ material handling costs and tons of material over a six-month period follow:

Tons of Material
Material Handling Cost
January 2,000 P1,600
February 2,400 2,100
March 3,000 2,400
April 2,300 1,900
May 2,800 2,500
June 2,100 1,800

Using the high-low method, what is the estimated material handling cost per ton of material?

a. P0.90
b. P1.25
c. P1.00
d. P0.80
20. Nutt Industries electricity costs and machine hours over a six-month period follow:

Machine Electricity
Hours Cost
January 2,000 P4,800
February 2,500 5,200
March 3,000 5,400
April 2,400 5,000
May 2,800 5,600
June 2,200 5,000

Using the high-low method, what is the formula that can be used to estimate electricity costs at
different levels of volume?

a. Electricity costs = P2,800 + (P1.00 x number of machine hours)

b. Electricity costs = P2,600 + (P1.00 x number of machine hours)
c. Electricity costs = P400 + (P1.67 x number of machine hours)
d. Electricity costs = P3,600 + (P.60 x number of machine hours)
21. After the observations of cost and production data are plotted on graph paper, a line is drawn by visual
inspection representing the trend shown by most of the data points using the:
 a. Observation method.
b. High-low method.
c. Method of least squares.
d. Scattergraph method.
22. A major disadvantage of the observation method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, based on which type
of behavior it more closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.
23. A major disadvantage of the high-low method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, based on which type
of behavior it more closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.
24. A major disadvantage of the scattergraph method of analyzing cost behavior is:
a. It bases its solution on only two observations.
b. It results in its analyzed cost being treated as either fixed or variable, based on which type
of behavior it more closely resembles.
c. Two persons could draw different lines through the data points.
d. It enables non-representative points, called outliers, to be identified.
25. The results of a least squares regression to separate the monthly utilities cost into its fixed and variable
components were as follows:

Y = 5,472 + .036 X
X = the number of units produced
R2 = .735

Which of the following statements is not true of the cost model?

a. Y represents the total semi-variable cost.
b. The total monthly fixed utilities costs are P5,472.
c. X is referred to as the dependent variable.
d. The equation would be represented as a straight line on a graph.
26. Victoria is a budget analyst at Young Industries. She used the least squares regression method to
separate the plant’s monthly utilities cost into its fixed and variable components. The results were as
follows:

Y = 3,250 + .054 X
X = the number of units produced
R2 = .892

How should Victoria interpret the R2 of .892?

a. The equation is a better predictor of fixed costs than of variable costs 89.2% of the time.
b. The equation will accurately predict utility costs 89.2% of the time.
c. Fixed costs make up 89.2% of the total semi-variable cost in any given month.
d. The number of units produced explains 89.2% of the variation in the plant utilities cost.
27. Flexible budgeting is a reporting system wherein the:
 a. Budget shows estimated costs at different levels of production volume.
b. Budget standards may be adjusted at will.
c. Reporting dates vary according to the levels of activity reported upon.
d. Statements included in the budget report vary from period to period.
28. Perry Company’s flexible budget for 25,000 units shows P75,000 and P25,000 in variable and fixed
costs, respectively. At 30,000 units, the flexible budget would show:
a. Variable costs of P100,000 and fixed costs of P25,000.
b. Variable costs of P90,000 and fixed costs of P30,000.
c. Variable costs of P75,000 and fixed costs of P30,000.
d. Variable costs of P90,000 and fixed costs of P25,000.
29. Venus Company has developed the following flexible budget formula for annual indirect labor cost:

Total annual cost = P12,000 + P0.25 / unit

Operating budgets for the current month are based on 5,000 units. Indirect labor costs included in this
monthly planning budget are:
a. P13,250.
b. P1,250.
c. P3,200.
d. P2,250.
30. Victoria is a budget analyst at Young Industries. She used the least squares regression method to
separate the plant’s monthly utilities cost into its fixed and variable components. The results were as
follows:

Y = 3,250 + .054 X
X = the number of units produced
R2 = .892

Based on these results, the December budget for plant utilities cost if Young Industries plans to
produce 100,000 units in that month would be:
a. P5,400
b. P8,650
c. P3,250
d. P8,920
31. When preparing a flexible budget for factory overhead costs, what will occur to fixed costs (on a per-
unit basis) as production increases?
a. Fixed costs per unit will increase.
b. Fixed costs are not considered in flexible budgeting.
c. Fixed costs per unit will decrease.
d. Fixed costs per unit will remain unchanged.
32. If a company uses a factory overhead ledger, at the end of the month, an accountant should:
a. close the accounts in the factory overhead ledger to Work in Process.
b. total the accounts in the factory overhead ledger and compare the total to the balance in
the Factory Overhead control account.
c. prepare a schedule of fixed costs.
d. All of the above are true.
33. The most appropriate basis for allocating the factory building rent to specific departments would be
the:
 a. Number of machines in each department.
b. Number of employees in each department.
c. Square footage of each department.
d. Amount of time the plant manager spends in the department.
34. Which of the following statements is true?

I. An expense-type factory overhead analysis spreadsheet makes it possible to distribute expenses on

a departmental basis as they are incurred.
II. A department-type factory overhead analysis worksheet makes it possible to distribute expenses on
a departmental basis as they are incurred.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
35. The report that is prepared after the posting is completed at the end of the accounting period that
shows the items of expense by department and in total, and is used to prove the balance of the Factory
Overhead Control account is the:
a. Schedule of Fixed Cost.
b. Summary of Factory Overhead.
c. Flexible Budget.
d. Subsidiary Ledger.
36. All of the following are examples of factory overhead costs that benefit the entire factory would
therefore be difficult to identify with a specific department except:
a. machine depreciation.
b. factory security.
c. the plant manager’s salary.
d. heating costs.
37. A factory department that is an essential part of the organization, but does not work directly on the
product is a(n):
a. indirect department.
b. overhead department.
c. service department.
d. flexible department.
38. Which of the following is most likely to be considered a service department in a manufacturing plant?
a. Assembly
b. Maintenance
c. Finishing
d. Fabrication
39. In a factory, all of the following would be considered service departments except:
a. Inspection and Packing
b. Assembly
c. Power
d. Human Resources
40. Which of the following is not true about production departments?
a. They perform the actual manufacturing operations that physically change the units being
produced.
b. Since they receive the benefit of work performed by service departments, service
department costs should be distributed to them.
 c. The cost of production departments should be distributed to other production departments
that benefit from their operations.
d. Machining and painting would be examples of production departments.
41. Which of the following statements about service departments and their costs is not true?
a. Service departments rarely provide services to other service departments.
b. Some service departments may be able to precisely measure the services it provides to
other departments.
c. Service department costs should be included in total product costs.
d. Allocation of service department costs should be made on an equitable basis.
42. The number of workers in the departments served would most likely be the basis for distributing the
cost of which service department?
a. Human Resources
b. Tool Room
c. Building Maintenance
d. Machine Shop
43. Kilowatt hours would be an appropriate basis for distributing the cost of which of the following
service departments to production departments?
a. Power
b. Machine Maintenance
c. Human Resources
d. Building Maintenance
44. The method of distributing service department costs to production departments which makes no
attempt to determine the extent to which one service department renders its services to another
department is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Reciprocal method.
45. The method of distributing service department costs to production departments which distributes
service department costs regressively to other service departments, and then to production departments
is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Reciprocal method.
46. The method of distributing service department costs to production departments that takes into
consideration that service departments not only may provide service to but also may receive service
from other service departments is the:
a. Direct distribution method.
b. Sequential distribution method.
c. Service department distribution method.
d. Reciprocal method.
47. The Lucas Manufacturing Company has two production departments (fabrication and assembly) and
three service departments (general factory administration, factory maintenance, and factory cafeteria).
A summary of costs and other data for each department, prior to allocation of service department costs
for the year ended June 30, appears below:
 The costs of the general factory administration department, factory maintenance department, and
factory cafeteria are allocated on the basis of direct labor hours, square footage occupied, and number
of employees, respectively.

General
Factory Factory Factory
Fabrication Assembly Admin. Maint. Cafeteria
Direct labor costs: P1,950,000 P2,050,000
Direct material costs: P3,130,000 P 950,000
Factory overhead costs: P1,650,000 P1,850,000 P80,000 P67,500 P58,000
Direct labor hours: 237,690 387,810
Number of employees: 160 128 20 42 25
Sq. footage occupied: 20,000 30,000 2,400 2,000 4,800

Assuming that Lucas elects to distribute service department costs to production departments using the
direct distribution method, the amount of general factory administration department costs that would
be allocated to the assembly department would be (round all final calculations to the nearest dollar):
a. P30,400.
b. P25,650.
c. P0.
d. P49,600.
48. The Lorenzo Printing Company has two production departments (printing and binding) and three
service departments (power generation, factory maintenance, and human resources). A summary of
costs and other data for each department, prior to allocation of service department costs for the year
ended April 30, appears below.

The costs of the power generation department, factory maintenance department, and human resources
are allocated on the basis of kilowatt hours, square footage occupied, and number of employees,
respectively.

Power Factory Human

Printing Binding Gen. Maint. Res.
Direct labor costs: P475,000 P438,000
Direct material costs: P632,000 P527,000
Factory overhead costs: P750,000 P832,000 P75,000 P50,000 P30,000
Direct labor hours: 262,000 254,000
Number of employees: 40 35 5 20 5
Sq. footage occupied: 36,000 24,000 5,000 3,000 1,000

Assuming that Lucas elects to distribute service department costs to production departments using the
direct distribution method, the amount of human resources department costs that would be allocated to
the printing department would be (round all final calculations to the nearest dollar):
a. P15,000.
b. P12,000.
c. P16,000.
d. P18,000.
49. The preferred sequence for distributing the cost of service departments to production departments
when using the sequential distribution method is:
a. to distribute the cost of the service department with the largest total overhead cost first.
 b. to always distribute the cost of the Human Resources Department first.
c. to distribute the costs of the service departments to the production department having the
largest amount of overhead cost first.
d. to distribute the costs of the service department that services the greatest number of
departments first.
50. The Jason Manufacturing Company has two production departments (millwright and assembly) and
three service departments (general factory administration, factory maintenance, and factory
development). A summary of costs and other data for each department, prior to allocation of service
department costs for the year ended March 30, appears below.

The costs of the general factory administration department, factory maintenance department, and
factory development department are allocated on the basis of direct labor hours, square footage
occupied, and number of employees, respectively.

General
Factory Factory Factory
Millwright Assembly Admin. Maint. Devel.
Direct labor costs: P1,950,000 P2,050,000
Direct material costs: P3,130,000 P 950,000
Factory overhead costs: P1,975,000 P2,510,000 P95,000 P87,000 P65,000
Direct labor hours: 235,980 376,180
Number of employees: 210 255 51 84 30
Sq. footage occupied: 10,000 40,000 2,500 2,300 5,200

Assuming that Jason elects to use the sequential method to distribute service department costs
(starting with factory development), what would be the amount of factory development that would be
allocated to the factory maintenance department?

a. P 9,100.
b. P 4,350.
c. P 29,640.
d. P 0.