Question

Fragakis Enterprises uses a job-order costing system. In reviewing its records at the end of the year, the company has discovered that $2,000 of raw materials has been drawn from the storeroom and used in the production of Job 1010, but that no entry has been made in the accounting records for the use of these materials. Job 1010 has been completed but it is unsold at year end. This error will cause:

a) Finished Goods to be understated by $2,000 at the end of the year.

b) Work in Process to be understated by $2,000 at year end.

c) Cost of Goods Manufactured to be overstated by $2,000 for the year.

d) Cost of Goods Sold to be overstated by $2,000 for the year.

Which of the following metrics is the best one for a company’s management to consider to determine the effect of dropping a specific product line on the net operating income of the company as a whole?

a) the product line’s sales dollars

b) the Product line’s segment margin

c) the product line’s segment margin minus an allocated portion of common fixed expenses

d) the product line’s contribution margin

Answer 1

• Question 1

Correct Answer = Option ‘A’ Finished Goods to be understated by $ 2,000 at the end of the year.

This is because $ 2000 of material used has not been considered. Had it been considered and accounted for, the cost would have been more. Since the Job and COMPLETE, but UNSOLD, the effect will be reflected in Finished Goods account.

• Question 2

Correct Answer is Option ‘B’ The Product Line’s segment margin is to be considered.

This is because Segment margin takes into consideration the traceable fixed cost. If that product is eliminated the tyraceable fixed cost of that will also be eliminated. Hence, Segment margin is to be considered.