HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales).  The distribution of each service department’s efforts (in percentges) to the other departments is


From                     Actuarial              Premium Rating                                Advertising                         Sales

Actuarial                                              80%                                        10%                                        10%

Premium             20%                                                                        20%                                        60

The direct operating costs of the departments (including both variable and fixed costs) are

Actuarial                              $80,000

Premium rating                   15,000

Advertising                           60,000

Sales                                        40,000

1.       Determine the total cost allocated to the advertising and sales departments using the direct method.

2.       Determine the total cost allocated to advertising and sales using the step method

3.       Determine the total cost allocated to advertising and sales using the reciprocal method.

Below is the assignment on chapters 5 & 6. The assignment is a multiple choice document with an answer sheet at the end of the document. Please circle the “MOST” correct answer and place the circled letter on the answer sheet. Each answer is worth 3 points. Many of the questions require critical thinking and managerial analysis based on the readings as a whole. We will discuss the answers in class.


Name:  __________________________________________________________


1.      Benson Company purchased two identical inventory items. The item purchased first cost $14.00, and the item purchased second cost $15.00. Benson sold one of the items for $24.00. Which of the following statements is true?

A. Ending inventory will be lower if Benson uses weighted average than if FIFO were used.

B. Cost of goods sold will be higher if Benson uses FIFO than if weighted average were used.

C. The dollar amount assigned to ending inventory will be the same no matter which cost flow method is used.

D. Gross margin will be higher if Benson uses LIFO than it would be if FIFO were used.


Flint Enterprises started the period with 150 units in beginning inventory that cost $2 each. During the period, the company purchased inventory items as follows

Flint sold 200 units after purchase 3.


2.       Flint’s cost of goods sold under FIFO would be:

A. $640.

B. $560.

C. $450.

D. $300.


3.       Flint’s ending inventory under LIFO would be:

A. $1,240.

B. $1,090.

C. $900.

D. $980.


4.       Flint’s ending inventory under weighted average would be approximately:

A. $980.

B. $900.

C. $450.

D. $1,015.



5.       If a firm is using the lower-of-cost-or-market rule and if a write-down entry is required, which of the following effects will apply?

A. Net income will increase.

B. Gross margin will decrease.

C. Assets will increase.

D. Liabilities will decrease.


6.       What is meant by “market” in lower-of-cost-or-market calculations?

A. The amount of gross margin earned by selling merchandise.

B. The amount the goods were sold for during the period.

C. The amount that would have to be paid to replace the merchandise.

D. The amount originally paid for the merchandise.


7.       Why are the inventory and cost of goods sold accounts attractive targets for managerial fraud?

A. There are few if any procedures that can check for fraud in these accounts.

B. These accounts are more significant than most other accounts.

C. There are no adequate methods of record keeping for inventory.

D. Cost of goods sold and Inventory accounts are not attractive targets of fraud.


8.       On December 31, 2011, Owen Corporation overstates the ending inventory account by $4,000. How will this affect Retained Earnings in the December 31, 2012 balance sheet?

A. Retained Earnings will be overstated by $4,000.

B. Retained Earnings will be understated by $4,000.

C. Retained Earnings will be correctly stated.

D. Cannot be determined with the above information.

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