The City of Denton Uses Encumbrance Accounting to Control Expenditures

question 7

Multiple Choice

The City of Denton uses encumbrance accounting to control expenditures. It charges the cost of outstanding purchase commitments to expenditures in the year they are received, not in the year they are ordered. If the city had $11,000 of purchase commitments outstanding at the end of Year 1 and received those goods during Year 2 at a cost of $11,700, what would be the impact on total fund balance for Year 2?

• A) Total fund balance at the end of Year 2 would be $11,700 less than at the end of Year 1.
• B) Total fund balance at the end of Year 2 would be $700 less than at the end of Year 1.
• C) Total fund balance at the end of Year 2 would be $700 greater than at the end of Year 1.
• D) Total fund balance at the end of Year 2 would be same as it was at the end of Year 1.

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Definitions:

Fixed Manufacturing Overhead

Indirect and constant production costs that are not affected by the level of goods or services produced, including factory rent, salaries of supervisory personnel, and utility costs.

Unit Product Cost

The total cost associated with producing one unit of a product, calculated by dividing the total production costs by the number of units produced.

Overhead Applied

The portion of overhead costs allocated to individual products or services based on a predetermined rate.

Machine-Hours

An evaluation of manufacturing productivity or action determined by how long equipment is running.