Cost Terminology quiz Cost Accounting Quiz On Aug 7, 2024 Share /20 1234567891011121314151617181920 Cost Terminology 20 questions in 20 minutes Pass Score 70% The questions change when you repeat the exam 1 / 20 Costs are allocated to cost objects in many ways and for many reasons. Which one of the following is a purpose of cost allocation ? Evaluating revenue center performance Budgeting cash and controlling expenditures Measuring income and assets for external reporting Aiding in variable costing for internal reporting Cost allocation is the process of assigning and reassigning costs to cost objects. It is used for those costs that cannot be directly associated with a specific cost object. Cost allocation is often used for purposes of measuring income and assets for external reporting purposes. Cost allocation is less meaningful for internal purposes because responsibility accounting systems emphasize controllability, a process often ignored in cost allocation 2 / 20 Management accounting differs from financial accounting in that financial accounting is : Primarily concerned with nonquantitative information Heavily involved with decision analysis and implementation of decisions More oriented toward the future Primarily concerned with external financial reporting Financial accounting is primarily concerned with historical accounting, i.e., traditional financial statements, and with external financial reporting to creditors and shareholders. Management accounting applies primarily to the planning and control of organizational operations, considers nonquantitative information, and is usually less precise 3 / 20 The terms direct cost and indirect cost are commonly used in accounting. A particular cost might be considered a direct cost of a manufacturing department but an indirect cost of the product produced in the manufacturing department. Classifying a cost as either direct or indirect depends upon The cost object to which the cost is being related Whether the cost is expensed in the period in which it is incurred The behavior of the cost in response to volume changes Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken A direct cost can be specifically associated with a single cost object in an economically feasible way. An indirect cost cannot be specifically associated with a single cost object. Thus, the specific cost object influences whether a cost is direct or indirect. For example, a cost might be directly associated with a single plant. The same cost, however, might not be directly associated with a particular department in the plant 4 / 20 A cost incurred for the benefit of more than one cost objective is : A common cost A variable cost A conversion cost A prime cost A cost incurred for the benefit of more than one cost objective is known as a common cost. Allocation of common costs is a persistent problem in responsibility accounting. For example, how should the costs of corporate headquarters be allocated to the segments of a conglomerate? Common cost is also a synonym for joint cost. In this sense, common costs are incurred in the production of two or more inseparable products (e.g., costs of refining petroleum into gasoline, diesel fuel, kerosene, lubricating oils, etc.) up to the point at which the products become separable (the split-off point). 5 / 20 Finley Painters Co., a painting contractor, maintains a job-order cost system. Job costs are accumulated by tracking the actual cost of paint and other materials used on each job, as well as the actual cost of wages earned by the painters on each job. In addition, overhead is applied to each job by using a predetermined rate based on the actual painters‟ wages. Leonard Wayne, painter, earned $168 today by working on Job 08-45. In computing prime cost and conversion cost for Job 08-45, how would the wages earned today by Wayne be classified ? As a component of neither prime cost nor conversion cost As a component of prime cost but not as a component of conversion cost As a component of conversion cost but not as a component of prime cost As a component of both prime and conversion cost Manufacturing costs are often grouped into the following classifications: prime cost, which equals direct materials plus direct labor (i.e., those costs directly attributable to a product), and conversion cost, which equals direct labor plus manufacturing overhead (i.e., the costs of converting raw materials into the finished product). The wages earned by a painter working for a painting contractor are thus properly classified as both a prime cost and a conversion cost. 6 / 20 In cost terminology, conversion costs consist of : Indirect labor and variable factory overhead Direct labor and direct materials Direct labor and factory overhead Direct and indirect labor Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw materials into a finished product 7 / 20 All of the following would be considered manufacturing overhead costs by a book publisher except : Rent on the warehouse containing the finished books inventory Depreciation on the printing equipment Fire insurance on the printing facilities Wages paid to the production supervisor Rent paid on the warehouse containing the finished books inventory is an example of an administrative expense, which is not part of manufacturing overhead. This is an example of a nonmanufacturing cost since the warehouse contains the finished books inventory and no manufacturing is occurring in that warehouse. Administrative expenses are those costs incurred by a company not directly related to producing or marketing the product 8 / 20 Which of the following is a period cost rather than a product cost of a manufacturer ? Variable overhead Fixed overhead Direct materials Abnormal spoilage Materials, labor, and overhead (both fixed and variable) are examples of product costs. Abnormal spoilage is an example of a period cost. Abnormal spoilage is not inherent in a production process and should not be categorized as a product cost. Abnormal spoilage should be charged to a loss account in the period that detection of the spoilage occurs 9 / 20 Conversion costs do not include : Indirect materials Depreciation Indirect labor Direct materials Conversion costs are necessary to convert raw materials into finished products. They include all manufacturing costs, for example, direct labor and factory overhead, other than direct materials 10 / 20 A cost that always can be directly traced to a cost object is : A conversion cost An indirect cost A prime cost A variable cost Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product 11 / 20 Inventoriable costs : Include only the prime costs of manufacturing a product Are expensed when products become part of finished goods inventory Are regarded as assets before the products are sold Include only the conversion costs of manufacturing a product Under an absorption costing system, inventoriable (product) costs include all costs necessary for good production. These include direct materials and conversion costs (direct labor and overhead). Both fixed and variable overhead is included in inventory under an absorption costing system. Inventoriable costs are treated as assets until the products are sold because they represent future economic benefits. These costs are expensed at the time of sale 12 / 20 Using absorption costing, fixed manufacturing overhead costs are best described as : Direct period costs Indirect product costs Indirect period costs Direct product costs Using absorption costing, fixed manufacturing overhead is included in inventoriable (product) costs. Fixed manufacturing overhead costs are indirect costs because they cannot be directly traced to specific units produced 13 / 20 The allocation of general overhead costs to operating departments can be least justified in determining : Costs for the federal government’s cost-plus contracts Costs for making management’s decisions Income of a product or functional unit Income tax payable In the short run, management decisions are made in reference to incremental costs without regard to fixed overhead costs because fixed overhead cannot be changed in the short run. Thus, the emphasis in the short run should be on controllable costs. For example, service department costs allocated as a part of overhead may not be controllable in the short run 14 / 20 Which one of the following items would not be considered a manufacturing cost ? Cream for an ice cream maker Plant property taxes for an ice cream maker Tires for an automobile manufacturer Sales commissions for a car manufacturer Manufacturing costs consist of direct materials, direct labor, and manufacturing overhead. The cream, plant property taxes, and tires are all integral to the production of the final product and so are properly classified as manufacturing costs. Sales commissions, however, are not incurred until after the product has been manufactured. They are properly classified as a selling expense 15 / 20 In practice, items such as wood screws and glue used in the production of school desks and chairs would most likely be classified as : Direct labor Direct materials Period costs Factory overhead Those tangible inputs to the manufacturing process that cannot practicably be traced to the product, such as wood screws and glue used in the production of school desks and chairs, are referred to as indirect costs. Indirect costs are one of the three components of manufacturing overhead, the other two being indirect labor and factory operating costs 16 / 20 Roberta Johnson is the manager of Sleep-Well Inn, one of a chain of motels located throughout the U.S. An example of an operating cost at Sleep-Well that is both direct and fixed is : Toilet tissue Advertising for the Sleep-Well Inn chain Johnson’s salary Water Direct costs are ones that can be associated with a particular cost object in an economically feasible way, that is, they can be traced to that object. Fixed costs are those that remain unchanged in total over the relevant range of production. A motel manager‟s salary is traceable to the single location she manages, and it remains fixed over a set period of time regardless of the number of guests 17 / 20 Conversion costs are : Manufacturing costs incurred to produce units of output The sum of raw materials costs and direct labor costs All costs associated with manufacturing other than direct labor costs and raw material costs The sum of direct labor costs and all factory overhead costs Conversion costs are the direct labor, indirect materials, and factory overhead incurred to convert raw materials and transferred-in goods in a cost center to finished goods 18 / 20 A company experienced a machinery breakdown on one of its production lines. As a consequence of the breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime to return manufacturing to schedule. Which one of the following methods is the proper way to account for the overtime paid to the direct laborers ? The overtime hours times the overtime premium would be charged to repair and maintenance expense, and the overtime hours times the straight-time wages would be treated as direct labor The overtime hours times the overtime premium would be charged to manufacturing overhead, and the overtime hours times the straight-time wages would be treated as direct labor The overtime hours times the sum of the straight-time wages and overtime premium would be charged entirely to manufacturing overhead The overtime hours times the sum of the straight-time wages and overtime premium would be treated as direct labor Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Factory overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be treated as direct labor; however, because the overtime premium cost is a cost that should be borne by all production, the overtime hours times the overtime premium should be charged to manufacturing overhead 19 / 20 Many companies recognize three major categories of costs of manufacturing a product. These are direct materials, direct labor, and overhead. Which of the following is an overhead cost in the production of an automobile ? The delivery costs for the tires on each automobile The cost of small tools used in mounting tires on each automobile The cost of the laborers who place tires on each automobile The cost of the tires on each automobile The cost of small tools used in mounting tires cannot be identified solely with the manufacture of a specific automobile. This cost should be treated as factory overhead because it is identifiable with the production process 20 / 20 A computer company charges indirect manufacturing costs to a project at a fixed percentage of a cost pool. This project is covered by a cost-plus government contract. Which of the following is an appropriate guideline for determining how costs are assigned to the pool ? Assign prime costs and variable administrative costs to the same pool Establish a separate pool for each assembly line worker to account for wages Establish separate pools for variable and fixed costs Assign all manufacturing costs related to the project to the same pool Cost pools are accounts in which a variety of similar costs are accumulated prior to allocation to cost objectives. The overhead account is a cost pool into which various types of overhead are accumulated prior to their allocation. Indirect manufacturing costs are an element of overhead allocated to a cost pool. Ordinarily, different allocation methods are applied to variable and fixed costs, thus requiring them to be separated. Establishing separate pools allows the determination of dual overhead rates. As a result, the assessment of capacity costs, the charging of appropriate rates to user departments, and the isolation of variances are facilitated Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback basic cost terminologycost accountingcost accounting exam