Cost Terminology quiz Cost Accounting Quiz On May 10, 2024 Share /20 1234567891011121314151617181920 Cost Terminology 20 questions in 20 minutes Answers at the end of the exam Pass Score 70% The questions change when you repeat the exam enter full-screen mode by pressing the icon located in the top- right comer of the exam 1 / 20 Rose Co.‟s fixed manufacturing overhead costs totaled $150,000 and variable selling costs totaled $75,000. How should these costs be classified under variable costing ? $0 period costs; $225,000 product costs $75,000 period costs; $150,000 product costs $225,000 period costs; $0 product costs $150,000 period costs; $75,000 product costs Product costs are incurred to produce units of output. They are expensed when the product is sold. Such costs include direct materials, direct labor, and factory (not general and administrative) overhead. Period costs are charged to expense as incurred because they are not identifiable with a product. Variable costing considers only variable manufacturing costs to be product costs. Fixed manufacturing costs are considered period costs and are expensed as incurred. Selling costs are period costs under both direct and absorption costing. Thus, the entire $225,000 ($150,000 + $75,000) is classified as period costs 2 / 20 Inventoriable costs : Include only the conversion costs of manufacturing a product Are regarded as assets before the products are sold Include only the prime costs of manufacturing a product Are expensed when products become part of finished goods inventory 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 3 / 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 4 / 20 Conversion cost pricing : Places heavy emphasis on indirect costs and disregards consideration of direct costs Could be used when the customer furnishes the material used in manufacturing a product Places minimal emphasis on the cost of materials used in manufacturing a product Places heavy emphasis on direct costs and disregards consideration of indirect costs Conversion costs consist of direct labor and factory overhead, the costs of converting raw materials into finished goods. Normally, a company does not consider only conversion costs in making pricing decisions, but if the customer were to furnish the raw materials, conversion cost pricing would be appropriate 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 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 neither prime cost nor conversion 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 Which one of the following best describes direct labor ? Both a product cost and a prime cost A period cost A prime cost A product cost Direct labor is both a product cost and a prime cost. Product costs are incurred to produce units of output and are deferred to future periods to the extent that output is not sold. Prime costs are defined as direct materials and direct labor 7 / 20 Conversion costs are : Manufacturing costs incurred to produce units of output 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 The sum of raw materials costs and direct labor 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 8 / 20 The allocation of general overhead costs to operating departments can be least justified in determining : Costs for making management’s decisions Costs for the federal government’s cost-plus contracts Income tax payable Income of a product or functional unit 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 9 / 20 A cost that always can be directly traced to a cost object is : A variable cost A conversion cost An indirect cost A prime cost Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product 10 / 20 The allocation of costs to particular cost objects allows a firm to analyze all of the following except : Why a particular product should be purchased rather than manufactured inhouse Why the sales of a particular product have increased Whether a product line should be discontinued Whether a particular department should be expanded Cost allocation is an internal matter that does not affect demand (except to the extent it results in a change in price) 11 / 20 Cost drivers are : Activities that cause costs to increase as the activity increases A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of factory, used to assign costs to activities Accounting measurements used to evaluate whether or not performance is proceeding according to plan Accounting techniques used to control costs A cost driver is “a measure of activity, such as direct labor hours, machine hours, beds occupied, computer time used, flight hours, miles driven, or contracts, that is a causal factor in the incurrence of cost to an entity” (IMA). It is a basis used to assign costs to cost objects 12 / 20 A firm calculates that its annual cost to hold excess goods in order to avoid any chance of running out of inventory is $50,000. This $50,000 is an example of a : Carrying cost Prime cost Quality cost Stockout cost The costs of holding or storing inventory are carrying costs. Examples include the costs of capital, insurance, warehousing, breakage, and obsolescence 13 / 20 The term “prime costs” refers to : All costs associated with manufacturing other than direct labor costs and raw material costs Manufacturing costs incurred to produce units of output The sum of direct labor costs and all factory overhead costs The sum of raw material costs and direct labor costs Prime costs are raw material costs and direct labor costs 14 / 20 In a traditional manufacturing operation, direct costs would normally include : Commissions paid to sales personnel Machine repairs in an automobile factory Wood in a furniture factory Electricity in an electronics plant Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw material (a direct cost) of furniture 15 / 20 In cost terminology, conversion costs consist of : Indirect labor and variable factory overhead Direct and indirect labor Direct labor and factory overhead Direct labor and direct materials Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw materials into a finished product 16 / 20 Conversion costs do not include : Direct materials Indirect labor Indirect materials Depreciation 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 17 / 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 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 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 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 18 / 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 Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken The behavior of the cost in response to volume changes 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 19 / 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 20 / 20 A cost incurred for the benefit of more than one cost objective is : A variable cost A conversion cost A prime cost A common 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). Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback basic cost terminologycost accountingcost accounting exam