Cost Terminology quiz Cost Accounting Quiz On Nov 27, 2025 Share Cost Terminology 20 questions in 20 minutes Pass Score 70% The questions change when you repeat the exam 1 / 20 All of the following would be considered manufacturing overhead costs by a book publisher except : Depreciation on the printing equipment Wages paid to the production supervisor Fire insurance on the printing facilities Rent on the warehouse containing the finished books inventory 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 2 / 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 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 Whether the cost is expensed in the period in which it is incurred 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 3 / 20 Cost drivers are : Accounting measurements used to evaluate whether or not performance is proceeding according to plan A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of factory, used to assign costs to activities Accounting techniques used to control costs Activities that cause costs to increase as the activity increases 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 4 / 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 both prime and 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 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. 5 / 20 In cost terminology, conversion costs consist of : Direct labor and direct materials Indirect labor and variable factory overhead Direct and indirect labor Direct labor and factory overhead Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw materials into a finished product 6 / 20 Management accounting differs from financial accounting in that financial accounting is : Primarily concerned with external financial reporting More oriented toward the future Heavily involved with decision analysis and implementation of decisions Primarily concerned with nonquantitative information 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 7 / 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 ? Budgeting cash and controlling expenditures Measuring income and assets for external reporting Aiding in variable costing for internal reporting Evaluating revenue center performance 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 8 / 20 Which one of the following items would not be considered a manufacturing cost ? Sales commissions for a car manufacturer Plant property taxes for an ice cream maker Cream for an ice cream maker Tires for an automobile 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 9 / 20 Conversion cost pricing : Places heavy emphasis on direct costs and disregards consideration of indirect costs Places heavy emphasis on indirect costs and disregards consideration of direct costs Places minimal emphasis on the cost of materials used in manufacturing a product Could be used when the customer furnishes the material used in manufacturing a product 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 10 / 20 Conversion costs do not include : Indirect labor Depreciation Indirect materials 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 11 / 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 ? Establish separate pools for variable and fixed costs Assign all manufacturing costs related to the project to the same 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 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 12 / 20 The allocation of costs to particular cost objects allows a firm to analyze all of the following except : Whether a particular department should be expanded Why the sales of a particular product have increased Why a particular product should be purchased rather than manufactured inhouse Whether a product line should be discontinued Cost allocation is an internal matter that does not affect demand (except to the extent it results in a change in price) 13 / 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 $225,000 period costs; $0 product costs $75,000 period costs; $150,000 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 14 / 20 Which one of the following best describes direct labor ? A prime cost A period cost A product cost Both a product cost and a prime 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 15 / 20 Inventoriable costs : Are expensed when products become part of finished goods inventory Are regarded as assets before the products are sold Include only the prime costs of manufacturing a product 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 16 / 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 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 manufacturing overhead, 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 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 17 / 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 materials Period costs Factory overhead Direct labor 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 18 / 20 In a traditional manufacturing operation, direct costs would normally include : Wood in a furniture factory Machine repairs in an automobile factory Commissions paid to sales personnel 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 19 / 20 Conversion costs are : 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 raw materials costs and direct labor 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 20 / 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback Follow the Facebook page Accountants Quiz and join the group Accounting Quiz basic cost terminologycost accountingcost accounting exam
