Cost Terminology quiz Cost Accounting Quiz On Jan 27, 2026 Share Cost Terminology 20 questions in 20 minutes Pass Score 70% The questions change when you repeat the exam 1 / 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 Quality cost Prime cost Stockout cost The costs of holding or storing inventory are carrying costs. Examples include the costs of capital, insurance, warehousing, breakage, and obsolescence 2 / 20 In a traditional manufacturing operation, direct costs would normally include : Electricity in an electronics plant Wood in a furniture factory Commissions paid to sales personnel Machine repairs in an automobile factory Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw material (a direct cost) of furniture 3 / 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 all manufacturing costs related to the project to the same pool Assign prime costs and variable administrative costs to the same pool Establish separate pools for variable and fixed costs 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 4 / 20 All of the following would be considered manufacturing overhead costs by a book publisher except : Wages paid to the production supervisor Rent on the warehouse containing the finished books inventory Fire insurance on the printing facilities Depreciation on the printing equipment 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 5 / 20 Conversion cost pricing : Places heavy emphasis on direct costs and disregards consideration of indirect 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 indirect costs and disregards consideration of direct 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 6 / 20 Which one of the following best describes direct labor ? A period cost A prime 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 7 / 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 8 / 20 Management accounting differs from financial accounting in that financial accounting is : More oriented toward the future Primarily concerned with nonquantitative information Heavily involved with decision analysis and implementation of decisions 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 9 / 20 Conversion costs are : Manufacturing costs incurred to produce units of output The sum of direct labor costs and all factory overhead costs The sum of raw materials costs and direct labor costs All costs associated with manufacturing other than direct labor costs and raw material 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 10 / 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 : Factory overhead Direct labor Direct materials Period costs 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 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 Using absorption costing, fixed manufacturing overhead costs are best described as : Indirect period costs Direct product costs Indirect product costs Direct period 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 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 cost of small tools used in mounting tires on each automobile The cost of the tires on each automobile The delivery costs for the tires on each automobile The cost of the laborers who place 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 14 / 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 Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken The cost object to which the cost is being related The behavior of the cost in response to volume changes 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 15 / 20 A cost that always can be directly traced to a cost object is : A variable cost An indirect cost A prime cost A conversion cost Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product 16 / 20 The allocation of general overhead costs to operating departments can be least justified in determining : Income tax payable Costs for the federal government’s cost-plus contracts Costs for making management’s decisions 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 17 / 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 18 / 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 both prime and conversion cost As a component of conversion cost but not as a component of prime 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. 19 / 20 Which one of the following items would not be considered a manufacturing cost ? Tires for an automobile manufacturer Plant property taxes for an ice cream maker Cream for an ice cream maker 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 20 / 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 ? Aiding in variable costing for internal reporting Measuring income and assets for external reporting Budgeting cash and controlling expenditures 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback basic cost terminologycost accountingcost accounting exam
