Cost Terminology quiz Cost Accounting Quiz Share Cost Terminology 20 questions in 20 minutes Pass Score 70% The questions change when you repeat the exam 1 / 20 Inventoriable costs : Include only the conversion costs of manufacturing a product Are regarded as assets before the products are sold Are expensed when products become part of finished goods inventory Include only the prime 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 2 / 20 In cost terminology, conversion costs consist of : Direct labor and direct materials Direct and indirect labor Direct labor and factory overhead Indirect labor and variable factory overhead Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw materials into a finished product 3 / 20 A cost that always can be directly traced to a cost object is : A variable cost A prime cost A conversion cost An indirect cost Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product 4 / 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 a separate pool for each assembly line worker to account for wages Assign all manufacturing costs related to the project to the same pool Establish separate pools for variable and fixed costs Assign prime costs and variable administrative costs 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 5 / 20 The allocation of general overhead costs to operating departments can beleastjustified in determining : Income of a product or functional unit Costs for the federal government’s cost-plus contracts Costs for making management’s decisions 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 6 / 20 Conversion costs are : The sum of direct labor costs and all factory overhead costs 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 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 7 / 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 8 / 20 All of the following would be considered manufacturing overhead costs by a book publisherexcept : Fire insurance on the printing facilities Depreciation on the printing equipment Wages paid to the production supervisor 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 9 / 20 In a traditional manufacturing operation, direct costs would normally include : Commissions paid to sales personnel Wood in a furniture factory Electricity in an electronics plant 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 10 / 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 Aiding in variable costing for internal reporting Measuring income and assets for external 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 11 / 20 Which one of the followingbestdescribes direct labor ? A product cost Both a product cost and a prime cost A prime cost A period 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 12 / 20 The term “prime costs” refers to : All costs associated with manufacturing other than direct labor costs and raw material costs The sum of raw material costs and direct labor costs The sum of direct labor costs and all factory overhead costs Manufacturing costs incurred to produce units of output Prime costs are raw material costs and direct labor costs 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 ? $150,000 period costs; $75,000 product costs $225,000 period costs; $0 product costs $0 period costs; $225,000 product costs $75,000 period costs; $150,000 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 The allocation of costs to particular cost objects allows a firm to analyze all of the followingexcept : Why a particular product should be purchased rather than manufactured inhouse Whether a particular department should be expanded Why the sales of a particular product have increased 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) 15 / 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 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 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 16 / 20 Which of the following is a period cost rather than a product cost of a manufacturer ? Fixed overhead Direct materials Variable overhead 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 17 / 20 In practice, items such as wood screws and glue used in the production of school desks and chairs wouldmostlikely be classified as : Direct labor Period costs Direct materials 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 18 / 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 : Johnson’s salary Advertising for the Sleep-Well Inn chain Toilet tissue 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 19 / 20 Which one of the following items wouldnotbe considered a manufacturing cost ? Tires for an automobile manufacturer Cream for an ice cream maker Plant property taxes 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 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 both prime and conversion cost As a component of conversion cost but not as a component of prime cost As a component of prime cost but not as a component of conversion 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. Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback basic cost terminologycost accountingcost accounting exam
