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 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 Stockout cost Prime cost Quality cost The costs of holding or storing inventory are carrying costs. Examples include the costs of capital, insurance, warehousing, breakage, and obsolescence 2 / 20 Cost drivers are : Activities that cause costs to increase as the activity increases 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 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 3 / 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 : Water Johnson’s salary Advertising for the Sleep-Well Inn chain Toilet tissue 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 4 / 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 5 / 20 A cost incurred for the benefit of more than one cost objective is : A prime cost A conversion cost A variable 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). 6 / 20 Conversion cost pricing : 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 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 7 / 20 Which one of the followingbestdescribes direct labor ? A period cost Both a product cost and a prime cost A product cost 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 8 / 20 A cost that always can be directly traced to a cost object is : An indirect cost A prime cost A variable 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 9 / 20 Inventoriable costs : Include only the prime costs of manufacturing a product 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 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 10 / 20 In cost terminology, conversion costs consist of : Direct labor and factory overhead Direct and indirect labor Direct labor and direct materials 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 11 / 20 In a traditional manufacturing operation, direct costs would normally include : Wood in a furniture factory Electricity in an electronics plant 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 12 / 20 In practice, items such as wood screws and glue used in the production of school desks and chairs wouldmostlikely be classified as : Factory overhead Direct materials Direct labor 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 13 / 20 Which one of the following items wouldnotbe considered a manufacturing cost ? Plant property taxes for an ice cream maker Tires for an automobile manufacturer 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 14 / 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 ? $225,000 period costs; $0 product costs $150,000 period costs; $75,000 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 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 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 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 overtime premium would be charged to manufacturing overhead, 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 16 / 20 The allocation of costs to particular cost objects allows a firm to analyze all of the followingexcept : Whether a product line should be discontinued Why the sales of a particular product have increased Whether a particular department should be expanded Why a particular product should be purchased rather than manufactured inhouse Cost allocation is an internal matter that does not affect demand (except to the extent it results in a change in price) 17 / 20 The term “prime costs” refers to : The sum of raw material costs and direct labor costs 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 Prime costs are raw material costs and direct labor costs 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 Whether the cost is expensed in the period in which it is incurred The cost object to which the cost is being related 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 arebestdescribed as : Indirect product costs Direct product costs Indirect period 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 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 ? 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 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback basic cost terminologycost accountingcost accounting exam
