Cost Terminology quiz Cost Accounting Quiz On Mar 9, 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 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 Depreciation on the printing equipment Fire insurance on the printing facilities 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 Inventoriable costs : Are regarded as assets before the products are sold Include only the conversion costs of manufacturing a product 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 Which one of the following best describes direct labor ? Both a product cost and a prime cost A prime cost A product 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 4 / 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 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 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 5 / 20 In a traditional manufacturing operation, direct costs would normally include : Wood in a furniture factory Commissions paid to sales personnel 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 6 / 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 : Advertising for the Sleep-Well Inn chain Water Johnson’s salary 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 7 / 20 Management accounting differs from financial accounting in that financial accounting is : More oriented toward the future Primarily concerned with external financial reporting Primarily concerned with nonquantitative information Heavily involved with decision analysis and implementation of decisions 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 8 / 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 behavior of the cost in response to volume changes 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 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 9 / 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 : Period costs Direct labor Factory overhead Direct materials 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 10 / 20 Conversion costs do not include : Direct materials Depreciation Indirect materials Indirect labor 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 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 heavy emphasis on indirect costs and disregards consideration of direct costs Places minimal emphasis on the cost of materials 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 12 / 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 $150,000 period costs; $75,000 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 13 / 20 A cost that always can be directly traced to a cost object is : A prime cost A variable cost An indirect 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 14 / 20 The allocation of costs to particular cost objects allows a firm to analyze all of the following except : Whether a product line should be discontinued Whether a particular department should be expanded Why a particular product should be purchased rather than manufactured inhouse Why the sales of a particular product have increased 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 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 : Stockout cost Quality cost Carrying cost Prime cost The costs of holding or storing inventory are carrying costs. Examples include the costs of capital, insurance, warehousing, breakage, and obsolescence 16 / 20 Which of the following is a period cost rather than a product cost of a manufacturer ? Fixed overhead Variable 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 17 / 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 the laborers who place tires on each automobile The cost of small tools used in mounting tires on each automobile The delivery costs for the tires on each automobile The cost of the 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 18 / 20 Using absorption costing, fixed manufacturing overhead costs are best described as : Indirect product costs Direct period costs Direct product costs Indirect 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 19 / 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 prime costs and variable administrative costs to the same pool Establish separate pools for variable and fixed costs Assign all manufacturing costs related to the project 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 20 / 20 The allocation of general overhead costs to operating departments can be least justified in determining : Income of a product or functional unit Costs for making management’s decisions Costs for the federal government’s cost-plus contracts 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback basic cost terminologycost accountingcost accounting exam