Cost Accounting QuizCost Terminology quiz 27/04/2026 1 min read Cost Terminology 20 questions in 20 minutes Pass Score 70% The questions change when you repeat the exam 1 / 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 ? $75,000 period costs; $150,000 product costs $225,000 period costs; $0 product costs $150,000 period costs; $75,000 product costs $0 period costs; $225,000 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 2 / 20 A cost that always can be directly traced to a cost object is : An indirect cost A conversion cost A prime cost A variable cost Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product 3 / 20 Conversion costs donotinclude : Direct materials Indirect labor Indirect materials Depreciation 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 4 / 20 Using absorption costing, fixed manufacturing overhead costs arebestdescribed as : Indirect period costs Indirect product costs Direct period costs Direct product 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 5 / 20 Inventoriable costs : Include only the conversion costs of manufacturing a product Are regarded as assets before the products are sold 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 6 / 20 The allocation of costs to particular cost objects allows a firm to analyze all of the followingexcept : Whether a particular department should be expanded Why a particular product should be purchased rather than manufactured inhouse Whether a product line should be discontinued 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) 7 / 20 Management accounting differs from financial accounting in that financial accounting is : More oriented toward the future Heavily involved with decision analysis and implementation of decisions Primarily concerned with external financial reporting 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 8 / 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 conversion cost but not as a component of prime cost As a component of both prime and conversion 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. 9 / 20 Cost drivers are : Accounting measurements used to evaluate whether or not performance is proceeding according to plan 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 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 10 / 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 Rent on the warehouse containing the finished books inventory Wages paid to the production supervisor 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 11 / 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 : Prime cost Carrying 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 12 / 20 In a traditional manufacturing operation, direct costs would normally include : Machine repairs in an automobile factory Wood in a furniture factory Electricity in an electronics plant Commissions paid to sales personnel Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw material (a direct cost) of furniture 13 / 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 Evaluating revenue center performance Measuring income and assets for external reporting Budgeting cash and controlling expenditures 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 14 / 20 The allocation of general overhead costs to operating departments can beleastjustified in determining : Costs for making management’s decisions Costs for the federal government’s cost-plus contracts Income of a product or functional unit 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 15 / 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 tires on each automobile The cost of small tools used in mounting tires on each automobile The cost of the laborers who place tires on each automobile The delivery costs for 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 16 / 20 In cost terminology, conversion costs consist of : Direct and indirect labor Direct labor and factory overhead Indirect labor and variable factory overhead Direct labor and direct materials Conversion costs consist of direct labor and factory overhead. These are the costs of converting raw materials into a finished product 17 / 20 Conversion costs are : All costs associated with manufacturing other than direct labor costs and raw material costs The sum of raw materials costs and direct labor costs The sum of direct labor costs and all factory overhead costs Manufacturing costs incurred to produce units of output 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 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 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 19 / 20 A cost incurred for the benefit of more than one cost objective is : A variable cost A prime cost A conversion 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). 20 / 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 Your score is LinkedIn Facebook Twitter VKontakte 0% Send feedback 🚀 Join Telegram Group 📢 Telegram Channel 📘 Facebook Group 👍 Facebook Page 📌 Pinterest
