New Era University

College of Accountancy

COST ACCOUNTING
Cost Terms, Concepts and Classification

1. Which of the following statements is/are true?

I. The classification of product and period costs is particularly valuable in management accounting.
II. The classification of variable and fixed costs is particularly valuable in financial accounting.
a. Both I and II c. I only
b. Neither I nor II d II only
.

2. Which of the following costs is not a product cost?

a. Wages paid to workers for rework on defective products
b. Wages paid to truck loaders who load finished goods onto outgoing delivery trucks
c. Fringe benefits paid to factory workers
d. Wages paid to workers for idle time due to machine breakdown in a production department

3. Which of the following costs is not always considered to be expired immediately upon being
recognized?
a. Cost of goods sold
b. Salesmens commission
c. Depreciation expense for factory equipment
d. Salary of the company president

4. Depreciation on a personal computer used in the marketing department of a manufacturing firm

would be classified as:
a. a product cost that is fixed with respect to the company's output.
b. a period cost that is fixed with respect to the company's output.
c. a product cost that is variable with respect to the company's output.
d. a period cost that is variable with respect to the company's output.

5. Cost of goods manufactured will usually include:

a. only costs incurred during the current period.
b. only direct labor and direct materials costs.
c. some costs incurred during the prior period as well as costs incurred during the current period.
d. some period costs as well as some product costs.

6. If the amount of "Cost of goods manufactured" during a period exceeds the amount of "Total
manufacturing costs" for the period, then:
a. ending work in process inventory is greater than or equal to the amount of the beginning work in
process inventory.
b. ending work in process is greater than the amount of the beginning work in process inventory.
c. ending work in process is equal to the cost of goods manufactured.
d. ending work in process is less than the amount of the beginning work in process inventory.

7. Which of the following is false with regard to direct materials for an auto manufacturer?
a. Steel would probably be a direct material.
b. Upholstery fabric would probably be a direct material
c. Oil to lubricate factory machines would not be a direct material.
d. Small plastic clips to hold on door panels, because they become part of the auto, must be
accounted for as direct materials.

8. Which of the following is an example of direct labor cost for an airplane manufacturer?
a. Cost of oil lubricants for factory machinery
b. Cost of wages of assembly worker
c. Salary of plant supervisor
d. Cost of jet engines

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9. Which of the following manufacturing costs is an indirect cost of producing a product?
a. Oil lubricants used for factory machinery
b. Commissions for sales personnel
c. Hourly wages of an assembly worker
d. Memory chips for a microcomputer manufacturer

10. Which one of the following would not be classified as manufacturing overhead?
a. Overtime premium when the overtime is caused by managements requirement
b. Idle time due to assembly line breakdown
c. Wages of the plant security guard and janitorial staff
d. None of these

11. Which of the following items is not charged to manufacturing overhead?

a. Factory depreciation and supplies
b. Costs of service departments
c. Costs of maintenance departments
d. Costs of marketing departments

12. Which of the following would most likely be included as part of manufacturing overhead in the
production of a wooden table?
a. The cost of glue used in the table.
b. The amount paid to the individual who stains the table.
c. The cost of the wood used in the table.
d. The commission paid to the salesperson who sold the table.

13. 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?
a. The overtime hours times the sum of the straight-time wages and overtime premium would be
charged entirely to manufacturing overhead.
b. The overtime hours times the sum of the straight-time wages and overtime premium would be
treated as direct labor.
c. 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.
d. 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.

14. Which of the following is not a prime cost?

a. Supervisors wages
b. Direct labor wages
c. Machine operator wages
d. Assembly line wages

15. Conversion costs include:

I. Indirect materials.
II. Depreciation.
III. Indirect labor.
a. I, II and III c. II and III only
b. I and III only d None of these
.

16. Which of the following should be classified as period costs?

Distribution costs Outside processing costs Sales commissions
a. Yes No Yes
b No Yes Yes
.
c. No No No
d Yes Yes Yes
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17. GG Inc. makes ski-boards in South Korea. Identify the correct matching of terms.
a. Fiberglass factory overhead
b. Plant real estate tax period cost
c. Depreciation on delivery trucks product cost
d. Payroll taxes for workers in the packaging department direct labor

18. Which of the following statements concerning various cost concepts is true?
a. A cost object is a target level of costs to be achieved.
b. Cost accumulation is a general term that encompasses both tracing costs to a cost object and
allocating costs to that cost object.
c. A given cost item can be a direct cost of one cost object and an indirect cost of another.
d. The materiality of the cost is not a factor in classifying the cost as direct or indirect.

19. The terms "direct cost" and "indirect cost" are commonly used in cost accounting. Classifying a cost
as either direct or indirect depends upon:
a. the behavior of the cost in response to volume changes.
b. whether the cost is expended in the period in which it is incurred.
c. whether the cost can be related readily to resources consumed for a cost object.
d. whether an expenditure is unavoidable because it cannot be changed regardless of any action
taken.

20. The nursing station on the fourth floor of Central Hospital is responsible for the care of patients who
have undergone orthopedic surgery. The costs of drugs administered by the nursing station to
patients would be classified as:
a. direct costs of the patients.
b. indirect costs of the patients.
c. overhead costs of the nursing station.
d. period costs of the hospital.

21. Costs are allocated to cost objects in many ways and for many reasons. Which one of the following
is a purpose of cost allocation?
a. Evaluating revenue center performance
b. Measuring income and assets for external reporting
c. Budgeting cash and controlling expenditures
d. Aiding in variable costing for internal reporting

22. Which of the following statements concerning cost drivers is/are true?
I. Cost drivers are activities that cause costs to increase as the activity increases.
II. Over the long run, all costs have cost drivers.
III. Volume of production is a cost driver of direct manufacturing costs.
a. I, II and III c. I and III only
b. I and II only d II and III only
.

23. A Johnson & Johnson analyst is preparing a presentation on cost drivers at one of its pharmaceutical
drug subsidiaries. Unfortunately, both the list of its business functions and the accompanying list of
representative cost drivers are accidentally randomized. The two lists now on the screen are:
Business Function Representative Cost Driver
A. Production 1. Minutes of TV advertising time
B. Research and development 2. Number of calls to toll-free customer telephone line
C. Marketing 3. Number of packages shipped
D. Distribution 4. Hours the packaging line is in operation
E. Design of products/processes 5. Number of patents filed with the patent office
F. Customer service 6. Hours spent designing tamper-proof bottles
Which of the following improperly matches the business function with its representative cost driver?
a. D : 3 c. F : 2
b A:4 d B:6
. .

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24. The difference between variable costs and fixed costs is:
a. variable costs per unit fluctuate and fixed costs per unit remain constant.
b. variable costs per unit are fixed over the relevant range and fixed costs per unit are variable.
c. total variable costs are variable over the relevant range and fixed in the long term, while fixed
costs never change.
d. variable costs per unit change in varying increments, while fixed costs per unit change in equal
increments.

25. Which of the following statements concerning cost behavior is true?

a. When production (in units) decreases, the average cost per unit of product increases.
b. Within the relevant range, unit variable costs vary directly with the activity level.
c. Costs incurred within the relevant range of production are called relevant costs.
d. If a products average unit cost is the same at all levels of volume, it must have only fixed costs.

26. Data for Cost A and Cost B are as follows:

Number of units Total Cost of Unit Cost of
produced Cost A Cost B
10,000 P120,000 P27.00
15,000 P180,000 P18.00
20,000 P240,000 P13.50
25,000 P300,000 P10.80
Which of the above best describes the behavior of Costs A and B?
a. Cost A is fixed, Cost B is variable.
b. Cost A is variable, Cost B is fixed.
c. Both Cost A and Cost B are variable.
d. Both Cost A and Cost B are fixed.

27. Which of the following is a variable product cost?

a. Salespersons commissions at Avon Products
b. Interest expense on CBSs long-term debt
c. The costs of X-ray film at the Mayo Clinics radiology lab
d. The depreciation on the playground equipment at a McDonalds outlet

28. An expense that is likely to contain both fixed and variable components is:
a. security guard wages. c. heat, light and power.
b. supplies. d small tools.
.

29. Which of the following fixed costs would be considered a direct cost?
a. Salary of the controller when the cost object is a unit of product
b. The rental cost of the finished goods warehouse when the cost object is the Accounting
Department
c. Salary of the sales manager when the cost object is the Sales Department
d. Fees of the Board of Directors when the cost object is the Production Department

30. Which of the following combinations of cost object and cost classification is most reasonable?
Cost Object Cost Classification
a. Declining balance depreciation Variable cost
b. Presidents salary Avoidable fixed cost
c. Advertising cost Discretionary fixed cost
d. Direct materials Mixed cost

31. Which of the following is an example of a committed fixed cost?

a. Investment in production facilities
b. Advertising
c. Preventive maintenance
d. Employee training programs

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32. Salaries of accounts payable clerks when one clerical worker is needed for every 500 accounts
payable is an example of:
a. fixed cost. c. curvilinear cost.
b. variable cost. d step cost.
.

Refer to the following information to answer the next four questions:

Ter Industries has recently developed two new products, a cleaning unit for laser discs and a tape
duplicator for reproducing home movies taken with a video camera. However, Ter has only enough
plant capacity to introduce one of these products during the current year. The company controller has
gathered the following data to assist management in deciding which product should be selected for
production. Ter's fixed overhead includes rent and utilities, equipment depreciation, and supervisory
salaries. Selling and administrative expenses are not allocated to products.
Tape Duplicator Cleaning Unit
Raw materials P44.00 P36.00
Machining @ P12/hr. 18.00 15.00
Assembly @ P10/hr. 30.00 10.00
Variable overhead @ P8/hr. 36.00 18.00
Fixed overhead @ P4/hr. 18.00 9.00
Total cost P146.00 P88.00

Suggested selling price P169.95 P99.98

Actual research and
development costs P240,000 P175,000
Proposed advertising and
promotion costs P500,000 P350,000

33. For Ter's tape duplicator, the unit costs for raw materials, machining, and assembly represent:
a. conversion costs. c. committed costs.
b. separable costs. d prime costs.
.

34. The total overhead cost for Ter's laser disc cleaning unit is a:
a. carrying cost. c. sunk cost.
b. discretionary cost. d mixed cost.
.

35. Research and development costs for Ter's two new products are:
a. conversion costs. c. relevant costs.
b. sunk costs. d avoidable costs.
.

36. The advertising and promotion costs for the product selected by Ter will be:
a. discretionary costs. c. committed costs.
b. opportunity costs. d incremental costs.
.

Use the following information to answer the next two questions:

The Hotel Sugu is a four-star hotel located in Guadalupe, Makati. The hotels operations vice
president would like to replace the hotels antiquated computer terminals at the registration desk with
attractive state-of-the-art flat-panel displays. The new displays would take less space, would
consume less power than the old computer terminals, and would provide additional security since
they can only be viewed from a restrictive angle. The new computer displays would not require any
new wiring. The hotels chef believes the funds would be better spent on a new bulk freezer for the
kitchen.

37. Which of the following should be considered sunk cost and therefore ignored when making the
decision to replace the old computer terminals with new flat-panel displays?
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a. Cost of the new flat-panel displays
b. Cost of maintaining the old computer terminals
c. Cost of existing registration desk wiring
d. Cost of removing the old computer terminals

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38. Which of the following is an opportunity cost of replacing the old computer terminals with new flat-
panel displays?
a. Cost of electricity to run the terminals
b. Rent on the space occupied by the registration desk
c. Wages of registration desk personnel
d. Benefits from a new freezer

39. Which of the following statements concerning various cost terms is/are true?
I. A common cost is one type of direct cost.
II. A sunk cost is usually a differential cost.
III. Opportunity costs are not usually recorded in the accounts of an organization.
IV. A particular cost may be direct or indirect depending on the cost object.
a. I, II, III and IV c. III and IV only
b II and III only d I and IV only
. .

40. The following activities are typical in production management:

1) Warranty work
2) Labor and overhead incurred for rework of defective products found by an inspector
3) Quality training program
4) The costs of a consumer complaint department
5) In-process inspection costs
6) Re-inspection of reworked products
7) Downtime attributed to quality problems
8) Product recalls
9) Lower sales due to poor product performance
10) Quality audits
To what classification of quality costs do the foregoing described costs belong?
Prevention Appraisal Internal Failure External Failure
a. 3, 7, 10 5, 6 2 1, 4, 8, 9
b 3, 10 5 2, 6, 7 1, 4, 8, 9
.
c. 10 3 2, 5, 6 1, 4, 7, 8, 9
d 3, 10 5 1, 2, 10 4, 7, 8, 9
.

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