CHAPTER 2

AN INTRODUCTION TO COST TERMS AND

PURPOSES
TRUE/FALSE

1. Products, services, departments, and customers may be cost objects.

TRUE

4. Accountants define a cost as a resource to be sacrificed to achieve a specific

objective.

TRUE

9. Improvements in information-gathering technologies are making it possible to trace

more costs as direct.
TRUE

10. Misallocated indirect costs may lead to promoting products that are not profitable.
TRUE

12. The cost of a customized machine only used in the production of a single product
would be classified as a direct cost.

TRUE

15. Fixed costs have no cost driver in the short run, but may have a cost driver in the
long run.

TRUE

18. Fixed costs vary with the level of production or sales volume.

FALSE

20. Fixed costs depend on the resources used, not the resources acquired.

FALSE

21. The variable cost per unit of a product should stay the same throughout the relevant
range of production.

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TRUE

24. When 50,000 units are produced the fixed cost is $10 per unit. Therefore, when
100,000 units are produced fixed costs will remain at $10 per unit.

FALSE
26. Service-sector companies provide services or intangible products to their customers.

TRUE

28. Merchandising companies purchase products and sell them to customers without
changing their basic form.

TRUE

30. Manufacturing sector firms normally hold three types of inventory: direct materials
inventory, work-in-process inventory, and finished goods inventory.

TRUE

31. Inventoriable costs are reported as an asset when incurred and expensed on the
income statement when the product is sold.

33. Operating income is sales revenue minus cost of goods manufactured.

35. All costs reported on the income statement of a service-sector company are period
costs.

36. Period costs are never included as part of inventory.

38. Inventory of a manufacturing firm includes goods partially worked on but not yet
fully completed.
39. The wages of a plant supervisor would be classified as a period cost.

Answer: False Difficulty: 2 Objective: 7

Terms to Learn: period costs
The wages of a plant supervisor would be classified as a product cost.

41. Depreciation can be classified as either an inventoriable cost or a period cost,

depending on what is being depreciated.

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43. Overtime premium consists of the wages paid to all workers (for both direct labor
and indirect labor) in excess of their straight-time wage rates.

50. A costing system traces direct costs and allocates indirect costs to products.

51. Management accountants help managers identify which information is relevant to a

particular decision.

MULTIPLE CHOICE

52. Cost objects include:

a. products
b. customers
c. departments
d. All of these answers are correct.

53. Actual costs are:

a. the costs incurred
b. budgeted costs
c. estimated costs
d. forecasted costs

54. The general term used to identify both the tracing and the allocation of accumulated
costs to a cost object is:
a. cost accumulation
b. cost assignment
c. cost tracing
d. conversion costing

56. Budgeted costs are:

a. the costs incurred this year
b. the costs incurred last year
c. planned or forecasted costs
d. competitor’s costs

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57. Cost assignment is:
a. always arbitrary
b. includes tracing and allocating
c. the same as cost accumulation
d. finding the difference between budgeted and actual costs

61. Cost allocation is:

a. the process of tracking both direct and indirect costs associated with a cost
object
b. the process of determining the actual cost of the cost object
c. the assignment of indirect costs to the chosen cost object
d. a function of cost tracing

63. 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 expensed in the period in which it is incurred
c. whether the cost can be easily identified with the cost object
d. whether an expenditure is avoidable or not in the future

70. Cost behavior refers to:

a. how costs react to a change in the level of activity
b. whether a cost is incurred in a manufacturing, merchandising, or service
company
c. classifying costs as either inventoriable or period costs
d. whether a particular expense has been ethically incurred

72. At a plant where a union agreement sets annual salaries and conditions, annual
labor costs usually:
a. are considered a variable cost
b. are considered a fixed cost
c. depend on the scheduling of floor workers
d. depend on the scheduling of production runs

73. Variable costs:

a. are always indirect costs
b. increase in total when the actual level of activity increases
c. include most personnel costs and depreciation on machinery
d. can always be traced directly to the cost object

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76. Which one of the following is a variable cost for an insurance company?
a. rent
b. president's salary
c. sales commissions
d. property taxes

77. Which of the following is a fixed cost for an automobile manufacturing plant?
a. administrative salaries
b. electricity used by assembly-line machines
c. sales commissions
d. windows for each car produced

79. The MOST likely cost driver of distribution costs is the:

a. number of parts within the product
b. number of miles driven
c. number of products manufactured
d. number of production hours

80. The MOST likely cost driver of direct material costs is the:
a. number of parts within the product
b. number of miles driven
c. number of products manufactured
d. number of production hours

86. When 10,000 units are produced, fixed costs are $14 per unit. Therefore, when
20,000 units are produced fixed costs will:
a. increase to $28 per unit
b. remain at $14 per unit
c. decrease to $7 per unit
d. total $280,000

87. When 10,000 units are produced, variable costs are $6 per unit. Therefore, when
20,000 units are produced:
a. variable costs will total $120,000
b. variable costs will total $60,000
c. variable unit costs will increase to $12 per unit (el coste unitario se mantiene
constant)
d. variable unit costs will decrease to $3 per unit

88. Christi Manufacturing provided the following information for last month:

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 Sales $10,000 - 20000
Variable costs 3,000 - 6000
Fixed costs 5,000 - 5000
Operating income $2,000 - 9000

If sales double next month, what is the projected operating income?

a. $4,000
b. $7,000
c. $9,000
d. $12,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 93 AND 94:
Axle and Wheel Manufacturing currently produces 1,000 axles per month. The following
per unit data apply for sales to regular customers:

Direct materials $30

Direct manufacturing labor 5
Variable manufacturing overhead 10
Fixed manufacturing overhead 40
Total manufacturing costs $85

93 The plant has capacity for 2,000 axles and is considering expanding production to
1,500 axles. What is the total cost of producing 1,500 axles?
a. $85,000
b. $170,000
c. $107,500 (fixed remains multiplied by 1000)
d. $102,500

94. What is the per unit cost when producing 1,500 axles?
a. $71.67
b. $107.50
c. $85.00
d. $170.00

THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 98 THROUGH 100:

The following information pertains to Alleigh’s Mannequins:

Manufacturing costs $1,500,000
Units manufactured 30,000
Units sold 29,500 units sold for $85 per unit
Beginning inventory 0 units
98. What is the average manufacturing cost per unit?
a. $50.00
b. $50.85
c. $17.65

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 d. $85.00

99. What is the amount of ending finished goods inventory?

a. $42,500
b. $25,424
c. $25,000 (a cálculo de precio de coste)
d. $1,475,000

100. What is the amount of gross margin?

a. $1,475,000
b. $1,500,000
c. $2,507,500
d. $1,032,500

104. Google, an internet search firm, would be classified as:

a. a manufacturing-sector company
b. a merchandising-sector company
c. a service sector company
d. None of these answers are correct.

105. Service-sector companies report:

a. only merchandise inventory
b. only finished goods inventory
c. direct materials inventory, work-in-process inventory, and finished goods
inventory accounts
d. no inventory accounts

106. Manufacturing-sector companies report:

a. only merchandise inventory
b. only finished goods inventory
c. direct materials inventory, work-in-process inventory, and finished goods
inventory accounts
d. no inventory accounts

108. For a manufacturing company, direct labor costs may be included in:
a. direct materials inventory only
b. merchandise inventory only
c. both work-in-process inventory and finished goods inventory
d. direct materials inventory, work-in-process inventory, and finished goods
inventory accounts

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114. Manufacturing overhead costs are also referred to as:
a. indirect manufacturing costs
b. prime costs
c. period costs
d. direct material

117. Work-in-process inventory would normally include:

a. direct materials in stock and awaiting use in the manufacturing process
b. goods partially worked on but not yet fully completed
c. goods fully completed but not yet sold
d.products in their original form intended to be sold without changing their

119. Merchandise inventory would normally include:

a. direct materials in stock and awaiting use in the manufacturing process
b. goods partially worked on but not yet fully completed
c. goods fully completed but not yet sold
d. products in their original form intended to be sold without changing their
basic form

123. Inventoriable costs:

a. include administrative and marketing costs
b. are expensed in the accounting period in which the products are sold
c. are particularly useful in management accounting
d. are also referred to as nonmanufacturing costs

129. The cost of inventory reported on the balance sheet may include all of the following
EXCEPT:
a. customer-service costs
b. wages of the plant supervisor
c. depreciation of the factory equipment
d. the cost of parts used in the manufacturing process

130. For a computer manufacturer, period costs include the cost of:
a. the keyboard
b. labor used for assembly and packaging
c. distribution
d. assembly-line equipment

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131. Period costs:
a. include only fixed costs
b. seldom influence financial success or failure
c. include the cost of selling, delivering, and after-sales support for customers
d. should be treated as an indirect cost rather than as a direct manufacturing cost

135. Prime costs include:

a. direct materials and direct manufacturing labor costs
b. direct manufacturing labor and manufacturing overhead costs
c. direct materials and manufacturing overhead costs
d. only direct materials

136. Conversion costs include:

a. direct materials and direct manufacturing labor costs
b. direct manufacturing labor and manufacturing overhead costs
c. direct materials and manufacturing overhead costs
d. only direct materials

140. Which of the following formulas determine cost of goods sold in a merchandising
entity?
a. Beginning inventory + Purchases + Ending inventory = Cost of goods sold
b. Beginning inventory + Purchases - Ending inventory = Costs of goods sold
c. Beginning inventory – Purchases + Ending inventory = Cost of goods sold
d. Beginning inventory – Ending inventory – Purchases = Cost of goods sold

141. Which of the following formulas determine cost of goods sold in a manufacturing
entity?
a. Beginning work-in-process inventory + Cost of goods manufactured – Ending
work-in-process inventory = Cost of goods sold
b. Beginning work-in-process inventory + Cost of goods manufactured + Ending
work-in-process inventory = Cost of goods sold
c. Cost of goods manufactured - Beginning finished goods inventory – Ending
finished goods inventory = Cost of goods sold
d. Cost of goods manufactured + Beginning finished goods inventory – Ending
finished goods inventory = Cost of goods sold

142. The following information pertains to the Cannady Corporation:

Beginning work-in-process inventory $ 50,000
Ending work-in-process inventory 48,000

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 Beginning finished goods inventory 180,000
Ending finished goods inventory 195,000
Cost of goods manufactured 1,220,000
What is cost of goods sold?
a. $1,235,000
b. $1,205,000
c. $1,218,000
d. $1,222,000
THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 144 THROUGH 146:
Beginning finished goods, 1/1/20X3 $ 80,000
Ending finished goods, 12/31/20X3 67,000
Cost of goods sold 270,000
Sales revenue 500,000
Operating expenses 145,000
144. What is cost of goods manufactured for 20X3?
a. $230,000
b. $257,000
c. $283,000
d. $355,000

145. What is gross margin for 20X3?

a. $283,000
b. $355,000
c. $230,000
d. $257,000

146. What is operating income for 20X3?

a. $85,000
b. $112,000
c. $62,000
d. $230,000

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THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 154 THROUGH 157:
The West Company manufactures several different products. Unit costs associated with
Product ORD203 are as follows:
Direct materials $ 40
Direct manufacturing labor 8
Variable manufacturing overhead 12
Fixed manufacturing overhead 23
Sales commissions (2% of sales) 6
Administrative salaries 9
Total $98

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154. What are the variable costs per unit associated with Product ORD203?
a. $60
b. $83
c. $66
d. $48
155. What are the fixed costs per unit associated with Product ORD203?
a. $23
b. $32
c. $35
d. $44
156. What are the inventoriable costs per unit associated with Product ORD203?
a. $60
b. $66
c. $48
d. $83
157. What are the period costs per unit associated with Product ORD203?
a. $15
b. $6
c. $9
d. $27

174. Joseph Davis worked 44 hours last week for Breakgood Manufacturing. Of the 44
hours 4 hours were considered overtime, and also Davis was idle for 5 of the 44
hours due to an equipment malfunction. Davis makes $20 per hour and is paid $30
an hour (time and a half) for overtime. Davis’ total compensation for that week
would be ______, and assuming Breakgood charges overtime premium and idle
time to indirect labor, the amount of this compensation credited to indirect labor
would be ______.
a. $840; $40
b. $840; $140
c. $920; $40
d. $920; $140

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178. Butler Hospital wants to estimate the cost for each patient stay. It is a general
health care facility offering only basic services and not specialized services such as
organ transplants.

Required:

a. Classify each of the following costs as either direct or indirect with respect to
each patient.
b. Classify each of the following costs as either fixed or variable with respect to
hospital costs per day.

Direct Indirect Fixed Variable

Electronic monitoring ______ ______ ______ ______

Meals for patients ______ ______ ______ ______
Nurses' salaries ______ ______ ______ ______
Parking maintenance ______ ______ ______ ______
Security ______ ______ ______ ______

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182. Combs, Inc., reports the following information for September sales:

Sales $15,000
Variable costs 3,000
Fixed costs 4,000
Operating income $ 8,000

Required:

If sales double in October, what is the projected operating income?

185. Evans Inc., had the following activities during 20X5:

Direct materials:
Beginning inventory $ 40,000
Purchases 123,200
Ending inventory 20,800
Direct manufacturing labor 32,000
Manufacturing overhead 24,000
Beginning work-in-process inventory 1,600
Ending work-in-process inventory 8,000
Beginning finished goods inventory 48,000
Ending finished goods inventory 32,000

Required:

a. What is the cost of direct materials used during 20X5?

b. What is cost of goods manufactured for 20X5?
c. What is cost of goods sold for 20X5?
d. What amount of prime costs was added to production during 20X5?
e. What amount of conversion costs was added to production during 20X5?

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187. Messinger Manufacturing Company had the following account balances for the
quarter ending March 31, unless otherwise noted:
Work-in-process inventory (January 1) $ 140,400
Work-in-process inventory (March 31) 171,000
Finished goods inventory (January 1) 540,000
Finished goods inventory (March 31) 510,000
Direct materials used 378,000
Indirect materials used 84,000
Direct manufacturing labor 480,000
Indirect manufacturing labor 186,000
Property taxes on manufacturing plant building 28,800
Salespersons' company vehicle costs 12,000
Depreciation of manufacturing equipment 264,000
Depreciation of office equipment 123,600
Miscellaneous plant overhead 135,000
Plant utilities 92,400
General office expenses 305,400
Marketing distribution costs 30,000

Required:
a. Prepare a cost of goods manufactured schedule for the quarter.
b. Prepare a cost of goods sold schedule for the quarter.

190. On the assembly floor, Cynthia Evans is paid $20 an hour for straight-time and $30
an hour for overtime. One week she worked 43 hours, which included 3 hours of
overtime.

Required:

a. What is Cynthia’s total compensation for the week? 890

b. What amount of compensation would be reported as direct manufacturing
labor? 43X20=860
c. What amount of compensation would be reported as manufacturing overhead?
3x10=30

CRITICAL THINKING

192. What is the meaning of the term “cost object”? Give an example of a cost object
that would be used in a manufacturing company, a merchandising company, and a
service sector company?

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 Answer:
A cost object is anything for which a measurement of costs is desired. An example
of a cost object for a manufacturing company might be the cost of manufacturing a
particular product. An example of a cost object for a merchandising company
might be a particular department of a retail store. An example of a cost object for a
service sector company might be the cost to serve or supply a particular customer.

193. Why is it possible that a raw material such as glue might be considered as an
indirect material for one furniture manufacturer and as a direct material for another
furniture manufacture?

Answer:
It is possible for a raw material such as glue to be considered as an indirect material
by one furniture manufacturer and as a direct material by another furniture
manufacturer. The decision is largely a choice by the manufacturer and depends on
a number of factors including the materiality of the cost in question, the cost of
gathering the information, and the design of the manufacturing process. If the
product in question has an insignificant cost, it might not be worth the trouble to
trace the cost of the glue to each piece of furniture, and the glue would be
considered indirect. If the cost of tracing the cost of the glue is high in relation to
the benefits received from tracing it, the glue would likely be considered as indirect
material. If the design of the manufacturing process easily permits all the glue to be
traced to a single type of furniture, then it would be easy for a company to consider
that material to be direct. Overall, the direct/indirect classification is decided on a
cost/benefit basis.

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196. Explain the difference between an inventoriable cost and a period cost. What
potential problems does an inaccurate classification of product and period costs
cause?

Answer:
Inventoriable costs are all costs of a product that are considered as assets in the
balance sheet when they are incurred and which become cost of goods sold only
when the product is sold. Period costs are treated as expenses of the accounting
period in which they are incurred. An inaccurate classification of inventoriable and
period costs could lead to violations of the matching principle, which states that
costs used in producing revenue should be matched on the income statement when
the revenue is recognized. In extreme cases, net income for a given period might be
significantly misstated if proper matching does not occur.

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