Deck 2: An Introduction to Cost Terms and Purposes

Question 1

"Cost" is defined by accountants as a resource sacrificed or foregone to achieve a specific objective.

Answer 1

True

Question 2

Overtime premium consists of wages paid to all workers in excess of their straight-time wage rates.

Answer 2

True

Question 3

The plant supervisor's salary is a direct labour cost.

Answer 3

False

Question 4

Factors affecting direct/indirect cost classifications are the materiality of the cost in question, the information-gathering technology used, and the operations.

Question 5

Nearly all accounting systems accumulate forecasted costs.

Question 6

A cost is classified as a direct or indirect cost based on the applicable cost object.

Question 7

A firm's strategy and mission are usually the same.

Question 8

Costs of Sales is another way of phrasing Cost of Goods Sold.

Question 9

Prime costs consist of direct and indirect manufacturing labour.

Question 10

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

Question 11

A value proposition is a distinct benefit for which customers will pay.

Question 12

Delivery charges are typically considered to be an indirect cost because it cannot be traced to each customer.

Question 13

Rent for the building that contains the manufacturing and engineering departments can all be charged as manufacturing overhead costs.

Question 14

Conversion costs include all direct manufacturing costs.

Question 15

Indirect costs cannot be economically traced directly to the cost objective.

Question 16

Cost tracing assigns indirect costs to the chosen cost object.

Question 17

An actual cost is a predicted cost.

Question 18

A cost object is anything for which a separate measurement of costs is desired.

Question 19

Governance refers to a company's relationship with all levels of government.

Question 20

Period costs are never included as part of inventory.

Question 21

Actual costs are defined as

A) costs incurred.
B) direct costs.
C) indirect costs.
D) predicted costs.
E) sunk costs.

Question 22

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

Question 23

Cost assignment is

A) always arbitrary.
B) linking actual costs to cost objects.
C) the same as cost accumulation.
D) finding the difference between budgeted and actual costs.
E) the same as cost conversion.

Question 24

Which one of the following examples could be classified as a direct cost?

A) The costs of an entire factory's electricity related to a product; the product line is the cost object.
B) The printing costs incurred for payroll cheque processing; the payroll cheque processing is the cost object.
C) The salary of a maintenance supervisor in the manufacturing plant; Product A is the cost object.
D) The costs incurred for electricity in the office; the accounting office is the cost object.
E) The cost of advertising the products.

Question 25

Anything for which a separate measurement of costs is desired is known as

A) a cost item.
B) a cost object.
C) a fixed cost item.
D) a variable cost object.
E) a cost driver.

Question 26

Which of the following is true concerning prime costs?

A) Prime costs are direct manufacturing costs.
B) They include indirect direct manufacturing labour.
C) They equal the sum of direct manufacturing costs plus conversion costs.
D) They equal the sum of fixed manufacturing costs plus conversion costs.
E) They are indirect manufacturing costs.

Question 27

Which one of the following items is typically an example of an indirect cost of a cost object?

A) courier charges for shipment delivery
B) manufacturing plant electricity
C) direct manufacturing labour
D) wood used for furniture manufacture
E) refundable sales tax on direct materials

Question 28

Costs are accounted for in two basic stages: assignment followed by accumulation.

Question 29

Assigning direct costs poses more problems than assigning indirect costs.

Question 30

A cost object is always either a product or a service.

Question 31

Which of the following is an indirect production cost?

A) materials placed into production
B) calibrating factory equipment
C) labour placed into production
D) cost of shipping a product to the customer
E) advertising

Question 32

Whether a company traces costs directly to an output unit or not depends upon

A) the materiality of the contribution a cost makes to the total cost per output unit.
B) the amount of similar costs in the cost assignment.
C) the effect of cost tracing on overhead.
D) the employment of cost management.
E) the amount of customer satisfaction.

Question 33

Prime costs can include

A) conversion costs.
B) direct material costs.
C) indirect manufacturing labour.
D) machine set up costs.
E) advertizing costs.

Question 34

Which of the following is a cost object?

A) direct materials
B) customers
C) conversion costs
D) cost assignments
E) indirect labour

Question 35

Overtime premium is always a component of direct labour.

Question 36

Conversion costs are all manufacturing costs other than direct materials.

Question 37

Improvements in information-gathering technologies are making it possible to trace more costs as direct.

Question 38

Wages paid to machine operators on an assembly line are an example of which type of cost?

A) direct manufacturing labour costs
B) direct manufacturing overhead costs
C) direct materials costs
D) indirect manufacturing overhead costs
E) indirect material costs

Question 39

The determination of a cost as being either direct or indirect depends upon

A) the accounting system.
B) the allocation system.
C) the cost tracing system.
D) only the cost object chosen to determine its individual costs.
E) the choice of the cost object, and the materiality of the cost in question.

Question 40

A department could be considered a cost object.

Question 41

Classifying a cost as either direct or indirect depends upon

A) the behaviour 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 identified with the cost object.
D) whether an expenditure is avoidable or not in the future.
E) the inventory classification system.

Question 42

When defining variable and fixed costs, it is assumed that there is only one cost driver.

Question 43

Changes in particular cost drivers automatically result in decreases in overall costs.

Question 44

The components of prime costs in the three-part classification include

A) only direct materials costs.
B) only direct manufacturing labour costs.
C) both direct materials and direct manufacturing labour costs.
D) only conversion costs.
E) direct materials, direct manufacturing labour and conversion costs.

Question 45

Sheen Manufacturing has three cost objects that it uses to assign costs in its manufacturing plants. They are:
The following manufacturing overhead costs categories are found in the accounting records:
1. Amortization on buildings and equipment
2. Fringe benefits
3. Idle time wages
4. Lubricants for machines
5. Night security
6. Overtime premiums
7. Property insurance
8. Property taxes
9. Safety hats and shoes
10. Supervisor's salaries
11. Utilities
Required:
Assign each of the cost categories to the one cost object you consider most appropriate.

Question 46

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

Question 47

Which statement about conversion costs is correct, using the three-part classification of costs?

A) They include only direct manufacturing labour costs.
B) They include only indirect manufacturing costs.
C) They include both direct manufacturing labour costs and manufacturing overhead costs.
D) They include indirect manufacturing labour costs but not manufacturing overhead costs.
E) They include indirect manufacturing costs and direct manufacturing labour costs.

Question 48

A manufacturing plant produces two product lines: football equipment and hockey equipment. An indirect cost for the hockey equipment line is the

A) material used to make the hockey sticks.
B) labour to bind the shaft to the blade of the hockey stick.
C) shift supervisor for the hockey line.
D) plant supervisor.
E) salesperson travelling expenses.

Question 49

Office Supply Company manufactures office furniture. Recently the company decided to develop a formal cost accounting system. The company is currently converting all costs into classifications as related to its manufacturing processes.
Required:
For the following items, label each as being appropriate for
• direct cost tracing of the finished furniture,
• indirect cost allocation of an indirect manufacturing cost to the finished furniture, or
• as a nonmanufacturing item.

Question 50

A relevant range is the range of the cost driver in which a specific relationship between cost and driver is valid.

Question 51

Which of the following statements about cost management is true?

A) It requires that managers actively strive to increase revenues.
B) It only focuses on inventoriable costs.
C) It is not affected by the organization's customers.
D) It only applies to period costs.
E) It requires efficient management of the use of the cost drivers in the value-added activities.

Question 52

Cost tracing is

A) the assignment of direct costs to the chosen cost object.
B) a function of cost allocation.
C) the process of tracking both direct and indirect costs associated with a cost object.
D) the process of determining the actual cost of the cost object.
E) the assignment of both direct and indirect costs associated with a cost object.

Question 53

Eichhorn Company's Process Engineering department has the responsibility of rearranging the individual work tasks for each assembly line worker, with the goal of utilizing each worker as much as possible. Currently, on average, each assembly line worker only has tasks that require 47 minutes per hour, and the plant manager wants this increased by at least 10 %. The company builds the Eichhorn Rocket Roadster, which is selling out of dealers' showrooms faster than the company's assembly plants can produce them. If production can't be increased, then sales will soon suffer.
Required:
Explain the effect on total costs of production, using the number of engineering changes (from Process Engineering) and at least two other cost drivers. Choose the cost driver that you think is most logical in the circumstances, and begin your answer with a brief explanation of a cost driver.

Question 54

A manufacturing plant produces two product lines: football equipment and hockey equipment. Direct costs for the football equipment line are the

A) beverages provided daily in the plant break room.
B) monthly lease payments for a specialized piece of equipment needed to manufacture the football helmet.
C) salaries of the clerical staff that work in the company administrative offices.
D) utilities paid for the manufacturing plant.
E) advertising costs.

Question 55

Cost allocation is

A) the process of tracking both direct and indirect costs associated to 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.
E) the assignment of direct costs to the chosen cost object.

Question 56

Total variable costs change in direct proportion to changes in cost drivers.

Question 57

A fixed cost is a cost that changes per unit as a cost driver changes.

Question 58

Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants. They are:
The following manufacturing overhead cost categories are found in the accounting records:
Required:
Assign each of the above costs to the most appropriate cost object.

Question 59

Competition places an increased emphasis on cost reductions. For an organization to reduce costs it must focus on

A) maximizing the cost allocation system.
B) reporting non-value added costs separately from value-added costs.
C) efficiently managing the use of the cost drivers in those value-added activities.
D) the cost allocation process.
E) reducing the number of cost drivers.

Question 60

An appropriate cost driver for shipping costs might be the number of units shipped.

Question 61

Fixed costs depend on the

A) amount of resources used.
B) amount of resources acquired.
C) volume of production.
D) volume of sales.
E) allocation method.

Question 62

A mixed cost is

A) a fixed cost.
B) a cost with fixed and variable elements.
C) a variable cost.
D) always an indirect cost.
E) a cost with direct and indirect elements.

Question 63

Use the information below to answer the following question(s).
Macadamia Co. produced and sold 40,000 units last year. Per unit revenue and costs were as follows:
Fixed manufacturing overhead and administrative salaries are fixed costs. The per unit amounts are based on last year's production.
Calculate this year's operating income if the company plans to produce and sell 60,000 units.

A) $150,000
B) $0
C) $<300,000>
D) $<650,000>
E) $300,000

Question 64

Which of the following statements is a fixed cost in a clothing store?

A) store manager's salary
B) electricity
C) sales commissions
D) inventory
E) paper for the cash register

Question 65

Which one of the following is a variable cost in a grocery store?

A) rent
B) president's salary
C) inventory of vegetables
D) property taxes
E) administrative salaries

Question 66

If each furnace required a hose that costs $20 and 2,000 furnaces are produced for the month, the $40,000 total cost for hoses

A) is considered to be a direct fixed cost.
B) is considered to be a direct variable cost.
C) is considered to be an indirect fixed cost.
D) is considered to be an indirect variable cost.
E) is considered to be variable or fixed, depending on the relevant range.

Question 67

Which of the following statements about the key features of cost accounting and cost management is true?

A) When making decisions about what products to produce, managers need to know how revenue and costs vary with changes in output levels.
B) Managers need to understand that period costs remain the same from one period to the next.
C) The costing system allocates direct costs and traces indirect costs to products.
D) When making decisions, managers must understand that all revenue and costs are relevant.
E) Cost accounting is used for managerial decision making, not for financial statements.

Question 68

Fixed costs

A) may include either direct or indirect costs.
B) vary with production or sales volumes.
C) include parts and materials used to manufacture a product.
D) can be adjusted in the short run to meet actual demands.
E) remain fixed regardless of the relevant range of production.

Question 69

Cost behaviour 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.
E) how costs react to a change in selling price.

Question 70

Boone Hospital wants to determine, to the extent possible, the actual cost for each patient stay. It is a general health care facility with all basic services but does not perform specialized services such as organ transplants.
Required:
Complete the following table by
a. Classifying each cost as a direct or indirect cost with respect to each patient.
b. Classifying each item as fixed or variable with respect to the number of patient days (sum of days each patient was in hospital) the hospital incurs.

Question 71

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.

Question 72

The relevant range is important because

A) it specifies which costs should be used for a given decision.
B) it provides a basis for determining a range of acceptable cost alternatives.
C) it is required to determine inventoriable costs under Canadian GAAP.
D) it specifies the limits beyond which the relationship of cost to cost drivers may not be valid.
E) it determines the time horizon.

Question 73

A new employee in the accounting department is having difficulty understanding two sets of accounting terms-variable and fixed costs as opposed to period and product costs. He understands that variable costs change during an accounting period while fixed costs do not. However, he explains that a period cost implies that it is for a period of time and is, therefore, also fixed. Does his assumption imply that all product costs are then variable?
Required:
As part of your responsibility to train new staff, explain the difference between these terms.

Question 74

Whippany manufacturing wants to estimate costs for each product they produce at its Troy plant. The Troy plant produces three products at this plant, and runs two flexible assembly lines. Each assembly line can produce all three products.
Required:
a. Classify each of the following costs as either direct or indirect for each product.
b. Classify each of the following costs as either fixed or variable with respect to the number of units produced of each product.

Question 75

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
E) amortization on the office equipment

Question 76

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.
E) change in relation to selling price.

Question 77

Use the information below to answer the following question(s).
Macadamia Co. produced and sold 40,000 units last year. Per unit revenue and costs were as follows:
Fixed manufacturing overhead and administrative salaries are fixed costs. The per unit amounts are based on last year's production.
Calculate last year's operating income when the company produced and sold 40,000 units.

A) $0
B) $<200,000>
C) $<500,000>
D) $<800,000>
E) $<1,000,000>

Question 78

Use the information below to answer the following question(s).
Macadamia Co. produced and sold 40,000 units last year. Per unit revenue and costs were as follows:
Fixed manufacturing overhead and administrative salaries are fixed costs. The per unit amounts are based on last year's production.
Calculate this year's operating income if the company plans to produce and sell 50,000 units.

A) $50,000
B) $0
C) $<250,000>
D) $<550,000>
E) $250,000

Question 79

Which of the following is a fixed cost for an automobile manufacturing plant?

A) amortization on factory equipment
B) electricity used by assembly-line machines
C) sales commissions
D) windows for each car produced
E) labour cost of assembly line workers

Question 80

Combs, Inc., reports the following information for September sales:
Required:
If sales double in October, what is the projected operating income?