Question 1

As with service firms, period costs appear below the line for gross margin.

Accepted Answer

Period costs, such as selling and administrative expenses, are considered separate from the cost of goods sold and appear below the line for gross margin. This applies to both service and product-based firms.

Question 2

The cost flows in merchandising firms resemble the flows for service firms.

Accepted Answer

True

Question 3

The sum of labor and overhead is referred to as conversion costs.

Accepted Answer

Conversion costs are the expenses incurred in converting raw materials into finished products, which include labor and overhead costs.

Question 4

Period costs are added to gross margin to arrive at profit before taxes.

Accepted Answer

Period costs are not included in calculating gross margin, which only includes the direct costs of producing goods. Therefore, they cannot be added to arrive at profit before taxes, which is calculated by subtracting operating expenses (including period costs) from gross profit.

Question 5

The terms cost of goods sold and costs of goods manufactured are used interchangeably.

Accepted Answer

Cost of goods sold refers to the cost of producing or purchasing products that have been sold, while cost of goods manufactured refers to the total cost of producing finished goods during a specific time period, regardless of whether or not they have been sold.

Question 6

Period costs are all costs that are not product costs.

Accepted Answer

Period costs are costs that are not directly related to the production or acquisition of goods or services, such as selling, general, and administrative expenses. Product costs, on the other hand, are costs directly related to the production or acquisition of goods or services, such as direct materials, direct labor, and manufacturing overhead.

Question 7

The cost of providing services might include depreciation on equipment.

Accepted Answer

Depreciation on equipment is a cost that gradually reflects the reduction in value of equipment over time due to wear and tear or obsolescence. Therefore, it is considered a cost of providing services.

Question 8

For financial reporting purposes, merchandising firms expense the cost of items when they purchase them.

Accepted Answer

For financial reporting purposes, merchandising firms do not expense the cost of items when they purchase them. Instead, they initially record the cost of merchandise as inventory and expense it when the merchandise is sold. This is known as the cost of goods sold.

Question 9

Product costs always appear "below the line" for gross margin.

Accepted Answer

Product costs are considered "above the line" because they are directly subtracted from sales revenue to calculate the gross margin on an income statement.

Question 10

The cost of purchasing goods from suppliers does not include the cost of transportation.

Accepted Answer

The cost of purchasing goods from suppliers can include the cost of transportation if it is part of the purchase agreement or if the buyer is responsible for arranging and paying for transportation.

Question 11

Service firms are distinguished from other firms in that the products service firms offer are not tangible or storable.

Accepted Answer

Service firms offer intangible products that cannot be touched or stored, such as haircuts, consulting services, or entertainment performances.

Question 12

Period costs contain controllable, but not non-controllable costs.

Accepted Answer

Period costs may contain both controllable and non-controllable costs, such as advertising expenses (controllable) and rent expenses (non-controllable).

Question 13

It frequently is vital to modify accounting reports and use non-financial data to estimate the controllable costs and benefits of a decision option.

Accepted Answer

Modifying accounting reports and incorporating non-financial data can provide a more accurate and complete picture of the costs and benefits of a decision option, and help managers make better-informed decisions.

Question 14

The GAAP income statement combines controllable with non-controllable costs and fixed costs with variable costs.

Accepted Answer

The GAAP (Generally Accepted Accounting Principles) income statement combines all costs, including controllable and non-controllable, fixed and variable, into one statement. This helps provide a comprehensive view of a company's financial performance.

Question 15

The total of all the indirect manufacturing inputs are sometimes referred to as manufacturing allocation.

Accepted Answer

The total of all the indirect manufacturing inputs are typically referred to as manufacturing overhead, not manufacturing allocation.

Question 16

GAAP provides considerable flexibility regarding reporting formats.

Accepted Answer

GAAP allows companies to choose reporting formats that best meet their needs, as long as the information provided is accurate and consistent with GAAP requirements. However, there are certain disclosure requirements that must be met regardless of the chosen format.

Question 17

Once the production process is completed, firms transfer finished work physically from work-in-process inventory to raw materials inventory.

Accepted Answer

This statement is incorrect. Finished work is transferred from work-in-process inventory to finished goods inventory, not to raw materials inventory. Raw materials inventory consists of materials that have not yet been used in production.

Question 18

To comply with GAAP, an income statement must separate direct and indirect costs.

Accepted Answer

The answer of To comply with GAAP, an income statement...

Question 19

Unlike service firms, merchandising firms maintain an inventory of goods that they buy and sell.

Accepted Answer

This statement is true. Merchandising firms purchase goods and maintain an inventory of those goods before selling them to customers. Service firms, on the other hand, do not sell physical goods and therefore do not usually maintain an inventory.

Question 20

Product costs are often referred to as inventoriable costs because these are the costs that firms attach to inventories of work in process and finished goods.

Accepted Answer

Product costs, such as direct materials, direct labor, and manufacturing overhead, are attached to inventories of work in process and finished goods, making them inventoriable costs.

Quiz 3: Cost Flows and Cost Terminology