Question 1

Indirect costs, such as manufacturing overhead, are always fixed costs.

Accepted Answer

Indirect costs, such as manufacturing overhead, can include both fixed and variable costs.

Question 2

A decrease in production will ordinarily result in an increase in fixed production costs per unit.

Accepted Answer

Fixed production costs are spread out over the total number of units produced. When production decreases, the same amount of fixed costs are spread out over a smaller number of units, resulting in an increase in fixed production costs per unit.

Question 3

Even if operations are interrupted or cut back, committed fixed costs remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized.

Accepted Answer

This statement is true. Committed fixed costs are usually long-term investments, such as buildings or equipment, that cannot be easily reduced or eliminated in the short term. Even if operations are interrupted or cut back, these costs will still need to be paid. In the short run, it may seem like cutting back on these costs will save money, but the costs of restoring them later will likely be much higher. Therefore, committed fixed costs remain largely unchanged in the short term.

Question 4

In external financial reports, factory utilities costs may be included in an asset account on the balance sheet at the end of the period.

Accepted Answer

The answer of In external financial reports, factory utilities costs...

Question 5

Automation results in a shift away from variable costs toward more fixed costs.

Accepted Answer

Automation often involves a significant upfront investment in equipment and technology, resulting in more fixed costs. However, over time, the cost per unit produced may decrease, resulting in lower variable costs.

Question 6

Manufacturing overhead combined with direct materials is known as conversion cost.

Accepted Answer

The answer of Manufacturing overhead combined with direct materials is...

Question 7

When the level of activity increases, total variable cost will increase.

Accepted Answer

Total variable cost is directly related to the level of activity. As the level of activity increases, the amount of resources (materials, labor, etc.) required also increases, resulting in an increase in total variable cost.

Question 8

Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead.

Accepted Answer

Property taxes and insurance premiums are examples of indirect expenses that are not directly tied to the production process but are necessary for the operation of the factory building. Therefore, they fall under the category of manufacturing overhead.

Question 9

A variable cost is a cost whose cost per unit varies as the activity level rises and falls.

Accepted Answer

The answer of A variable cost is a cost whose...

Question 10

Direct material costs are generally variable costs.

Accepted Answer

Direct material costs vary with the level of production and are considered a variable cost.

Question 11

Advertising costs are considered product costs for external financial reports because they are incurred in order to promote specific products.

Accepted Answer

The answer of Advertising costs are considered product costs for...

Question 12

Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas.

Accepted Answer

Discretionary fixed costs are costs that can be controlled or avoided by management decisions. They are not strictly necessary for the operation of a business and arise from annual decisions to spend in fixed cost areas such as advertising or research and development.

Question 13

Depreciation is always considered a product cost for external financial reporting purposes in a manufacturing firm.

Accepted Answer

While depreciation is considered a product cost for internal management accounting purposes, it is not always considered a product cost for external financial reporting purposes. In some cases, depreciation may be classified as an overhead cost or included as part of the cost of goods sold. It ultimately depends on the specific accounting principles and standards being used.

Question 14

Selling and administrative expenses are product costs under generally accepted accounting principles.

Accepted Answer

Selling and administrative expenses are not product costs but rather period costs. Product costs include direct materials, direct labor, and manufacturing overhead.

Question 15

All costs incurred in a merchandising firm are considered to be period costs.

Accepted Answer

Merchandising firms have both product costs (cost of goods sold) and period costs (selling, general, and administrative expenses). The cost of goods sold is a product cost, while selling, general, and administrative expenses are period costs.

Question 16

Traditional format income statements are prepared primarily for external reporting purposes.

Accepted Answer

Traditional format income statements are designed to comply with generally accepted accounting principles (GAAP) and are primarily used for external reporting purposes such as financial statements for investors, creditors, and regulatory bodies.

Question 17

The concept of the relevant range does not apply to fixed costs.

Accepted Answer

The answer of The concept of the relevant range does...

Question 18

Committed fixed costs are fixed costs that are not controllable.

Accepted Answer

The answer of Committed fixed costs are fixed costs that...

Question 19

A mixed cost is partially variable and partially fixed.

Accepted Answer

A mixed cost has both variable and fixed elements. The fixed portion remains constant regardless of the level of activity, while the variable portion changes based on the level of activity.

Question 20

In order for a cost to be variable it must vary with either units produced or units sold.

Accepted Answer

The answer of In order for a cost to be...

Quiz 1: Managerial Accounting and Cost Concepts