Question 1

For a lamp manufacturing company,the cost of the insurance on its vehicles that deliver lamps to customers is best described as a:

Accepted Answer

The cost of insurance on delivery vehicles is a period cost because it is not directly related to the manufacturing of the lamps themselves. Period costs are expenses that are not directly tied to the production process, such as selling, general and administrative expenses.

Question 2

The following costs should be considered by a law firm to be indirect costs of defending a particular client in court: rent on the law firm's offices,the law firm's receptionist's wages,the costs of heating the law firm's offices,and the depreciation on the personal computer in the office of the attorney who has been assigned the client.

Accepted Answer

These costs are considered indirect costs because they are not directly attributable to the particular client being defended in court, but rather are general overhead costs that are incurred by the law firm as a whole.

Question 3

The following would typically be considered indirect costs of manufacturing a particular Boeing 747 to be delivered to Singapore Airlines: electricity to run production equipment,the factory manager's salary,and the cost of the General Electric jet engines installed on the aircraft.

Accepted Answer

Explanation: Indirect costs are those not directly traceable to a specific product. Electricity and the factory manager's salary are indirect costs, but the cost of the jet engines is a direct cost as it can be directly attributed to the specific aircraft being manufactured.

Question 4

In a contribution format income statement,sales minus cost of goods sold equals the gross margin.

Accepted Answer

In a contribution format income statement, sales minus variable expenses equals the contribution margin, not the gross margin.

Question 5

Manufacturing overhead consists of:

Accepted Answer

Manufacturing overhead includes all manufacturing costs except for direct materials and direct labor. This includes indirect materials, such as supplies and utilities, indirect labor, such as maintenance and supervision, and other indirect costs like depreciation and rent.

Question 6

Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture?

Accepted Answer

Sheet steel is a direct material used in the production of the file cabinet and should be classified as a direct cost, not manufacturing overhead.

Question 7

In a traditional format income statement for a merchandising company,the cost of goods sold reports the product costs attached to the merchandise sold during the period.

Accepted Answer

In a traditional format income statement for a merchandising company, the cost of goods sold represents the cost of the merchandise that was sold during the period. It includes the cost of materials, labor, and overhead expenses associated with producing or acquiring the goods that are sold to customers.

Question 8

In any decision making situation,sunk costs are irrelevant and should be ignored.

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered. In decision making, it is important to consider only the future costs and benefits associated with different options. Sunk costs should be ignored because they cannot be changed or undone, and including them in the decision making process can lead to irrational choices.

Question 9

Which of the following costs would not be included as part of manufacturing overhead?

Accepted Answer

Insurance on sales vehicles would not be included as part of manufacturing overhead because it pertains to sales and not actual production of goods. The other options are all examples of costs that would be included in manufacturing overhead.

Question 10

The advertising costs that Pepsi incurred to air its commercials during the Super Bowl can best be described as a:

Accepted Answer

The advertising costs for Pepsi during the Super Bowl can be considered a fixed cost because it is a set expense that does not change regardless of how many Pepsi products are sold. It is a necessary expense to promote the brand during the Super Bowl, but it does not directly vary with production or sales.

Question 11

Although the contribution format income statement is useful for external reporting purposes,it has serious limitations when used for internal purposes because it does not distinguish between fixed and variable costs.

Accepted Answer

The contribution format income statement is specifically designed to distinguish between fixed and variable costs, making it useful for internal decision-making purposes.

Question 12

The following costs should be considered direct costs of providing delivery room services to a particular mother and her baby: the costs of drugs administered in the operating room,the attending physician's fees,and a portion of the liability insurance carried by the hospital to cover the delivery room.

Accepted Answer

Direct costs are those that can be directly traced to a specific service or product. While the costs of drugs and the attending physician's fees are direct costs, the liability insurance is an indirect cost as it is not directly attributable to a specific delivery.

Question 13

The wages of factory maintenance personnel would usually be considered to be: $\begin{array}{ccc}
&\text { Indirect labor } & \begin{array}{c}
\text { Manufacturing } \
\text { overhead }
\end{array} \
\text { A) } & \text { No } & \text { Yes } \
\text { B) } & \text { Yes } & \text { No } \
\text { C) } & \text { Yes } & \text { Yes } \
\text { D) } & \text { No } & \text { No }
\end{array}$

Accepted Answer

The wages of factory maintenance personnel are considered indirect labor because they do not directly contribute to the production of goods. They are also part of manufacturing overhead as they are necessary for maintaining the production facility.

Question 14

Each of the following would be a period cost except:

Accepted Answer

Period costs are not directly related to the production process, but rather are expenses incurred that are not associated with the making of a product. Option A, B, and D are all period costs. However, depreciation of a machine used in manufacturing is a product cost because it is a cost associated directly with the production process.

Question 15

Conversion cost consists of which of the following?

Accepted Answer

Conversion cost consists of direct labor and manufacturing overhead cost. It excludes direct materials cost.

Question 16

The cost of leasing production equipment is classified as: $\begin{array}{lcc} 
& \text { Prime cost } & \text { Product cost } \
\text { A) } & \text { No } & \text { Yes } \
\text { B) } & \text { No } & \text { No } \
\text { C) } & \text { Yes } & \text { No } \
\text { D) } & \text { Yes } & \text { Yes }
\end{array}$

Accepted Answer

The cost of leasing production equipment is a product cost because it is incurred in the production of goods. Prime costs are direct material and direct labor costs.

Question 17

The traditional format income statement is used as an internal planning and decision-making tool.Its emphasis on cost behavior aids cost-volume-profit analysis,management performance appraisals,and budgeting.

Accepted Answer

The traditional format income statement is primarily used for external reporting and does not emphasize cost behavior, which is crucial for internal planning and decision-making tools like the contribution margin income statement.

Question 18

Which of the following costs is an example of a period rather than a product cost?

Accepted Answer

Wages of salespersons are an example of a period cost because they are incurred in the selling and administrative activities of the company, rather than in the production of goods. Period costs are expensed in the period in which they are incurred, rather than being included in the inventory cost of the product. Depreciation, wages of production machine operators, and insurance on production equipment are all examples of product costs, as they are directly related to the production of goods.

Question 19

Which of the following would be considered a product cost for external financial reporting purposes?

Accepted Answer

Product costs are costs that are directly associated with the manufacturing of goods. The cost of sand used in the factory is a direct manufacturing cost, as it is used in the production process to maintain the machinery.

Question 20

In a contribution format income statement for a merchandising company,cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the income statement.

Accepted Answer

Cost of goods sold is a variable cost because it changes directly with the level of sales. Therefore, it is included in the "Variable expenses" portion of the income statement.

Quiz 1: Managerial Accounting and Cost Concepts