Cost Terms and Concepts

TRUE-FALSE

1. The three basic costs of a manufactured product are direct materials, direct labor, and
manufacturing overhead.

2. The labor cost for janitors, supervisors, materials handlers, engineers, and maintenance
personnel would be considered a direct labor cost.

3. Direct labor cost combined with manufacturing overhead cost is referred to as prime cost.

4. Indirect labor, indirect materials, heat and light for the factory, property taxes on the
factory, depreciation on production equipment, and insurance on production equipment would
be classified as manufacturing overhead.

5. The combined cost of direct materials cost and direct labor cost is known as prime cost.

6. Costs that are involved in the manufacture of a product are called period costs.

7. Factory rent is included in manufacturing costs, and office rent is included in period costs.

8. The salary of the company's vice president for marketing could be classified as a fixed
product cost.

9. Product costs are often called inventoriable costs.

10. In addition to maintaining three balance-sheet inventory accounts, there are other
significant differences in the balance sheet accounts maintained by a manufacturer, compared
to the balance sheet accounts maintained by a merchandising firm.

11. The income statement for a manufacturer does not contain the line item 'Cost of Goods
Sold.'

12. Manufacturers have two classes of inventory--work in process and finished goods.

13. How a cost will react or respond to changes in the level of business activity is called cost
analysis.

14. Variable costs are costs that vary, in total and per unit of product, in direct proportion to
changes in levels of activity.

15. A fixed cost varies per unit of product within the relevant range of activity.

16. A cost that is incurred as a consequence of general, overall operating activities, rather
than a specifically identified activity, is known as a common cost.

17. A cost that can be easily and conveniently traced to individual units of product is called a
direct cost.

18. Any cost that is present under one alternative but absent in whole or in part under another
alternative is known as a differential cost.

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19. An opportunity cost can be defined as the potential benefit that is given up or sacrificed
when an alternative course of action is selected over another.

20. A sunk cost is a cost that has already been incurred and is a relevant cost to present and
future decisions.

MULTIPLE-CHOICE
1. The three basic elements of cost for a manufactured product are:
a. indirect materials, indirect labor, and manufacturing overhead
b. merchandise inventory, work in process, and finished goods inventory
c. direct materials, work in process, and finished goods inventory
d. direct materials, direct labor, and manufacturing overhead

2. Which of the following is not an element of conversion cost?

a. direct material cost
b. indirect labor cost
c. depreciation on factory equipment
d. indirect materials cost
e. salary of the factory superintendent

3. Prime cost and conversion cost have one particular cost element in common, which is:
a. raw materials used in production
b. manufacturing overhead
c. period costs
d. factory rent
e. none of the above

4. Which of the following is not an element of manufacturing overhead?

a. Indirect labor and indirect materials
b. Depreciation of maintenance equipment
c. The salary of a plant supervisor
d. Property taxes on factory buildings
e. The salary of a marketing manager

6. Which of the following is a period cost?

a. direct materials cost
b. indirect materials cost
c. factory utilities cost
d. administrative costs
e. all of the above are period costs

7. Period costs are:

a. synonymous with administrative costs
b. a function of production
c. reported as assets on the balance sheet
d. reported as a part of the cost of goods sold on the income statement
e. unrelated to production

8. Which of the following is not an inventoriable cost?

a. Direct labor
b. Factory supervisory salaries
c. Factory utilities
d. Sales commissions

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 e. Indirect materials

9. The cost of goods manufactured may be determined as:

a. beginning raw materials + direct labor costs + manfct. overhead
b. beg. finished goods + cost of goods sold - ending finished goods
c. period costs + direct labor + direct materials
d. raw materials used + direct labor + manufacturing overhead
e. none of the above

10. A firm had beginning finished goods inventory of Php20,000; a cost of goods
manufactured of Php75,000; a gross margin of Php80,000; and sales of Php140,000. The
ending finished goods inventory is:
a. Php60,000
b. Php40,000
c. Php95,000
d. Php35,000

11. A company had beginning finished goods inventory of Php15,000; ending finished goods
inventory of Php20,000; and cost of goods sold of Php80,000. The cost of goods manufactured
was:
a. Php80,000
b. Php85,000
c. Php75,000
d. Php65,000
e. Php60,000

12.

Raw materials purchased Php2,000 Direct labor costs Php2,000

Factory insurance cost 100 Office insurance 275
Beginning work in process 2,500 Indirect materials 300
Beginning raw materials 400 Indirect labor 250
Ending work in process 3,250 Cost of goods sold 4,320
Ending raw materials 800 Factory depreciation 150

The dollar amount of raw materials used in production was:

a. Php1,900
b. Php1,800
c. Php1,200
d. Php2,400
e. none of the above

13.

Raw materials purchased Php2,000 Direct labor costs Php2,000

Factory insurance cost 100 Office insurance 275
Beginning work in process 2,500 Indirect materials 300
Beginning raw materials 400 Indirect labor 250
Ending work in process 3,250 Cost of goods sold 4,320
Ending raw materials 800 Factory depreciation 150

The cost of goods manufactured during the period was:

a. Php6,900

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 b. Php4,400
c. Php3,250
d. Php3,650

14. Which of the following is an example of a fixed cost?

a. Direct material
b. Electricity cost to operate assembly line equipment
c. A commission paid to sales personnel
d. Direct labor
e. The salary of a factory supervisor

15. Direct labor might be classified as a(n):

a. direct cost, a variable cost, or a period cost
b. indirect cost, a fixed cost, or a product cost
c. direct cost, a variable cost, or a product cost
d. direct cost, a fixed cost, or a product cost
e. direct cost, a fixed cost, or a prime cost

16. For the production of 3,000 units of product, variable costs are Php4,500 and fixed costs
are Php3,000. For the production of 3,200 units (within the relevant range), which cost
pattern will occur?

Variable Costs Variable Cost/Unit Fixed Costs Fixed Cost/Unit

a. Php4,500 Php1.50 Php3,000 Php1.00
b. Php4,800 Php1.50 Php3,200 Php1.00
c. Php4,500 Php1.40625 Php3,200 Php1.00
d. Php4,800 Php1.50 Php3,000 Php .9375

17. Which of the following is an indirect cost?

a. Salary of maintenance supervisor
b. Electricity cost to operate a plant security system
c. Depreciation of factory equipment
d. Cost of materials to maintain factory equipment in working order
e. All of the above are indirect costs

18. Which of the following statements is false?

a. raw materials are any materials going into a manufactured product
b. order-getting and order-filling costs are treated as marketing costs
c. variable costs per unit of product remain unchanged
d. inventoriable cost is a synonym for product cost
e. common costs are a synonym for direct costs

19. Which is NOT TRUE of a differential cost?

a. It is always a variable cost
b. It can be an incremental cost
c. It is present under one alternative but is absent under another
d. It can be a decremental cost

20. A potential benefit that is lost or sacrificed when the choice of one course of action
requires the giving up of a competing course of action is known as:
a. a period cost
b. a sunk cost
c. a variable cost

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 d. a differential cost
e. none of the above

21. Within two weeks after rebuilding a piece of assembly-line equipment, at a cost of
Php45,000, management decided to replace the equipment with a newer, faster model. They
received no trade-in on the old equipment. The Php45,000 expenditure should be considered
a(an):
a. period cost
b. opportunity cost
c. sunk cost
d. differential cost
e. decremental cost

22. A firm had Php200,000 in sales; Php120,000 in goods available for sale; ending finished
goods inventory of Php20,000; and marketing and administrative costs of Php55,000. Which
of the following is true?
a. net income was 22.5% of sales
b. the cost of goods sold was Php100,000
c. the gross margin was Php100,000
d. the beginning finished goods cannot be determined from the data
e. all of the above are true

23. The total production cost to produce one unit of finished goods was Php45.00. Direct
materials were 1/3 of the total cost and direct labor was 40% of prime cost. The cost per unit
for direct materials, direct labor, and manufacturing overhead was:
a. Php15.00, Php18.00, and Php12.00, respectively
b. Php15.00, Php12.00, and Php18.00, respectively
c. Php15.00, Php16.00, and Php14.00, respectively
d. Php15.00, Php10.00, and Php20.00, respectively

FIL IN THE BLANKS

1. Factory labor costs that can be easily traced to individual units of product are called ______
labor or 'touch labor.'

2. Small items of material such as glue and nails that enter into the manufacture of furniture
would be considered ________ materials.

3. Another term for product cost is _____________ cost.

4. The total of direct materials cost plus direct labor cost is known as _____ cost

5. Another term for direct labor is _____ labor.

6. When a course of action is chosen over the current condition and the cost of the selected
alternative is greater than the cost under the current condition, the difference is called a(an)
___________ cost.

7. Anything for which cost data are desired, such as products, product lines, customers, jobs,
and organizational subunits is called a ____ ______.

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8. At 50,000 units of product, the cost of X was Php50,000 (Php1.00 per unit).
At 40,000 units of product, the cost of X was Php50,000 (Php1.25 per unit).
The cost of X is a _____ cost.

9. When a course of action increases the revenue over the revenue of the current condition,
the increase is referred to as ____________ revenue.

10. A student decided to reduce her work hours from 8 hours per day to 6 hours per day in
order to attend an accounting course once a week. Her weekly pay decreased by Php36.50.
The Php36.50 is the ___________cost of attending the accounting course.

11. The range of activity within which assumptions about variable and fixed cost behavior are
valid is called the ________ range of activity.

12. A firm had beginning finished goods inventory of Php30,000; its cost of goods
manufactured was Php85,000; its gross margin was Php85,000; and its sales were
Php160,000. The ending finished goods inventory was Php______.

13. A company had beginning finished goods inventory of Php25,000; ending finished goods
inventory of Php30,000; and its cost of goods sold was Php95,000. The cost of goods
manufactured was Php_______.

14. The total production cost to produce one unit of finished goods was Php60.00. Direct
materials were 1/4 of the total cost and direct labor was 60% of prime cost. The cost per unit
for manufacturing overhead was Php__.__.

15. All of the manufacturing costs, except for direct materials and direct labor, are called
_____________ overhead.

16. Direct materials and direct labor are examples of (FIXED or VARIABLE) costs.

17. A company purchased a pipe bending machine for Php47,000. The Php47,000 is an
example of a ____ cost, since it has been incurred and cannot be changed by any decision
made now or in the future.