New Era University

COST ACCOUNTING
Cost Terms, Concepts and Classification

• Which of the following statements is/are true?

• The classification of product and period costs is particularly valuable in
management accounting.
• The classification of variable and fixed costs is particularly valuable in financial
accounting.
a. Both I and II c. I only
b. Neither I nor II d II only
.

• Which of the following costs is not a product cost?

• Wages paid to workers for rework on defective products
• Wages paid to truck loaders who load finished goods onto outgoing delivery
trucks
• Fringe benefits paid to factory workers
• Wages paid to workers for idle time due to machine breakdown in a production
department

• Which of the following costs is not always considered to be expired immediately

upon being recognized?
• Cost of goods sold
• Salesmen’s commission
• Depreciation expense for factory equipment
• Salary of the company president

• Depreciation on a personal computer used in the marketing department of a

manufacturing firm would be classified as:
• a product cost that is fixed with respect to the company's output.
• a period cost that is fixed with respect to the company's output.
• a product cost that is variable with respect to the company's output.
• a period cost that is variable with respect to the company's output.

• Cost of goods manufactured will usually include:

• only costs incurred during the current period.
• only direct labor and direct materials costs.
• some costs incurred during the prior period as well as costs incurred during the
current period.
• some period costs as well as some product costs.

• If the amount of "Cost of goods manufactured" during a period exceeds the amount of
"Total manufacturing costs" for the period, then:
• ending work in process inventory is greater than or equal to the amount of the
beginning work in process inventory.
• ending work in process is greater than the amount of the beginning work in
process inventory.
• ending work in process is equal to the cost of goods manufactured.
• ending work in process is less than the amount of the beginning work in process
inventory.
• Which of the following is false with regard to direct materials for an auto
manufacturer?
• Steel would probably be a direct material.
• Upholstery fabric would probably be a direct material
• Oil to lubricate factory machines would not be a direct material.
• Small plastic clips to hold on door panels, because they become part of the auto,
must be accounted for as direct materials.

• Which of the following is an example of direct labor cost for an airplane

manufacturer?
• Cost of oil lubricants for factory machinery
• Cost of wages of assembly worker
• Salary of plant supervisor
• Cost of jet engines
•

• Which of the following manufacturing costs is an indirect cost of producing a

product?
• Oil lubricants used for factory machinery
• Commissions for sales personnel
• Hourly wages of an assembly worker
• Memory chips for a microcomputer manufacturer

• Which one of the following would not be classified as manufacturing overhead?

• Overtime premium when the overtime is caused by management’s requirement
• Idle time due to assembly line breakdown
• Wages of the plant security guard and janitorial staff
• None of these

• Which of the following items is not charged to manufacturing overhead?

• Factory depreciation and supplies
• Costs of service departments
• Costs of maintenance departments
• Costs of marketing departments

• Which of the following would most likely be included as part of manufacturing

overhead in the production of a wooden table?
• The cost of glue used in the table.
• The amount paid to the individual who stains the table.
• The cost of the wood used in the table.
• The commission paid to the salesperson who sold the table.

• Which of the following is not a prime cost?

• Supervisor’s wages
• Direct labor wages
• Machine operator wages
• Assembly line wages

• Conversion costs include:

• Indirect materials.
• Depreciation.
 • Indirect labor.
a. I, II and III c. II and III only
b. I and III only d None of these
.

• Which of the following should be classified as period costs?

Distribution costs Outside processing costs Sales commissions
a. Yes No Yes
b No Yes Yes
.
c. No No No
d Yes Yes Yes
.
•

• GG Inc. makes ski-boards in South Korea. Identify the correct matching of terms.
• Fiberglass – factory overhead
• Plant real estate tax – period cost
• Depreciation on delivery trucks – product cost
• Payroll taxes for workers in the packaging department – direct labor

• Which of the following statements concerning various cost concepts is true?

• A cost object is a target level of costs to be achieved.
• Cost accumulation is a general term that encompasses both tracing costs to a cost
object and allocating costs to that cost object.
• A given cost item can be a direct cost of one cost object and an indirect cost of
another.
• The materiality of the cost is not a factor in classifying the cost as direct or
indirect.

• The terms "direct cost" and "indirect cost" are commonly used in cost accounting.
Classifying a cost as either direct or indirect depends upon:
• the behavior of the cost in response to volume changes.
• whether the cost is expended in the period in which it is incurred.
• whether the cost can be related readily to resources consumed for a cost object.
• whether an expenditure is unavoidable because it cannot be changed regardless of
any action taken.

• The nursing station on the fourth floor of Central Hospital is responsible for the care
of patients who have undergone orthopedic surgery. The costs of drugs administered
by the nursing station to patients would be classified as:
• direct costs of the patients.
• indirect costs of the patients.
• overhead costs of the nursing station.
• period costs of the hospital.

• Costs are allocated to cost objects in many ways and for many reasons. Which one of
the following is a purpose of cost allocation?
• Evaluating revenue center performance
• Measuring income and assets for external reporting
• Budgeting cash and controlling expenditures
 • Aiding in variable costing for internal reporting

• Which of the following statements concerning cost drivers is/are true?

• Cost drivers are activities that cause costs to increase as the activity incr0065ases.
• Over the long run, all costs have cost drivers.
• Volume of production is a cost driver of direct manufacturing costs.
a. I, II and III c. I and III only
b. I and II only d II and III only
.

• A Johnson & Johnson analyst is preparing a presentation on cost drivers at one of its
pharmaceutical drug subsidiaries. Unfortunately, both the list of its business functions
and the accompanying list of representative cost drivers are accidentally randomized.
The two lists now on the screen are:
Business Function Representative Cost Driver
• Production • Minutes of TV advertising time
• Research and development • Number of calls to toll-free customer telephone line
• Marketing • Number of packages shipped
• Distribution • Hours the packaging line is in operation
• Design of products/processes • Number of patents filed with the patent office
• Customer service • Hours spent designing tamper-proof bottles
Which of the following improperly matches the business function with its
representative cost driver?
a. D : 3 c. F : 2
b A:4 d B:6
. .

• The difference between variable costs and fixed costs is:

• variable costs per unit fluctuate and fixed costs per unit remain constant.
• variable costs per unit are fixed over the relevant range and fixed costs per unit
are variable.
• total variable costs are variable over the relevant range and fixed in the long term,
while fixed costs never change.
• variable costs per unit change in varying increments, while fixed costs per unit
change in equal increments.

• Which of the following statements concerning cost behavior is true?

• When production (in units) decreases, the average cost per unit of product
increases.
• Within the relevant range, unit variable costs vary directly with the activity level.
• Costs incurred within the relevant range of production are called relevant costs.
• If a product’s average unit cost is the same at all levels of volume, it must have
only fixed costs.

• Data for Cost A and Cost B are as follows:

Number of units Total Cost of Unit Cost of
produced Cost A Cost B
 10,000 P120,000 P27.00
15,000 P180,000 P18.00
20,000 P240,000 P13.50
25,000 P300,000 P10.80
Which of the above best describes the behavior of Costs A and B?
• Cost A is fixed, Cost B is variable.
• Cost A is variable, Cost B is fixed.
• Both Cost A and Cost B are variable.
• Both Cost A and Cost B are fixed.

• Which of the following is a variable product cost?

• Salespersons’ commissions at Avon Products
• Interest expense on CBS’s long-term debt
• The costs of X-ray film at the Mayo Clinic’s radiology lab
• The depreciation on the playground equipment at a McDonald’s outlet

• An expense that is likely to contain both fixed and variable components is:
a. security guard wages. c. heat, light and power.
b. supplies. d small tools.
.

• Which of the following fixed costs would be considered a direct cost?

• Salary of the controller when the cost object is a unit of product
• The rental cost of the finished goods warehouse when the cost object is the
Accounting Department
• Salary of the sales manager when the cost object is the Sales Department
• Fees of the Board of Directors when the cost object is the Production Department

• Which of the following combinations of cost object and cost classification is most
reasonable?
Cost Object Cost Classification
Declining balance depreciation Variable cost
President’s salary Avoidable fixed cost
Advertising cost Discretionary fixed cost
Direct materials Mixed cost

• Which of the following is an example of a committed fixed cost?

• Investment in production facilities
• Advertising
• Preventive maintenance
• Employee training programs
•

• Salaries of accounts payable clerks when one clerical worker is needed for every 500
accounts payable is an example of:
a. fixed cost. c. curvilinear cost.
b. variable cost. d step cost.
.

Refer to the following information to answer the next four questions:

 Ter Industries has recently developed two new products, a cleaning unit for laser discs
and a tape duplicator for reproducing home movies taken with a video camera.
However, Ter has only enough plant capacity to introduce one of these products
during the current year. The company controller has gathered the following data to
assist management in deciding which product should be selected for production. Ter's
fixed overhead includes rent and utilities, equipment depreciation, and supervisory
salaries. Selling and administrative expenses are not allocated to products.
Tape Duplicator Cleaning Unit
Raw materials P44.00 P36.00
Machining @ P12/hr. 18.00 15.00
Assembly @ P10/hr. 30.00 10.00
Variable overhead @ P8/hr. 36.00 18.00
Fixed overhead @ P4/hr. 18.00 9.00
Total cost P146.00 P88.00

Suggested selling price P169.95 P99.98

Actual research and
development costs P240,000 P175,000
Proposed advertising and
promotion costs P500,000 P350,000

• For Ter's tape duplicator, the unit costs for raw materials, machining, and assembly
represent:
a. conversion costs. c. committed costs.
b. separable costs. d prime costs.
.

• The total overhead cost for Ter's laser disc cleaning unit is a:
a. mixed cost. c. sunk cost.
b. discretionary cost. d carrying cost.
.

• Research and development costs for Ter's two new products are:
a. conversion costs. c. relevant costs.
b. sunk costs. d avoidable costs.
.

• The advertising and promotion costs for the product selected by Ter will be:
a. discretionary costs. c. committed costs.
b. opportunity costs. d incremental costs.
.

Use the following information to answer the next two questions:

The Hotel Sugu is a four-star hotel located in Guadalupe, Makati. The hotel’s
operations vice president would like to replace the hotel’s antiquated computer
terminals at the registration desk with attractive state-of-the-art flat-panel displays.
The new displays would take less space, would consume less power than the old
computer terminals, and would provide additional security since they can only be
viewed from a restrictive angle. The new computer displays would not require any
new wiring. The hotel’s chef believes the funds would be better spent on a new bulk
freezer for the kitchen.
• Which of the following should be considered sunk cost and therefore ignored when
making the decision to replace the old computer terminals with new flat-panel
displays?
• Cost of the new flat-panel displays
• Cost of maintaining the old computer terminals
• Cost of existing registration desk wiring
• Cost of removing the old computer terminals
•

• Which of the following is an opportunity cost of replacing the old computer terminals
with new flat-panel displays?
• Cost of electricity to run the terminals
• Rent on the space occupied by the registration desk
• Wages of registration desk personnel
• Benefits from a new freezer

• Which of the following statements concerning various cost terms is/are true?
• A common cost is one type of direct cost.
• A sunk cost is usually a differential cost.
• Opportunity costs are not usually recorded in the accounts of an organization.
• A particular cost may be direct or indirect depending on the cost object.
a. I, II, III and IV c. III and IV only
b II and III only d I and IV only
. .

• The following activities are typical in production management:

1) Warranty work
2) Labor and overhead incurred for rework of defective products found by an
inspector
3) Quality training program
4) The costs of a consumer complaint department
5) In-process inspection costs
6) Re-inspection of reworked products
7) Downtime attributed to quality problems
8) Product recalls
9) Lower sales due to poor product performance
10) Quality audits
To what classification of quality costs do the foregoing described costs belong?
Prevention Appraisal Internal Failure External Failure
a. 3, 7, 10 5, 6 2 1, 4, 8, 9
b. 3, 10 5 2, 6, 7 1, 4, 8, 9
c. 10 3 2, 5, 6 1, 4, 7, 8, 9
d. 3, 10 5 1, 2, 10 4, 7, 8, 9

• The terms direct cost and indirect cost are commonly used in accounting. A particular
cost might be considered a direct cost of a manufacturing department but an indirect
cost of the product produced in the manufacturing department. Classifying a cost as
either direct or indirect depends upon
• The behavior of the cost response to volume changes.
• Whether the cost is expensed in the period in which it is incurred.
 • The cost object to which the cost is being related
• Whether expenditure is unavoidable because it cannot be changed regardless of
any.

• In determining cost behavior in business, the cc often expressed as Y = a + bX. Which

one of the following cost estimation methods should not be used in estimating fixed
and variable costs for the equation?
• Graphic method.
• Simple regression.
• High and low point method.
• Multiple regression.

• Which one of the following best describe labor?

• A prime cost
• A period cost
• A product cost
• Both a product cost and a prime cost

• Inventoriable costs
• Include only the prime costs of manufacturing a product.
• Include only the conversion costs of manufacturing a product.
• Are expensed when products become part a finished goods inventory.
• Are regarded as assets before the products are sold.

• An operation costing system is

• Identical to a process costing system except that actual cost is used for
manufacturing overhead.
• The same as a process costing system except that materials are allocated on the
basis of batches of production.
• The same as job-order costing system except that materials are accounted for in
the same way as they are in a process costing system.
• The same as a job-order costing system except that no overhead allocations are
made since actual costs are used

• In cost terminology, conversion costs

• Direct and indirect labor.
• Direct labor and direct materials,
• Direct labor and factory overhead.
• Indirect labor and variable factory

• Cost drivers are

• Activities that cause costs to increase as the activity increases.
• Accounting techniques used to control costs.
• Accounting measurements used to evaluate whether or not performance is
proceeding according to plan.
• A mechanical basis, such as machine hours, computer time, size of equipment, or
square footage of factory, used to assign costs to activities.

• Which one of the following categories of cost most likely not considered a
component of fixed factory overhead?
• Rent.
• Property Taxes.
• Depreciation.
 • Power.

• The difference between variable costs and fixed cost is

• Variable costs per unit fluctuate and fixed costs per unit remain constant.
• Variable costs per unit are fixed over the relevant range and fixed costs per unit
are variable.
• Total variable costs are variable over the relevant range and fixed in the long term,
while fixed costs never change.
• Variable costs per unit change in varying increments, while fixed costs per unit
change in equal increments.

The next two questions are based on the following information

A company wants to determine its marketing costs or budgeting purposes. Activity
measures and cost incurred for 4 months of the current year are presented in the table
commissions. The sales force was increased from 20 to 21 individuals during the month
of May.

Activity Measures March April May June

Sales orders 2,000 1,800 2,400 2,300
Units sold 55,000 60,000 70,000 65,000
Dollar sales P1,150,000 P1,200,000 P1,330,000 P1,275,000

Marketing costs:
Advertising P190,000 P200,000 P190,000 P190,000
Sales salaries 20,000 20,000 21,000 21,000
Commissions 23,000 24,000 26,600 107,000
Shipping costs 93,000 100,000 114,000 107,000
Total costs P326,000 P344,000 P351,600 P343,500

• Which of the following most appropriately describes the classification and behavior
of shipping costs?
Classification Behavior
• Variable cost P1.66 per unit sold
• Mixed cost P16,000 per month plus P1.40 per unit sold
• Mixed cost P30,000 per month plus P35.00 per sales order
• Mixed costs P58,000 per month plus P23.33 per sales order

• In relation to the dollar amount of sales, which the following cost classifications is
appropriate advertising and sales salaries costs?
Advertising Sales Salaries
• A. Mixed cost Fixed costs
• B. Fixed cost Variable cost
• C. Mixed cost Mixed cost
• D. Fixed cost Fixed cost

• An assembly plant accumulates its variable and fixed manufacturing overhead costs
in a single cost pool, which is then applied to work in process using a single
application base. The assembly plant management wants to estimate the magnitude of
the total manufacturing overhead costs for different volume levels of the application
activity base using a flexible budget formula. If there is an increase in the application
activity base that is within the relevant range of activity for the assembly plant, which
one of the following relationships regarding variable and fixed costs is correct?
• The variable cost per unit is constant, and the total fixed costs decrease.
• The variable cost per unit is constant, and the total fixed costs increase.
 • The variable cost per unit and the total fixed costs remain constant.
• The variable cost per unit is Increases, and the total fixed costs remain constant.

• A company is attempting to determine if there is a cause-and-effect relationship

between scrap value and output produced. The following exhibit presents the
company's scrap data for the last fiscal year:

Scrap Value as a Percent of Standard Dollar Value of Output Produced

Standard Dollar Percent

Month Value of Output Scrap(%)
Nov. 2000 P1,500,000 4.5
Dec. 2000 P1,650,000 2.5
Jan 2001 P1,600,000 3.0
Feb 2001 P1,550:000 2.5
Mar 2001 P1,650,000 1.5
Apr. 2001 P1,550,000 4.0
May 2001 P1,400,000 2.5
June 2001 P1,300,000 3.5
July 2001 P1,650,000 5.5
Aug 2001 P1,000,000 4.5
Sept 2001 P1,400,000 3.5
Oct 2001 P1,600,000 2.5

Based on the above data, the company’s scrap value in relation to the standard dollar
value of output produced appears to be
• A variable Cost
• A fixed cost
• A semi-fixed cost
• Unrelated to the standard dollar value

• Conversion Costs do not include

• Depreciation
• Direct Materials
• Indirect Labor
• Indirect Materials

• A fixed cost that would be considered a direct cost is

• A cost accountant's salary when the cost object is a unit of product.
• The rental cost of a warehouse to store inventory when the cost object is the
Purchasing Department.
• A production supervisors salary when the cost object is the Production
Department.
• Board of directors' fees when the cost object is the Marketing Department.

• Select the incorrect statement concerning cost objects.

• When the cost object is the Production Department, the cost of a production
supervisor’s salary would be a direct cost.
• A direct cost must be conveniently and economically traceable to the cost object.
• When the cost object is a Tundra truck, the cost of the truck’s engine is a direct
cost.
• When the cost object is the Toyota Princeton Indiana manufacturing plant the cost
of overhead is an indirect cost.
• Which of the following statements is correct concerning fixed costs?
a. Within the relevant range, total fixed costs always increase when volume increases.
b. A step cost may be fixed or variable.
c. The fixed costs per unit will remain constant provided volume remains within the
relevant range.
d. Within the relevant range, total fixed costs always decrease when volume
increases.

• A utility bill that includes a flat charge for basic service plus a stated rate for each
kilowatt hour of usage beyond a specified level is an example of a
• mixed cost.
• step cost.
• variable cost.
• independent cost.

• In relation to the dollar amount of Tundra truck sales, which of the following
classifications is appropriate for the truck tires used in production and for the salaries
of production supervisors?
Truck Tires Production Supervisor Salaries
• Variable cost Fixed cost
• Fixed cost Variable cost
• Variable cost Mixed cost
• Mixed cost Fixed cost

• Which of the following is not a product cost for Tundra trucks?

• Steering wheel
• Glue
• Salary of product sales manager
• Overhead

• Which of the following would not be classified as direct material for a Tundra truck?
• Cost of the battery
• Cost of the glue used to secure the carpet in the cab of the truck
• Cost of freight paid on the truck windshield
• Cost of the fuel tank

• Which of the following would be classified as direct labor for the production of a
Tundra truck?
• Wages paid to assembly line (production) workers
• Bonuses paid to production workers for exceeding production goals
• Production workers’ Social Security taxes
• All of the above

• Which of the following costs would not be classified as overhead for the production
of Tundra trucks?
• Salary of plant manager
• Indirect labor costs
• Salary of Toyota Chief Executive Officer
• Depreciation of production machinery

• All of the following are reasons why overhead costs are allocated to cost objects
except:
• to compare alternative courses of action for management planning and decision
making.
 • to identify the fixed and variable components of the various overhead costs.
• to determine the full cost of the cost object.
• to motivate the manager in charge of the cost object to manage it efficiently.

• All of the following are reasons for using predetermined overhead rates in product
costing except:
• to overcome the problem of fluctuations in activity levels that have no impact on
fixed overhead costs.
• to overcome the problem caused by overhead containing both fixed and variable
costs.
• to adjust for variations in actual overhead costs that are unrelated to fluctuations
in activity.
• to allow management to determine whether a product, product line, or customer is
profitable.

• What is the best method for disposing of significant underapplied factory overhead?
• Charge the underapplied amount to cost of goods sold
• Prorate the underapplied amount to cost of goods sold, finished goods, and work
in process
• Prorate the underapplied amount to inventory only (work in process and finished
goods)
• Charge the underapplied amount to a loss account at the end of the period

• Select the incorrect statement concerning overapplied overhead.

• The overhead control account will have a debit balance.
• The amount of overhead transferred to WIP from the overhead control account
exceeded the actual amount of overhead incurred.
• Overapplied overhead must be closed at year-end because a single year’s activity
level was used to set the predetermined overhead rate.
• Overapplied overhead may result if the company’s actual utilization of capacity is
greater than expected.

• In determining cost behavior in business, the cost function is often expressed as y = a

+ bx. What does the “a” term represent?
• Total variable costs
• Total fixed costs
• Unit variable cost
• Unit fixed cost

• Which method of separating mixed costs ensures the best fitting regression line?
• High-low method
• Scattergraph method
• Proration method
• Least squares regression method

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