Chapter 1--Cost Terminology and Cost Behaviors

LEARNING OBJECTIVES

LO 1 What assumptions do accountants make about cost behavior, and why are these
assumptions necessary
LO 2 How are costs classified, and why are such classifications useful?
LO 3 How does the conversion process occur in manufacturing and service companies?
LO 4 What product cost categories exist, and what items compose those categories?
LO 5 How is the cost of goods manufactured calculated and used in preparing an income
statement?

TRUE/FALSE

1. The portion of an asset’s value on the balance sheet is referred to as an expired cost.
2. The portion of an asset that was consumed during a period is referred to an expired cost.
3. A variable cost remains constant on a per-unit basis as production increases
4. A fixed cost remains constant on a per-unit basis as production changes.
5. The relevant range is valid for all levels of activity
6. An indirect cost can be easily traced to a cost object.
7. Both accountants and economists view variable costs as linear in nature.
8. Fixed cost per unit varies directly with production.
9. Variable cost per unit remains constant within the relevant range.
10. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a
mixed cost.
11. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a step
cost.
12. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a
mixed cost.
13. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a
step cost.
14. A predictor which has an absolute cause and effect relationship to a cost is referred to a cost driver.
15. A mixed cost will be an effective cost driver.
16. A variable cost will be an effective cost driver.
17. Unexpired costs are reflected on the balance sheet.
18. Expired costs are reflected on the balance sheet.
19. Distribution costs are an example of product costs.
20. Distribution costs are an example of period costs.
21. Retailers generally have a much high degree of conversion than do manufacturing or professional firms.
22. Retailers generally have a much lower degree of conversion than do manufacturing or professional firms.
23. In a service industry, direct materials are usually insignificant in amount and cannot easily be traced to a
cost object.
24. In a service industry, direct materials are usually significant in amount and can be easily traced to a cost
object.
25. There is an inverse relationship between prevention costs and failure costs.
26. There is a direct relationship between prevention costs and failure costs.

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 27. In an actual cost system, actual production overhead costs are accumulated in an Overhead Control
account and assigned to Work in Process at the end of the period.
28. In an normal cost system, actual production overhead costs are accumulated in an Overhead Control
account and assigned to Work in Process at the end of the period.
29. In a normal cost system, factory overhead is applied to Work in Process using a predetermined overhead
rate.
30. In an actual cost system, factory overhead is applied to Work in Process using a predetermined overhead
rate.

ANS: F DIF: Moderate OBJ: 2-4

COMPLETION

1. Costs that can be conveniently traced to a cost object are referred to as ____________ costs.

2. Anything for which management wants to accumulate or collect costs is known as a

______________________.

3. Costs that cannot be conveniently traced to a cost object are known as __________________ costs.

4. A cost that remains unchanged in total within the relevant range is known as a _____________ cost.

5. A cost that varies in total in direct proportion to changes in activity is known as a _______________ cost

6. The assumed range of activity that reflects the company’s normal operating range is referred to as the
_____________________________.

7. A cost that remains constant on a per unit basis within the relevant range is a
________________________ cost.

8. A cost that varies inversely with the level of production is known as a _______________ cost.

9. A cost that has both fixed and variable components is known as a __________________ cost.

10. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a
___________ cost.

11. Another name for inventoriable costs is ______________ costs.

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 12. The three stages of production for a manufacturing firm are ______________, ________________, and
______________________.

13. Costs that are incurred to improve quality by precluding defects and improper processing are referred to
as ____________________ costs.

14. Costs incurred for monitoring or inspecting products are known as ____________________ costs.

15. Costs that result from defective units, product returns, and complaints are referred to as
_______________________ costs.

MULTIPLE CHOICE

1. The term "relevant range" as used in cost accounting means the range over which
a. costs may fluctuate.
b. cost relationships are valid.
c. production may vary.
d. relevant costs are incurred.

2. Which of the following defines variable cost behavior?

Total cost reaction Cost per unit reaction

to increase in activity to increase in activity

a. remains constant remains constant

b. remains constant increases
c. increases increases
d. increases remains constant

3. When cost relationships are linear, total variable prime costs will vary in proportion to changes in
a. direct labor hours.
b. total material cost.
c. total overhead cost.
d. production volume.

4. Which of the following would not generally be considered a fixed overhead cost?

Straight-line Factory Units-of-production

depreciation insurance depreciation

a. no no no
b. yes no yes
c. yes yes no
d. no yes no

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 5. An example of a fixed cost is
a. total indirect material cost.
b. total hourly wages.
c. cost of electricity.
d. straight-line depreciation.
6. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n)
a. expired cost.
b. fixed cost.
c. variable cost.
d. mixed cost.

7. A(n) ________ cost increases or decreases in intervals as activity changes.

a. historical cost
b. fixed cost
c. step cost
d. budgeted cost

8. When the number of units manufactured increases, the most significant change in unit cost will be
reflected as a(n)
a. increase in the fixed element.
b. decrease in the variable element.
c. increase in the mixed element.
d. decrease in the fixed element.

9. Which of the following always has a direct cause-effect relationship to a cost?

Predictor Cost driver

a. yes yes
b. yes no
c. no yes
d. no no

10. A cost driver

a. causes fixed costs to rise because of production changes.
b. has a direct cause-effect relationship to a cost.
c. can predict the cost behavior of a variable, but not a fixed, cost.
d. is an overhead cost that causes distribution costs to change in distinct increments with
changes in production volume.
11. Product costs are deducted from revenue
a. as expenditures are made.
b. when production is completed.
c. as goods are sold.
d. to minimize taxable income.

12. A selling cost is a(n)

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 product cost period cost inventoriable cost

a. yes yes no
b. yes no no
c. no yes no
d. no yes yes

13. Which of the following is not a product cost component?

a. rent on a factory building
b. indirect production labor wages
c. janitorial supplies used in a factory
d. commission on the sale of a product

14. Period costs

a. are generally expensed in the same period in which they are incurred.
b. are always variable costs.
c. remain unchanged over a given period of time.
d. are associated with the periodic inventory method.

15. Period costs include

distribution costs outside processing costs sales commissions

a. yes no yes
b. no yes yes
c. no no no
d. yes yes yes

16. The three primary inventory accounts in a manufacturing company are

a. Merchandise Inventory, Supplies Inventory, and Finished Goods Inventory.
b. Merchandise Inventory, Work in Process Inventory, and Finished Goods Inventory.
c. Supplies Inventory, Work in Process Inventory, and Finished Goods Inventory.
d. Raw Material Inventory, Work in Process Inventory, and Finished Goods Inventory.
17. Cost of Goods Sold is an
a. unexpired product cost.
b. expired product cost.
c. unexpired period cost.
d. expired period cost.

18. The indirect costs of converting raw material into finished goods are called
a. period costs.
b. prime costs.
c. overhead costs.
d. conversion costs.

19. Which of the following would need to be allocated to a cost object?

a. direct material
b. direct labor

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 c. direct production costs
d. indirect production costs

20. Conversion cost does not include

a. direct labor.
b. direct material.
c. factory depreciation.
d. supervisors' salaries.

21. The distinction between direct and indirect costs depends on whether a cost
a. is controllable or non-controllable.
b. is variable or fixed.
c. can be conveniently and physically traced to a cost object under consideration.
d. will increase with changes in levels of activity.

22. Broussard Company is a construction company that builds houses on special request. What is the proper
classification of the carpenters' wages?

Product Period Direct

a. yes yes no
b. yes no yes
c. no no no
d. no yes yes

23. Broussard Company is a construction company that builds houses on special request. What is the proper
classification of the cost of the cement building slab used?

Direct Fixed

a. no no
b. no yes
c. yes yes
d. yes no

24. Broussard Company is a construction company that builds houses on special request. What is the proper
classification of indirect material used?

Prime Conversion Variable

a. no no no
b. no yes yes
c. yes yes yes
d. yes no no

25. Which of the following costs would be considered overhead in the production of chocolate chip cookies?
a. flour

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 b. chocolate chips
c. sugar
d. oven electricity

26. All costs related to the manufacturing function in a company are

a. prime costs.
b. direct costs.
c. product costs.
d. conversion costs.

27. Prime cost consists of

direct material direct labor overhead

a. no yes no
b. yes yes no
c. yes no yes
d. no yes yes

28. Plastic used to manufacture dolls is a

prime cost product cost direct cost fixed cost

a. no yes yes yes

b. yes no yes no
c. yes yes no yes
d. yes yes yes no

29. The term "prime cost" refers to

a. all manufacturing costs incurred to produce units of output.
b. all manufacturing costs other than direct labor and raw material costs.
c. raw material purchased and direct labor costs.
d. the raw material used and direct labor costs.

30. Conversion of inputs to outputs is recorded in the

a. Work in Process Inventory account.
b. Finished Goods Inventory account.
c. Raw Material Inventory account.
d. both a and b.

31. In a perpetual inventory system, the sale of items for cash consists of two entries. One entry is a debit to
Cash and a credit to Sales. The other entry is a debit to
a. Work in Process Inventory and a credit to Finished Goods Inventory.
b. Finished Goods Inventory and a credit to Cost of Goods Sold.
c. Cost of Goods Sold and a credit to Finished Goods Inventory.
d. Finished Goods Inventory and a credit to Work in Process Inventory.
32. The formula to compute cost of goods manufactured is

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 a. beginning Work in Process Inventory plus purchases of raw material minus ending
Work in Process Inventory.
b. beginning Work in Process Inventory plus direct labor plus direct material used plus
overhead incurred minus ending Work in Process Inventory.
c. direct material used plus direct labor plus overhead incurred.
d. direct material used plus direct labor plus overhead incurred plus beginning Work in
Process Inventory.

33. The final figure in the Schedule of Cost of Goods Manufactured represents the
a. cost of goods sold for the period.
b. total cost of manufacturing for the period.
c. total cost of goods started and completed this period.
d. total cost of goods completed for the period.

34. The formula for cost of goods sold for a manufacturer is

a. beginning Finished Goods Inventory plus Cost of Goods Manufactured minus ending
Finished Goods Inventory.
b. beginning Work in Process Inventory plus Cost of Goods Manufactured minus ending
Work in Process Inventory.
c. direct material plus direct labor plus applied overhead.
d. direct material plus direct labor plus overhead incurred plus beginning Work in Process
Inventory.

35. Which of the following replaces the retailing component "Purchases" in computing Cost of Goods Sold
for a manufacturing company?
a. direct material used
b. cost of goods manufactured
c. total prime cost
d. cost of goods available for sale
36. Costs that are incurred to preclude defects and improper processing are:
a. prevention costs c. appraisal costs
b. detection costs d. failure costs
37. Costs that are incurred for monitoring and inspecting are:
a. prevention costs c. appraisal costs
b. detection costs d. failure costs

38. Costs that are incurred when customers complain are:

a. prevention costs c. appraisal costs
b. detection costs d. failure costs