1. Selling costs can be either direct or indirect costs.
2. A direct cost is a cost that cannot be easily traced to the particular cost object under
consideration.
3. Property taxes and insurance premiums paid on a factory building are examples of period
costs.
4. Conversion cost equals product cost less direct labor cost.
5. Thread that is used in the production of mattresses is an indirect material that is therefore
classified as manufacturing overhead.
6. Direct labor is a part of prime cost, but not conversion cost.
7. Conversion cost is the sum of direct labor cost and direct materials cost.
8. Direct material costs are generally fixed costs.
9. Product costs are recorded as expenses in the period in which the related products are
sold.
10. Depreciation on manufacturing equipment is a product cost.
11. Manufacturing salaries and wages incurred in the factory are period costs.
12. Depreciation on office equipment would be included in product costs.
13. Rent on a factory building used in the production process would be classified as a product
cost and as a fixed cost.
14. A fixed cost remains constant if expressed on a unit basis.
15. Total variable cost is expected to remain unchanged as activity changes within the
relevant range.
16. Country Charm Restaurant is open 24 hours a day and always has a fire going in the
fireplace in the middle of its dining area. The cost of the firewood for this fire is fixed with
respect to the number of meals served at the restaurant.
17. Committed fixed costs represent organizational investments with a multi-year planning
horizon that can’t be significantly reduced even for short periods.
18. Commissions paid to salespersons are a variable selling expense.
19. Variable costs are costs that vary, in total, in direct proportion to changes in the volume or
level of activity.
20. The planning horizon for a committed fixed cost usually encompasses many years.
21. Cost behavior is considered linear whenever a straight line is a reasonable approximation
for the relation between cost and activity.
22. The high-low method uses cost and activity data from just two periods to establish the
formula for a mixed cost.
23. The engineering approach to the analysis of mixed costs involves a detailed analysis of
what cost behavior should be, based on an industrial engineer’s evaluation of the production
methods to be used, the materials specifications, labor requirements, equipment usage,
production efficiency, power consumption, and so on.
24. The contribution margin is the amount remaining from sales revenues after variable
expenses have been deducted.
25. A contribution format income statement for a merchandising company organizes costs into
two categories—cost of goods sold and selling and administrative expenses.
26. The traditional format income statement provides managers with an income statement
that clearly distinguishes between fixed and variable costs and therefore aids planning, control,
and decision making.
27. In a contribution format income statement, the gross margin minus selling and
administrative expenses equals net operating income.
28. A traditional format income statement organizes costs on the basis of behavior.
29. In a traditional format income statement for a merchandising company, the selling and
administrative expenses report all period costs that have been expensed as incurred.
30. The contribution format is widely used for preparing external financial statements.
31. Contribution margin equals revenue minus all fixed costs.
32. The potential benefit that is given up when one alternative is selected over another is
called an opportunity cost.
33. A cost that differs from one month to another is known as a differential cost.
34. The nursing station on the fourth floor of Central Hospital is responsible for the care of
orthopedic surgery patients. The costs of prescription drugs administered by the nursing station
to patients should be classified as:
35. All of the following costs would be found in a company’s accounting records except:
36. The costs of the Accounting Department at Central Hospital would be considered by the
Surgery Department to be:
37. Which of the following is classified as a direct labor cost?
Wages of assembly-
line workers Wages of a factory supervisor
A) No No
B) Yes Yes
C) No Yes
D) Yes No
38. In a manufacturing company, direct labor costs combined with direct materials costs are
known as:
39. The property taxes on a factory building would be an example of:
Prime Cost Conversion Cost
A) No Yes
B) Yes No
C) Yes Yes
D) No No
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40. Which of the following would most likely be included as part of manufacturing overhead
in the production of a wooden table?
41. Property taxes on a manufacturing facility are classified as:
Conversion cost Period cost
A) Yes No
B) Yes Yes
C) No Yes
D) No No
42. Indirect labor is a(n):
43. The salary paid to the maintenance supervisor in a manufacturing plant is an example of:
Product Cost Manufacturing Overhead
A) No Yes
B) Yes No
C) Yes Yes
D) No No
44. All of the following would be classified as product costs except: