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1. Direct material costs are generally variable costs.
2. Property taxes and insurance premiums paid on a factory building are examples of
manufacturing overhead.
3. Manufacturing overhead combined with direct materials is known as conversion cost.
4. All costs incurred in a merchandising firm are considered to be period costs.
5. Depreciation is always considered a product cost for external financial reporting purposes
in a manufacturing firm.
6. In external financial reports, factory utilities costs may be included in an asset account on
the balance sheet at the end of the period.
7. Advertising costs are considered product costs for external financial reports because they
are incurred in order to promote specific products.
8. Selling and administrative expenses are product costs under generally accepted
accounting principles.
9. A variable cost is a cost whose cost per unit varies as the activity level rises and falls.
10. When the level of activity increases, total variable cost will increase.
11. A decrease in production will ordinarily result in an increase in fixed production costs per
unit.
12. Automation results in a shift away from variable costs toward more fixed costs.
13. In order for a cost to be variable it must vary with either units produced or units sold.
14. The concept of the relevant range does not apply to fixed costs.
15. Indirect costs, such as manufacturing overhead, are always fixed costs.
16. Discretionary fixed costs arise from annual decisions by management to spend in certain
fixed cost areas.
17. Even if operations are interrupted or cut back, committed fixed costs remain largely
unchanged in the short term because the costs of restoring them later are likely to be far greater
than any short-run savings that might be realized.
18. Committed fixed costs are fixed costs that are not controllable.
19. A mixed cost is partially variable and partially fixed.
20. Traditional format income statements are prepared primarily for external reporting
purposes.
21. In a contribution format income statement, sales minus cost of goods sold equals the
gross margin.
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
27. 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.
28. 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.
29. In any decision making situation, sunk costs are irrelevant and should be ignored.
30. For a lamp manufacturing company, the cost of the insurance on its vehicles that deliver
lamps to customers is best described as a:
31. The cost of leasing production equipment is classified as:
32. The wages of factory maintenance personnel would usually be considered to be:
33. Manufacturing overhead consists of:
34. Which of the following should NOT be included as part of manufacturing overhead at a
company that makes office furniture?
35. Which of the following costs would not be included as part of manufacturing overhead?
36. Conversion cost consists of which of the following?
37. The advertising costs that Pepsi incurred to air its commercials during the Super Bowl
can best be described as a:
38. Each of the following would be a period cost except:
39. Which of the following costs is an example of a period rather than a product cost?
40. Which of the following would be considered a product cost for external financial reporting
purposes?
41. Which of the following would NOT be treated as a product cost for external financial
reporting purposes?
42. The salary of the president of a manufacturing company would be classified as which of
the following?
43. Conversion costs do NOT include:
44. Last month, when 10,000 units of a product were manufactured, the cost per unit was
$60. At this level of activity, variable costs are 50% of total unit costs. If 10,500 units are
manufactured next month and cost behavior patterns remain unchanged the:
45. Variable cost:
46. Which of the following statements regarding fixed costs is incorrect?
