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Chapter 2
Basic Cost Management Concepts Answer Key
True / False Questions
1. An important first step in studying managerial accounting is to create a framework for
thinking about the various types of costs incurred by organizations and how those costs are
actively managed.
2. Different cost concepts and classifications are used for different purposes.
3. Inventoriable costs are expensed when incurred.
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4. Another term for product cost is cost of goods sold.
5. Finished goods inventory is ordinarily held for sale by a manufacturing company.
6. Selling and administrative costs are always period costs on any type of company’s income
statement.
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7. There are three standard categories of manufacturing processes.
8. A job shop is generally associated with high production volume.
9. Manufacturing costs are classified into four categories.
10. Indirect labor is not a component of manufacturing overhead.
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11. The following equation — Beginning finished goods + cost of goods manufactured –
ending finished goods — is used to calculate cost of goods sold during the period.
12. The total cost of direct material, direct labor, and manufacturing overhead transferred
from work-in-process inventory to finished-goods inventory is called the cost of goods
manufactured.
13. A suitable cost driver for the amount of direct materials used is the number of direct labor
hours worked.
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14. The higher the correlation between the cost and the cost driver, the more accurate will be
the resulting understanding of cost behavior.
15. As activity changes, total variable cost increases or decreases proportionately with the
activity change, but unit variable cost remains the same.
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16. As the activity level increases, total fixed cost remains constant and unit fixed cost
remains the same.
17. A cost that is not directly traceable to a particular cost object is called an indirect cost.
18. Costs that a manager can influence significantly are classified as uncontrollable costs of
that manager.
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19. Out-of-pocket costs are defined as the benefit that is sacrificed when the choice of one
action precludes taking an alternative course of action.
20. Sunk costs are irrelevant to all future decisions.
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Multiple Choice Questions
21. Which of the following statements is true?
A. The word “cost” has the same meaning in all situations in which it is used.
22. Research and development costs are classified as:
A. product costs.
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23. Product costs are:
A. expensed when incurred.
24. Which of the following is a product cost?
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25. Which of the following would not be classified as a product cost?
A. Direct materials.
26. The accounting records of Dixon Company revealed the following costs: direct materials
used, $250,000; direct labor, $425,000; manufacturing overhead, $375,000; and selling and
administrative expenses, $220,000. Dixon’s product costs total:
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27. Costs that are expensed when incurred are called:
A. product costs.
28. Which of the following is a period cost?
A. Direct material.
29. Which of the following is not a period cost?
A. Legal costs.
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30. The accounting records of Younkin Corporation revealed the following selected costs:
Sales commissions, $65,000; plant supervision, $190,000; and administrative expenses,
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31. Shu Corporation recently computed total product costs of $567,000 and total period costs
of $420,000, excluding $35,000 of sales commissions that were overlooked by the company’s
administrative assistant. On the basis of this information, Shu’s income statement should
reveal operating expenses of:
32. Which of the following would not be a period cost?
A. Sales salaries.
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33. Which of the following entities would most likely have raw materials, work in process,
and finished goods?
34. Selling and administrative expenses would likely appear on the balance sheet of:
35. Which of the following inventories would a discount retailer report as an asset?
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36. Which of the following inventories would a company ordinarily hold for sale?
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37. Which of the four items listed below is not a type of production process?
38. Which type of production process is ideal for a low production volume and one-of-a-kind
products?
A. Batch.
39. Which type of production process is likely used for custom yachts built by Hargrave?
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Feedback E: Direct assembly process would not be used for custom products.
40. Which type of production process is likely used by a paint manufacturer to produce paint?
41. Which of the following would not be classified as direct materials by a company that
makes automobiles?
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42. Which of the following employees of a commercial printer/publisher would be classified
as direct labor?
43. Guaranteed Appliance Co. produces washers and dryers in an assembly-line process.
Labor costs incurred during a recent period were: corporate executives, $500,000; assembly–
line workers, $180,000; security guards, $45,000; and plant supervisor, $110,000. The total of
Guaranteed’s direct labor cost was:
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44. Which of the following employees would not be classified as indirect labor?
45. Depreciation of factory equipment would be classified as:
46. Which of the following costs is not a component of manufacturing overhead?
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47. The accounting records of Comacho Company revealed the following costs, among
others:
Factory insurance
$ 32,000
Raw material used
256,000
Customer entertainment
15,000
Indirect labor
45,000
Depreciation on salespersons’ cars
22,000
Production equipment rental costs
72,000
Costs that would be considered in the calculation of manufacturing overhead total: