Chapter 16 – Cost Concepts and Cost Allocation
TRUE/FALSE
1. Product costs for a manufacturing company consist of direct materials, direct labor, and overhead.
2. Period cost and product cost are synonymous terms.
3. The costs of marketing and delivering a product are not included in its inventory valuation.
4. For a manufactured product, all costs incurred to get the product ready for sale are included in the
inventory value of the product.
5. Period costs flow through three types of inventory accounts before becoming part of the cost of goods
sold amount.
6. Product costs could be found on both the balance sheet and the income statement.
7. Some period costs can be found in inventory accounts on the balance sheet.
8. Product costs could be reported as assets.
9. Period costs are consumed entirely in the current reporting period.
10. Both product costs and period costs could appear on the income statement.
11. Period costs are not considered when costing products for inventory.
12. Inventoriable cost is a synonym of period cost.
13. Manufacturing costs behave as variable or fixed costs.
14. The two primary types of cost behavior are fixed and variable.
15. Direct labor is a fixed cost because it always occurs.
16. Fixed costs per unit are constant along a defined range of activity.
17. The two types of cost behavior are value-adding and nonvalue-adding.
18. Equipment depreciation is an example of a direct product cost in a manufacturing company.
19. Indirect costs can be conveniently traced to a cost object.
20. Variable costs per unit change in an inversely proportional rate to changes in volume.
21. Total fixed costs remain constant within a defined time period or range of activity.
22. Depreciation on factory equipment is a value-adding cost.
23. Nonvalue-adding costs increase the cost of a product.
24. Direct materials are the only materials in a product.
25. Because it is invisible, direct labor cannot be traced to products.
26. All labor costs can be directly traced to finished products.
27. Both indirect materials and indirect labor are overhead costs.
28. Overhead can be traced to products once the products are completed.
29. Overhead costs are traced to products in the same way that direct materials and direct labor are traced.
30. Wages of machine operators and other workers involved in actually shaping the product are classified
as direct labor costs.
31. Salaries of supervisory production personnel should be classified as direct labor costs.
32. A cost is classified as an overhead cost if it is not directly traceable to an end product or a cost object.
33. Lubrication used for machines is an example of a direct material.
34. Minor materials and other production supplies that cannot be conveniently or economically traced to
specific products are accounted for as indirect materials.
35. Product unit cost comprises only direct materials and direct labor costs.
36. Product unit cost is computed by dividing cost of goods sold by the number of units sold.
37. Accounting personnel utilize estimates when deriving product unit costs in order to determine product
pricing.
38. Sugar is an indirect cost in the manufacture of candy.
39. Property taxes and equipment depreciation are examples of indirect manufacturing costs.
40. The costs of labor for maintenance and inspections are examples of direct labor.
41. (Direct Materials + Direct Labor + Overhead) / Total Number of Units Produced = Product Unit Cost.
42. Normal costing is the sum of actual direct materials, actual direct labor, and actual overhead.
43. Standard costing is based on actual direct materials and direct labor plus estimated overhead.
44. The product costs that appear in the financial statements are actual product costs.
45. Both direct labor and indirect labor are recorded in the Work in Process Inventory account as the
product is being manufactured.
46. Direct materials, direct labor, and overhead costs will most likely become part of the Cost of Goods
Sold account balance in case of manufacturing companies.
47. At the end of an accounting period, the balance in the Finished Goods Inventory account is made up of
the costs of products completed but not sold as of that date.
48. The costs of materials used in production are transferred from the Materials Inventory account directly
to the Finished Goods Inventory account.
49. Factory employees’ wages should be incorporated into the Work in Process Inventory account.
50. Indirect costs incurred are charged directly to the Work in Process Inventory account.
51. As units are completed, their costs are transferred from the Work in Process Inventory account to the
Finished Goods Inventory account.
52. A materials request form is prepared whenever the purchasing department orders materials.
53. The job order cost card reflects the product cost per unit.
54. Materials costs flow from the Materials Inventory to the Work in Process Inventory to the Cost of
Goods Sold account.
55. Total manufacturing costs increase the balance of the Work in Process Inventory account.
56. Cost of goods manufactured decreases the Work in Process Inventory account.
57. Overhead costs decrease the Work in Process Inventory account.
58. The key to the preparation of an income statement for a manufacturing company is proper
determination of the cost of goods manufactured.
59. The expressions total manufacturing costs and total cost of goods manufactured are not synonymous.
60. The amount computed for cost of goods manufactured should be the same as the amount transferred
from the materials inventory, direct labor, and overhead accounts into the Work in Process Inventory
account.
61. The cost of goods manufactured is added to the beginning balance of Finished Goods Inventory to
obtain the total cost of goods available for sale during the period.
62. The amount for cost of goods manufactured should be the same as the amount transferred from the
Work in Process Inventory account to the Finished Goods Inventory account during the year.
63. Total manufacturing costs include all direct materials used as well as all direct labor costs and
overhead costs incurred for a period.
64. The changes in Work in Process Inventory and total manufacturing costs for a period are used to
compute cost of goods manufactured.
65. Manufacturing costs incurred in an accounting period cannot be included in cost of goods sold for the
subsequent accounting period.
66. Cost of goods manufactured appears on the income statement of a manufacturing company in a similar
manner as purchases appear on the income statement of a merchandising company.
67. Total manufacturing costs and the change in Finished Goods Inventory are used to compute cost of
goods sold.
68. Total estimated overhead costs should be divided by actual direct labor hours to compute an overhead
rate per direct labor hour.
69. If Company G uses an overhead rate of $3.50 per direct labor dollar, and 63,500 hours of direct labor
at $9.00 per hour are actually incurred, $222,250 of overhead costs are allocated for that period.
70. Overhead costs generally are estimated as part of the normal budgeting function.
71. By using a predetermined overhead rate and an allocation base, such as direct labor dollars or hours,
one can assign overhead costs by debiting the Overhead account and crediting the Work in Process
Inventory account.
72. As actual overhead costs are incurred, the Overhead account is debited.
73. If overhead has been overapplied during the period, the adjusting entry could include a credit to the
Cost of Goods Sold account.
74. The entry to record the application of overhead costs includes a debit to the Overhead account.
75. The Overhead account is used to accumulate actual overhead costs.
76. The amount of underapplied or overapplied overhead is the difference between applied overhead and
estimated overhead.
77. Actual overhead plus overapplied overhead equals applied overhead.
78. Overhead is said to be underapplied when actual overhead costs exceed the amount applied to
production.
79. The product is the cost object when assigning indirect product costs.
80. A cost pool is a collection of overhead costs related to a cost object.
81. A cost driver is a cost pool that increases with activity.
82. Cost allocation requires pooling of overhead costs and the selection of a cost driver.
83. Calculation of a product’s overhead rate is done during the accounting period.
84. The overhead rate is equal to the total estimated overhead costs divided by the actual cost driver level.
85. Applied overhead is equal to the overhead rate times the actual cost driver level.
86. Cost of Goods Sold is decreased for underapplied overhead.
87. A predetermined overhead rate allows managers to make more timely product pricing decisions.
88. An understated cost driver level will cause an understatement of the predetermined overhead rate.
89. The four most common activity bases used for overhead cost allocation purposes are direct labor
dollars, units of output, water pressure, and machine hours.
90. A predetermined overhead rate times the amount of activity basis equals the overhead cost assigned to
the product.
91. In the traditional manufacturing environment, overhead costs cannot be traced directly to products.
92. A single predetermined overhead rate is most appropriately used to assign overhead costs when a
company produces a diverse set of products.
93. When a company uses a single predetermined overhead rate to assign overhead to production, only one
cost pool is used.
MULTIPLE CHOICE
1. Which of the following would not be included in the cost of a manufactured product?
a.
Cost to ship products to a customer
b.
Cost of factory machinery used in production
c.
Cost to design the product
d.
Plant supervisor’s salary
2. Which of the following is not included in the purchase cost of merchandise inventory?
a.
Purchase discounts
b.
Overhead costs
c.
Freight-in costs
d.
Purchase returns and allowances
3. Which of the following is not a reason to classify costs as either product or period costs?
a.
To determine unit manufacturing costs
b.
To determine if the costs are fixed or variable
c.
To analyze costs for control purposes
d.
To report production costs on the income statement
4. Depreciation expense could be
a.
a period cost.
b.
a product cost.
c.
a fixed cost.
d.
all of these.
5. An example of a period cost is
a.
advertising costs.
b.
indirect materials.
c.
product design costs.
d.
direct materials.
6. Another term for product cost is
a.
period cost.
b.
direct cost.
c.
value-adding cost.
d.
inventoriable cost.
7. A projected cost for the future is a
a.
direct cost.
b.
fixed cost.
c.
inventoriable cost.
d.
budgeted cost.
8. Which of the following is not a product cost?
a.
Depreciation of office furniture
b.
Overhead
c.
Direct labor
d.
Direct materials
9. Which of the following is a typical example of a variable cost?
a.
Sales commissions
b.
Rent
c.
Depreciation
d.
Salaries
10. Which of the following is a value-adding cost?
a.
Depreciation on personnel department equipment
b.
Depreciation on factory equipment
c.
Depreciation on office equipment
d.
Depreciation on sales department equipment
11. Prime costs consist of
a.
direct materials and overhead.
b.
direct labor and overhead.
c.
direct labor and indirect labor.
d.
direct materials and direct labor.
12. Conversion costs consist of
a.
direct materials and direct labor.
b.
direct labor and overhead.
c.
direct materials and overhead.
d.
direct labor and indirect labor.
13. The three costs in every product are
a.
direct materials, work in process, and overhead.
b.
direct materials, work in process, and finished goods.
c.
direct materials, direct labor, and overhead.
d.
direct materials, direct labor, and period costs.
14. Materials and supplies that cannot be traced conveniently to specific products are called
a.
indirect materials.
b.
raw materials.
c.
minor materials.
d.
direct materials.
15. Which of the following terms does not apply to materials and supplies that cannot be traced
conveniently to specific products?
a.
Indirect materials
b.
Indirect manufacturing costs
c.
Direct costs
d.
Overhead
16. Costs that are identified with and traced to one product or a batch of products are called
a.
overhead costs.
b.
indirect costs.
c.
direct costs.
d.
fixed costs.
17. The factory personnel whose wages are traceable directly to a product include
a.
maintenance personnel.
b.
support personnel.
c.
factory supervisors.
d.
employees who help to shape the product.
18. Costs such as salary of supervisors and other support personnel, which are accounted for as overhead
costs, are called
a.
direct labor.
b.
sales assistance.
c.
indirect labor.
d.
variable labor.
19. All manufacturing costs incurred and assigned to products that are being produced are classified as
a.
variable costs.
b.
allocated costs.
c.
product costs.
d.
overhead costs.
20. Which of the following labor costs would be included in direct labor?
a.
Maintenance workers
b.
Machine operators
c.
Managers and supervisors
d.
Materials storeroom custodian
21. Which of the following costs is considered overhead?
a.
Indirect labor only
b.
Indirect materials only
c.
Indirect materials and indirect labor
d.
None of these
22. Which of the following is not an example of indirect materials?
a.
Wood in a desk
b.
Nails in a desk
c.
Screws in a desk
d.
Lubricants for machinery
23. The following are costs for a selected period: direct materials put into production, $94,000; direct labor
cost of converting materials into product, $200,000; total indirect costs of manufacturing the product,
$40,000. What is the per unit cost of manufacturing 20,000 units in this period?
a.
$4.70
b.
$16.70
c.
$8.70
d.
$12.70
24. Recorded costs for the DC5 Division, which manufactured 6,000 units of Product DC5 during the
month, are as follows:
Direct materials
$458,000
Direct labor
400,000
Indirect production costs
80,000
Supervisory services
40,000
Total
$978,000
The per-unit cost of manufacturing Product DC5 this month is
a.
$163.
b.
$152.
c.
$170.
d.
$150.
25. Which of the following is the formula used to compute a product’s unit cost?
a.
(Direct Materials + Direct Labor) / Number of Units Produced
b.
(Direct Materials + Direct Labor + Overhead) / Number of Units Produced
c.
(Direct Labor + Overhead) / Number of Units Produced
d.
(Indirect Materials + Indirect Labor + Overhead) / Number of Units Produced
26. Which of the following represents normal cost measurement?
a.
Actual Direct Materials + Actual Direct Labor + Actual Overhead
b.
Actual Direct Materials + Actual Direct Labor + Estimated Overhead
c.
Estimated Direct Materials + Estimated Direct Labor + Actual Overhead
d.
Actual Direct Materials + Estimated Direct Labor + Estimated Overhead
27. When a company calculates its product unit cost using estimated costs, it is using which cost
measurement method?
a.
Standard costing
b.
Actual costing
c.
Full costing
d.
Normal costing
28. Which of the following types of product costs appear in the financial statements?
a.
Normal costs
b.
Estimated costs
c.
Standard costs
d.
Actual costs
29. Which of the following documents initiates the purchasing of materials?
a.
Job order cost sheet
b.
Receiving report
c.
Purchase requisition
d.
Purchase order
30. Overhead costs are not
a.
allocated to the Work in Process Inventory account.
b.
charged directly to the Finished Goods Inventory account.
c.
assigned to specific products.
d.
considered product costs.
31. Which of the following contains period costs?
a.
Work in Process
b.
Finished Goods
c.
Cost of Goods Sold
d.
Selling and administrative expenses
32. In a manufacturing environment, direct labor costs initially flow
a.
into the Materials Inventory account.
b.
directly to Cost of Goods Sold.
c.
into the Work in Process Inventory account.
d.
into the Finished Goods Inventory account.
33. In a manufacturing environment, costs of materials initially flow
a.
into the Work in Process Inventory account.
b.
into the Materials Inventory account.
c.
directly to Cost of Goods Sold.
d.
into the Finished Goods Inventory account.
34. All manufacturing costs that are assigned to completed (but unsold) products should be classified as
a.
materials inventory costs.
b.
overhead costs.
c.
work in process inventory costs.
d.
finished goods inventory costs.
35. Completed but unsold units for a manufacturing firm would be included in which of the following
accounts?
a.
Pending-Sale Inventory
b.
Finished Goods Inventory
c.
Work in Process Inventory
d.
Materials Inventory
36. In which one of the following accounts would all three product costs not be found?
a.
Work in Process Inventory
b.
Materials Inventory
c.
Finished Goods Inventory
d.
Cost of Goods Sold
37. Consider the following information: direct materials used totaled $134,400; direct labor amounted to
$396,800; overhead was computed to be $789,600; Work in Process Inventory on January 1, 2010,
was $378,200; and Work in Process Inventory on December 31, 2010, was $385,200. What was the
cost of goods manufactured?
a.
$1,313,800
b.
$1,320,800
c.
$1,327,800
d.
$2,084,200
38. Which of the following should not be included in the computation of cost of goods manufactured?
a.
Power costs
b.
Small tools expense
c.
Total selling costs
d.
Work in Process Inventory
39. Which of the following is not a product cost?
a.
Indirect materials costs
b.
Packaging costs
c.
Direct labor costs
d.
Overhead costs
40. Which of the following is a source document for materials?
a.
Vendor’s invoice
b.
Materials request
c.
Receiving report
d.
All of these
41. The cost of goods manufactured decreases which of the following accounts?
a.
Work in Process Inventory
b.
Finished Goods Inventory
c.
Overhead
d.
Cost of Goods Sold
42. Total manufacturing costs increase which of the following accounts?
a.
Cost of Goods Sold
b.
Work in Process Inventory
c.
Finished Goods Inventory
d.
Overhead
43. Total manufacturing costs are equal to
a.
Direct Materials + Direct Labor + Selling Costs.
b.
Direct Materials + Direct Labor + Overhead.
c.
Direct Labor + Overhead + Selling Costs + Administrative Costs.
d.
Product Costs + Period Costs.
44. Cost of goods manufactured is equal to
a.
Direct Materials + Direct Labor + Overhead.
b.
Beginning Work in Process Inventory + Total Manufacturing Costs – Ending Work in
Process Inventory.
c.
Beginning Work in Process Inventory + Period Costs – Ending Work in Process
Inventory.
d.
Beginning Work in Process Inventory + Product Costs.
45. To reconcile total manufacturing costs with the total cost of goods manufactured during the period,
a.
subtract out all period costs from total manufacturing costs to arrive at cost of goods
manufactured.
b.
add beginning and subtract ending finished goods inventory to total manufacturing costs.
c.
you must know how many goods were sold during the period.
d.
add beginning and subtract ending work in process inventory to total manufacturing costs.
46. Which of the following financial statements is unique to a production-oriented company?
a.
Balance sheet
b.
Statement of cash flows
c.
Income statement
d.
Statement of cost of goods manufactured
47. The Finished Goods Inventory and Cost of Goods Sold for a manufacturing company for the year 20xx
are as follows: January 1 Finished Goods Inventory, $382,500; December 31 Finished Goods
Inventory, $270,000; Cost of Goods Sold for the year, $1,488,000. The cost of goods manufactured for
the year was
a.
$1,105,500.
b.
$610,500.
c.
$1,150,500.
d.
$1,375,500.