Chapter 2—Basic Cost Management Concepts Key
1. The cost management information system is primarily concerned with producing outputs for internal users
using inputs and processes needed to satisfy management objectives.
2. The Financial accounting information system provides information for three broad objectives: costing
services and products, planning and control, and decision making.
3. The value chain is the set of activities required to design, develop, produce, market, deliver and provide post-
sales service for the products and services sold to customers.
4. Cost management information benefits production, marketing, and customer service systems as well as being
a crucial part of managerial decision making.
5. An integrated cost management system receives information from and provides information to only the
controller of a company.
6. Cost assignment is one of the key processes of the cost accounting system.
7. Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to bring a current
or future loss to the company.
8. The three methods of cost assignment are direct tracing, driver tracing, and allocation.
9. Assigning costs accurately to cost objects is of low priority. Accuracy is not evaluated based on knowledge of
some underlying “true cost”.
10. The most precise of the three methods of cost assignment is direct tracing since it relies on observable
causal relationships.
11. Services differ from tangible products on three dimension: intangibility, perishability, and inseparability.
12. Intangible products are goods produced by converting raw material into finished products through the use of
labor and capital inputs.
13. Production costs are costs associated with manufacturing goods or providing services and are classified as
direct materials, direct labor, and overhead.
14. Conversion cost is the sum of direct materials and direct labor cost and prime cost is the sum of direct labor
and overhead cost.
15. Product costs include production, marketing, and customer service, and are used for strategic design
decisions and tactical profitability analysis.
16. The income statement prepared for external parties is frequently referred to as absorption-costing income, or
full costing income.
17. The cost of goods sold is the cost of direct materials, direct labor and overhead attached to the units sold.
18. The cost of goods manufactured represents the total manufacturing cost of goods completed during the
current period.
19. Work in process consists of all partially completed units found in production at a given point in time.
20. Gross margin, also called gross profit, is the difference between sales and costs of finished products.
21. Cost management systems can be broadly classified as traditional or activity based.
22. A traditional cost accounting system assumes that all costs can be classified as fixed with respect to changes
in the units or volume produced.
23. The overall objective of an activity-based cost management system is to manage activities to reduce costs
and improve customer value.
24. The cost accounting system that emphasizes tracing over allocation is called an activity-based accounting
system.
25. Error costs are costs associated with measurements required by the cost management system and
measurement costs are the costs associated with making poor decisions.
26. A subsystem of the accounting information system designed to satisfy costing, controlling and decision
making objectives is called the __________ system.
27. The cost management subsystem designed to provide accurate and timely feedback concerning the
performance of managers relative to their control of activities is the __________ information system.
28. The overall objective of accounting information is to provide information to __________.
29. The resources given up that are expected to bring a current or future benefit to the organization are called
__________ .
30. Expired costs used up in the generation of revenues are called __________ .
31. The least accurate but easiest to apply method of cost assignment is the __________ method.
32. __________ means the consumer cannot see, hear, feel, or taste a service before it is bought.
33. __________ are generally materials necessary for production that do not become part of the finished
product or are not used to provide a service.
34. Costs necessary to market and distribute a product or service are often referred to as
order- __________ and order- __________ costs.
35. In preparing an income statement, __________ and __________ costs are separated.
36. Gross margin is the difference between __________ and the cost of goods or services sold.
37. __________ income is the difference between gross margin and selling and administrative expenses.
38. Cost management systems are made up of two subsystems: the __________ accounting system and the
__________ control system.
39. Generally, more managerial objectives can be met with an activity-based system than with a _________
system.
40. In deciding whether to implement a(n) __________ cost management system, managers must evaluate the
trade-off between costs of measurement and cost of errors.
41. The set of interrelated parts that performs one or more processes to accomplish specific objectives is called
a(n):
42. The overall objective of accounting information systems is to
43. In an accounting information system, which of the following is NOT a transformation process?
44. Which of the following is a cost management subsystem designed to assign costs to individual products and
services and other objects, as specified by management?
45. In a company that supplies muffins to bakeries, which of the following would be considered an input?
46. In a company that supplies muffins to bakeries, which of the following would NOT be considered an input?
47. In a company that supplies muffins to bakeries, which of the following would NOT be considered a
transforming process?
48. In a company that supplies muffins to bakeries, which of the following would be considered a transforming
process?
49. In a company that supplies muffins to bakeries, delivered muffins to bakeries would be a(n)
50. In an accounting information system, the inputs are usually
51. Which of the following is a cost management subsystem designed to provide accurate and timely feedback
concerning the performance of managers and others relative to their planning and control of activities?
52. The accounting information subsystem that is primarily concerned with producing outputs for external users
is called:
53. High quality cost management systems should have an organization-wide perspective. Which of the
following would NOT be a benefit of a cost management system?
54. Which of the following is a major subsystem of the cost accounting information system?
55. A computerized information system that strives to input data once and to make it available to people across
the company for different purposes is called a:
56. A cost management subsystem designed to provide accurate and timely feedback concerning the
performance of managers and others relative to their planning and control activities is called the:
57. Which of the following is NOT one of the features of an operational control information system?
58. Which of the following is NOT an objective of the operational control system?
59. The resources given up that are expected to bring a current or future benefit to the organization are
represented by:
60. The cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or
future benefit to the organization is/are called:
61. A cost used up in the production of revenues is a(n)
62. Which of the following is an example of a loss?
63. Which of the following is an example of an expense?
64. Which of the following is an example of a possible cost object?
65. Traceability is a function of
66. Factors that cause changes in resource usage, activity usage, costs and revenues are called
67. The most likely method to assign the cost of an assembly-line supervisor when the assembly line is the cost
object is the:
68. Which cost assignment method would likely assign the cost of heating in a plant that makes beds and
dressers when the bed product line is the cost object?
69. Which cost assignment method would likely assign the cost of maintenance for machines in a department
that does cutting when the cutting activity is the cost object?
70. Which of the following expenses incurred by a department store is a direct cost for the women’s shoe
department?
71. Which of the following costs incurred by a chair manufacturer would be traced to the product cost through
direct tracing?
72. Direct costs
73. The direct costs of operating a college computer center would NOT include
74. Which of the following methods of assigning costs is based on convenience or some assumed linkage, and
reduces the overall accuracy of the cost assignments?
75. Which of the following costs incurred by a bus manufacturer would NOT be directly attributable to the
finished product?
76. The assignment of indirect costs to cost objects is referred to as:
77. What is a disadvantage of assigning costs evenly over all cost objects?
78. The insurance paid on the factory is
79. Which of the following would NOT be a cost that could be directly traced to a custom piece of furniture
based upon physical observation?
80. The precision of driver tracing depends upon
81. If physical observation can NOT be used to identify the exact amount of resources consumed by a cost
object, the next best approach is
82. Services differ from tangible products in which of the following dimensions?
83. With regards to products, perishability can be defined as
84. Intangibility of services means that
85. An example of a tangible product, rather than a service, would be
86. With regard to services, inseparability means that
87. An example of a service, rather than a tangible product, would be
88. Which of the following is a service organization?
89. Which of the following costs would be included in value-chain product costs?
90. Product value-chain costs assist managers in meeting which of the following objectives?
91. Value-chain product costs include which of the following?
92. Which of the following costs would NOT be included in operating product costs?
93. Which of the following costs would be included in traditional product costs used for external reporting?
94. Which of the following costs is NOT a product cost?
95. Which of the following costs is an example of product costs?
96. Which of the following costs incurred by a furniture manufacturer would be a product cost?
97. Which of the following costs is a product cost?
98. Which of the following costs is a period cost for a manufacturing company?
99. In a traditional manufacturing company, product costs include
100. Which of the following costs is an indirect product cost?
101. If the total warehousing cost for the year amounts to $450,000, and 40 percent of the warehousing activity
is associated with finished goods and 60 percent with direct materials, how much of the cost would be charged
as a product cost?
102. Which of the following costs would be included as part of direct materials in the production of an
automobile?
103. All of Eva Enterprise’s operations are housed in one building with the costs of occupying the building
accumulated in a separate account. The total costs incurred in July amounted to $48,000. The company allocates
these costs on the basis of square feet of floor space occupied. Administrative offices, sales offices, and factory
operations occupy 9,000, 6,000, and 30,000 square feet, respectively. How much will be classified as a product
cost for July?
104. Which of the following costs would be considered a direct material?
105. The difference between a supply and an indirect material is that
106. Which of the following costs would be included as part of direct labor?
107. Which of the following costs would be included as part of factory overhead?
108. Which of the following items would NOT be classified as part of factory overhead of a firm that makes
sailboats?
109. Wages paid to a janitor in the factory would be classified as
110. All of the following costs are included in factory overhead EXCEPT
111. Selling and administrative costs are classified as
112. Which of the following costs is NOT a period cost?
113. Which of the following costs is a period cost?
114. An example of a period cost is
115. An example of a nonproduction cost is
116. Which of the following costs are expensed in the period in which they are incurred?
117. Order-getting costs would NOT include
118. Period costs do NOT include
119. Prime product costs include
120. The sum of direct labor and factory overhead is referred to as
121. Conversion costs do NOT include
122. Which of the following would NOT be included in the conversion cost of an automobile?
123. Costs that are expensed in the period in which they are incurred are called:
124. Figure 2-11
Information from the records of the Abel Corporation for July 2014 was as follows:
Sales
$1,230,000
Selling and administrative expenses
210,000
Direct materials used
264,000
Direct labor
300,000
Factory overhead *
405,000
*variable overhead is $205,000, fixed overhead is $200,000
Inventories
July 1, 2014
July 31, 2014
Direct materials
$36,000
$42,000
Work in process
75,000
84,000
Finished goods
69,000
57,000
Refer to Figure 2-11. The conversion cost is
125. Figure 2-11
Information from the records of the Abel Corporation for July 2014 was as follows:
Sales
$1,230,000
Selling and administrative expenses
210,000
Direct materials used
264,000
Direct labor
300,000
Factory overhead *
405,000
*variable overhead is $205,000, fixed overhead is $200,000
Inventories
July 1, 2014
July 31, 2014
Direct materials
$36,000
$42,000
Work in process
75,000
84,000
Finished goods
69,000
57,000
Refer to Figure 2-11. The prime costs are