Ch2 Concept

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True/False Questions 1. The sum of all costs of manufacturing costs except direct materials is called manufacturing overhead. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 2. Conversion cost is the sum of direct labor and manufacturing overhead. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 3. Prime cost is the sum of direct labor and manufacturing overhead. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 4. Thread used in the production of mattresses, an indirect material, is classified as manufacturing overhead. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 5. Period costs are also known as inventoriable costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 6. All costs in a merchandising company are period costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 7. The cost of goods sold of a manufacturing company equals beginning finished goods inventory + cost of goods manufactured - ending finished goods inventory. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting, Measurement LO: 3 Level: Easy

8. A variable cost is constant if expressed on a per unit basis but the total dollar amount changes as the number of units increases or decreases. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy 9. As activity increases within the relevant range, fixed costs remain constant on a per unit basis. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 5 Level: Easy 10. Direct costs are often difficult to trace to the specific cost object under consideration. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 6 Level: Easy 11. All of the following are examples of opportunity costs: salary given up to start a business; rental income given up when you live in a house you own; interest income that could be earned on money spent for a car. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Medium 12. The amount that was paid by a company for a building to house its operations is an example of a sunk cost. Ans: True AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 7 Level: Easy 13. The most effective way to minimize quality costs while maintaining high quality is to avoid having quality problems in the first place. This is the reason for incurring appraisal costs. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 2B LO: 9 Level: Medium 14. External failure costs are limited to the costs of repairing defective products that are under warranty. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 2B LO: 9 Level: Hard

15. The costs of lost sales arising from poor quality are always included in quality cost reports. Ans: False AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting Appendix: 2B LO: 10 Level: Medium Multiple Choice Questions 16. The cost of the cushions that are used to manufacture sofas is best described as a: A) manufacturing overhead cost. B) period cost. C) variable cost. D) conversion cost. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,2,5 Level: Medium 17. Chezpere Company manufactures and sells washing machines. In order to make assembly of the machines faster and easier, some of the metal parts in the machines are coated with grease. How should the cost of this grease be classified? A) B) C) D) Direct Material Cost Fixed Cost Yes Yes Yes No No Yes No No

Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,5,6 Level: Hard

18. A security guard's wages at a factory would be an example of: A) B) C) D) Indirect labor Fixed manufacturing overhead No No Yes Yes Yes No No Yes

Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1,5 Level: Medium Source: CPA, adapted 19. Manufacturing overhead includes: A) all direct material, direct labor and administrative costs. B) all manufacturing costs except direct labor. C) all manufacturing costs except direct labor and direct materials. D) all selling and administrative costs. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 20. Materials used in the operation of a factory, such as cleaning supplies, that are not an integral part of the final product should be classified as: A) direct materials. B) a period cost. C) administrative expense. D) manufacturing overhead. Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 21. The one cost that would be classified as part of both prime cost and conversion cost would be: A) indirect material. B) direct labor. C) direct material. D) indirect labor. Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy

22. Direct costs: A) are incurred to benefit a particular accounting period. B) are incurred due to a specific decision. C) can be easily traced to a particular cost object. D) are the variable costs of producing a product. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy 23. Prime costs consist of: A) direct materials and the variable portion of manufacturing overhead. B) direct labor and indirect labor. C) indirect labor and the fixed portion of manufacturing overhead. D) direct labor and direct materials. Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Easy Source: CMA, adapted 24. Which of the following is NOT a period cost? A) Monthly depreciation of the equipment in a fitness room used by factory workers. B) Salary of a billing clerk. C) Insurance on a company showroom, where current and potential customers can view new products. D) Cost of a seminar concerning tax law updates that was attended by the company's controller. Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 1 Level: Medium 25. The annual insurance premium for the factory building would be a: A) fixed cost, period cost, and indirect cost with regard to units of product. B) fixed cost, product cost, and direct cost with regard to units of product. C) variable cost, product cost, direct cost with regard to units of product. D) fixed cost, product cost, indirect cost with regard to units of product. Ans: D AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,5,6 Level: Medium

26. Factory supplies in a manufacturing plant are most likely: A) sunk costs. B) period costs. C) variable costs. D) excluded from product costs. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2,5,7 Level: Medium 27. All of the following are examples of product costs except: A) depreciation on the company's retail outlets. B) salary of the plant manager. C) insurance on the factory equipment. D) rental costs of the factory facility. Ans: A AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 28. Inventoriable (i.e., product) costs that have become expenses can be found in: A) period costs. B) selling expenses. C) cost of goods sold. D) administrative expenses. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 29. The fixed portion of the cost of electricity for a manufacturing plant is a: A) B) C) D) Period cost Product cost Yes No Yes Yes No Yes No No

Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium Source: CPA, adapted

30. Which of the following statements about product costs is true? A) Product costs are deducted from revenue when the production process is completed. B) Product costs are deducted from revenue as expenditures are made. C) Product costs associated with unsold finished goods and work in process appear on the balance sheet as assets. D) Product costs appear on financial statements only when products are sold. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Medium 31. Conversion costs consist of: A) direct and indirect labor. B) direct labor and direct materials. C) direct labor and manufacturing overhead. D) prime costs and manufacturing overhead. Ans: C AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy Source: CMA, adapted 32. Which of the following is an example of a period cost? A) Fabric used to produce men's pants. B) Advertising cost for a new product campaign. C) Factory supervisor's salary. D) Monthly depreciation of production equipment. Ans: B AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Reporting LO: 2 Level: Easy 33. In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of manufacturing overhead the rental expense on the firm's retail facilities. This inclusion would: A) overstate period expenses on the income statement. B) overstate the cost of goods sold on the income statement. C) understate the cost of goods manufactured. D) have no effect on the cost of goods manufactured. Ans: B AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Reporting LO: 4 Level: Hard

34. Desco Electronics, Inc. manufactures car radios. The direct material cost assigned to car radios that Desco started during the period but did not fully complete would be found in the ending