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The correct answer for each question is indicated by a .

Chapter 2 - Basic Cost Management Concepts


1
INCORRECT The sacrifice made, usually measured by the resources given up, to achieve a
particular purpose is called which of the following?

A)A cost

B)An expense

C)A product cost

D)An inventoriable cost

E)A period cost

Feedback:
A cost may be defined as sacrifice made, usually measured by the
resources given up, to achieve a particular purpose. An expense is the
consumption of assets for generating revenue. LO 1

2 CORRECT
Product costs are:

A)expensed in the period incurred.

B)initially capitalized on the balance sheet.

C)treated in the same manner as period costs.

D)always classified as an indirect cost.

E)immediately subtracted from cost of goods sold.

Feedback:
A product cost is a cost assigned to goods that were either purchased or
manufactured for resale. The product cost is used to value the inventory
of manufactured goods or merchandise until the goods are sold. A
product cost is an "inventoriable" cost and is initially capitalized on the
balance sheet as part of the recorded value of the inventory. In the period
of the sale, the product costs are recognized as an expense called cost of
goods sold. The product cost of merchandise inventory acquired by a
retailer or wholesaler for resale consists of the purchase cost of the
inventory plus any shipping charges. The product cost of manufactured
inventory includes all of the costs incurred in its manufacture. LO2
3
INCORRECT Which of the following statements is true?

A)Product costs affect only the balance sheet.

B)Product costs affect only the income statement.

C)Period costs affect only the balance sheet.

Product costs eventually affect both the balance sheet and the income
D)statement.

E)None of the above

Feedback:
A product cost is an "inventoriable" cost and is initially capitalized on the
balance sheet as part of the recorded value of the inventory. In the period
of the sale, the product costs are recognized as an expense called cost of
goods sold. As such product costs eventually affect both the balance
sheet (i.e. inventory) and the income statement (COGS). Period costs are
identified with the period of time in which they are incurred rather than
with units of purchased or produced goods. Period costs are recognized
as expenses during the time period in which they are incurred and are
never recorded in the inventory account on the Balance Sheet. LO2

4
INCORRECT Manufacturers, such as Caterpillar, have three broad types of inventory
accounts showing up on their Balance Sheet. Which of the following
statements correctly depicts these accounts?

A)Direct Materials, Work-in-Process, Finished Goods

B)Indirect Material, Job Shop, Manufacturing Overhead

C)Raw Materials, Work In Process, Cost of Goods Manufactured

D)Direct Materials, Direct Labor, Manufacturing Overhead

E)Raw Materials, Work-in-Process, Finished Goods

Feedback:
Manufacturers such as Caterpillar, have three types of inventory. Raw-
material inventory includes all materials before they are placed into
production. Work-in-process inventory refers to manufactured products
that are only partially completed at the date when the balance sheet is
prepared. Finished-goods inventory refers to manufactured goods that
are complete and ready for sale. LO 3
5
INCORRECT Which of the following types of business would not incur a product cost?

A)Retailer

B)Wholesaler

C)Manufacturer

D)Service provider

E)All of the above could incur a product cost.

Feedback: A service provider does not have inventory and would


therefore not incur a product or "inventoriable" cost. LO2

6
INCORRECT Which of the following types of business would not incur a period cost?

A)Retailer

B)Wholesaler

C)Manufacturer

D)Service provider

E)All of the above could incur a period cost.

Feedback: All businesses (i.e. whether or not they own inventory) can
and will incur period cost. LO2

7
INCORRECT Which of the following statements is (are) correct?

Overtime premiums should be treated as a component of manufacturing


A)overhead.

B)Overtime premiums should be treated as a component of direct labor.

C)Idle time should be treated as a component of direct labor.


D)Idle time should be accounted for as a special type of loss.

E)Both "B" and "C" are correct.

Feedback: Other manufacturing overhead costs include overtime


premiums and the cost of idle time. LO5

8
INCORRECT Which of the following production processes is described as a production
process with high production volume, and with many standardized
components and/or customized combination of components?

A)Batch

B)Assembly line

C)Mass customization

D)Continuous flow

E)Job shop

Feedback:
The mass customization production process can be described as
production process with high production volume, with many standardized
components and/or customized combination of components. LO 4

9
INCORRECT Which of the following production processes is described as a process with
multiple products and low volume?

A)Batch

B)Assembly line

C)Mass customization

D)Continuous flow

E)Job shop

Feedback:
The batch production process can be described as a production process
with multiple products and low volume. LO 4
10
INCORRECT Which of the following costs is a conversion cost?

A)Direct materials

B)Salary paid to sales manager

C)Salary paid to production line worker

D)Only (B) and (C)

E)Only (A) and (C)

Feedback:
Conversion cost is the total of direct labor cost and manufacturing
overhead costs, which includes indirect material, indirect labor, and other
manufacturing costs. Factory rent is an "other manufacturing costs."
Office management is a period cost, not a product cost. LO 5

11
INCORRECT Consider the following taken from a schedule of cost of goods manufactured:

What is the value of the ending work-in-process inventory?

A)$50,000

B)$82,000

C)$70,000

D)$35,000

E)$65,000

Feedback: The total manufacturing costs plus beginning work-in-process


inventory minus ending work-in-process inventory equals the cost of
goods manufactured. The total manufacturing costs are $1,240,000
($140,000 + $500,000 + $600,000). Ending work-in-process inventory is
$50,000 (= $1,240,000 + $15,000 – X = $1,205,000, where X is the
ending work-in-process inventory). LO 6

12
INCORRECT Consider the following taken from a schedule of cost of goods manufactured:

What was the amount of the ending raw-material inventory?

A)$55,000

B)$65,000

C)$15,000

D)$100,000

E)None of the above

Feedback: Raw materials used = Beginning raw–material inventory +


Purchases of raw material – Ending raw-material inventory. $45,000 +
$280,000 – X = $225,000, where X is the ending raw-material inventory.
The ending raw materials inventory is $100,000 (= $325,000 –
$225,000). LO 6

13
INCORRECT Consider the following:

Which of the costs, A, B, or C, is a variable cost?

A)Cost A

B)Cost B

C)Cost C
D)Cost A and C

E)None of the above

Feedback:
A variable cost changes in total in direct proportion to a change in the
level of activity (or cost driver) and remains unchanged per unit of
activity. Cost B is a fixed cost-it remained unchanged in total at different
levels of activity and varied inversely per unit with increases in activity
levels. Cost C is neither a variable cost nor a fixed cost. LO 8

14
INCORRECT Which of the following refers to a cost that can be substantially influenced by
a manager?

A)Sunk cost.

B)Direct cost.

C)Opportunity cost.

D)Controllable cost.

E)Sunk cost

Feedback:
A cost that can be controlled or heavily influenced by a manager is called
a controllable cost. LO 9

15
CORRECT Which of the following refers to a cost that is a benefit sacrificed when the
choice of one action precludes taking an alternative course of action?

A)Out-of-pocket cost.

B)Direct cost.

C)Opportunity cost.

D)Controllable cost.

E)None of the above

Feedback:
An opportunity cost is a benefit sacrificed when the choice of one action
precludes taking an alternative course of action. LO 10