Chapter M2: Classifying Costs
Multiple Choice
1.
The following statement is true regarding costs:
Direct costs cannot be specifically traced to a cost object.
*
Examples of direct costs include the wheels and gears of a bicycle.
Indirect costs can be specifically traced to a cost object.
Examples of indirect costs include the salaries of employees
assembling the bicycles.
Hint for question 1
Managers need cost data on all aspects of the business to make wise decisions.
A cost object is anything for which a separate measurement of costs is desired.
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2.
The following statement is true regarding service, merchandising, and
manufacturing companies:
For service companies the most significant cost is usually cost of
goods sold.
Merchandising companies convert raw materials into finished
products.
Examples of merchandising companies including Nike and Reebok.
For manufacturing companies the most significant cost is usually cost
of goods sold.
Hint for question 2
*
Service companies provide intangible services. Merchandise companies buy
ready-made inventory for resale to customers. Manufacturing companies use
labor, plant, and equipment to convert raw materials into finished products.
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3.
Product costs --
include selling and administrative expense.
might be reported in three different inventory accounts on the balance
sheet of a merchandising firm.
include the cost of shipping inventory to customers.
are expensed on the income statement in the period the product is
sold.
Hint for question 3
*
Product costs are incurred making products available and ready to sell.
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4.
Period costs --
are also known as inventoriable costs.
*
will only be found on the income statement and not on the balance
sheet.
include freight-in.
include direct materials, direct labor, and manufacturing overhead for
a manufacturing firm.
Hint for question 4
Period costs are all costs not considered product costs. Period costs are typically
divided into selling and administrative expense.
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5.
Direct materials --
have been purchased but have not yet entered the production
process.
include cleaning supplies used in the factory.
become part of the manufacturing overhead costs.
are included in both work-in-process inventory and finished goods
inventory.
Hint for question 5
*
Direct materials include raw materials that become a part of the final product and
can be easily traced to the individual units produced.
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6.
Direct labor costs --
include the salary of the VP of Marketing.
will never be found in inventory.
*
include the salaries and wages of factory workers who are part of the
manufacturing process.
can be classified as either a product or a period cost depending on
the work performed.
Hint for question 6
Direct labor costs include the cost of all production labor that can be traced
directly to units of a manufactured product.
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7.
Manufacturing overhead includes --
utility costs for executive headquarters that are separate from the
manufacturing plant.
salaries and wages of factory workers who put the product together.
*
depreciation expense on plant equipment.
indirect and direct costs.
Hint for question 7
Manufacturing overhead includes all costs associated with the operation of the
manufacturing facility besides direct material costs and direct labor costs. It is
composed entirely of indirect manufacturing costs.
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8.
*
Bicycle oil $500; bicycle wheels $10,000; cashier salary $15,000; cleaning
fluid $200; bicycle polish $300; and store rental costs $60,000. For the
Pro Bicycle Shop indirect material costs total -$1,000.
$10,500.
$16,000.
$61,000
Hint for question 8
Indirect materials are raw materials used in production that cannot be traced to
the individual units produced.
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9.
Compute manufacturing overhead from the following information:
Direct materials $30,000; indirect materials $10,000; direct labor $40,000;
indirect labor $20,000; factory depreciation $50,000; and administrative
salaries $60,000.
*
$80,000.
$140,000.
$150,000.
none of the above.
Hint for question 9
Manufacturing overhead only includes indirect manufacturing costs.
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10.
*
Beginning WIP inventory $10,000; ending WIP inventory $15,000; 2007
direct material costs $30,000; 2007 direct labor costs $40,000; and 2007
manufacturing overhead costs $80,000. 2007 cost of goods manufactured
equals -$145,000.
$150,000.
$155,000.
none of the above.
Hint for question 10
Cost of goods manufactured is the cost of the goods that completed the
production process in 2007. It's the cost of inventory that was transferred from
WIP to FG inventory.
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11.
Beginning FG inventory $20,000; ending FG inventory $25,000; and 2007
cost of goods manufactured $145,000. The following statement is true:
Goods available for sale equals $165,000.
Cost of goods sold equals $140,000.
At the end of the accounting period, the amount reported on the
balance sheet totals $25,000.
*
All of the above are correct.
Hint for question 11
Finished goods can either be sold or remain unsold.
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12.
Service corporations --
generally report cost of goods sold as their largest expense.
report only one type of inventory on the balance sheet.
*
report cost of services on the income statement.
report no period costs on the income statement.
Hint for question 12
Service companies provide intangible services rather than a product.
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Submit for Grade
Chapter M2: Classifying Costs
True or False
1.
*
Cost information is one of the key components of financial decision
making.
TRUE
FALSE
Hint for question 1
Cost is how much you give up to get something. Price is what we charge; cost is
what we pay.
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2.
Inventory is expensed in the accounting period purchased.
TRUE
*
FALSE
Hint for question 2
Inventory only includes product costs. In which accounting period are product
costs expensed?
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3.
*
Period costs are never included in the cost of inventory.
TRUE
FALSE
Hint for question 3
Period costs are expensed in the accounting period they are incurred.
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4.
In a manufacturing company, employee salaries are always reported as
period costs.
TRUE
*
FALSE
Hint for question 4
Does the employee work at administrative headquarters or in the factory?
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5.
*
Cost of services performed for a service corporation is similar to cost of
goods sold for a merchandising firm.
TRUE
FALSE
Hint for question 5
Cost of services performed includes the cost of materials, labor, and
overhead required to perform services.
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Chapter M2: Classifying Costs
Fill In The Blanks
1.
A __________ company buys ready-made inventory for resale to
customers.
wholesale
service
manufacturing
*
merchandising
Hint for question 1
Service companies provide intangible services. Merchandise companies buy
ready-made inventory for resale to customers. Manufacturing companies use
labor, plant, and equipment to convert raw materials into finished products.
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2.
Advertising is an example of a(n) __________ cost expensed on the
income statement in the accounting period the advertisement is used.
product
indirect
direct
*
period
Hint for question 2
What type of cost is expensed when incurred?
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3.
*
The cost of factory insurance is an example of __________, which is an
inventoriable product cost.
manufacturing overhead
direct labor
indirect materials
direct materials
Hint for question 3
There are three inventoriable costs: direct materials, direct labor, and
manufacturing overhead.
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4.
__________ is defined as the cost of the units completed during the
production process this accounting period.
Finished goods inventory
Work-in-process inventory
*
Cost of goods manufactured
Cost of goods sold
Hint for question 4
In other words, these units were finished this accounting period.
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5.
Product costs appear on the __________ in the accounting period the
product is sold.
balance sheet
statement of stockholders' equity
*
income statement
statement of cash flows
Hint for question 5
Unsold product costs appear on the balance sheet as inventory. What
happens to those costs when the product is sold?
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Chapter M2: Classifying Costs
Essay Questions
1.
Describe inventoriable product costs and period costs for a merchandising
company. Explain in which accounting period each type of cost is expensed.
2.
Describe the three components of a manufacturing company's inventoriable
product costs. List one example of each type of cost.
3.
For a manufacturing firm, list the four financial statement accounts that may
include costs for raw materials. Indicate the financial statement that would
report each of these amounts.
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