Chapter 2 Cost Terms, Concepts, and Classifications
True/False Questions
1. The!!sum!!of!!all!!costs!!of!!manufacturing!!costs!!except!!direct!!materials!!is!!call
ed!!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!!goo
ds!!inventory!!+!!cost!!of!!goods!!manufactured!!-!!ending!!finished!!goods!!inventory.
Ans:! ! True AACSB:! ! Reflective!!Thinking
AICPA!!BB:! ! Critical!!Thinking!!AICPA!!FN:! ! Reporting, !!Measu
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 2-1
,Chapter 2 Cost Terms, Concepts, and Classifications
rement LO:! ! 3 Level:! ! Easy
8. A!!variable!!cost!!is!!constant!!if!!expressed!!on!!a !!per !!unit!!basis!!but!!the!!total!!dollar!!amo
unt!!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!!p
er!!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!!inco
me!!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!!a
re!!under!!warranty.
2-2 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
,Chapter 2 Cost Terms, Concepts, and Classifications
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!!c
ost!!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!!machin
es!!are!!coated!!with!!grease.!!How!!should!!the!!cost!!of!!this!!grease!!be!!classified?
Direct!!Material!!Cost Fixed!!Cost
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Ans:! ! D AACSB:! ! Reflective!!Thinking
AICPA!!BB:! ! Critical!!Thinking!!AICPA!!FN:! ! Reporting
LO:! ! 1,5,6 Level:! ! Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 2-3
, Chapter 2 Cost Terms, Concepts, and Classifications
18. A!!security!!guard's!!wages!!at!!a !!factory!!would!!be!!an!!example!!o
f:!!Indirect!!labor Fixed!!manufacturing!!overhead
A) No No
B) Yes Yes
C) Yes No
D) 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!!c
ost!!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
2-4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
True/False Questions
1. The!!sum!!of!!all!!costs!!of!!manufacturing!!costs!!except!!direct!!materials!!is!!call
ed!!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!!goo
ds!!inventory!!+!!cost!!of!!goods!!manufactured!!-!!ending!!finished!!goods!!inventory.
Ans:! ! True AACSB:! ! Reflective!!Thinking
AICPA!!BB:! ! Critical!!Thinking!!AICPA!!FN:! ! Reporting, !!Measu
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 2-1
,Chapter 2 Cost Terms, Concepts, and Classifications
rement LO:! ! 3 Level:! ! Easy
8. A!!variable!!cost!!is!!constant!!if!!expressed!!on!!a !!per !!unit!!basis!!but!!the!!total!!dollar!!amo
unt!!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!!p
er!!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!!inco
me!!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!!a
re!!under!!warranty.
2-2 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
,Chapter 2 Cost Terms, Concepts, and Classifications
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!!c
ost!!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!!machin
es!!are!!coated!!with!!grease.!!How!!should!!the!!cost!!of!!this!!grease!!be!!classified?
Direct!!Material!!Cost Fixed!!Cost
A) Yes Yes
B) Yes No
C) No Yes
D) No No
Ans:! ! D AACSB:! ! Reflective!!Thinking
AICPA!!BB:! ! Critical!!Thinking!!AICPA!!FN:! ! Reporting
LO:! ! 1,5,6 Level:! ! Hard
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition 2-3
, Chapter 2 Cost Terms, Concepts, and Classifications
18. A!!security!!guard's!!wages!!at!!a !!factory!!would!!be!!an!!example!!o
f:!!Indirect!!labor Fixed!!manufacturing!!overhead
A) No No
B) Yes Yes
C) Yes No
D) 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!!c
ost!!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
2-4 Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition
