Managerial Accounting – Chapter 2: Cost Concepts,
Decision Making & Exam Review Notes[MA-CH2-
2026/2027] – Questions & Verified Answers with
Rationales – Grade A+
SECTION II: COST TERMINOLOGY & CLASSIFICATION (Questions 1–50)
1. Which of the following best defines a cost object?
A. Any item for which a cost is incurred but not recorded
B. Anything for which a separate measurement of costs is desired
C. Only tangible products manufactured by a company
D. A cost that cannot be traced to a specific product
A cost object is anything for which management wants a separate
measurement of costs—a product, service, department, customer, or activity. It is
not limited to tangible products.
2. Which of the following is a product cost for a manufacturing company?
A. Sales commission
B. Administrative salaries
C. Direct materials
D. Advertising expense
Product costs include direct materials, direct labor, and manufacturing
overhead. Sales commissions, administrative salaries, and advertising are period
costs.
3. A cost that remains constant in total regardless of changes in the level of
activity is called a:
,A. Variable cost
B. Mixed cost
C. Fixed cost
D. Step cost
A fixed cost remains constant in total within the relevant range, although
it decreases on a per-unit basis as volume increases.
4. Which of the following costs is classified as manufacturing overhead?
A. Wages of assembly-line workers
B. Raw materials used in production
C. Depreciation on factory equipment
D. Salary of the company president
Manufacturing overhead includes all manufacturing costs other than
direct materials and direct labor, such as factory depreciation, factory utilities,
and indirect materials.
5. Prime cost is the sum of:
A. Direct labor and manufacturing overhead
B. Direct materials and direct labor
C. Direct materials and manufacturing overhead
D. All manufacturing costs
Prime cost = direct materials + direct labor. Conversion cost = direct labor
+ manufacturing overhead.
6. Conversion cost is the sum of:
A. Direct materials and direct labor
B. Direct labor and manufacturing overhead
C. Direct materials and manufacturing overhead
D. All product costs
, Conversion cost represents the cost of converting raw materials into
finished goods: direct labor + manufacturing overhead.
7. A cost that has already been incurred and cannot be changed by any current or
future decision is a:
A. Opportunity cost
B. Sunk cost
C. Relevant cost
D. Differential cost
Sunk costs are historical costs that are irrelevant to decision making
because they cannot be avoided or changed.
8. The potential benefit given up when one alternative is selected over another is
a(n):
A. Sunk cost
B. Out-of-pocket cost
C. Opportunity cost
D. Committed cost
Opportunity cost is the benefit foregone by choosing one alternative over
the next best alternative.
9. Which of the following is a period cost?
A. Factory rent
B. Direct materials
C. Sales salaries
D. Indirect labor
Period costs are non-manufacturing costs (selling and administrative)
expensed in the period incurred. Sales salaries are a selling cost.
, 10. Indirect materials are classified as:
A. Direct materials
B. Manufacturing overhead
C. Period costs
D. Administrative expenses
Indirect materials (e.g., lubricants, small tools) cannot be conveniently
traced to a specific product and are therefore part of manufacturing overhead.
11. Which cost classification is most useful for predicting cost behavior?
A. Product vs. period
B. Direct vs. indirect
C. Variable vs. fixed
D. Prime vs. conversion
Variable vs. fixed classification focuses on how costs respond to changes in
activity, which is essential for cost prediction.
12. A cost that has both a fixed and a variable component is a:
A. Step cost
B. Mixed cost
C. Sunk cost
D. Discretionary cost
Mixed costs (semivariable costs) contain both fixed and variable elements,
such as a utility bill with a fixed monthly charge plus usage charges.
13. Which of the following is a direct cost with respect to a specific product?
A. Factory supervisor's salary
B. Lubricants for factory machines
Decision Making & Exam Review Notes[MA-CH2-
2026/2027] – Questions & Verified Answers with
Rationales – Grade A+
SECTION II: COST TERMINOLOGY & CLASSIFICATION (Questions 1–50)
1. Which of the following best defines a cost object?
A. Any item for which a cost is incurred but not recorded
B. Anything for which a separate measurement of costs is desired
C. Only tangible products manufactured by a company
D. A cost that cannot be traced to a specific product
A cost object is anything for which management wants a separate
measurement of costs—a product, service, department, customer, or activity. It is
not limited to tangible products.
2. Which of the following is a product cost for a manufacturing company?
A. Sales commission
B. Administrative salaries
C. Direct materials
D. Advertising expense
Product costs include direct materials, direct labor, and manufacturing
overhead. Sales commissions, administrative salaries, and advertising are period
costs.
3. A cost that remains constant in total regardless of changes in the level of
activity is called a:
,A. Variable cost
B. Mixed cost
C. Fixed cost
D. Step cost
A fixed cost remains constant in total within the relevant range, although
it decreases on a per-unit basis as volume increases.
4. Which of the following costs is classified as manufacturing overhead?
A. Wages of assembly-line workers
B. Raw materials used in production
C. Depreciation on factory equipment
D. Salary of the company president
Manufacturing overhead includes all manufacturing costs other than
direct materials and direct labor, such as factory depreciation, factory utilities,
and indirect materials.
5. Prime cost is the sum of:
A. Direct labor and manufacturing overhead
B. Direct materials and direct labor
C. Direct materials and manufacturing overhead
D. All manufacturing costs
Prime cost = direct materials + direct labor. Conversion cost = direct labor
+ manufacturing overhead.
6. Conversion cost is the sum of:
A. Direct materials and direct labor
B. Direct labor and manufacturing overhead
C. Direct materials and manufacturing overhead
D. All product costs
, Conversion cost represents the cost of converting raw materials into
finished goods: direct labor + manufacturing overhead.
7. A cost that has already been incurred and cannot be changed by any current or
future decision is a:
A. Opportunity cost
B. Sunk cost
C. Relevant cost
D. Differential cost
Sunk costs are historical costs that are irrelevant to decision making
because they cannot be avoided or changed.
8. The potential benefit given up when one alternative is selected over another is
a(n):
A. Sunk cost
B. Out-of-pocket cost
C. Opportunity cost
D. Committed cost
Opportunity cost is the benefit foregone by choosing one alternative over
the next best alternative.
9. Which of the following is a period cost?
A. Factory rent
B. Direct materials
C. Sales salaries
D. Indirect labor
Period costs are non-manufacturing costs (selling and administrative)
expensed in the period incurred. Sales salaries are a selling cost.
, 10. Indirect materials are classified as:
A. Direct materials
B. Manufacturing overhead
C. Period costs
D. Administrative expenses
Indirect materials (e.g., lubricants, small tools) cannot be conveniently
traced to a specific product and are therefore part of manufacturing overhead.
11. Which cost classification is most useful for predicting cost behavior?
A. Product vs. period
B. Direct vs. indirect
C. Variable vs. fixed
D. Prime vs. conversion
Variable vs. fixed classification focuses on how costs respond to changes in
activity, which is essential for cost prediction.
12. A cost that has both a fixed and a variable component is a:
A. Step cost
B. Mixed cost
C. Sunk cost
D. Discretionary cost
Mixed costs (semivariable costs) contain both fixed and variable elements,
such as a utility bill with a fixed monthly charge plus usage charges.
13. Which of the following is a direct cost with respect to a specific product?
A. Factory supervisor's salary
B. Lubricants for factory machines
