Accounting Cost Classifications Quiz

Product Costs

• Fire insurance for a manufacturing plant is generally considered a product cost.
• Depreciation is a product cost for external financial reporting purposes in manufacturing firms.
• Factory utilities can be included in an asset account on the balance sheet at the end of a period.
• Advertising costs are period costs, not product costs.
• Property taxes and insurance premiums on a factory building are considered manufacturing overhead.
• Manufacturing overhead combined with direct labor is conversion cost.

Cost of Goods Sold

• If ending finished goods inventory is understated, net income will be overstated.
• Goods available for sale equals the sum of the cost of goods manufactured and beginning finished goods inventory.

Cost Behavior

• Variable costs are costs whose per unit costs vary as the activity level rises and falls.
• Fixed costs vary inversely with the level of activity on a per-unit basis.

Cost Classifications (Product vs. Period)

• Rent for a manufacturing plant is a product cost but not a prime cost.
• The salary of the company president's secretary is considered a period cost.
• The cost of a general accounting office is considered a period cost.
• Depreciation of a machine used in manufacturing is considered a product cost.
• Sales commissions are considered a period cost.
• The cost of a warehouse used to store finished goods is considered a product cost.
• The cost of guided public tours through the company's facilities is considered a period cost.
• The cost of travel necessary to sell the manufactured product is considered a period cost.
• The cost of sand spread on the factory floor to absorb oil from manufacturing machines is considered a product cost.
• Transportation costs incurred by a manufacturing company to ship its product to its customers are considered period costs.
• Wages of factory maintenance personnel are considered indirect labor and also manufacturing overhead.

Manufacturing Overhead

• Manufacturing overhead consists of all manufacturing costs except direct materials and direct labor.
• Sheet steel used in a file cabinet made by a company is considered direct material, not manufacturing overhead.
• Manufacturing equipment depreciation is considered manufacturing overhead.
• Idle time for direct labor is considered manufacturing overhead.
• Taxes on a factory building are considered manufacturing overhead.

Cost of Goods Manufactured and Sold

• If cost of goods sold is greater than cost of goods manufactured, then finished goods inventory has decreased during the period.
• Total variable costs will remain unchanged if the level of activity changes, assuming cost behavior patterns remain unchanged.
• Fixed costs will not change in total if the level of activity changes, assuming cost behavior patterns remain unchanged.
• Variable costs per unit will remain unchanged if the level of activity changes, assuming cost behavior patterns remain unchanged.
• Total cost per unit will decrease if the level of activity changes, assuming cost behavior patterns remain unchanged.

Cost Behavior & Decision Making

• A variable cost remains constant on a per-unit basis as the number of units produced increases.
• If the cost of goods manufactured is greater than the cost of goods sold, then finished goods inventory has increased during the period.
• Expressing fixed costs on a per-unit basis is usually not the best approach for decision making.
• Assumptions by accountants regarding the behavior of fixed costs rest heavily on the concept of the relevant range.
• An opportunity cost is the benefit forgone by selecting one alternative instead of another.
• Opportunity cost is often important in decision making but omitted from conventional accounting records.

Cost of Goods Manufactured Calculation

• Cost of Goods Manufactured = Direct Materials + Direct Labor + Manufacturing Overhead + Beginning Work in Process Inventory - Ending Work in Process Inventory.
• For Green Company, the cost of goods manufactured is $105,000: $27,000 (direct materials) + $34,000 (direct labor) + $24,000 (manufacturing overhead) + $16,000 (beginning work in process) - $9,000 (ending work in process) = $105,000.

Product and Period Costs - Prepaid Insurance

• When a company prepays insurance for a period longer than a single accounting period, the cost must be allocated between product and period costs.
• The amount allocated to product cost should be the portion of the insurance premium that applies to manufacturing operations.
• The amount allocated to period costs should be the portion of the insurance premium that applies to selling and administrative activities.
• In the case of the three-year insurance prepayment, the first year's product cost is $720 ($2,700 total premium x 80% manufacturing x 1/3 year) and the period cost is $180 ($2,700 total premium x 20% selling & administrative x 1/3 year).

Beginning Work in Process Inventory

• Beginning Work in Process = Cost of Goods Manufactured - (Direct Materials + Direct Labor + Manufacturing Overhead) + Ending Work in Process.
• In the provided example, the beginning work in process inventory is $25: $80 (cost of goods manufactured) - ($15 (direct materials) + $20 (direct labor) + $30 (manufacturing overhead) + $10 (ending work in process) = $25.

Direct Labor Calculation

• Direct Labor = Total Manufacturing Cost - (Direct Materials + Manufacturing Overhead)
• In Bennett Manufacturing's case, direct labor was $36,000: $106,000 (total manufacturing cost) - ($43,000 (direct materials) + $27,000 (manufacturing overhead)) = $36,000.

Cost of Goods Manufactured with Inventory Changes

• Cost of Goods Manufactured = Beginning Raw Materials + Raw Materials Purchases - Ending Raw Materials + Direct Labor + Manufacturing Overhead + Beginning Work in Process - Ending Work in Process.
• For Reardon Company, cost of goods manufactured is $41,500: $15,000 (beginning raw materials) + $15,000 (purchases) - $2,000 (ending raw materials) + $17,000 (direct labor) + $8,500 (manufacturing overhead) + $10,000 (beginning work in process) - $11,000 (ending work in process) = $41,500.