Accounting Cost Classifications Quiz

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Questions and Answers

Is the cost of fire insurance for a manufacturing plant generally considered a product cost?

True (correct)

Only in certain cases

False

Only for external reporting

Does depreciation in a manufacturing firm always count as a product cost for external financial reporting?

False (correct)

True

Only for machinery

Only for building depreciation

Are factory utilities costs included in an asset account on the balance sheet in external financial reports?

True (correct)

Only for leased factories

False

Only if incurred during the year

Are advertising costs classified as product costs for external financial reports?

False Signup and view all the answers

Are property taxes and insurance premiums on a factory building examples of manufacturing overhead?

True Signup and view all the answers

Is manufacturing overhead combined with direct materials known as conversion cost?

True Signup and view all the answers

If the ending inventory of finished goods is understated, what is the effect on net income?

Net income will be overstated Signup and view all the answers

Which of the following would NOT be classified as a period cost?

Depreciation of a machine used in manufacturing Signup and view all the answers

Transportation costs incurred by a manufacturing company to ship its product to its customers would be classified as which of the following?

Period Costs Signup and view all the answers

How would the wages of factory maintenance personnel usually be classified?

Yes, Yes Signup and view all the answers

Manufacturing overhead consists of which of the following?

All manufacturing costs, EXCEPT direct materials and direct labour Signup and view all the answers

Which of the following should NOT be included as part of manufacturing overhead at a company that makes office furniture?

Sheet steel in a file cabinet made by the company Signup and view all the answers

What is the outcome if the cost of goods sold is greater than the cost of goods manufactured?

Finished goods inventory has decreased during the period Signup and view all the answers

If 10,500 units are manufactured next month and cost behavior patterns remain unchanged, how will costs be affected?

Total cost per unit will decrease Signup and view all the answers

Which of the following statements regarding variable cost is true?

Variable cost remains constant on a per unit basis as the number of units produced increases Signup and view all the answers

What is the total amount for product cost and period cost for option b)?

$6,160, $540 Signup and view all the answers

What represents the beginning work in process inventory based on the provided data?

$25 Signup and view all the answers

What is the total for direct labor in Bennett Manufacturing Company assuming given inventories?

$36,000 Signup and view all the answers

Which option correctly indicates the total manufacturing costs for the data provided?

$89,000 Signup and view all the answers

What is the cost of goods manufactured for Reardon Company considering the changes in inventory?

$39,500 Signup and view all the answers

Which figure represents the correct work in process inventory at the end based on the provided data?

$11,000 Signup and view all the answers

What amount signifies the total cost of goods sold based on the context provided?

$70,000 Signup and view all the answers

What amount can be used to calculate the beginning work in process inventory using the cost of goods manufactured?

$85,000 Signup and view all the answers

If the cost of goods manufactured is greater than the cost of goods sold, what does this indicate?

Finished goods inventory has increased during the period. Signup and view all the answers

Which statement regarding fixed costs is incorrect?

Fixed costs expressed on a per unit basis remain constant regardless of activity level. Signup and view all the answers

How is opportunity cost best defined?

The benefit forgone by selecting one alternative instead of another. Signup and view all the answers

Which type of cost is often omitted from conventional accounting records but is important in decision making?

Opportunity cost. Signup and view all the answers

Calculate the cost of goods manufactured for Green Company in August given the following costs.

$138,000 Signup and view all the answers

In a scenario where a manufacturing company prepays insurance for three years, which percentage of the premium applies to manufacturing operations?

80% Signup and view all the answers

Which statement best indicates the nature of fixed costs?

They remain constant within a relevant range. Signup and view all the answers

What happens to fixed costs per unit as production increases?

They decrease proportionately with each additional unit. Signup and view all the answers

Study Notes

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.

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Description

Test your knowledge on product costs, cost of goods sold, and cost behavior in manufacturing. This quiz will cover various classifications, including product vs. period costs, and how inventory impacts net income. Perfect for accounting students or professionals looking to refresh their skills.