COST CONCEPTS AND CLASSIFICATIONS 1

Review Questions

1. Why is the cost of idle time treated as manufacturing overhead?

2. Indicate whether each of the following costs is a direct cost or an indirect cost of the restaurant in a hotel.
a. Cost of food served
b. Chefs salary and fringe benefits
c. Part of the cost of maintaining the grounds around the hotel, which is allocated to the restaurant.
d. Part of the cost of advertising the hotel, which is allocated to the restaurant
3. List and briefly describe the three types of product costs.
4. List and briefly describe the three types of manufacturing inventories.
5. Describe how the income statement of a manufacturing company differs from the income statement of a
merchandising company.
6. A variable cost is a cost that varies per unit of product, whereas a fixed cost is constant per unit of product. Do you
agree? Explain.
7. Why is manufacturing overhead considered an indirect cost of a unit of product?

EXERCISES
Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income Statement)
Amazing Aluminum Company, a manufacturer of recyclable soda cans, had the following inventory balances at the
beginning and end of 2005:

Inventory Classification January 1, 2005 December 31, 2005

Raw Material P 60,000 P 70,000
Work in process 120,000 115,000
Finished Goods 150,000 165,000
During 2005, the company purchased P 250,000 of raw material and spent P 400,000 on direct labor. Manufacturing
overhead costs were as follows:
Indirect material P 10,000
Indirect labor 25,000
Depreciation on plant and equipment 100,000
Utilities 25,000
Other 30,000
Sales revenue was P 1,105,000 for the year. Selling and administrative expenses for the year amounted to P 110,000.
The firms tax rate is 40 percent.
Required:
1. Prepare a schedule of cost of goods manufactured.
2. Prepare a schedule of cost of goods sold.
3. Prepare an income statement.
Exercise 2
For each of the following costs incurred in a manufacturing operation, indicate whether the costs would be fixed or
variable (F or V) and whether they would be period costs or product costs (P or R, respectively) under full-absorption
costing.
a. Transportation-in costs on materials purchased l. Supplies used in assembly work
b. Assembly-line workers wages m. Factory heat and air conditioning
c. Property taxes on work in process inventories n. Power to operate factory equipment
d. Salaries of top executives in the company o. Depreciation on furniture for sales staff
e. Overtime premium for assembly workers p. Varnish used for finishing product
f. Sales commissions q. Marketing personnel health insurance
g. Sales personnel office rental r. Packaging materials for finished product
h. Production supervisory salaries s. Salary of the quality control manager who checks
i. Controllers office supplies work on the assembly line
j. Executive office heat and air conditioning t. Assembly line workers dental insurance.
k. Executive office security personnel
u.

v. Exercise 3 (Cost Classification; Manufacturer)

w. Daisy Ryan Shirt Shop manufactures T-Shirts and decorates them with custom designs for retail sale on the
premises. Several costs incurred by the company are listed below. For each cost, indicate which of the following
classifications best describes the cost. More than one classification may apply to the same cost item.
x. Cost classification
a. Variable g. Manufacturing
b. Fixed h. Research and development
c. Period i. Direct material
d. Product j. Direct labor
e. Administrative k. Manufacturing overhead
f. Selling
l. Cost items
1. Cost of fabric used in T-shirts
2. Wages of shirtmakers
3. Cost of new sign in front of retail T-shirt shop
 COST CONCEPTS AND CLASSIFICATIONS 2
4. Wages of the employee who repairs the firms sewing machines
5. Cost of electricity used in the sewing department
6. Wages of T-shirt designers and painters
7. Wages of sales personnel
8. Depreciation on sewing machines
9. Rent on the building. Part of the buildings first floor is used to make and paint T-shirts. Part of it is used for the
retail sales shop. The second floor is used for administrative offices and storage of raw materials and finished
goods
10. Cost of daily advertisements in local media
11. Wages of designers who experiment with new fabrics, paints, and T-shirt designs
12. Cost of hiring a pilot to fly along the beach pulling a banner advertising the shop
13. Salary of the owners secretary
14. Cost of repairing the gas furnace
15. Cost of insurance for the production of employees
m.

n. Exercise 4. (Economic Characteristics of Costs)

o. The following terms are used to describe various economic characteristics of costs.
p.

q. Opportunity cost t. Differential cost

r. Out-of-pocket cost u. Marginal cost
s. Sunk cost v. Average cost
w.

x. Required:
y. Choose one of the terms listed above to characterize each of the amounts described below.
1. The cost of including one extra child in a day care center.
2. The cost of merchandise inventory purchased two years ago, which is now obsolete.
3. The cost of feeding 500 children in a public school cafeteria is P 800 per day, or P 1.60 per child per day. What
economic term describes this P 1.60 cost?
4. The management of a high-rise office building uses 2,500 square feet of space in the building for its own
management functions. This space could be rented for P 250,000. What economic term describes this P 250,000
in lost rental revenue?
5. The cost of building an automated assembly line in a factory is P 800,000. The cost of building a manually
operated assembly line is P 375,000. What economic term is used to describe the difference between these two
amounts?
6. Referring to the preceding question, what economic term is used to describe the P 800,000 cost of building the
automated assembly line?
z.

aa. Exercise 5 (Cost Classifications; Hotel)

ab. Several costs incurred by Wow Hotel and Restaurant are listed below. For each cost, indicate which of the
following classifications best describe the cost. More than one classification may apply to the same cost item.
ac. Cost classifications
a. Differential cost g. Indirect cost of the food and beverage department
b. Marginal cost h. Controllable by the kitchen manager
c. Opportunity cost i. Uncontrollable by the kitchen manager
d. Sunk cost j. Controllable by the hotel general manager
e. Out-of-pocket cost k. Uncontrollable by the hotel general manager
f. Direct cost of the food and beverage department
l.

m. Cost items
1. The cost of food used in the kitchen
2. The cost of general advertising by the hotel, which is allocated to the food and beverage department
3. The cost of space (depreciation) occupied by a sauna next to the pool. The space could otherwise have been
used for a magazine and bookshop.
4. The discount on room rates given as a special offer for a Labor Day Gateway Special.
5. The wages earned by table-service personnel.
6. The salary of the kitchen manager.
7. The cost of leasing a computer used for reservations, payroll and general hotel accounting
8. The wages of the hotels maintenance employees, who spent 11 hours (at P 14 per hour) repairing the dishwasher
in the kitchen.
9. The difference in the total cost incurred by the hotel when one additional guest is registered.
10. The cost of space (depreciation) occupied by the kitchen.
11. The profit that would have been earned in a magazine and bookshop, if the hotel had one.
12. The cost of the refrigerator purchased 13 months ago. The unit was covered by a warranty for 12 months, during
which time it worked perfectly. It conked out after 13 months, despite an original estimate that it would last five
years.
13. The cost of dishes broken by kitchen employees.
14. The cost of a pool service that cleans and maintains the hotels swimming pool.
n.

o. Exercise 6
p.
q. TOP Pickups is an up-scale, higher-priced, specialty pickup truck maker based in Binan, Laguna. The
management accountant for TOP Pickups compiled information for various levels of pickup truck output:
r.

s. Pickup Truck Output

 COST t.CONCEPTS AND CLASSIFICATIONS 3
u. v. 3,000 w. 6,00 x. 9,00
trucks 0 0
truck truck
s s
y. Variable production z. P aa. P ab. P
costs 29,64
0,000
ac. Fixed production ad. ae. 39,2 af.
costs 00,0
00
ag. Variable selling ah. 4,500 ai. aj.
costs ,000
ak. Fixed selling costs al. 13,66 am. 13,6 an.
0,000 60,0
00
ao. Total costs ap. aq. ar.
as. at. au. av.

aw. Selling price per ax. 46,00 ay. 40,1 az. 35,9
truck 0 00 00
ba. Unit cost bb. 29,00 bc. bd.
0
be. Profit per truck bf. bg. bh.
bi. Required:
bj. Rounding all calculations to the nearest peso, fill in the blanks with the correct figures.
bk.

bl. MULTIPLE CHOICES

1. Which statement is TRUE?

a. All variable costs are direct costs
b. Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs
c. All fixed costs are indirect costs
d. All direct costs are variable costs
bm.

2. Indirect manufacturing costs

a. Can be traced to the product that created the costs
b. Can be easily identified with the cost object
c. Generally include the cost of material and the cost of labor
d. May include both variable and fixed costs
bn.

3. Variable costs
a. Are always indirect costs
b. Increase in total when the actual level of activity increases
c. Include most personnel costs and depreciation on machinery
d. Can always be traced directly to the cost object
bo.

4. Fixed costs
a. May include either direct or indirect costs
b. Vary with production or sales volumes
c. Includes parts and materials used to manufacture a product
d. Can be adjusted in the short run to meet actual demands
bp.

5. Which one of the following is a variable costs in an insurance company?

a. Rent c. Sales commissions

b. Presidents salary d. Property taxes
6.

7. Service-sector companies report

a. Only merchandise inventory
b. Only finished goods inventory
c. Direct materials inventory, work in process inventory, and finished goods inventory accounts
d. No inventory accounts
8.

9. Manufacturing sector companies report

a. Only merchandise inventory
b. Only finished goods inventory
c. Direct materials inventory, work in process inventory, and finished goods inventory accounts
d. No inventory accounts
10.

11. For a manufacturing company, direct material costs may be included in

a. Direct materials inventory only
b. Merchandise inventory only
c. Both work in process inventory and finished goods inventory
d. Direct materials inventory, work in process inventory and finished goods inventory accounts
12. For a manufacturing company, direct labor costs may be included in
a. Direct materials inventory only
b. Merchandise inventory only
 COST CONCEPTS AND CLASSIFICATIONS 4
c. Both work in process inventory and finished goods inventory
d. Direct materials inventory, work in process inventory and finished goods inventory
13.

14. For a manufacturing company, indirect manufacturing costs may be included in

a. Direct materials inventory only
b. Merchandise inventory only
c. Both work in process inventory and finished goods inventory
d. Direct materials inventory, work in process inventory and finished goods inventory
15.

16. The income statement of a service-sector firm reports

a. Period costs only
b. Inventoriable costs only
c. Both period and inventoriable costs
d. Period and inventoriable costs but at different times, the reporting varies
17.

18. Inventoriable costs are expensed on the income statement

a. When direct materials for the product are purchased
b. After the products are manufactured
c. When the products are sold
d. Not at any particular time, it varies
19.

20. For merchandising companies, inventoriable costs include

a. The cost of the goods themselves c. Insurance costs for the goods
b. Incoming freight costs d. All of the above

e. The following information applies to questions 14 through 17.

f. The Awit Company manufactures several different products. Unit costs associated with Product ABC are as
follows:

g. Direct materials P 60
h. Direct manufacturing labor 10
i. Variable manufacturing overhead 18
j. Fixed manufacturing overhead 32
k. Sales commissions (2% of sales) 4
l. Administrative salaries 16
m. Total P 140
21. What are the variable costs per unit associated with Product ABC?

a. P 18 b. P 22 c. P 88 d. P 92
22.

23. What are the fixed costs per unit associated with Product ABC?

a. P 102 b. P 48 c. P 52 d. P 32
24.

25. What are the inventoriable costs per unit associated with Product ABC?

a. P 120 b. P 140 c. P 50 d. P 88
26.

27. What are the period costs per unit associated with Product ABC?

a. P 4 b. P 16 c. P 20 d. P 52
28.

29. All of the cost categories listed below are usually found in a companys accounting records, except for:

a. Sunk costs c. Opportunity costs

b. Inventoriable costs d. Marketing costs
30.

31. The term committed costs refers to those

a. Costs which are governed mainly by past decisions that established the present levels of operating and
organizational capacity and which only change slowly in response to small changes in capacity
b. Costs which are likely to respond to the amount of attention devoted to them by a specified manager
c. Costs which fluctuate in total in response to small changes in the rate of utilization of capacity
d. Amortization of costs which were capitalized in previous periods
32.

33. The term discretionary costs refers to those

a. Costs which management decides to incur in the current period to enable the company to achieve objectives
other than the filling of orders placed by customers
b. Costs which are likely to respond to the amount of attention devoted to them by a specified manager
c. Amortization of costs which were capitalized in previous periods
d. Costs which will be unaffected by current managerial decisions
34.

35. Those costs referred to as controllable costs are

 COST CONCEPTS AND CLASSIFICATIONS 5
a. Costs which management decides to incur in the current period to enable the company to achieve objectives
other than the filling of orders placed by customers
b. Costs which are likely to respond to the amount of attention devoted to them by a specified manager
c. Costs which fluctuate in total in response to small changes in the rate of utilization of capacity
d. Costs which will be unaffected by current managerial decisions
36.

37. In the preparation of the schedule of Cost of Goods Manufactured, the accountant incorrectly included as part of
manufacturing overhead the rental expense on the firms retail facilities. This inclusion would
a. Overstate period expense on the income statement
b. Overstate the cost of goods sold on the income statement
c. Understate the cost of goods manufactured
d. Have no effect on the cost of goods manufactured
38.

39. Cost of goods manufactured will usually include:

a. Only costs incurred during the current period
b. Only direct labor and direct materials costs
c. Some costs incurred during the prior period as well as costs incurred during the current period
d. Some period costs as well as some product costs
40.

41. An example of a fixed cost that would be considered a direct cost is

a. A cost accountants salary when the cost object is a unit of product
b. The rental cost of a warehouse to store finished goods when the cost object is the Purchasing Department
c. A production supervisors salary when the cost objective is the Production Department
d. Board of Directors fees when the cost object is the Marketing Department
42.

43. Buffy Company rents out a small unused portion of its factory to another company for P 1,000 per month. The rental
agreement will expire next month, and rather than renew the agreement Buffy Company is thinking about using the
space itself to store materials. The term to describe the P 1,000 per month is

a. Sunk cost c. Opportunity cost

b. Period cost d. Variable cost
 44.

45. The cost associated with idle time should be

a. Included as part of direct labor costs
b. Treated as part of manufacturing overhead
c. Added directly to cost of goods sold for the period
d. Included as part of selling and administrative expenses
46.

47. A direct labor overtime premium should be charged to a specific job when the overtime is caused by the:
a. Increased overall level of activity in the factory
b. Customers requirement for early completion of the job
c. Managements failure to include the job in the production schedule
d. Managements requirement that the job be completed before the annual factory closure due to vacation
48.

49. Costs which are inventoriable are

a. Manufacturing costs incurred to produce units of output
b. All costs associated with manufacturing other than direct labor costs and raw material costs
c. Costs which are associated with marketing, shipping, warehousing, billing activities
d. The sum of direct labor costs and all factory overhead costs
50.

51. For external reporting

a. Costs are classified as either inventoriable or period costs
b. Costs reflect current values
c. There are no prescribed rules since no one is exactly sure how investors and creditors will use these numbers
d. Costs include amounts that reflect both current and future benefits
52.

53. Ryan Soh is paid P 10 an hour for straight-time and P 15 an hour for overtime. One week he worked 45 hours, which
included 5 hours of overtime, and 3 hours of idle time caused by materials shortages. Compensation would be
reported as
a. P 370 of direct labor and P 105 of manufacturing overhead
b. P 420 of direct labor and P 55 of manufacturing overhead
c. P 450 of direct labor and P 25 of manufacturing overhead
d. P 445 of direct labor and P 30 of manufacturing overhead

54.

55.