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Chapter 2
Basic Cost Management Concepts Answer Key
True / False Questions
1. An important first step in studying managerial accounting is to create a framework for
thinking about the various types of costs incurred by organizations and how those costs are
actively managed.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01
Feedback True: Correct! Thinking about various types of costs and how they are actively managed is an important first step.
Feedback False: This is an important first step.
2. Different cost concepts and classifications are used for different purposes.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01
Feedback True: Correct! Different cost concepts and classifications are used for different purposes.
Feedback False: This is a true statement.
3. Inventoriable costs are expensed when incurred.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback True: This statement is incorrect.
Feedback False: Correct! Inventoriable costs are not expensed when incurred.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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4. Another term for product cost is cost of goods sold.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback True: Product cost is not known as cost of goods sold.
Feedback False: Correct! Product cost is not known as cost of goods sold.
5. Finished goods inventory is ordinarily held for sale by a manufacturing company.
TRUE
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03
Feedback True: Correct! It is true that finished goods inventory is held for sale by a manufacturing company.
Feedback False: It is true that finished goods inventory is held for sale by a manufacturing company.
6. Selling and administrative costs are always period costs on any type of company’s income
statement.
TRUE
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03
Feedback True: Correct! It is true that selling and administrative costs are period costs on any type of company’s income statement.
Feedback False: It is true that selling and administrative costs are period costs on any type of company’s income statement.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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7. There are three standard categories of manufacturing processes.
FALSE
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04
Feedback True: There are not three standard categories of manufacturing processes.
Feedback False: Correct! There are not three standard categories of manufacturing processes.
8. A job shop is generally associated with high production volume.
FALSE
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04
Feedback True: Job shops are not associated with high production volume.
Feedback False: Correct! Job shops are not associated with high production volume.
9. Manufacturing costs are classified into four categories.
FALSE
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05
Feedback True: Manufacturing costs are not classified into four categories.
Feedback False: Correct! Manufacturing costs are not classified into four categories.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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10. Indirect labor is not a component of manufacturing overhead.
FALSE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05
Feedback True: Indirect labor is a component of manufacturing overhead.
Feedback False: Correct! Indirect labor is a component of manufacturing overhead.
11. The following equation — Beginning finished goods + cost of goods manufactured –
ending finished goods — is used to calculate cost of goods sold during the period.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-06
Feedback True: Correct! This is the equation used to calculate cost of goods sold during the period.
Feedback False: This is the equation used to calculate cost of goods sold during the period.
12. The total cost of direct material, direct labor, and manufacturing overhead transferred
from work-in-process inventory to finished-goods inventory is called the cost of goods
manufactured.
TRUE
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-06
Feedback True: Correct! Total cost of direct material, direct labor, and manufacturing overhead that is transferred from WIP to finished
goods is called cost of goods manufactured.
Feedback False: This is a true statement.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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13. A suitable cost driver for the amount of direct materials used is the number of direct labor
hours worked.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-07
Feedback True: A suitable cost driver for material would not be labor.
Feedback False: Correct! This statement is false because a suitable cost driver for material would not be labor.
14. The higher the correlation between the cost and the cost driver, the more accurate will be
the resulting understanding of cost behavior.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-07
Feedback True: Correct! It is true that higher correlation between cost and cost driver will result in greater understanding of the cost
behavior.
Feedback False: A higher correlation between cost and cost driver will result in greater understanding of the cost behavior.
15. As activity changes, total variable cost increases or decreases proportionately with the
activity change, but unit variable cost remains the same.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-08
Feedback True: Correct! It is true that as activity changes, total variable cost will increase or decrease proportionately, but unit variable
cost stays the same.
Feedback False: As activity changes, total variable cost will increase or decrease proportionately, but unit variable cost stays the same.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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16. As the activity level increases, total fixed cost remains constant and unit fixed cost
remains the same.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-08
Feedback True: Total fixed cost and total unit fixed cost will not remain the same with activity level increases.
Feedback False: Correct! Total fixed cost and total unit fixed cost will not remain the same with activity level increases.
17. A cost that is not directly traceable to a particular cost object is called an indirect cost.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-09
Feedback True: Correct! It is true that a cost, which is not directly traceable to a particular cost object, is called an indirect cost.
Feedback False: A cost, which is not directly traceable to a particular cost object, is called an indirect cost.
18. Costs that a manager can influence significantly are classified as uncontrollable costs of
that manager.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-09
Feedback True: Costs influenced by managers are not classified as uncontrollable costs.
Feedback False: Correct! Costs influenced by managers are not classified as uncontrollable costs.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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19. Out-of-pocket costs are defined as the benefit that is sacrificed when the choice of one
action precludes taking an alternative course of action.
FALSE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-10
Feedback True: When an action precludes taking an alternative action, this is not known as out-of-pocket costs.
Feedback False: Correct! When an action precludes taking an alternative action, this is not known as out-of-pocket costs.
20. Sunk costs are irrelevant to all future decisions.
TRUE
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-10
Feedback True: Correct! It is true that sunk costs are irrelevant to all future decisions.
Feedback False: Sunk costs are irrelevant to all future decisions.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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Multiple Choice Questions
21. Which of the following statements is true?
A. The word “cost” has the same meaning in all situations in which it is used.
B. Cost data, once classified and recorded for a specific application, are appropriate for use in
any application.
C. Different cost concepts and classifications are used for different purposes.
D. All organizations incur the same types of costs.
E. Costs incurred in one year are always meaningful in the following year.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01
Feedback A: Cost has different meanings in different situations.
Feedback B: Cost data from one application may not be appropriate for use in another application.
Feedback C: Correct! It is true that different cost concepts and classifications are used for different purposes.
Feedback D: Not all organizations incur the same types of costs.
Feedback E: Cost incurred in one year may not be meaningful in the following year.
22. Research and development costs are classified as:
A. product costs.
B. period costs.
C. inventoriable costs.
D. cost of goods sold.
E. labor costs.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Research and development costs are not classified as product costs.
Feedback B: Correct! Research and development costs are classified as period costs.
Feedback C: Research and development costs are not classified as inventoriable costs.
Feedback D: Research and development costs are not classified as cost of goods sold.
Feedback E: Research and development costs are not classified as labor costs.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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23. Product costs are:
A. expensed when incurred.
B. inventoried.
C. treated in the same manner as period costs.
D. treated in the same manner as advertising costs.
E. subtracted from cost of goods sold.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Correct! Product costs are not expensed when incurred.Product costs are not expensed when occurred.
Feedback B: Correct! Product costs are inventoried.
Feedback C: Product costs are not treated in the same manner as period costs.
Feedback D: Product costs are not treated in the same manner as advertising costs.
Feedback E: Product costs are not subtracted from cost of goods sold.
24. Which of the following is a product cost?
A. Circuitry used in producing hard drives.
B. Monthly advertising in the newspaper.
C. The salary of the vice president-finance.
D. Sales commissions.
E. Research costs for new router development.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Correct! Circuitry used in manufacturing hard drives is a product cost.
Feedback B: Advertising is not a product cost.
Feedback C: The salary of the vice president-finance is not a product cost.
Feedback D: Sales commission is not a product cost.
Feedback E: Research and development cost is not a product cost.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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25. Which of the following would not be classified as a product cost?
A. Direct materials.
B. Direct labor.
C. Indirect materials.
D. Insurance on a manufacturing plant.
E. Sales bonuses for meeting quota sales.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Direct materials are product costs.
Feedback B: Direct labor is a product cost.
Feedback C: Indirect materials are product costs.
Feedback D: Manufacturing plant insurance is a product cost.
Feedback E: Correct! Sales bonuses are not product costs.
26. The accounting records of Dixon Company revealed the following costs: direct materials
used, $250,000; direct labor, $425,000; manufacturing overhead, $375,000; and selling and
administrative expenses, $220,000. Dixon’s product costs total:
A. $1,050,000.
B. $830,000.
C. $895,000.
D. $1,270,000.
E. None of the answers is correct.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 02-02
Feedback A: Correct! Product costs = Direct materials used + Direct labor + Manufacturing overhead =$250,000 + $425,000 + $375,000
= $1,050,000
Feedback B: This amount is incorrect.
Feedback C: This amount is incorrect.
Feedback D: This amount is incorrect.
Feedback E: There is a correct amount given.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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27. Costs that are expensed when incurred are called:
A. product costs.
B. direct costs.
C. inventoriable costs.
D. period costs.
E. indirect costs.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Product costs are not expensed when incurred.
Feedback B: Direct costs are not expensed when incurred.
Feedback C: Inventoriable costs are not expensed when incurred.
Feedback D: Correct! Period costs are expensed when incurred.
Feedback E: Indirect costs are not expensed when incurred.
28. Which of the following is a period cost?
A. Direct material.
B. Advertising expense.
C. Indirect labor.
D. Miscellaneous supplies used in production activities.
E. Factory foreman salary for the motor production line.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Direct material is not a period cost.
Feedback B: Correct! Advertising expense is a period cost.
Feedback C: Indirect labor is not a period cost.
Feedback D: Miscellaneous supplies used in production are not period costs.
Feedback E: Factory foreman salary is not a period cost.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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29. Which of the following is not a period cost?
A. Legal costs.
B. Public relations costs.
C. Sales commissions.
D. Wages of assembly-line workers.
E. The salary of a company’s chief financial officer (CFO).
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-02
Feedback A: Legal costs are period costs.
Feedback B: Public relations costs are period costs.
Feedback C: Sales commissions are period costs.
Feedback D: Correct! The wages of assembly line workers are not period costs.
Feedback E: The salary of a company’s chief financial officer (CFO) is a period cost.
30. The accounting records of Younkin Corporation revealed the following selected costs:
Sales commissions, $65,000; plant supervision, $190,000; and administrative expenses,
$185,000. Younkin’s period costs total:
A. $250,000.
B. $440,000.
C. $375,000.
D. $255,000.
E. $185,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-02
Feedback A: Correct! Period costs = Sales commissions + Administrative expenses = $65,000 + $185,000 = $250,000.
Feedback B: This is not the correct amount.
Feedback C: This is not the correct amount.
Feedback D: This is not the correct amount.
Feedback E: This is not the correct amount.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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31. Shu Corporation recently computed total product costs of $567,000 and total period costs
of $420,000, excluding $35,000 of sales commissions that were overlooked by the company’s
administrative assistant. On the basis of this information, Shu’s income statement should
reveal operating expenses of:
A. $35,000.
B. $420,000.
C. $455,000.
D. $567,000.
E. $602,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-02
Feedback A: This is not the correct amount.
Feedback B: This is not the correct amount.
Feedback C: Correct! Operating expenses = Period costs + Excluded sales commissions = $420,000 + $35,000 = $455,000
Feedback D: This is not the correct amount.
Feedback E: This is not the correct amount.
32. Which of the following would not be a period cost?
A. Sales salaries.
B. Sales commissions.
C. Tamper-proof packaging.
D. Legal costs.
E. Accounting costs.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-02
Feedback A: This is a period cost.
Feedback B: This is a period cost.
Feedback C: Correct! Tamper-proof packaging would not be a period cost.
Feedback D: This is a period cost.
Feedback E: This is a period cost.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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33. Which of the following entities would most likely have raw materials, work in process,
and finished goods?
A. A petroleum refiner.
B. A national department store.
C. A fast food restaurant.
D. A regional airline.
E. A state university.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03
Feedback A: Correct! A petroleum refiner would be most likely to have these three inventories.
Feedback B: A retail department store is not likely to have these three inventories.
Feedback C: A fast food restaurant is not likely to have these three inventories.
Feedback D: A regional airline is not likely to have these three inventories.
Feedback E: A state university or education service provider is not likely to have these three inventories.
34. Selling and administrative expenses would likely appear on the balance sheet of:
A. A clothing store.
B. A computer manufacturer.
C. A television network.
D. All of these firms.
E. None of these firms.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03
Feedback A: These expenses would not be found on the balance sheet.
Feedback B: These expenses would not be found on the balance sheet.
Feedback C: These expenses would not be found on the balance sheet.
Feedback D: These expenses would not be found on the balance sheet.
Feedback E: Correct! Expenses are found on the income statement, not the balance sheet.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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35. Which of the following inventories would a discount retailer report as an asset?
A. Raw materials.
B. Work in process.
C. Finished goods.
D. Merchandise inventory.
E. All of the answers are correct.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03
Feedback A: Retailers would not have raw materials.
Feedback B: Retailers would not have work in process.
Feedback C: Retailers would not produce finished goods.
Feedback D: Correct! Retailers purchase their merchandise inventories from wholesalers, who get the inventory from manufacturers.
Feedback E: Not all of these inventories would be found in the assets of a retailer.
36. Which of the following inventories would a company ordinarily hold for sale?
A. Raw materials.
B. Work in process.
C. Finished goods.
D. Raw materials and finished goods.
E. Work in process and finished goods.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03
Feedback A: Raw materials are typically not held for sale.
Feedback B: Work in Process is typically not held for sale.
Feedback C: Correct! Inventories held for sale by manufacturers are finished goods.
Feedback D: Not both of these are held for sale.
Feedback E: Not both of these are held for sale.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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37. Which of the four items listed below is not a type of production process?
A. Batch.
B. Job Shop.
C. Continuous Flow.
D. Job Flow.
E. Assembly.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-04
Feedback A: Batch is a type of production process.
Feedback B: Job shop is a type of production process.
Feedback C:Continuous flow is a type of production process.
Feedback D: Correct! Job flow is not a type of production process.
Feedback E: Assembly is a type of production process.
38. Which type of production process is ideal for a low production volume and one-of-a-kind
products?
A. Batch.
B. Continuous Flow.
C. Job Shop.
D. Assembly.
E. Direct assembly.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA: FN Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-04
Feedback A: A batch process is not ideal for one-of-a-kind products.
Feedback B: A continuous flow process is not ideal for one-of-a-kind products.
Feedback C: Correct! One-of-a-kind products are ideally made in a job shop process.
Feedback D: An assembly process is not ideal for one-of-a-kind products.
Feedback E: A direct assembly process is not ideal for one-of-a-kind products.
Chapter 2 – Basic Cost Management Concepts and Accounting for Mass Customization Operations
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39. Which type of production process is likely used for custom yachts built by Hargrave?
