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Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 15
True/False Questions
1. Manufacturing overhead is an indirect cost with respect to units of product.
Answer: True Level: Medium LO: 1
2. Depreciation on office equipment would not be included in the cost of goods
manufactured.
Answer: True Level: Easy LO: 2,4
3. Rent on a factory building used in the production process would be classified as a period
cost and as a fixed cost.
Answer: False Level: Medium LO: 2,5
4. Period costs are found only in manufacturing companies, not in merchandising
companies.
Answer: False Level: Medium LO: 2
5. Depreciation on equipment a company uses in its selling and administrative activities
would be classified as a product cost.
Answer: False Level: Medium LO: 2
6. If the finished goods inventory increases between the beginning and the end of a period,
then the cost of goods manufactured is smaller than the cost of goods sold.
Answer: False Level: Hard LO: 3,4
7. The cost of goods manufactured is calculated by adding the amount of work in process
at the end of the year to the cost of raw materials used, direct labor worked, and
manufacturing overhead incurred for the year and then subtracting work in process at
the beginning of the year.
Answer: False Level: Medium LO: 4
8. A publisher that sells its books through agents who are paid a constant percentage
commission on each book sold would classify the commissions as a fixed cost.
Answer: False Level: Medium LO: 5
Chapter 2 Cost Terms, Concepts, and Classifications
16 Garrison, Managerial Accounting, Eleventh Edition
9. Variable costs per unit are affected by changes in activity.
Answer: False Level: Easy LO: 5
10. A cost is either direct or indirect. The classification will not change if the cost object
changes.
Answer: False Level: Medium LO: 6
11. The amount that a manufacturing company could earn by renting unused portions of its
warehouse is an example of an opportunity cost.
Answer: True Level: Easy LO: 7
12. Labor fringe benefits may be charged to direct labor or manufacturing overhead while
overtime premiums paid usually are considered a part of manufacturing overhead.
Answer: True Level: Easy LO: 8 Appendix: 2A
13. The cost of idle time should be charged as direct labor of the job that is in process when
the breakdown occurs.
Answer: False Level: Medium LO: 8 Appendix: 2A
14. Internal failure costs result from identification of defects during the appraisal process.
Such costs may include scrap, rejected products, rework, and downtime.
Answer: True Level: Easy LO: 9 Appendix: 2B
15. ISO 9000 certification is relatively easy to achieve because little documentation on
quality control procedures is needed.
Answer: False Level: Easy LO: 11 Appendix: 2B
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 17
Multiple Choice Questions
16. Indirect labor is a part of:
A) Prime cost.
B) Conversion cost.
C) Period cost.
D) Nonmanufacturing cost.
Answer: B Level: Medium LO: 1,2 Source: CPA, adapted
17. The cost of lubricants used to grease a production machine in a manufacturing company
is an example of a(n):
A) period cost.
B) direct material cost.
C) indirect material cost.
D) none of the above.
Answer: C Level: Easy LO: 1,2
18. The salary paid to the president of King Company would be classified on the income
statement as a(n):
A) administrative expense.
B) direct labor cost.
C) manufacturing overhead cost.
D) selling expense.
Answer: A Level: Easy LO: 1
19. Direct labor cost is a part of:
Conversion cost Prime cost
A) No No
B) No Yes
C) Yes Yes
D) Yes No
Answer: C Level: Easy LO: 1 Source: CPA, adapted
Chapter 2 Cost Terms, Concepts, and Classifications
18 Garrison, Managerial Accounting, Eleventh Edition
20. Direct material cost is a:
Conversion cost Prime cost
A) No No
B) No Yes
C) Yes Yes
D) Yes No
Answer: B Level: Medium LO: 1 Source: CPA, adapted
21. Prime cost and conversion cost share what common element of total cost?
A) Direct materials.
B) Direct labor.
C) Variable overhead.
D) Fixed overhead.
Answer: B Level: Easy LO: 1 Source: CPA, adapted
22. Prime cost consists of:
A) direct labor and manufacturing overhead.
B) direct materials and manufacturing overhead.
C) direct materials and direct labor.
D) direct materials, direct labor and manufacturing overhead.
Answer: C Level: Easy LO: 1
23. Wages paid to a timekeeper in a factory are a:
Prime cost Conversion cost
A) Yes No
B) Yes Yes
C) No No
D) No Yes
Answer: D Level: Medium LO: 1 Source: CPA, adapted
24. Property taxes on a company’s factory building would be classified as a(n):
A) product cost.
B) opportunity cost.
C) period cost.
D) variable cost.
Answer: A Level: Easy LO: 2,5,7
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 19
25. Depreciation on a personal computer used in the marketing department of a
manufacturing firm would be classified as:
A) a product cost that is fixed with respect to the company’s output.
B) a period cost that is fixed with respect to the company’s output.
C) a product cost that is variable with respect to the company’s output.
D) a period cost that is fixed with respect to the company’s output.
Answer: B Level: Medium LO: 2,5
26. The nursing station on the fourth floor of Central Hospital is responsible for the care of
patients who have undergone orthopedic surgery. The costs of drugs administered by
the nursing station to patients would be classified as:
A) direct costs of the patients.
B) indirect costs of the patients.
C) overhead costs of the nursing station.
D) period costs of the hospital.
Answer: A Level: Hard LO: 2,6
27. All of the following would be classified as product costs except:
A) property taxes on production equipment.
B) insurance on factory machinery.
C) salaries of the advertising staff.
D) wages of machine operators.
Answer: C Level: Easy LO: 2
28. Product costs appear on the balance sheet:
A) only if goods are partially completed at the end of the period.
B) only if goods are unsold at the end of a period.
C) only if goods are partially completed or are unsold at the end of a period.
D) only in merchandising firms.
Answer: C Level: Medium LO: 2
Chapter 2 Cost Terms, Concepts, and Classifications
20 Garrison, Managerial Accounting, Eleventh Edition
29. Ross Corporation shipped finished goods to a customer on credit, but the sale was not
recorded and the costs of the finished goods were incorrectly included on the period’s
balance sheet as part of the finished goods inventory. Which one of the following
statements is correct concerning the effects of this error?
A) Accounts receivable was not affected, inventory was overstated, sales were
understated, and cost of goods sold was understated.
B) Accounts receivable was understated, inventory was not affected, sales were
understated, and cost of goods sold was understated.
C) Accounts receivable was understated, inventory was overstated, sales were
understated, and cost of goods sold was overstated.
D) Accounts receivable was understated, inventory was overstated, sales were
understated, and cost of goods sold was understated.
Answer: D Level: Easy LO: 3 Source: CMA, adapted
30. Data for Cost A and Cost B are as follows:
Number of
Units
Produced Unit Cost Total Cost
Cost A
1 ? $10
10 ? $100
100 ? $1,000
1,000 ? $10,000
Cost B
1 $5,000 ?
10 $500 ?
100 $50 ?
1,000 $5 ?
Which of the above best describes the behavior of Costs A and B?
A) Cost A is fixed, Cost B is variable.
B) Cost A is variable, Cost B is fixed.
C) Both Cost A and Cost B are variable.
D) Both Cost A and Cost B are fixed.
Answer: B Level: Medium LO: 5
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 21
31. Fixed costs expressed on a per unit basis:
A) will increase with increases in activity.
B) will decrease with increases in activity.
C) are not affected by activity.
D) should be ignored in making decisions since they cannot change.
Answer: B Level: Medium LO: 5
32. The costs of staffing and operating the accounting department at Central Hospital would
be considered by the Department of Surgery to be:
A) direct costs.
B) indirect costs.
C) incremental costs.
D) opportunity costs.
Answer: B Level: Hard LO: 6,7
33. A cost incurred in the past that is not relevant to any current decision is classified as
a(n):
A) period cost.
B) opportunity cost.
C) sunk cost.
D) differential cost.
Answer: C Level: Easy LO: 7
34. Differential costs can:
A) only be fixed costs.
B) only be variable costs.
C) be either fixed or variable.
D) be incremental but not decremental.
Answer: C Level: Easy LO: 7
35. John Johnson decided to leave his former job where he earned $12 per hour to go to a
new job where he will earn $13 per hour. In the decision process, the former wage of
$12 per hour would be classified as a(n):
A) sunk cost.
B) direct cost.
C) fixed cost.
D) opportunity cost.
Answer: D Level: Easy LO: 7
Chapter 2 Cost Terms, Concepts, and Classifications
22 Garrison, Managerial Accounting, Eleventh Edition
36. The term that refers to costs incurred in the past that are not relevant to a decision is:
A) marginal cost.
B) indirect cost.
C) period cost.
D) sunk cost.
Answer: D Level: Easy LO: 7
37. Lathe operators at KF Manufacturing are hourly employees who are paid time and a half
for hours worked in excess of 40 hours per week. Lester is a lathe operator who worked
45 hours during the current week and had no idle time. The correct accounting for the
amounts paid to Lester would be:
A) charge only the overtime premium earned to the overhead account.
B) charge the hourly wage earned plus the overtime premium earned to the overhead
account.
C) charge only the overtime premium earned to the direct labor cost for the project
Lester was working on when the overtime was incurred.
D) charge the hourly wage earned plus the overtime premium earned to the direct labor
cost for the project Lester was working on when the overtime was incurred.
Answer: A Level: Medium LO: 8 Appendix: 2A
38. The controller of the recently organized Crandall Company is considering the two
methods listed below for accounting for labor fringe benefits. Which of the two methods
is considered acceptable?
Method A: Treat all labor fringe benefits as indirect labor by adding them in
total to manufacturing overhead.
Method B: Treat labor fringe benefits that relate to direct labor as additional
direct labor cost and fringe benefits relating to indirect labor as part
of manufacturing overhead.
A) Only Method A is acceptable.
B) Only Method B is acceptable.
C) Both Method A and Method B are acceptable.
D) Neither Method A nor Method B is acceptable; labor fringe benefits should be
treated as period expenses and should be charged off as incurred.
Answer: C Level: Medium LO: 8 Appendix: 2A
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 23
39. Which of the following would be classified as a prevention cost on a quality cost report?
A) Disposal of defective products.
B) Net cost of spoilage.
C) Depreciation of test equipment.
D) Technical support provided to suppliers.
Answer: D Level: Medium LO: 9,10 Appendix: 2B
40. Which of the following would be classified as a prevention cost on a quality cost report?
A) Debugging software errors.
B) Quality training.
C) Test and inspection of incoming materials.
D) Cost of field servicing and handling complaints.
Answer: B Level: Medium LO: 9,10 Appendix: 2B
41. Which of the following would be classified as a prevention cost on a quality cost report?
A) Supplies used in testing and inspection.
B) Debugging software errors.
C) Quality improvement projects.
D) Lost sales arising from a reputation for poor quality.
Answer: C Level: Medium LO: 9,10 Appendix: 2B
42. Which of the following would be classified as an appraisal cost on a quality cost report?
A) Final product testing and inspection.
B) Net cost of spoilage.
C) Repairs and replacements beyond the warranty period.
D) Rework labor and overhead.
Answer: A Level: Medium LO: 9,10 Appendix: 2B
Chapter 2 Cost Terms, Concepts, and Classifications
24 Garrison, Managerial Accounting, Eleventh Edition
43. Which of the following would be classified as an appraisal cost on a quality cost report?
A) Quality improvement projects.
B) Supplies used in testing and inspection.
C) Audits of the effectiveness of the quality system.
D) Quality data gathering, analysis, and reporting.
Answer: B Level: Medium LO: 9,10 Appendix: 2B
44. Which of the following would be classified as an appraisal cost on a quality cost report?
A) Maintenance of test equipment.
B) Re-entering data because of keying errors.
C) Debugging software errors.
D) Warranty repairs and replacements.
Answer: A Level: Medium LO: 9,10 Appendix: 2B
45. Which of the following would be classified as an internal failure cost on a quality cost
report?
A) Quality improvement projects.
B) Supervision of testing and inspection activities.
C) Debugging software errors.
D) Warranty repairs and replacements.
Answer: C Level: Medium LO: 9,10 Appendix: 2B
46. Which of the following would be classified as an internal failure cost on a quality cost
report?
A) Final product testing and inspection.
B) Warranty repairs and replacements.
C) Depreciation of test equipment.
D) Debugging software errors.
Answer: D Level: Medium LO: 9,10 Appendix: 2B
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 25
47. Which of the following would be classified as an internal failure cost on a quality cost
report?
A) Rework labor and overhead.
B) Cost of field servicing and handling complaints.
C) Technical support provided to suppliers.
D) Lost sales arising from a reputation for poor quality.
Answer: A Level: Medium LO: 9,10 Appendix: 2B
48. Which of the following would be classified as an external failure cost on a quality cost
report?
A) Reentering data because of keying errors.
B) Customer returns arising from quality problems.
C) Test and inspection of in-process goods.
D) Rework labor and overhead.
Answer: B Level: Medium LO: 9,10 Appendix: 2B
49. Which of the following would be classified as an external failure cost on a quality cost
report?
A) Repairs and replacements beyond the warranty period.
B) Technical support provided to suppliers.
C) Quality improvement projects.
D) Rework labor and overhead.
Answer: A Level: Medium LO: 9,10 Appendix: 2B
50. Which of the following would be classified as an external failure cost on a quality cost
report?
A) Final product testing and inspection.
B) Disposal of defective products.
C) Supervision of testing and inspection activities.
D) Cost of field servicing and handling complaints.
Answer: D Level: Medium LO: 9,10 Appendix: 2B
51. Inspection of products would be classified as a(n):
A) prevention cost.
B) appraisal cost.
C) internal failure cost.
D) external failure cost.
Answer: B Level: Medium LO: 9 Appendix: 2B
Chapter 2 Cost Terms, Concepts, and Classifications
26 Garrison, Managerial Accounting, Eleventh Edition
52. The cost of warranty repairs would be classified as a(n):
A) prevention cost.
B) appraisal cost.
C) internal failure cost.
D) external failure cost.
Answer: D Level: Easy LO: 9 Appendix: 2B
53. The cost of quality training would be classified as a(n):
A) prevention cost.
B) appraisal cost.
C) internal failure cost.
D) external failure cost.
Answer: A Level: Easy LO: 9 Appendix: 2B
54. The cost of labor time required to rework defective units would be classified as a(n):
A) prevention cost.
B) appraisal cost.
C) internal failure cost.
D) external failure cost.
Answer: C Level: Easy LO: 9 Appendix: 2B
55. Which of the following is (are) categorized as internal failure cost(s)?
I. Rework.
II. Responding to customer complaints.
III. Statistical quality control procedures.
A) I only.
B) II only.
C) III only.
D) I, II, and III.
Answer: A Level: Medium LO: 9 Source: CPA, adapted Appendix: 2B
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 27
56. Adolphson Corporation has provided the following summary of its quality cost report
for the last two years:
Summary of Quality Cost Report
(in thousands)
This Year Last Year % Change
Prevention costs…………………….. $ 300 $ 200 +50
Appraisal costs ……………………… 315 210 +50
Internal failure costs………………. 114 190 -40
External failure costs……………… 621 1,200 -48
Total quality costs …………………. $1,350 $1,800 -25
On the basis of this report, which one of the following statements is most likely correct?
A) An increase in prevention and appraisal costs resulted in fewer defects, and
therefore, resulted in a decrease in internal and external failure costs.
B) A decrease in internal and external failure costs resulted in less need for prevention
and appraisal costs.
C) Quality costs such as scrap and rework decreased by 48%.
D) Quality costs such as returns and repairs under warranty decreased by 40%.
Answer: A Level: Medium LO: 10 Source: CMA, adapted Appendix: 2B
57. The following costs were incurred in January:
Direct materials ……………………….. $33,000
Direct labor……………………………… $28,000
Manufacturing overhead……………. $69,000
Selling expenses………………………. $16,000
Administrative expenses……………. $21,000
Conversion costs during the month totaled:
A) $97,000
B) $167,000
C) $102,000
D) $61,000
Answer: A Level: Medium LO: 1,2
Chapter 2 Cost Terms, Concepts, and Classifications
28 Garrison, Managerial Accounting, Eleventh Edition
58. The following costs were incurred in February:
Direct materials……………………. $43,000
Direct labor …………………………. $16,000
Manufacturing overhead ……….. $37,000
Selling expenses…………………… $17,000
Administrative expenses……….. $26,000
Conversion costs during the month totaled:
A) $59,000
B) $80,000
C) $53,000
D) $139,000
Answer: C Level: Medium LO: 1,2
59. The following costs were incurred in March:
Direct materials ……………………….. $21,000
Direct labor……………………………… $17,000
Manufacturing overhead……………. $67,000
Selling expenses………………………. $16,000
Administrative expenses……………. $15,000
Conversion costs during the month totaled:
A) $88,000
B) $38,000
C) $136,000
D) $84,000
Answer: D Level: Medium LO: 1,2
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 29
60. The following costs were incurred in January:
Direct materials ……………………….. $39,000
Direct labor……………………………… $26,000
Manufacturing overhead……………. $21,000
Selling expenses………………………. $14,000
Administrative expenses……………. $27,000
Prime costs during the month totaled:
A) $86,000
B) $65,000
C) $47,000
D) $127,000
Answer: B Level: Medium LO: 1,2
61. The following costs were incurred in February:
Direct materials ……………………….. $39,000
Direct labor……………………………… $18,000
Manufacturing overhead……………. $14,000
Selling expenses………………………. $13,000
Administrative expenses……………. $29,000
Prime costs during the month totaled:
A) $71,000
B) $32,000
C) $113,000
D) $57,000
Answer: D Level: Medium LO: 1,2
Chapter 2 Cost Terms, Concepts, and Classifications
30 Garrison, Managerial Accounting, Eleventh Edition
62. The following costs were incurred in March:
Direct materials ……………………….. $39,000
Direct labor……………………………… $24,000
Manufacturing overhead……………. $14,000
Selling expenses………………………. $11,000
Administrative expenses……………. $19,000
Prime costs during the month totaled:
A) $63,000
B) $107,000
C) $38,000
D) $77,000
Answer: A Level: Medium LO: 1,2
63. Aable Company’s manufacturing overhead is 20% of its total conversion costs. If direct
labor is $45,000 and if direct materials are $53,000, the manufacturing overhead is:
A) $11,250
B) $13,250
C) $180,000
D) $24,500
Answer: A Level: Hard LO: 1
64. Abair Company’s manufacturing overhead is 20% of its total conversion costs. If direct
labor is $38,000 and if direct materials are $35,000, the manufacturing overhead is:
A) $18,250
B) $9,500
C) $8,750
D) $152,000
Answer: B Level: Hard LO: 1
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 31
65. Abbey Company’s manufacturing overhead is 60% of its total conversion costs. If direct
labor is $35,000 and if direct materials are $55,000, the manufacturing overhead is:
A) $135,000
B) $23,333
C) $82,500
D) $52,500
Answer: D Level: Hard LO: 1
66. During the month of January, direct labor cost totaled $17,000 and direct labor cost was
60% of prime cost. If total manufacturing costs during January were $82,000, the
manufacturing overhead was:
A) $11,333
B) $53,667
C) $28,333
D) $65,000
Answer: B Level: Hard LO: 1
67. During the month of February, direct labor cost totaled $13,000 and direct labor cost
was 40% of prime cost. If total manufacturing costs during February were $80,000, the
manufacturing overhead was:
A) $32,500
B) $19,500
C) $67,000
D) $47,500
Answer: D Level: Hard LO: 1
68. During the month of March, direct labor cost totaled $17,000 and direct labor cost was
70% of prime cost. If total manufacturing costs during March were $88,000, the
manufacturing overhead was:
A) $24,286
B) $71,000
C) $63,714
D) $7,286
Answer: C Level: Hard LO: 1
Chapter 2 Cost Terms, Concepts, and Classifications
32 Garrison, Managerial Accounting, Eleventh Edition
69. Knowel Company’s direct labor is 40 percent of its conversion cost. If the
manufacturing overhead cost for the last period was $60,000 and the direct materials
cost was $30,000, the direct labor cost was:
A) $90,000
B) $20,000
C) $60,000
D) $40,000
Answer: D Level: Hard LO: 1
70. In January direct labor was 40% percent of conversion cost. If the manufacturing
overhead cost for the month was $78,000 and the direct materials cost was $22,000, the
direct labor cost was:
A) $14,667
B) $52,000
C) $33,000
D) $117,000
Answer: B Level: Hard LO: 1
71. In February direct labor was 60% percent of conversion cost. If the manufacturing
overhead cost for the month was $78,000 and the direct materials cost was $22,000, the
direct labor cost was:
A) $52,000
B) $14,667
C) $117,000
D) $33,000
Answer: C Level: Hard LO: 1
72. In March direct labor was 60% percent of conversion cost. If the manufacturing
overhead cost for the month was $38,000 and the direct materials cost was $32,000, the
direct labor cost was:
A) $21,333
B) $48,000
C) $25,333
D) $57,000
Answer: D Level: Hard LO: 1
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 33
73. Crossland Company’s direct labor cost is 30% of its conversion cost. If the
manufacturing overhead cost for the last period was $49,000 and the direct materials
cost was $20,000, the direct labor cost was:
A) $ 6,000
B) $14,700
C) $21,000
D) $34,000
Answer: C Level: Hard LO: 1
74. CF Company manufactures wooden rocking chairs. CF identified the following three
material costs in its production process for July: $100,000 for springs for the rocking
mechanism; two springs at a cost of $10 each are used in each chair; $1,700 for glue
used as needed from one gallon containers; and $500 for stain used to touch up spots on
the chairs. The total cost that should have been assigned to indirect material for July
was:
A) $102,200
B) $500
C) $2,200
D) $1,700
Answer: C Level: Medium LO: 1
75. Fab Co. manufactures textiles. Fab’s manufacturing costs last year included the
following salaries and wages:
Loom operators…………………….. $120,000
Factory foremen …………………… $45,000
Machinery repairmen ……………. $30,000
What is the amount of direct labor included in this list?
A) $195,000
B) $165,000
C) $150,000
D) $120,000
Answer: D Level: Medium LO: 1 Source: CPA, adapted
Chapter 2 Cost Terms, Concepts, and Classifications
34 Garrison, Managerial Accounting, Eleventh Edition
76. A manufacturing company has provided the following cost data for a recent period:
Direct materials ……………………………………….. $8,000
Manufacturing overhead……………………………. $12,000
Direct labor……………………………………………… $10,000
Increase in work-in-process……………………….. $4,000
Prime cost for the period was:
A) $18,000
B) $26,000
C) $30,000
D) $34,000
Answer: A Level: Medium LO: 1 Source: CIMA, adapted
77. A manufacturing company prepays its insurance coverage for a three-year period. The
premium for the three years is $3,000 and is paid at the beginning of the first year.
Three-fourths of the premium applies to factory operations and one-fourth applies to
selling and administrative activities. What amounts should be considered product and
period costs respectively for the first year of coverage?
Product Period
A) $1,000 $0
B) $250 $750
C) $2,250 $750
D) $750 $250
Answer: D Level: Hard LO: 2
78. Last month a manufacturing company had the following operating results:
Beginning finished goods inventory……………. $72,000
Ending finished goods inventory………………… $66,000
Sales……………………………………………………….. $465,000
Gross margin …………………………………………… $88,000
What was the cost of goods manufactured for the month?
A) $371,000
B) $459,000
C) $383,000
D) $377,000
Answer: A Level: Hard LO: 3,4
Chapter 2 Cost Terms, Concepts, and Classifications
Garrison, Managerial Accounting, Eleventh Edition 35
