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Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-1
Multiple Choice Questions
1. 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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 1
2. 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
Bloom’s: RC
Difficulty: Easy
Learning Objective: 2
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-2
3. Which of the following is a product cost?
A. Glass in an automobile.
B. Advertising.
C. The salary of the vice president-finance.
D. Rent on a factory.
E. Both “A” and “D.”
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: N
Difficulty: Medium
Learning Objective: 2
4. 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 commissions.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC, N
Difficulty: Medium
Learning Objective: 2
5. The accounting records of Tacoma Company revealed the following costs: direct materials
used, $170,000; direct labor, $350,000; manufacturing overhead, $400,000; and selling and
administrative expenses, $220,000. Tacoma’s product costs total:
A. $520,000.
B. $750,000.
C. $920,000.
D. $1,140,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 2
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-3
6. 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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 2
7. Which of the following is a period cost?
A. Direct material.
B. Advertising expense.
C. Depreciation on cars driven by a firm’s president and treasurer.
D. Miscellaneous supplies used in production activities.
E. Both “B” and “C.”
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: N
Difficulty: Medium
Learning Objective: 2
8. 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
Bloom’s: RC, N
Difficulty: Medium
Learning Objective: 2
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-4
9. The accounting records of Hill Corporation revealed the following selected costs: Sales
commissions, $40,000; plant supervision, $94,000; and administrative expenses, $185,000.
Hill’s period costs total:
A. $40,000.
B. $94,000.
C. $185,000.
D. $225,000.
E. $319,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 2
10. Chen 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, Chen’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
Bloom’s: A
Difficulty: Medium
Learning Objective: 2
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-5
11. Which of the following entities would most likely have raw materials, work in process,
and finished goods?
A. Exxon Corporation.
B. Macy’s Department Store.
C. Wendy’s.
D. Southwest Airlines.
E. Columbia University.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Bloom’s: N
Difficulty: Easy
Learning Objective: 3
12. Selling and administrative expenses would likely appear on the balance sheet of:
A. The Gap.
B. Texas Instruments.
C. Turner Broadcasting System.
D. All of these firms.
E. None of these firms.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Bloom’s: N
Difficulty: Medium
Learning Objective: 3
13. Which of the following inventories would a discount retailer such as Wal-Mart report as
an asset?
A. Raw materials.
B. Work in process.
C. Finished goods.
D. Merchandise inventory.
E. All of these.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Bloom’s: RC
Difficulty: Medium
Learning Objective: 3
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-6
14. 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
Bloom’s: RC
Difficulty: Medium
Learning Objective: 3
15. Zeno Corporation engages in mass customization and direct sales, the latter by accepting
customer orders over the Internet. As a result, Zeno:
A. would probably begin the manufacturing process upon receipt of a customer’s order.
B. would typically have fairly low inventory levels for the amount of sales revenue generated.
C. would typically have fairly high inventory levels for the amount of sales revenue
generated.
D. would likely find choices “A” and “B” to be applicable.
E. would likely find choices “A” and “C” to be applicable.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Bloom’s: RC
Difficulty: Medium
Learning Objective: 4
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-7
16. Companies that engage in mass customization:
A. tend to have a relatively low production volume.
B. tend to have a high production volume that involves highly standardized end-products.
C. tend to have a high production volume, many standardized components, and customerspecified combinations of components.
D. tend to have a high production volume, many unique components, and customer-specified
combinations of components.
E. could be typified by the refining operations of Shell Oil.
AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Bloom’s: RC
Difficulty: Medium
Learning Objective: 4
17. Midwest Motors manufactures automobiles. Which of the following would not be
classified as direct materials by the company?
A. Sheet metal used in the automobile’s body.
B. Tires.
C. Interior leather.
D. CD player.
E. Wheel lubricant.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 5
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-8
18. Which of the following employees of a commercial printer/publisher would be classified
as direct labor?
A. Book binder.
B. Plant security guard.
C. Sales representative.
D. Plant supervisor.
E. Payroll supervisor.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 5
19. Norwood Appliance produces washers and dryers in an assembly-line process. Labor
costs incurred during a recent period were: corporate executives, $100,000; assembly-line
workers, $80,000; security guards, $18,000; and plant supervisor, $30,000. The total of
Norwood’s direct labor cost was:
A. $80,000.
B. $98,000.
C. $110,000.
D. $128,000.
E. $228,000.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 5
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-9
20. Which of the following employees would not be classified as indirect labor?
A. Custodian.
B. Salesperson.
C. Assembler of wooden furniture.
D. Plant security guard.
E. Choices “B” and “C.”
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: 5
21. Depreciation of factory equipment would be classified as:
A. operating cost.
B. “other” cost.
C. manufacturing overhead.
D. depreciation expense.
E. administrative cost.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: 5
22. Which of the following costs is not a component of manufacturing overhead?
A. Indirect materials.
B. Factory utilities.
C. Factory equipment.
D. Indirect labor.
E. Property taxes on the manufacturing plant.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Difficulty: Medium
Learning Objective: 5
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-10
23. The accounting records of Diego Company revealed the following costs, among others:
Costs that would be considered in the calculation of manufacturing overhead total:
A. $149,000.
B. $171,000.
C. $186,000.
D. $442,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 5
24. Which of the following statements is (are) correct?
A. Overtime premiums should be treated as a component of manufacturing overhead.
B. Overtime premiums should be treated as a component of direct labor.
C. Idle time should be treated as a component of direct labor.
D. Idle time should be accounted for as a special type of loss.
E. Both “B” and “C” are correct.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 5
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-11
25. Conversion costs are:
A. direct material, direct labor, and manufacturing overhead.
B. direct material and direct labor.
C. direct labor and manufacturing overhead.
D. prime costs.
E. period costs.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 5
26. Prime costs are comprised of:
A. direct materials and manufacturing overhead.
B. direct labor and manufacturing overhead.
C. direct materials, direct labor, and manufacturing overhead.
D. direct materials and direct labor.
E. direct materials and indirect materials.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 5
27. Which of the following statements is true?
A. Product costs affect only the balance sheet.
B. Product costs affect only the income statement.
C. Period costs affect only the balance sheet.
D. Period costs affect both the balance sheet and the income statement.
E. Product costs eventually affect both the balance sheet and the income statement.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: N
Difficulty: Medium
Learning Objective: 6
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-12
28. In a manufacturing company, the cost of goods completed during the period would
include which of the following elements?
A. Raw materials used.
B. Beginning finished goods inventory.
C. Marketing costs.
D. Depreciation of delivery trucks.
E. More than one of the above.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 6
29. Which of the following equations is used to calculate cost of goods sold during the
period?
A. Beginning finished goods + cost of goods manufactured + ending finished goods.
B. Beginning finished goods – ending finished goods.
C. Beginning finished goods + cost of goods manufactured.
D. Beginning finished goods + cost of goods manufactured – ending finished goods.
E. Beginning finished goods + ending finished goods – cost of goods manufactured.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 6
30. Work-in-process inventory is composed of:
A. direct material and direct labor.
B. direct labor and manufacturing overhead.
C. direct material and manufacturing overhead.
D. direct material only.
E. direct material, direct labor, and manufacturing overhead.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Medium
Learning Objective: 6
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-13
31. Fort Walton Industries began July with a finished-goods inventory of $48,000. The
finished-goods inventory at the end of July was $41,000 and the cost of goods sold during the
month was $125,000. The cost of goods manufactured during July was:
A. $77,000.
B. $84,000.
C. $118,000.
D. $132,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Industry
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
32. Kansas Plating Company reported a cost of goods manufactured of $260,000, with the
firm’s year-end balance sheet revealing work in process and finished goods of $35,000 and
$67,000, respectively. If supplemental information disclosed raw materials used in production
of $40,000, direct labor of $70,000, and manufacturing overhead of $120,000, the company’s
beginning work in process must have been:
A. $5,000.
B. $37,000.
C. $65,000.
D. $97,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-14
33. The accounting records of Bronco Company revealed the following information:
Bronco’s cost of goods manufactured is:
A. $519,000.
B. $522,000.
C. $568,000.
D. $571,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
34. The accounting records of Dolphin Company revealed the following information:
Dolphin’s cost of goods sold is:
A. $508,000.
B. $529,000.
C. $531,000.
D. $553,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-15
35. The accounting records of Brownwood Company revealed the following information:
Brownwood’s cost of goods sold is:
A. $721,000.
B. $730,000.
C. $778,000.
D. $787,000.
E. some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
36. For the year just ended, Cole Corporation’s manufacturing costs (raw materials used,
direct labor, and manufacturing overhead) totaled $1,500,000. Beginning and ending work-inprocess inventories were $60,000 and $90,000, respectively. Cole’s balance sheet also
revealed respective beginning and ending finished-goods inventories of $250,000 and
$180,000. On the basis of this information, how much would the company report as cost of
goods manufactured (CGM) and cost of goods sold (CGS)?
A. CGM, $1,430,000; CGS, $1,460,000.
B. CGM, $1,470,000; CGS, $1,540,000.
C. CGM, $1,530,000; CGS, $1,460,000.
D. CGM, $1,570,000; CGS, $1,540,000.
E. Some other amounts.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Hard
Learning Objective: 6
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-16
37. Roebuck Industries reported the following data for the year just ended: sales revenue,
$875,000; cost of goods sold, $490,000; cost of goods manufactured, $280,000; and selling
and administrative expenses, $85,000. Roebuck’s gross margin would be:
A. $20,000.
B. $300,000.
C. $385,000.
D. $510,000.
E. $595,000.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
38. Pumpkin Enterprises began operations on January 1, 20×1, with all of its activities
conducted from a single facility. The company’s accountant concluded that the year’s building
depreciation should be allocated as follows: selling activities, 20%; administrative activities,
35%; and manufacturing activities, 45%. If Pumpkin sold 60% of 20×1 production during that
year, what percentage of the depreciation would appear (either directly or indirectly) on the
20×1 income statement?
A. 27%.
B. 45%.
C. 55%.
D. 82%.
E. 100%.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: A
Difficulty: Hard
Learning Objective: 6
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-17
39. An employee accidentally overstated the year’s advertising expense by $50,000. Which of
the following correctly depicts the effect of this error?
A. Cost of goods manufactured will be overstated by $50,000.
B. Cost of goods sold will be overstated by $50,000.
C. Both cost of goods manufactured and cost of goods sold will be overstated by $50,000.
D. Cost of goods sold will be overstated by $50,000, and cost of goods manufactured will be
understated by $50,000.
E. None of these.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Bloom’s: A
Difficulty: Medium
Learning Objective: 6
40. Which of the following would likely be a suitable cost driver for the amount of direct
materials used?
A. The number of units sold.
B. The number of direct labor hours worked.
C. The number of machine hours worked.
D. The number of employees working in the factory.
E. The number of units produced.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 7
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-18
41. The choices below depict five costs of Benton Corporation and a possible driver for each
cost. Which of these choices likely contains an inappropriate cost driver?
A. Gasoline consumed; number of miles driven.
B. Manufacturing overhead incurred in a heavily automated facility; direct labor hours.
C. Sales commissions; gross sales revenue.
D. Building maintenance cost; building square footage.
E. Human resources department cost; number of employees.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 7
42. Variable costs are those costs that:
A. vary inversely with changes in activity.
B. vary directly with changes in activity.
C. remain constant as activity changes.
D. decrease on a per-unit basis as activity increases.
E. increase on a per-unit basis as activity increases.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Easy
Learning Objective: 8
43. As activity decreases, unit variable cost:
A. increases proportionately with activity.
B. decreases proportionately with activity.
C. remains constant.
D. increases by a fixed amount.
E. decreases by a fixed amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Easy
Learning Objective: 8
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-19
44. Which of the following is not an example of a variable cost?
A. Straight-line depreciation on a machine that has a five-year service life.
B. Wages of manufacturing workers whose pay is based on hours worked.
C. Tires used in the production of tractors.
D. Aluminum used to make patio furniture.
E. Commissions paid to sales personnel.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 8
45. Fixed costs are those costs that:
A. vary directly with changes in activity.
B. vary inversely with changes in activity.
C. remain constant on a per-unit basis.
D. increase on a per-unit basis as activity increases.
E. remain constant as activity changes.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: RC
Difficulty: Easy
Learning Objective: 8
46. The fixed cost per unit:
A. will increase as activity increases.
B. will increase as activity decreases.
C. will decrease as activity increases.
D. will remain constant.
E. will exhibit the behavior described in choices “B” and “C.”
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 8
Chapter 002: Basic Cost Management Concepts and Accounting for Mass
Customization Operations
2-20
47. Which of the following is an example of a fixed cost?
A. Paper used in the manufacture of textbooks.
B. Property taxes paid by a firm to the City of Los Angeles.
C. The wages of part-time workers who are paid $8 per hour.
D. Gasoline consumed by salespersons’ cars.
E. Surgical supplies used in a hospital’s operating room.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: N
Difficulty: Easy
Learning Objective: 8
48. The variable costs per unit are $4 when a company produces 10,000 units of product.
What are the variable costs per unit when 8,000 units are produced?
A. $4.00.
B. $4.50.
C. $5.00.
D. $5.50.
E. Some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 8
49. The fixed costs per unit are $10 when a company produces 10,000 units of product. What
are the fixed costs per unit when 12,500 units are produced?
A. $4.
B. $6.
C. $8.
D. $10.
E. Some other amount.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Measurement
Bloom’s: A
Difficulty: Medium
Learning Objective: 8
