Chapter 2
Which statement is true?
Because of a cost-benefit tradeoff, some direct costs may be treated as indirect costs.
In order to make decisions, managers need to know:
Both costs, actual and budgeted
What are the differences between direct costs and indirect costs? Give an example of each
Direct costs are costs that can be traced easily to the product manufactured or the service rendered. Examples of direct costs include direct materials and direct manufacturing labor used in a product. Indirect costs cannot be easily identified with individual products or services rendered, and are usually assigned using allocation formulas. In a plant that manufactures multiple products, examples of indirect costs include the plant supervisor's salary and the cost of machines used to produce more than one type of product.
Some fixed costs may be classified as direct manufacturing costs.
TRUE
A cost system determines the cost of a cost object by:
accumulating and then assigning costs
If each motorcycle requires a belt that costs $20 and 2,000 motorcycles are produced for the month, the total cost for belts is:
considered to be a direct variable cost
Cost behavior refers to
how costs react to a change in the level of activity
Which of the following statements about the direct/indirect cost classification is NOT true?
indirect costs are always traced
Cost assignment :
is includes tracing and allocating
All of the following are true EXCEPT that indirect costs:
may be included in prime costs
Indirect manufacturing costs:
may include both variable and fixed costs
Fixed costs
may include either direct or indirect costs
Which of the following is a mixed cost
monthly electric bill
A manufacturing plant produces two product lines: golf equipment and soccer equipment. An example of direct costs for the golf equipment line are:
monthly lease payments for a specialized piece of equipment needed to manufacture the golf driver
Cost objects include:
products, customers, departments
Which of the following is a variable cost for an insurance company
sales commissions
An understanding of the underlying behavior of costs helps in all of the following EXCEPT:
sales volume can be better estimated
Which of the following does NOT affect the direct/indirect classification of a cost?
the level of budgeted profit for the next year
Which statement is true?
A direct cost of one cost object can be an indirect cost of another cost object.
Lucas Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plants. They are: Cost object #1: The physical buildings and equipment Cost object #2: The use of buildings and equipment Cost object #3: The availability and use of manufacturing labor The following manufacturing overhead cost categories are found in the accounting records: a. Depreciation on buildings and equipment b. Lubricants for machines c. Property insurance d. Supervisors salaries e. Fringe benefits f. Property taxes g. Utilities
Assign each of the above costs to the most appropriate cost object. Answer: Cost object # 1 includes categories a, c, and f. Cost object # 2 includes categories b and g. Cost object # 3 includes categories d and e.
A cost object is always either a product or a service.
FALSE
Assigning direct costs poses more problems than assigning indirect costs.
FALSE
Costs are accounted for in two basic stages: assignment followed by accumulation.
FALSE
The distinction between direct and indirect costs is clearly set forth in Generally Accepted Accounting Principles (GAAP).
FALSE
Why is it possible that a raw material such as glue might be considered as an indirect material for one furniture manufacturer and as a direct material for another furniture manufacture?
It is possible for a raw material such as glue to be considered as an indirect material by one furniture manufacturer and as a direct material by another furniture manufacturer. The decision is largely a choice by the manufacturer and depends on a number of factors including the materiality of the cost in question, the cost of gathering the information, and the design of the manufacturing process. If the product in question has an insignificant cost, it might not be worth the trouble to trace the cost of the glue to each piece of furniture, and the glue would be considered indirect. If the cost of tracing the cost of the glue is high in relation to the benefits received from tracing it, the glue would likely be considered as indirect material. If the design of the manufacturing process easily permits all the glue to be traced to a single type of furniture, then it would be easy for a company to consider that material to be direct. Overall, the direct/indirect classification is decided on a cost/benefit basis.
Archambeau Products Company manufactures office furniture. Recently, the company decided to develop a formal cost accounting system and classify all costs into three categories. Categorize each of the following items as being appropriate for (1) cost tracing to the finished furniture, (2) cost allocation of an indirect manufacturing cost to the finished furniture, or (3) as a nonmanufacturing item.
Look it over
Which one of the following items is a direct cost?
Printing costs incurred for payroll check processing; payroll check processing is the cost object.
A customer could be considered a cost object.
TRUE
Accountants define a cost as a resource to be sacrificed to achieve a specific objective
TRUE
Actual costs and historical costs are two different terms referring to the same thing.
TRUE
Improvements in information-gathering technologies are making it possible to trace more costs as direct.
TRUE
Misallocated indirect costs may lead to NOT promoting profitability.
TRUE
Products, services, departments, and customers may be cost objects.
TRUE
The cost of electricity used in the production of multiple products would be classified as a indirect cost.
TRUE
The materiality of the cost is a factor in classifying the cost as a direct or indirect cost.
TRUE
The same cost may be direct for one cost object and indirect for another cost object.
TRUE
A mixed cost is
a cost with fixed and variable elements
Which of the following is a fixed cost for an automobile manufacturing plant?
administrative salaries
Fixed costs depend on the
amount of resources acquired
At a plant where a union agreement sets annual salaries and conditions, annual labor costs usually:
are considered a fixed costs
The collection of accounting data in some organized way is
cost accumulation
The general term used to identify both the tracing and the allocation of accumulated costs to a cost object is:
cost assignment
The determination of a cost as either direct or indirect depends upon the:
cost object chosen
variable costs
increase in total when the actual level of activity increases
Budgeted costs are:
planned or forecasted costs
A manufacturing plant produces two product lines: golf equipment and soccer equipment. An example of indirect cost for the soccer equipment line is:
plant supervisor
Cost tracing is:
the assignment of direct costs to the chosen cost object
Cost allocation is:
the assignment of indirect costs to the chosen cost object
Actual costs are:
the costs incurred
Classifying a cost as either direct or indirect depends upon:
whether the cost can be easily identified with the cost object
