Deck 14: Costs and Cost Behaviour

Question 1

Indirect costs are not included in the calculation of the overhead absorption rate as it is generally thought to be too complex to share these costs equitably.

Answer 1

False

Question 2

Absorption costing includes a proportion of fixed costs in the inventory value, whereas variable costing does not.

Answer 2

True

Question 3

Fixed costs such as rent, rates, and administration salaries are normally also classified as overhead costs.

Answer 3

True

Question 4

Knowledge of unit costs is necessary to companies for many reasons. Which of the following are uses of unit cost information? I. Valuation of inventories
II) Controlling costs
III) Setting selling prices

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 5

With advanced manufacturing technology, indirect costs have become a greater portion of total costs.

Question 6

A dependent variable represents the cost of an activity, while the independent variable represents the level of the activity.

Question 7

The selling price of products is determined by market forces but can also be dependent on the cost of the product, particularly where there is little or no competition.

Question 8

Absorption costing is a method of allocating direct and indirect costs of production to a cost object.

Question 9

The relevant range of activity relates to the levels of activity that the firm has experienced in past periods.

Question 10

The basic difference between management and financial accounting is that the financial accounting system relies on accounting information whereas management accounting does not.

Question 11

When sales exceeds production, absorption costing shows a higher profit than variable costing because a portion of fixed costs are charged to inventories and thereby deferred to future periods.

Question 12

In multi-product firms, it is necessary to set up a system to account for costs and to identify direct and indirect costs.

Question 13

The overhead costs for product Y are estimated to be $160 000 and the activity level is estimated to be 80 000 machine hours. The actual costs are found to be $180 000 and the actual machine hours are 85 000. Under absorption costing this will necessitate an entry to the statement of comprehensive income to record a period cost of $10 000.

Question 14

Fixed costs are constant over all levels of activity.

Question 15

Product costs are held as assets until sold, whereas period costs are expensed in the period in which they are incurred.

Question 16

In traditional-based costing, overheads are apportioned based on one volume measure, whereas in activity-based costing, overheads are apportioned according to cost drivers.

Question 17

Discounts, increased prices and diminishing returns are all reasons why a variable cost function will not necessarily behave in a linear fashion.

Question 18

Direct costs are sometimes referred to as prime costs, and indirect costs as overhead costs.

Question 19

Costs that change in response to changes in the level of activities are referred to as fixed costs.

Question 20

When production exceeds sales, absorption costing shows a higher profit than variable costing because a portion of fixed costs are charged to inventories and thereby deferred to future periods.

Question 21

The primary difference between a product cost and a period cost is that:

A) product costs are associated with specific goods, and period costs are not.
B) product costs are incurred by manufacturers, and period costs by service providers.
C) only product costs are recorded as expenses.
D) period costs become part of cost of goods sold but product costs do not.

Question 22

Paul's Ltd is considering increasing its production by 5%. If production increases, what is the most likely impact on costs?

A) Administrative wages will increase.
B) Factory casual labour will increase.
C) Power costs will decrease.
D) Depreciation charges will increase.

Question 23

Adel Department Store incurred $8000 of indirect advertising costs for its operations. The following data were collected for its three departments:
How much of the indirect advertising costs would have been allocated to the Automotive Department if sales were the allocation base?

A) $1200
B) $1600
C) $2400
D) $8000

Question 24

Adel Department Store incurred $8000 of indirect advertising costs for its operations. The following data were collected for its three departments:
How much of the indirect advertising costs would have been allocated to the Shoe Department if newspaper ad space were the allocation base?

A) $4340
B) $4960
C) $5600
D) $7000

Question 25

Which of the following are not production costs?

A) Direct materials
B) Indirect labour
C) Selling expenses
D) Indirect materials

Question 26

Costs that would be included in the factory overhead account would normally not include:

A) depreciation on plant and equipment.
B) indirect materials.
C) direct materials.
D) factory gas and electricity.

Question 27

Work-in-progress includes all of the items below except:

A) cost of materials.
B) cost of labour.
C) selling costs.
D) overhead costs.

Question 28

The overhead absorption rate is determined by using:

A) estimated costs.
B) marginal costs.
C) average costs.
D) historical costs.

Question 29

Which of the following shows a combination of costs that would normally be fixed and variable costs for a production plant?

A) Costs of building and costs of equipment
B) Land purchase costs and costs of equipment
C) Cost of building and costs of materials
D) Land purchase costs and general manager's salary

Question 30

What will fixed costs do when activity increases but remains within the relevant range of activity?

A) Increase
B) Remain the same
C) Decrease
D) Display an erratic behaviour

Question 31

Service departments often provide service to:

A) revenue-producing departments only.
B) other service departments only.
C) both revenue-producing and service departments.
D) shareholders.

Question 32

Management requires information about the cost of products for all of the following reasons except to:

A) ascertain the relative profitability of products.
B) control costs.
C) estimate rate of depreciation for equipment.
D) aid planning.

Question 33

Indirect costs for an electrician would not include:

A) factory rent.
B) protective clothing.
C) depreciation of tools.
D) the electrician's salary.

Question 34

Period costs are:

A) costs that are unlikely to represent future benefits.
B) costs that are recognised in the accounting period in which they are incurred.
C) costs for which the future benefits cannot be reliably measured.
D) all of the above are period costs.

Question 35

Costs directly associated with specific goods are:

A) product costs.
B) period costs.
C) prepaid costs.
D) past period costs.

Question 36

Management accounting is concerned with:

A) the company as a whole, rather than with its segments.
B) providing information to internal decision makers.
C) meeting the requirements of generally accepted accounting principles.
D) recording the financial history of an organisation.

Question 37

Unit costs help managers make decisions about:

A) continuing to offer a product for sale.
B) resource allocation.
C) product pricing.
D) all of the above.

Question 38

Arches Manufacturing Company provides the following information: What is the total unit cost of one unit of finished product?

A) $87
B) $90
C) $95
D) $105

Question 39

Which of the following is not normally a method of allocating overhead costs to products?

A) Cost per machine hour
B) Cost per direct labour dollar
C) Cost per direct labour hour
D) Cost per unit sold

Question 40

Adel Department Store incurred $8000 of indirect advertising costs for its operations. The following data were collected for its three departments:
How much of the indirect advertising costs would have been allocated to the Clothing Department if direct advertising costs were the allocation base?

A) $1600
B) $2000
C) $4000
D) $8000

Question 41

In a manufacturing operation, costs can be divided into product costs and period expenses.
(a) Explain the difference between product costs and period expenses.
(b) Give two examples of costs classified as product costs.
(c) Give two examples of costs classified as period expenses.

Question 42

Veronica's Clothing Manufacturers supplies the following information. Direct materials cost is $3.00 per unit; direct labour is $4.50 per unit. Variable overhead is $1.50 per unit; fixed overhead is $2.00 per unit. Secretarial salaries are $7.00 per unit and advertising amounts to $4.00 per unit. What is the total manufacturing cost per unit under variable costing?

A) $7.50
B) $9
C) $11
D) $22

Question 43

Which of the following is true of activity-based costing?

A) Overhead is allocated using direct labour hours.
B) Record keeping is less than under functional-based costing.
C) Overhead is allocated using only activity measures.
D) Overhead may be allocated using activity and volume-based measures.

Question 44

The application of overhead costs to products involves the use of:

A) exact figures.
B) fixed costs only.
C) variable costs only.
D) estimates.

Question 45

Explain the difference in the way that fixed manufacturing overhead is treated under variable costing and absorption costing.

Question 46

Manufacturing costs flow through an accounting system as products physically move through a factory.

Question 47

How is the variable cost approach used in managerial accounting? What are the advantages and disadvantages of this method?

Question 48

Opulent Baked Goods, Inc. makes two kinds of breads, Plain and Fancy. The owner has asked you to determine the cost of the two products so that he may know how to reasonably price his baked goods. The plain bread can be prepared and baked in large batches, while the fancy bread is made one loaf at a time. He has provided the following information about the manufacturing (baking) process for the 200 000 loaves of each of the two products for the year.
Overhead costs (annual budget amounts):

Question 49

The Blizzard Company manufactures skiing equipment. They make six different types of skis and this requires reconfiguring the machinery to new settings for the production of each of the six models. Under activity-based costing, which of the following would be the most appropriate basis on which to apportion the set-up costs for each model?

A) Direct labour hours
B) Direct machine hours
C) Number of set ups
D) Number of orders

Question 50

Brumpy Ltd uses a predetermined overhead rate in applying overhead costs to product, using direct labour costs for cost centre A and machine hours for cost centre
B) The estimates for this year are:
What are the predetermined overhead rates for cost centres A and B?

A) $140 and $7.50
B) $1.40 and $7.50
C) $8.75 and $30
D) $1.40 and $4.29

Question 51

Your friend, Bumble Beasley, just graduated from State University with a degree in business. He is planning to start his own consulting firm, and has asked you for accounting advice. Specifically, he has the following questions:
Respond to Bumble's questions.

Question 52

Which of the following statements is not true of absorption costing?

A) When sales equal production, absorption costing yields the same profit as variable costing.
B) When production exceeds sales, absorption costing shows a lower profit than variable costing does.
C) When sales exceed production, absorption costing shows a lower profit than variable costing does.
D) Absorption costing allocated both fixed and variable overheads to product cost.

Question 53

If the allocated overhead using a predetermined overhead rate is less than the actual overhead costs, the difference is:

A) expensed to the statement of comprehensive income.
B) recognised as income in the statement of comprehensive income.
C) recognised as part of inventory on the balance sheet.
D) expensed to the cost of goods sold.

Question 54

In a manufacturing operation that produces more than one product, the method of cost allocation chosen can have a major impact on which of the following?

A) The total cost of raw materials.
B) The unit cost of each product.
C) Conversion costs.
D) The method of allocation has no impact because the total manufacturing costs will still be the same.

Question 55

Absorption costing would be based on which of the following?

A) Both fixed and variable costs of production
B) Fixed portion of production costs only
C) Variable portion of production costs only
D) None of the above

Question 56

Consider the plant layout shown below: This layout would likely encourage manufacturing personnel to:

A) specialise in one process.
B) be cross-trained in more than one process.
C) act in the best interests of shareholders.
D) act in the best interests of customers.

Question 57

Veronica's Clothing Manufacturers supplies the following information. Direct materials cost is $3.00 per unit; direct labour is $4.50 per unit. Variable overhead is $1.50 per unit; fixed overhead is $2.00 per unit. Secretarial salaries are $7.00 per unit and advertising amounts to $4.00 per unit. What is the total manufacturing cost per unit under absorption costing?

A) $7.50
B) $9
C) $11
D) $22

Question 58

Java Ltd manufactures two products, A and
B) The manufacturing processes for the two products are very similar. The following are excerpts from the product data for these two products for this year: Overhead costs total $285 000.
What is the cost per unit for each of A and B in respect of overhead costs using absorption costing, if costs are absorbed on the basis of direct labour hours?

A) $15 and $30
B) $1 and $2
C) $16.96 and $23.75
D) $38.86 and $12.95

Question 59

Silver Streak Ltd manufactures two products, P and Q. The following data have been collected for the current year: Overhead costs for both products are as follows:
Calculate the total unit cost rounded to the nearest whole cent (i.e. two decimal places) for both products using the traditional-based cost system and the activity-based cost system. Assume both products use machine hours under the traditional-based system. Based on your calculations, which of the following statements is incorrect?

A) Total unit cost under the traditional-based system is $46.82 for Q.
B) Under the traditional-based cost system, product P would be under-priced compared to the activity-based system.
C) Set-up costs are $1250 per set-up and machine costs are $2.27 per machine hour.
D) Total production costs are $311 850 for 5000 units of P as per the activity-based system.

Question 60

Hardware Products manufactures a wide variety of products in its plant located in Boston, Massachusetts. Listed below are some of the manufacturing and administrative activities identified by management.

Question 61

Big River College, a small, private college, is trying to categorise its costs in an effort to reduce the overall costs of running the college. The students who attend the college are considered its 'product'.
Required:

Question 62

In the US in the 1970s Lockheed Aircraft Corporation paid USD $12.5 million in 'fees' to All Nippon Airways (ANA) to secure the sale of 21 Tristar aircraft. Carl Kochian, the president of Lockheed at that time, defended his actions with reference to the following:
Bribery was common and expected in Japan in the 1970s. Kochian did not initiate the payment. He was asked to make the payment.
Required:
Discuss the accounting and ethical issues involved in this case.

Question 63

How is the absorption cost method used in managerial decisions? What are the advantages and disadvantages of this method?