De La Salle Lipa College of Business, Economics, Accountancy and Management Management Accounting Name: ___________________

Test I. TRUE/FALSE. Write T if the statement is correct and F is otherwise. (One point each) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. The portion of an assets value on the balance sheet is referred to as an expired cost. The portion of an asset that was consumed during a period is referred to an expired cost. A variable cost remains constant on a per-unit basis as production increases A fixed cost remains constant on a per-unit basis as production changes. The relevant range is valid for all levels of activity An indirect cost can be easily traced to a cost object. Both accountants and economists view variable costs as linear in nature. Fixed cost per unit varies directly with production. Variable cost per unit remains constant within the relevant range. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a mixed cost. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a step cost. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a mixed cost. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a step cost. A predictor which has an absolute cause and effect relationship to a cost is referred to a cost driver. A mixed cost will be an effective cost driver. A variable cost will be an effective cost driver. Unexpired costs are reflected on the balance sheet. Expired costs are reflected on the balance sheet. Distribution costs are an example of product costs. Distribution costs are an example of period costs. Retailers generally have a much high degree of conversion than do manufacturing or professional firms. Retailers generally have a much lower degree of conversion than do manufacturing or professional firms. In a service industry, direct materials are usually insignificant in amount and cannot easily be traced to a cost object. In a service industry, direct materials are usually significant in amount and can be easily traced to a cost object. There is an inverse relationship between prevention costs and failure costs. There is a direct relationship between prevention costs and failure costs. In an actual cost system, actual production overhead costs are accumulated in an Overhead Control account and assigned to Work in Process at the end of the period. In an normal cost system, actual production overhead costs are accumulated in an Overhead Control account and assigned to Work in Process at the end of the period. In a normal cost system, factory overhead is applied to Work in Process using a predetermined overhead rate.

30. In an actual cost system, factory overhead is applied to Work in Process using a predetermined overhead rate.

Test II. MULTIPLE CHOICE Read the questions carefully. Write the letter of the correct answer on the space before the number. One point Each. Capital letters only. 1. The term "relevant range" as used in cost accounting means the range over which a. costs may fluctuate. b. cost relationships are valid. c. production may vary. d. relevant costs are incurred. 2. Which of the following defines variable cost behavior? Total cost reaction to increase in activity a. b. c. d. remains constant remains constant increases increases Cost per unit reaction to increase in activity remains constant increases increases remains constant

3. When cost relationships are linear, total variable prime costs will vary in proportion to changes in a. direct labor hours. b. total material cost. c. total overhead cost. d. production volume. 4. Which of the following would not generally be considered a fixed overhead cost? Straight-line depreciation a. b. c. d.
no yes yes no

Factory insurance
no no yes yes

Units-of-production depreciation
no yes no no

5. An example of a fixed cost is a. total indirect material cost. b. total hourly wages. c. cost of electricity. d. straight-line depreciation. 6. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n) a. expired cost. b. fixed cost.

c. variable cost. d. mixed cost. 7. A(n) ________ cost increases or decreases in intervals as activity changes. a. historical cost b. fixed cost c. step cost d. budgeted cost 8. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n) a. increase in the fixed element. b. decrease in the variable element. c. increase in the mixed element. d. decrease in the fixed element. 9. Which of the following always has a direct cause-effect relationship to a cost? Predictor a. b. c. d.
yes yes no no

Cost driver
yes no yes no

10. A cost driver a. causes fixed costs to rise because of production changes. b. has a direct cause-effect relationship to a cost. c. can predict the cost behavior of a variable, but not a fixed, cost. d. is an overhead cost that causes distribution costs to change in distinct increments with changes in production volume. 11. Product costs are deducted from revenue a. as expenditures are made. b. when production is completed. c. as goods are sold. d. to minimize taxable income. 12. A selling cost is a(n) product cost a. b. c. d.
yes yes no no

period cost
yes no yes yes

inventoriable cost
no no no yes

13. Which of the following is not a product cost component? a. rent on a factory building b. indirect production labor wages c. janitorial supplies used in a factory d. commission on the sale of a product

14. Period costs a. are generally expensed in the same period in which they are incurred. b. are always variable costs. c. remain unchanged over a given period of time. d. are associated with the periodic inventory method. 15. Period costs include distribution costs a. b. c. d.
yes no no yes

outside processing costs

no yes no yes

sales commissions
yes yes no yes

Test III. Problems

High-Low Method: During the past year, the high and low levels of resource usage occurred in April and October (for three different resources). The three resources are associated with the machining activity. Machine hours is the activity driver. The total costs of the three resources, and the activity output, as measured by machine hours for the two different levels follow: Activity Cost Machine depreciation Low 130,000 High 130,000 Power Usage Low High Drilling Labor Low High Required: 1) Determine the cost behavior of each resource. Use the high-low method to assess the fixed and variable components. 2) Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 15,000 machine hours. 3) Construct a cost formula that can be used to predict the total cost of the three resources combined. Using this formula, predict the total machining cost if activity usage (output) is 18,000 direct labor hours. In general, when can cost formulas be combined to form a single cost formula 10,000 25,000 10,000 25,000 10,000 25,000 13,000 32,500 22,000 37,000 P Machine hours Total

High-Low Method: During the past year, the high and low levels of resource usage occurred in April and October (for three different resources). The three resources are associated with the machining activity. Machine hours is the activity driver. The total costs of the three resources, and the activity output, as measured by machine hours for the two different levels follow: Activity Cost Machine hours Total

Machine depreciation Low 130,000 High 130,000 Power Usage Low High Drilling Labor Low High Required:

10,000 25,000 10,000 25,000 10,000 25,000

13,000 32,500 22,000 37,000

1) Determine the cost behavior of each resource. Use the high-low method to assess the fixed and variable components. 2) Using your knowledge of cost behavior, predict the cost of each item for an activity output level of 15,000 machine hours. 3) Construct a cost formula that can be used to predict the total cost of the three resources combined. Using this formula, predict the total machining cost if activity usage (output) is 18,000 direct labor hours. In general, when can cost formulas be combined to form a single cost formula De La Salle Lipa College of Business, Economics, Accountancy and Management Management Accounting Name: ___________________

Test I. TRUE/FALSE. Write T if the statement is correct and F is otherwise. (One point each) 1. The portion of an assets value on the balance sheet is referred to as an expired cost. ANS: F DIF: Easy OBJ: 2-1

2. The portion of an asset that was consumed during a period is referred to an expired cost. ANS: T DIF: Easy OBJ: 2-1

3. A variable cost remains constant on a per-unit basis as production increases ANS: T DIF: Easy OBJ: 2-1

4. A fixed cost remains constant on a per-unit basis as production changes. ANS: F DIF: Easy OBJ: 2-1

5. The relevant range is valid for all levels of activity ANS: F DIF: Easy OBJ: 2-1

6. An indirect cost can be easily traced to a cost object. ANS: F DIF: Easy OBJ: 2-1

7. Both accountants and economists view variable costs as linear in nature. ANS: F DIF: Moderate OBJ: 2-1

8. Fixed cost per unit varies directly with production. ANS: F DIF: Easy OBJ: 2-1

9. Variable cost per unit remains constant within the relevant range. ANS: T DIF: Easy OBJ: 2-1

10. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a mixed cost. ANS: F DIF: Easy OBJ: 2-1

11. A cost that shifts upward or downward when activity changes by a certain interval is referred to as a step cost. ANS: T DIF: Easy OBJ: 2-1

12. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a mixed cost. ANS: T DIF: Moderate OBJ: 2-1

13. If the cost of an additive is $5,000 + $0.50 for every unit of solvent produced, the cost is classified as a step cost. ANS: F DIF: Moderate OBJ: 2-1

14. A predictor which has an absolute cause and effect relationship to a cost is referred to a cost driver. ANS: T DIF: Easy OBJ: 2-1

15. A mixed cost will be an effective cost driver. ANS: F DIF: Moderate OBJ: 2-1

16. A variable cost will be an effective cost driver.

ANS: T

DIF: Moderate

OBJ: 2-1

17. Unexpired costs are reflected on the balance sheet. ANS: T DIF: Easy OBJ: 2-2

18. Expired costs are reflected on the balance sheet. ANS: F DIF: Easy OBJ: 2-2

19. Distribution costs are an example of product costs. ANS: F DIF: Easy OBJ: 2-2

20. Distribution costs are an example of period costs. ANS: T DIF: Easy OBJ: 2-2

21. Retailers generally have a much high degree of conversion than do manufacturing or professional firms. ANS: F DIF: Moderate OBJ: 2-3

22. Retailers generally have a much lower degree of conversion than do manufacturing or professional firms. ANS: T DIF: Moderate OBJ: 2-3

23. In a service industry, direct materials are usually insignificant in amount and cannot easily be traced to a cost object. ANS: T DIF: Moderate OBJ: 2-4

24. In a service industry, direct materials are usually significant in amount and can be easily traced to a cost object. ANS: F DIF: Moderate OBJ: 2-4

25. There is an inverse relationship between prevention costs and failure costs. ANS: T DIF: Moderate OBJ: 2-4

26. There is a direct relationship between prevention costs and failure costs. ANS: F DIF: Moderate OBJ: 2-4

27. In an actual cost system, actual production overhead costs are accumulated in an Overhead Control account and assigned to Work in Process at the end of the period. ANS: T DIF: Moderate OBJ: 2-4

28. In an normal cost system, actual production overhead costs are accumulated in an Overhead Control account and assigned to Work in Process at the end of the period. ANS: F DIF: Moderate OBJ: 2-4

29. In a normal cost system, factory overhead is applied to Work in Process using a predetermined overhead rate. ANS: T DIF: Moderate OBJ: 2-4

30. In an actual cost system, factory overhead is applied to Work in Process using a predetermined overhead rate. ANS: F DIF: Moderate OBJ: 2-4

Test II. MULTIPLE CHOICE Read the questions carefully. Write the letter of the correct answer on the space before the number. One point Each. Capital letters only. 1. The term "relevant range" as used in cost accounting means the range over which a. costs may fluctuate. b. cost relationships are valid. c. production may vary. d. relevant costs are incurred. ANS: B DIF: Easy OBJ: 2-1

2. Which of the following defines variable cost behavior? Total cost reaction to increase in activity a. b. c. d. remains constant remains constant increases increases DIF: Easy Cost per unit reaction to increase in activity remains constant increases increases remains constant OBJ: 2-1

ANS: D

3. When cost relationships are linear, total variable prime costs will vary in proportion to changes in a. direct labor hours. b. total material cost. c. total overhead cost. d. production volume. ANS: D DIF: Easy OBJ: 2-1

4. Which of the following would not generally be considered a fixed overhead cost? Straight-line depreciation a. b. c. d. ANS: C
no yes yes no

Factory insurance
no no yes yes

Units-of-production depreciation
no yes no no

DIF: Easy

OBJ: 2-1

5. An example of a fixed cost is a. total indirect material cost. b. total hourly wages. c. cost of electricity. d. straight-line depreciation. ANS: D DIF: Easy OBJ: 2-1

6. A cost that remains constant in total but varies on a per-unit basis with changes in activity is called a(n) a. expired cost. b. fixed cost. c. variable cost. d. mixed cost. ANS: B DIF: Easy OBJ: 2-1

10

7. A(n) ________ cost increases or decreases in intervals as activity changes. a. historical cost b. fixed cost c. step cost d. budgeted cost ANS: C DIF: Easy OBJ: 2-1

8. When the number of units manufactured increases, the most significant change in unit cost will be reflected as a(n) a. increase in the fixed element. b. decrease in the variable element. c. increase in the mixed element. d. decrease in the fixed element. ANS: D DIF: Easy OBJ: 2-1

9. Which of the following always has a direct cause-effect relationship to a cost? Predictor a. b. c. d.
yes yes no no

Cost driver
yes no yes no

ANS: C

DIF: Moderate

OBJ: 2-1

10. A cost driver a. causes fixed costs to rise because of production changes. b. has a direct cause-effect relationship to a cost. c. can predict the cost behavior of a variable, but not a fixed, cost. d. is an overhead cost that causes distribution costs to change in distinct increments with changes in production volume. ANS: B DIF: Easy OBJ: 2-1

11. Product costs are deducted from revenue a. as expenditures are made. b. when production is completed. c. as goods are sold. d. to minimize taxable income. ANS: C 12. A selling cost is a(n) product cost a. yes b. yes period cost
yes no

DIF: Easy

OBJ: 2-2

inventoriable cost
no no

11

c. no d. no ANS: C

yes yes

no yes

DIF: Easy

OBJ: 2-2

13. Which of the following is not a product cost component? a. rent on a factory building b. indirect production labor wages c. janitorial supplies used in a factory d. commission on the sale of a product ANS: D DIF: Easy OBJ: 2-2

14. Period costs a. are generally expensed in the same period in which they are incurred. b. are always variable costs. c. remain unchanged over a given period of time. d. are associated with the periodic inventory method. ANS: A 15. Period costs include distribution costs a. b. c. d.
yes no no yes

DIF: Easy

OBJ: 2-2

outside processing costs

no yes no yes

sales commissions
yes yes no yes

ANS: A

DIF: Easy

OBJ: 2-2

Test III.

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