1. Indirect manufacturing costs:

     a  can be traced to the product that created the costs

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      b  may have a cause-and-effect relationship with capacity rather than with individual units of production

     c  generally include the cost of material and the cost of labor

     d  are included in period costs

2. Cost behavior refers to: (Points : 3)

     a  how costs react to a change in the level of activity

     b  whether a cost is incurred in a manufacturing, merchandising, or service company

     c  classifying costs as either product or period costs

     d  whether a particular expense has been ethically incurred

3. Depreciation of plant facilities is classified as a(n):

     a  direct material cost

     b  direct labor cost

     c  indirect manufacturing cost

     d  general and administrative cost

4. An understanding of the underlying behavior of costs helps in all of the following EXCEPT:

     a  sales volume can be better estimated

     b  costs can be better estimated as volume expands and contracts

     c  true costs of processes can be better evaluated

     d  process inefficiencies can be better identified and, as a result, improved

5. Costs that must be allocated to products for external reporting purposes include:

     a  selling and marketing costs

     b  direct material and direct labor costs

     c  the cost of equipment used to manufacture several different products

     d  All of these are correct.

6. Chezpere Company manufactures and sells washing machines.  In order to make assembly of the machines faster and easier, some of the metal parts in the machines are coated with grease.  How should the cost of this grease be classified?

a.  Direct Material Cost

b.  Fixed Cost


    a  a. Yes, b. Yes

     b  a. Yes, b. No

    c   a. No, b. Yes

     d  a. No, b. No

7. Factory supplies in a manufacturing plant are most likely:

   a    sunk costs.

     b  period costs.

     c  variable costs.

    d   excluded from product costs.

8. When the level of activity decreases within the relevant range, the fixed cost per unit will:

      a decrease.

    b   increase.

      c remain the same.

     d  The effect cannot be predicted.

9. Which of the following is correct concerning reactions to INCREASES in activity?

a.  Total Variable Cost

b.  Variable Cost Per Unit


     a  a. Increases, b. Decreases

     b  a. Constant, b. Decreases

     c  a. Decreases, b. Constant

     d  a. Increases, b. Constant

10. The potential benefit that is given up when one alternative is selected over another is called:

     a  A sunk cost.

     b  An opportunity cost.

     c  Both a sunk cost and an opportunity cost.

      d Neither a sunk cost nor an opportunity cost.

11. In a decision-making situation involving an asset, which of the following costs is generally NOT considered relevant to the decision and should be ignored?

    a   Incremental cost of selecting one alternative over another.

    b   Opportunity cost of using the asset in an alternative.

    c   Differential cost between two alternatives.

     d  The original cost of the asset.

12. Haala Inc. is a merchandising company.  Last month the company’s cost of goods sold was $68,000.  The company’s beginning merchandise inventory was $11,000 and its ending merchandise inventory was $17,000.  What was the total amount of the company’s merchandise purchases for the month?

     a  $96,000

     b  $62,000

     c  $68,000

     d  $74,000

13. How much sunk cost is represented in the following list?

Annual operating cost $80,000

Fixed operating costs other than depreciation $14,000

Resale value, if sold now $25,000

Original cost of current machine $68,000


    a   $80,000

     b  $14,000

     c  $25,000

     d  $68,000

14. Mendoza, Inc. manufactures and sells aluminum dishes for camping and outdoor enthusiasts through a mail order catalog operation.  Large rectangular sheets of aluminum are purchased by Mendoza. These sheets are cut down into smaller squares and are then fed into a machine where they are trimmed down into a circular shape.  These aluminum circles are then fed into a stamping machine where they are formed into plates and bowls.  After production, the dishes are shipped to warehouses where they are packed and then shipped to customers.

Which of the following terms could be used to correctly describe the cost of electricity used to run the stamping machine?


     a  variable cost

     b  indirect cost

     c  manufacturing overhead cost

     d  All of these

15. Mark is an engineer who has designed a telecommunications device.  He is convinced that there is a big potential market for the device.  Accordingly, he has decided to quit his present job and start a company to manufacture and market the device.

The cost of the raw materials that will be used in manufacturing the computer board is:


     a  a sunk cost

     b  a fixed cost

     c  a period cost

      d a variable cost

16. Leas Corporation staffs a helpline to answer questions from customers.  The costs of operating the helpline are variable with respect to the number of calls in a month.  At a volume of 25,000 calls in a month, the costs of operating the helpline total $452,500.

To the nearest whole dollar, what should be the total cost of operating the helpline costs at a volume of 23,900 calls in a month? (Assume that this call volume is within the relevant range.)


     a  $442,545

     b  $452,500

     c  $473,326

     d  $432,590

17. Leas Corporation staffs a helpline to answer questions from customers.  The costs of operating the helpline are variable with respect to the number of calls in a month.  At a volume of 25,000 calls in a month, the costs of operating the helpline total $452,500.

To the nearest whole cent, what should be the average cost of operating the helpline per call at a volume of 25,300 calls in a month? (Assume that this call volume is within the relevant range.)


    a   $18.93

    b   $18.00

     c  $17.89

    d   $18.10

18. The following cost data pertain to the operations of Quinonez Department Store, Inc. for the month of September:

Corporate headquarters building lease $77,000

Cosmetics Department sales commissios-Northridge Store $4,000

Corporate legal office salaries $59,000

Store manager’s salary-Northridge Store $11,000

Heating-Northridge Store $10,000

Cosmetics Department cost of sales-Northridge Store $37,000

Central warehouse lease cost $16,000

Store security-Northridge Store $12,000

Cosmetics Department manager’s salary-Northridge Store $4,000

The Northridge Store is just one of many stores owned and operated by the company.  The Cosmetics Department is one of many departments at the Northridge Store.  The central warehouse serves all of the company’s stores.

What is the total amount of the costs listed above that are direct costs of the Cosmetics Department?

     a  $78,000

     b  $45,000

      c $41,000

     d  $37,000

19. A trucking business is considering whether to give up its local delivery routes or to expand its long haul (over 100 miles) operations.

In this decision, the lost income from the local delivery routes given up can best be described as a(n):

     a  opportunity cost.

     b  conversion cost.

     c  sunk cost.

     d  differential (incremental) cost

20. Dominik Corporation purchased a machine 5 years ago for $527,000 when it launched product M08Y.  Unfortunately, this machine has broken down and cannot be repaired.  The machine could be replaced by a new model 310 machine costing $545,000 or by a new model 240 machine costing $450,000.  Management has decided to buy the model 240 machine. It has less capacity than the model 310 machine, but its capacity is sufficient to continue making product M08Y. Management also considered, but rejected, the alternative of dropping product M08Y and not replacing the old machine. If that were done, the $450,000 invested in the new machine could instead have been invested in a project that would have returned a total of $532,000.

In making the decision to invest in the model 240 machine, the opportunity cost was:

    a   $545,000

    b   $450,000

    c   $532,000


     d  $527,000

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