Question

g. Which of the following are included in manufacturing overhead?

1) All direct material, direct labour, and administrative costs

2) All manufacturing costs except direct labour

3) All manufacturing costs except direct labour and direct materials

4) All selling and administrative costs

h. Which of the following statements describes the treatment of period costs?

1) They will never constitute part of the cost of goods manufactured statement but will always be part of the income statement.

2) They will always be part of the cost of goods manufactured statement.

3) They will never constitute part of the cost of goods manufactured statement or be part of the income statement.

4) They will only be incurred if the product is made in the current period.

i. What criterion is used in making the distinction between indirect and direct costs?

1) Whether a cost differs between alternatives

2) Whether a cost is variable or fixed

3) Whether a cost is a product or a period cost

4) Whether a cost can be easily traced to the cost object under consideration

j. Buford Company rents out a small unused portion of its factory to another company for €1,000 per month. The rental agreement will expire next month, and rather than renew the agreement, Buford Company is thinking about using the space itself to store materials. What term is used to describe the €1,000 per month?

1) Sunk cost

2) Period cost

3) Variable cost

4) Opportunity cost

k. A machine was purchased in 20X6 to make experimental boards. The machine is still being used in the manufacture of the new board. What term is used to describe the cost of this machine in 20X9?

1) Opportunity cost

2) Sunk cost

3) Differential cost

4) Period cost

Note:

Questions (l) through (n) are based on the following information pertaining to Hailey’s manufacturing operations:

Inventories January 1, 2019 December 31, 2020

Direct materials € 30,000 € 20,000

Work in progress 30,000 25,000

Finished goods 28,000 35,000

Additional information for 2019:

Direct materials purchased € 110,000

Direct manufacturing labour payroll 90,000

Direct manufacturing labour rate per hour 10

Factory overhead rate per direct manufacturing labour-hour 7

l. For 2019, what was the prime cost?

1) € 90,000

2) €120,000

3) €170,000

4) €210,000

m. For 2020, what was the conversion cost?

1) € 90,000

2) €153,000

3) €183,000

4) €200,000

n. For 2019, what was the cost of goods manufactured?

1) € 35,000

2) €268,000

3) €273,000

4) €278,000

o. In the preparation of the schedule of cost of goods manufactured, the accountant incorrectly excluded as part of manufacturing overhead the janitorial expense of the firm’s factory. What impact will this error have on the financial statements?

1) It will overstate period expenses on the income statement.

2) It will overstate the cost of goods sold on the income statement.

3) It will understate the cost of goods manufactured.

4) It will have no effect on the cost of goods manufactured.

Answer 1

g. Which of the following are included in manufacturing overhead?

Answer - All manufacturing costs except direct labour and direct materials.

(Direct Material & Direct Labour are separate cost heads and all other manufacturing cost are manufacturing overheads)

h. Which of the following statements describes the treatment of period costs?

Answer: They will never constitute part of the cost of goods manufactured statement but will always be part of the income statement.

(Since they are period cost they are not directly related to production of units & thus not included in cost of goods mfg. but they are part of income statement to compute income.

i) What criterion is used in making the distinction between indirect and direct costs?

Answer -  Whether a cost is a product or a period cost.

Direct cost means directly related to production of Goods. Product cost also refers to the same.

Direct cost can either be Fixed or Variable. For eg. Fixed Mfg Overhead.

j. Buford Company rents out a small unused portion of its factory to another company for €1,000 per month. The rental agreement will expire next month, and rather than renew the agreement, Buford Company is thinking about using the space itself to store materials. What term is used to describe the €1,000 per month?

Answer - Opportunity cost

(Opportunity cost is the cost of next best alternative foregone. Thus in this case it was rent of 1000 per month)

k. A machine was purchased in 20X6 to make experimental boards. The machine is still being used in the manufacture of the new board. What term is used to describe the cost of this machine in 20X9?

Answer - Sunk cost

(A sunk cost refers to money that has already been spent and which cannot be recovered)