Final Review

Multiple Choice Test

Cost Accounting

Multiple Choice Test

Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.

1. A favorable materials price variance would most likely occur when:

a. the standard price is more than the actual price
b. the actual price is more than the standard price
c. the standard quantity is more than the actual quantity
d. the actual quantity is more than the standard quantity


A. This variance is the difference between AQ x AP and AQ x SP. Favorable means that the actual price was lower/less than standard. The quantity used for both actual and standard is the same, so the answer can not be related to quantity (c. & d.) See Variable Cost Variances

2. The step method of allocating service department costs recognizes that

a. other service departments do not benefit from services provided
b. only revenue generating units benefit from all services provided
c. a company can determine the exact amount of cost incurred by other service departments
d. some service departments serve other departments and revenue generating units


D. The step method allocates all cost unit costs to cost units and revenue generating units. It recognizes that cost units can benefit from other cost units. See Allocating Costs

3. When allocating costs to joint products using relative sales value at split off the further processing costs after split-off are

a. ignored for purposes of allocating the joint costs
b. deducted from the relative sales value for each product
c. deducted from the joint cost allocated to each product
d. added to the relative sales value at split off


A. Further processing costs are never used to allocate joint costs.   See Joint Products

4. Indirect labor is included in manufacturing overhead because

a. it is easy to determine the quantity of indirect hours incurred to make one product
b. the cost is so insignificant that it is included as a traceable product cost
c. it is difficult to determine the indirect labor incurred to make one unit and it is a necessary cost to make the product
d. it is expensed as incurred and reported on the current period income statement


C. Manufacturing overhead costs are always product costs that occur at the manufacturing plant. The term indirect means that it is difficult to determine how much it costs to make one unit of product. Indirect labor is often a very significant cost which includes plant managers, supervisors, quality inspectors, manufacturing accountants and other labor that supports the process of making the product. See Product & Period Costs.

5. The wages for machine operators of the machines that make the product are

a. period expenses
b. a period cost that is variable
c. a product cost that is variable
d. a product cost that is indirect


C. The cost to run the machine that makes the product is considered a direct cost to making the product. It is a direct labor assembly cost of an automated manufacturing process. It is a product cost that can be directly traced to making the product. Direct labor is always variable. See Variable and Fixed Costs.

6. Which of the following statements is not true for FIFO and weighted average process costing?

a. Total units are the same using both methods
b. Cost per equivalent unit is calculated using the same formula for both methods
c. Product costs are included in total cost
d. Equivalent units for ending inventory are never the same


D. Ending work in process inventory is always the same under both methods. The only difference in the two methods is how beginning inventory is treated. Beginning inventory equivalent units are always 100% of units for weighted average and only work completed in the current period using FIFO. Work on beginning inventory last period is not included in beginning inventory equivalent units under FIFO. Statements in a., b., & c. are always correct. See Process Costing.

7. Product costs are expensed when

a. the product is sold to the customer
b. they are incurred
c. the production of the product is completed
d. the cost of the product is estimated


A. The cost of making the product (inventory), is reported on the balance sheet as a current asset until it is sold to the customer and then the cost is reported on the income statement as cost of goods sold. See Product and Period Costs.

8. Discrete production spoiled units are assumed to occur

a. evenly throughout the entire process
b. always at the end of the production process
c. always at the inspection point
d. after the inspection point


C. Spoilage is detected at a regular inspection point in a discrete process. See Process Costing – Spoilage

9. Idle capacity in the purchasing division will

a. lead to a higher transfer price
b. lead to a lower transfer price
c. increase the external selling price
d. have no impact on the transfer price


D. The purchasing division is the division that is buying and idle capacity is not a factor. The presence of idle capacity at the selling division should reduce the possible minimum transfer price. See Transfer Pricing

10. The formula: high $ – low $ divided by high activity – low activity directly calculates

a. variable cost per activity
b. total fixed costs
c. total variable costs
d. fixed cost per unit


A. The high low formula directly calculates the variable cost per activity. This variable cost per activity is then used to compute the total fixed costs. The fixed cost per unit and total variable costs are different for different levels of activity. See Mixed Costs.

11. A significant material quantity variance should be closed to

a. cost of goods sold
b. raw material
c. work in process, finished goods and cost of goods sold
d. raw material, work in process, finished goods and cost of goods sold


C. A material quantity usage variance occurs only with the manufacturing of the product. It does not occur when material sits on the shelf and should not be allocated to raw materials. See Recording Variances

12. Manufacturing overhead includes the following costs:

a. direct costs to make the products
b. warehouse and inventory storage costs
c. costs of the facilities and management at the manufacturing plant
d. all costs incurred to ship the product to the customer


C. Manufacturing overhead by definition is all costs except direct material and direct labor that must be incurred to make the product. These costs are generally related to the facility and the management required to operate the facility. All manufacturing overhead costs are indirect (a). Warehouse and inventory storage costs are period costs that are expensed as incurred. Costs to ship the product are selling costs that are period costs. See Product & Period Costs.

13. Managers use which of the following information provided by the managerial accountant for decision making

a. the GAAP income statement since it is more relevant
b. the general ledger
c. information relevant to the decision that is being made
d. precise, actual costs


C. It is the managerial accountant’s responsibility to provide whatever financial information is necessary to make a good business decision. The managerial accountant most often deals with future costs, which will be estimated and not precise. The GAAP income statement is formatted to emphasize matching and does not provide information necessary for analysis. The general ledger is provided by the financial accountant.

14. The use of indirect labor is initially recorded as an increase in

a. work in process
b. wages expense
c. manufacturing overhead
d. period expenses


C. Indirect materials are part of manufacturing overhead. All manufacturing overhead expenses incurred are originally recorded as an increase (debit) in manufacturing overhead and then transferred to work in process when manufacturing overhead is applied. See Job Costing.

15. When manufacturing overhead is applied to products based on machine hours, a favorable efficiency variance will occur when

a. you have an unfavorable overhead spending variance
b. less machine hours are used to produce the products manufactured than expected
c. the company spends less money than the original budget for manufacturing overhead
d. less products are manufactured than expected


B. A favorable efficiency variance means that less machine hours were used to produce the units that were made this period than expected. This variance compares actual machine hours used to the machine hours that should have been used to manufacture actual products made during the period. The standard price is held constant. Any answer related to cost is not correct as there is no difference in standard cost per machine hour (a. & c.) This variance is computed based on the quantity of machine hours that should have been used to make the products. See Variable Cost Variances.

16. Work in process inventory is increased (debited) when

a. direct costs are incurred in production
b. manufactured goods are completed
c. finished goods are sold
d. indirect materials are used on the production line


A. Direct costs are recorded as WIP when used in production. For (b.), work in process is decreased, credited. (c.) does not impact work in process. Indirect materials are recorded as an increase in manufacturing overhead since they are not directly traceable to the product. (d.) See Job Costing.

17. Costs incurred to pack the product to get it ready to ship to the customer are

a. period, manufacturing overhead
b. product, manufacturing overhead
c. direct material costs
d. period costs


D. Costs incurred to pack the product to ship are not costs of making the product and are not manufacturing overhead. (a. & b.) Direct material costs become part of the product and packing materials do not become part of the product. Shipping costs are period costs that are expensed in the period incurred. (d.) See Product & Period Costs.

18. To get the actual cost of work in process that is transferred to finished goods, you would include

a. actual direct costs + applied manufacturing overhead
b. actual direct material + actual manufacturing overhead
c. actual direct costs + actual manufacturing overhead + beginning WIP – ending WIP
d. all indirect costs + all direct costs


C. The calculated cost of goods manufactured is equal to the cost of completed finished goods for the period. Cost of goods manufactured uses actual costs for the period and is reported as part of cost of goods sold (a.). (b.) does not include all product costs. All indirect costs includes period costs which are not part of inventory (d.). Ending WIP is not yet finished, so it is not part of the cost of finished goods. See Cost of Goods Manufactured.

19. A company incurred the same sales, fixed costs and cost per unit in the current year as it did in the prior year. Production is lower in the current year and finished goods inventory decreased. When preparing the current year income statement for its shareholder’s

a. income will be higher this year than last year
b. variable costing will give a lower income than absorption costing
c. absorption costing will give a higher income than variable costing
d. income will be lower this year than last year


D. Income statements presented to shareholders are done using the absorption costing method. Under absorption costing, when inventory decreases, income is lower. Variable costing would give a higher income than absorption income when inventory levels are lower. See Variable and Absorption Costing Income Statements.

20. A company that maintains a standard inventory system and does not record and adjust for unfavorable variances will

a. report a lower cost of goods sold than actual
b. report a higher cost of goods sold than actual
c. report a lower income than actual
d. report higher inventory costs than actual


A. Unfavorable variances means that actual costs were higher than standard. If the costs are not adjusted higher to actual, inventory accounts will be lower (d.) and cost of goods sold will be lower (b.). A lower cost of goods sold gives a higher income (c.) See Recording Variances

21. A company that evaluates management based on profitability at each division should set transfer prices based on

a. full cost
b. absorption cost
c. incremental costs
d. external selling prices


D. The external selling price will be the most representative of a third-party transaction. Cost based methods are often subjective as to which costs are included when determining the transfer price. See Transfer Pricing

22. The variance accounts are reported on the financial statements as

a. separate line items so the user can see efficiencies related to the company’s manufacturing operations
b. always included of cost of goods sold
c. always included in finished goods
d. none of the above


D. Variance accounts are included in cost of goods sold when they total an immaterial amount. When the amount is material, the amount is allocated to all inventory accounts and a part is included in each. Variances are not ever reported separately; the cost is added to the affected accounts. See Recording Variances

23. Which of the following is a fixed manufacturing overhead quantity variance?

a. overhead rate variance
b. overhead efficiency variance
c. overhead volume variance
d. overhead price variance


C. The overhead volume variance compares budget volumes to actual volumes. The difference is caused by producing a different number of units than expected (or using a different amount of activity than expected). The efficiency variance is related to variable overhead costs. (b.)
There is no overhead price variance, the difference in the amount spent is called a budget variance. See Fixed Manufacturing Overhead Variances.

24. The cost of ending finished goods using the FIFO method of process costing is determined by

a. taking equivalent units in finished goods times the cost of each equivalent unit
b. taking equivalent units started and completed times the cost of each equivalent unit and then add the total cost of beginning inventory
c. taking the units in finished goods times the cost per equivalent unit
d. the costs of all effort added this period


B. Beginning inventory units are the first units to be completed and transferred to finished goods. The cost of beginning inventory includes effort to finish the units this period and costs that Began with the units this period. Other units started and completed are finished also. The total cost of all these are included in the cost of finished goods for the period. The cost of all effort is not correct because some costs are still in work in process (d.). Cost per equivalent unit is always multiplied by equivalent units, not units. (c.) Answer (a.) leaves out beginning of the period costs and beginning equivalent units. See Process Costing

25. A company could never incur an operating loss greater than

a. total costs
b. total sales
c. total fixed costs
d. total contribution margin


A. Use the formula: Sales – VC = CM – FC = Income/Loss. If sales are 0 than the loss will not be greater than total costs, FC + VC. Sales of 0 are the lowest sales can go, so the company can’t incur more loss than its total costs. See Cost Volume Profit Analysis

26. The purpose of allocating joint costs is to

a. determine a cost per unit produced to value inventory
b. determine the total cost of manufacturing
c. record added processing costs
d. determine the exact cost of each product


A. Joint costs are allocated to individual products to determine the cost of making one unit of product. Inventory is valued based on the cost of manufacturing one unit. The total cost of manufacturing can be determined without allocating joint costs (b.). Added processing costs occur separately from joint costs (c.). Allocating joint costs is an estimate and will not give an exact cost (d.) See Joint Products

27. A traditional cost system is different from an activity-based costing system because

a. indirect costs are allocated based on activity
b. cost allocation pools are not used for either method
c. cost groups are determined for activity-based costing
d. all product costs are either direct or allocated to the product


C. Both costing methods allocate overhead costs, which are indirect, based on an activity. Under a traditional cost system cost pools are not used and there is only one overhead rate. Indirect costs are allocated based on activity under both methods. (a.) The difference is that more than one group of overhead costs is used in ABC and only one overhead group is used for traditional costing. See Activity Based Costing.

28. Standard quantity allowed means

a. expected units produced multiplied by the standard rate
b. the standard output allowed multiplied by the standard input
c. estimated quantity for the annual expected production
d. actual units produced multiplied by the standard required per unit


D. Standard quantity allowed is another way to say, “what should you have used for the actual units you did produce”. It is calculated by multiplying actual units produced x the quantity one unit was expected to use. The answer must include actual units produced and a., b., and c., all use an estimated quantity of units. See Variable Cost Variances.

29. When calculating break even, which of the following assumptions is not used?

a. sales mix remains the same
b. variable costs do not change per unit
c. fixed costs do not change per unit
d. fixed costs do not change in total


C. All of the above are assumptions assumed to be true when calculating break even except (c.). Fixed costs do change per unit as volume changes. See Cost Volume Profit Analysis

30. The only difference in absorption and variable costing income is

a. where product and period costs are reported
b. where fixed and variable costs are reported
c. manufacturing overhead is a different amount when finished goods inventory changes
d. there is no difference, a company has to report all costs on the income statement no matter what


C. Fixed production costs are reported as a period cost for variable costing and a product cost for absorption costing. This is the only difference in income. All other costs listed are reported at the same amount on both statements. The format used does not cause the income to be different. See Variable and Absorption Costing Income Statements.

31. Operating leverage is used to estimate

a. how income will change as sales change
b. how contribution margin per unit will change as sales in units change
c. how much the company can borrow and comfortably repay the amount borrowed
d. how many employees are necessary to maintain production levels


A. The formula for operating leverage is used to estimate future income based on a given sales increase. It is calculated in total for the company and not per unit. Contribution margin per unit does not change when sales in units change, contribution margin changes in total as sales in units change (b.) See Cost Volume Profit Analysis

32. The term relevant range means the range that

a. variable costs are not relevant
b. relevant costs are not incurred
c. production volumes will remain constant
d. fixed costs will not change within that range


D. The relevant range is the range where fixed cost will not change as long as volume remains within this range. It is the range where expected cost assumptions will hold true. Production volumes will vary within this range (c.) Variable costs are always relevant costs. (a.)
See Cost Behavior – Fixed & Variable

33. Responsibility accounting defines a profit center as one with a manager who is responsible for

a. all costs only
b. all revenues only
c. all revenues and all unallocated costs
d. all revenues, direct costs and assets


C. A profit center is responsible for all revenues and unallocated costs. Unallocated costs are direct costs the manager can control. The profit center is not responsible for making decisions related to investing funds in assets. A cost center generates no revenues and is responsible for only costs. Investment centers are responsible for revenues, direct costs, and assets. See Allocating Costs.

34. When a cost changes in total and the cost per unit does not change, the cost is always

a. a product cost
b. a period cost
c. a variable cost
d. a fixed cost


C. A variable cost must be incurred every time you make or sell a product. Variable costs in total change as volume changes. The cost per unit for a variable cost does not change. Fixed costs do not change in total with changes in volume (d.). Product and period costs are both variable and fixed. See Cost Behavior – Fixed & Variable

35. A company calculates cost of goods manufactured so that they can

a. expense these costs in the period incurred
b. determine the cost of inventory that is not yet completed
c. report costs on the income statement and the balance sheet
d. report costs only on the balance sheet


C. The cost of goods manufactured is the cost of completed goods inventory. This is reported on the balance sheet until it is sold to the customer and then it is reported as cost of goods sold on the income statement. Both of these will occur during a given period. Cost of goods manufactured is the cost of completed goods. (b.) All manufacturing costs are product costs which are not expensed as incurred, they are expensed when sold to the customer. (a.) See Cost of Goods Manufactured

36. Which of the following would be considered part of the cost of inventory?

a. costs to ship to the customer
b. rent at the manufacturing facility
c. costs of warehousing inventory
d. corporate administrative costs


B. All product costs are included in the cost of inventory. Product costs are direct materials direct labor, and manufacturing overhead. Rent at the manufacturing facility is part of manufacturing overhead. Costs to ship to the customer is a selling (period) cost and corporate administrative costs are general and administrative (period) costs. The cost of warehousing inventory is also a period cost. See Cost of Goods Manufactured.

37. Accounting practices in a decentralized organization are commonly called

a. responsibility accounting
b. departmentalized accounting
c. management accounting
d. allocation accounting


A. A decentralized organization delegates decision making authority to managers within the organization. The responsibility accounting system reports revenues and costs associated with delegated lines of authority. See Allocating Costs

38. A company that uses variable costing for management decisions depends on

a. the matching concept
b. cost volume relationships
c. fixed costs in total will change as volume changes
d. variable costs per unit change as volume changes


B. The variable cost statement sorts by fixed and variable which is related to cost volume relationships. The matching concept is not followed under a variable costing statement because the product cost fixed manufacturing overhead is expensed as incurred, not when the product is sold. As volume changes, fixed costs do not change in total and variable cost per unit does not change. See Variable and Absorption Costing Income Statements.

39. Using activity-based costing for external financial reporting is a violation of GAAP because

a. period costs are assigned to products and treated as product costs for analysis
b. all manufacturing costs are allocated to products
c. the allocation is subject to management judgment
d. activity based costing uses more than one activity base


A. Under GAAP, only product costs are reported as part of the cost to make the product. Under ABC costing, all indirect costs, whether manufacturing or administrative can be assigned to the product in order to determine the profitability of the product. More than one activity base is acceptable under GAAP. Both methods allocate all manufacturing overhead.  See Activity Based Costing.

40. The net realizable value direct approach to accounting for scrap records the sales value of scrap as

a. a cost that is ignored
b. an increase directly to cost of goods sold for the total cost
c. an increase in joint processing costs
d. a decrease in joint processing costs


D. This method directly decreases joint processing costs for the value of scrap or by product sales. See Joint Products – By Products

41. When manufacturing overhead is over applied it means that

a. management spent more money than originally budgeted for overhead expenses
b. more activity was used than planned and total budgeted manufacturing overhead expense was more than or equal to actual expense
c. less activity was used than planned and budgeted manufacturing overhead expense was lower than actual expense
d. budgeted dollars spent is always higher than actual dollars spent


B. Over applied means that more overhead was applied than was actually spent. The amount of overhead applied is calculated by taking the actual activity used times the predetermined rate. The predetermined rate is calculated based on an expected amount of activity. If budgeted and actual expense is the same, more activity must have occurred in order to apply more than what was actually spent. (a.) does not consider the level of activity that occurred. Both (c.) and (d.) will lead to overhead being under applied See Job Costing.

42. Which of the following related to a variable costing income statement is true?

a. gross profit is reported
b. you can determine fixed production costs from looking at the statement
c. variable period costs are not included when determining contribution margin
d. the statement separates costs by product and period


B. All fixed costs, including fixed manufacturing overhead costs, are reported separately below contribution margin on a variable cost statement. Gross profit is not reported on a variable costing statement. All variable costs are reported above contribution margin, which also includes variable period costs. The variable costing income statement separates costs by fixed and variable, cost behavior. See Variable and Absorption Costing Income Statements.

43. Which of the following is a major assumption that is used in cost volume profit analysis?

a. all costs are categorized as product or period
b. total contribution margin will change as volume changes
c. variable costs change per unit
d. fixed costs are constant per unit


B. As volume changes the sales price per unit and the variable cost per unit is constant. Total contribution margin is equal to contribution margin per unit, which does not change, times the number of units sold. As units sold changes, total contribution margin changes. Answers (c.) and (d.) are not correct, the costs behave the opposite way. Costs are categorized as fixed and variable for cost volume profit analysis (a.) See Cost Volume Profit Analysis

44. When the fixed overhead budget variance is 0

a. actual overhead spent is equal to budgeted overhead dollars
b. total applied is always equal to actual overhead dollars
c. the budgeted activity was equal to the actual activity
d. the budgeted fixed costs are always equal to the applied fixed costs


A. The budget variance compares the budgeted dollars to actua l dollars spent. When the variance is 0, there is no difference between the two. Variance related to activity or units made are related to the volume variance (c. & d.). (b.) is incorrect because applied overhead does not impact the budget variance. See Fixed Manufacturing Overhead Variances.

45. If the sales volume decreases and nothing else changes

a. contribution margin per unit will increase
b. margin of safety will decrease in units
c. break even will increase in units
d. operating income will increase


B. Margin of safety is “current sales – breakeven sales” and as current sales decreases, margin of safety decreases also. Since sales and variable costs per unit does not change, the contribution margin per unit does not change and the break even amount does not change either. Operating income will decrease when sales decrease. See Cost Volume Profit Analysis

46. A cost that is fixed

a. is set at the beginning of the year and actual will equal budget
b. is fixed for one level of production volumes
c. behaves very similar to costs incurred for direct labor
d. will not change proportionately to changes in production volume


D. By definition, a fixed cost will not change as volume changes within a relevant range. The term “fixed” does not mean that it will never change or that actual will be what was originally budgeted. (a.) Fixed costs are fixed within a range of production. (b.) Direct labor is a variable cost (c.) See Cost Behavior – Fixed & Variable

47. A mixed cost

a. will not change when volume of production changes
b. increases in total only when activity increases outside the relevant range
c. has a flat cost and a cost per usage
d. is always reported as a fixed cost


C. A mixed cost consists of a fixed cost portion and a variable cost portion. Fixed costs are constant within a relevant range (b.) As volume changes, mixed costs also change, however, not in direct proportion to activity. See Mixed Costs

48. Contribution margin is defined as

a. the amount of sales revenue that is available to cover fixed costs
b. the amount of sales revenue that is available to cover variable costs
c. sales less period costs
d. fixed costs less variable cost


A. By definition, contribution margin is the amount that is available to cover fixed costs. Sales – VC = CM – FC = Profit Variable costs are both product and period costs (c.) See Cost Volume Profit Analysis

49. The process of assigning manufacturing overhead costs to a job is called

a. direct costing
b. applying
c. job order costing
d. manufacturing overhead actual costing


B. Assigning overhead is called “applying” overhead to a job. It is the estimated amount of overhead costs that were incurred to make the products. It is part of job order costing, however, job order costing entails a great deal more (c.) Applying is using an estimate and is not actual costing (d.) Direct costing does not require the allocation of costs (a.) See Job Costing

50. Assigning costs to normal spoiled equivalent units must occur when the process is

a. continuous
b. discrete
c. continuous and discrete
d. abnormal and discrete


B. In a discrete process, normal spoilage will have equivalent units. The equivalent units must be assigned costs and this cost is added to finished goods. A continuous process does not assign costs to spoiled units because equivalent units are 0; the cost is averaged in to good  units. See Process Costing – Spoilage