Product vs Period Costs
Medium to Hard Practice Test
Introduction to Accounting
Medium to Hard Practice Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. Indirect materials are manufacturing overhead because
a. it is easy to determine how much is used to make one product
b. they are so insignificant that you don’t have to use them to make the product
c. they are difficult to track and a necessary cost to make the product
d. they are expensed as incurred
Answer
C. It is much too costly to track how much of indirect materials is used to make one product, so company’s do not track it, and (a.) they are necessary to make the product (b.). They are a product cost and are not expensed as incurred. (d.)
2. Manufacturing overhead can be summarized as follows:
a. direct costs to make the products
b. costs of the facilities and management at the manufacturing plant
c. all the people working to make the product with the exception of workers touching the product
d. all costs incurred at corporate headquarters
Answer
B. Manufacturing overhead by definition is all the other costs that must be incurred to make the product other than direct materials and direct labor, which is mostly related to the facility and management to operate the facility. Direct costs of material and labor is not correct because all manufacturing overhead is indirect (a). (c) covers only part of manufacturing overhead costs and leaves out the facility related costs. Costs incurred at corporate headquarters are period costs and not manufacturing overhead. (d)
3. Low cost materials used to make the product that are not traceable are called
a. direct materials
b. indirect materials
c. manufacturing overhead
d. both b. and c.
Answer
D. The difference in direct and indirect materials is how easy it is to determine and track the amount that is used to make the product. Both direct and indirect materials can be low cost. Indirect material are not traceable and they are part of manufacturing overhead.
4. Accounting and human resource personnel working at the plant
a. are considered period costs
b. are considered administrative costs
c. are considered manufacturing overhead costs
d. are considered direct labor costs
Answer
C. All other costs at the manufacturing plant that are not direct materials or direct labor are manufacturing overhead. Since the people are working at the plant they are part of manufacturing overhead. If they were working at the corporate office, they would be considered period, administrative costs a. or b. They are not direct labor since they do not touch the product to make it. d.
5. Indirect labor is
a. directly involved in all products made at the plant
b. involved in making the product, but don’t touch it to make it
c. always a higher total cost to the company than direct labor
d. not someone who would inspect the product
Answer
B. Indirect labor by definition is b. Indirect labor is not directly involved in the products made as they do not touch the product to make it. (a.) Inspectors are considered indirect labor (d.) Indirect labor may or may not cost more than direct labor, depending on the manufacturing process and what is required. (c.)
6. The cost of windows to a homebuilder would be what type of cost?
a. period, direct materials
b. period, indirect materials
c. product, direct materials
d. product, indirect materials
Answer
C. The windows become part of the house that is sold to the customer, therefore, they are direct materials which are a product cost. It is easy to determine how many windows are put in the house, so it is not indirect (d.). All materials used to make the product are product costs and not period costs (a. & b.).
7. Costs that are incurred to move inventory around are
a. period, manufacturing overhead
b. product, manufacturing overhead
c. period, indirect costs
d. period, direct costs
Answer
C. Warehouse and inventory movement costs are period costs. It is difficult to tell how much cost is incurred to support one product, therefore they are indirect. They are not product costs and are not part of inventory or manufacturing overhead.
8. The plant manager’s salary is considered
a. an administrative expense because they are an executive
b. a period cost that is indirect
c. a product cost that is direct
d. a product cost that is indirect
Answer
D. The plant manager does not touch the product to make it and is a necessary cost to manufacture the product, therefore it is a product cost. It is indirect, and is part of manufacturing overhead, because it is difficult to determine how much of the cost must be incurred to make one product. Costs that occur at the plant are not administrative costs or period costs. (a. & b.)
9. Manufacturing overhead is
a. an indirect cost that can be directly traced to the products
b. a direct cost that can not be directly traced to one product
c. a product cost that can be traced easily to the products
d. a product cost that can not be directly traced to one product
Answer
D. By definition, manufacturing overhead occurs at the plant and is a product cost. It is costs incurred to support the overall operations at the plant and can not be traced or easily identified to one product.(c). Direct costs can be traced to one product.(b.) Indirect cost can not be directly traced to products. (a.)
10. Which of the following would not generally be considered a manufacturing overhead cost?
a. supervisors for the production line
b. inspectors that inspect in the middle of the production line
c. shipping the product
d. materials that cost a very small amount
Answer
C. Shipping the product to customers is a period, selling expense and is not manufacturing overhead. All a., b, and d, are manufacturing overhead.
11. Inventory is reported on the balance sheet until
a. the materials are taken to the production line
b. the inventory is sold to the customer
c. the inventory is stored in the warehouse ready to ship to the customer
d. the cost of the inventory is determined
Answer
B. 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. Materials on the production line are inventory – work in process. Inventory ready to ship to the customer is finished goods. The company should always be able to estimate the cost of inventory and it is not moved to the income statement when the cost is determined, it is moved to the income statement when sold.
12. The difference in administrative costs and selling costs is that generally
a. administrative has to do with attracting the customer and selling has to do with shipping to the customer
b. administrative is related to operating the organization and selling is related to identifying the customer and getting the product to the customer
c. there is no real difference
d. selling is related to the salaries of the sales force only
Answer
B. Gives the distinction between selling and administrative costs. Both are period costs but are incurred for very different activities (c.) Selling costs also include the costs of direct marketing, advertising, and shipping. (d.)
13. Conversion costs would consist of
a. wood in a table and the worker that makes the table
b. wood in a table and the cost of utilities at the plant
c. the supervisors salary and the worker that makes the table
d. the traceable nails in the chair and the worker that makes the table
Answer
C. Conversion costs are direct labor and manufacturing overhead. (c.) is the only answer that consists of direct labor and manufacturing overhead. (a.) is direct material and direct labor, which are prime costs. (b.) is direct material and manufacturing overhead. (d.) is direct material and direct labor.
14. A manufacturing company makes cell phones. Materials that became part of the finished products cost $869,000. Insurance at the manufacturing plant cost $56,000. Plant management were paid $202,000. Rent on corporate headquarters was $48,000. Salespeople were paid $250,000 in salary and $62,000 in commissions. The screws used in the phone that are hard to keep track of costs $7,500. The workers on the production line were
paid $1,250,000. Depreciation on the manufacturing equipment cost $155,000. Utilities at the manufacturing plant cost $132,000. Advertising of the products cost $37,000. Supplies for the corporate office cost $12,000. Glue used to put the back and front of the cell phone together cost $3,900.
Compute the total amount of each of the following costs:
|
Direct
Material |
Direct
Labor |
Manufacturing
Overhead |
All
Period |
Total
Product
|
Answer
|
Direct
Material |
Direct
Labor |
Manufacturing
Overhead |
All
Period |
Total
Product |
|
869,000
|
1,250,000
|
155,000
132,000 56,000 202,000 3,900 7,500 556,400 |
48,000
|
2,675,400
|
15. Zachery Surf Shop produces and sells beach clothing. Costs incurred were:
| Cost of material used to make clothing |
567,000
|
| Wages paid to the workers using sewing machines |
298,000
|
| Salaries of clothing designer |
89,000
|
| Salaries/commission paid to salespersons |
112,000
|
| Wages paid to workers who maintain sewing machines |
56,000
|
| Cost of electricity used for the production area |
67,000
|
| Cost of advertising nationally |
42,000
|
| Cost of health insurance for production employees |
35,000
|
| Cost of health insurance for corporate employees |
14,000
|
| Cost of rent for the manufacturing building |
108,000
|
| Depreciation expense on the corporate office building |
51,000
|
| Salary to the chief executive officer |
150,000
|
| Cost of thread that is not tracked by use |
18,000
|
| Cost of oil for sewing machines |
7,000
|
Put the amounts in the proper categories:
|
Direct |
Direct |
Manufacturing |
All |
Total |
Answer
|
Direct
Material |
Direct
Labor |
Manufacturing
Overhead |
All
Period |
Total
Inventoriable |
|
567,000
|
298,000
|
56,000
67,000 35,000 108,000 18,000 7,000 291,000 |
89,000
112,000 42,000 14,000 51,000 150,000 458,000 |
1,156,000
|
16. For each of the following types of costs, identify them first as Product (PR) or Period (PD), then as Direct Labor (DL), Direct Material (DM), Manufacturing Overhead (OH), Selling (S), Administrative (A), or Warehouse (W). State the abbreviation for each one on the line below
Type, Name
1. ____, _____ rubber that becomes part of the product
2. ____, _____ labor that touches the product to make the product
3. ____, _____ labor that operates the machine that makes the product
4. ____, _____ screws that become part of the product, too small to track
5. ____, _____ electricity used at the factory
6. ____, _____ property taxes at the corporate headquarters
7. ____, _____ wages of those who handle inventory
8. ____, _____ quality inspector salaries
9. ____, _____ depreciation on salespersons automobiles
10.____, _____ accounting office personnel at the corporate office
11.____, _____ product design salaries at corporate headquarters
12.____, _____ plant management salaries
13.____, _____ janitor wages at the manufacturing facility
14.____, _____ cost to ship to the customers
15.____, _____ cost of tracking inventory in the warehouse
16.____, _____ advertising expenses
17.____, _____ insurance for the manufacturing plant
18.____, _____ wages for those who pack individual products
19.____, _____ equipment maintenance at the factory
20.____, _____ wire used in the products, a traceable part
Answer
Type Name
1. PR, DM rubber that becomes part of the product
2. PR, DL labor that touches the product to make the product
3. PR, DL labor that operates the machine that makes the product
4. PR, OH screws that become part of the product, too small to track
5. PR, OH electricity used at the factory
6. PD, A property taxes at the corporate headquarters
7. PD, W wages of those who handle inventory
8. PR, OH quality inspector salaries
9. PD, S depreciation on salespersons automobiles
10. PD, A accounting office personnel at the corporate office
11. PD, A product design salaries at corporate headquarters
12. PR, OH plant management salaries
13. PR, OH janitor wages at the manufacturing facility
14. PD, S cost to ship to the customers
15. PD, W cost of tracking inventory in the warehouse
16. PD, S advertising expenses
17. PR, OH insurance for the manufacturing plant
18. PR, DL wages for those who pack individual products
19. PR, OH equipment maintenance at the factory
20. PR, DM wire used in the products, a traceable part