1. Which of the following statements is correct?

a. A cost driver is an accounting technique used to control costs.

b. A cost driver is a measure of activity, such as direct labor hours, machine hours, beds occupied, computer
time, etc., that is a causal factor in the incurrence of costs.
c. A cost driver is an accounting measurement used to evaluate whether or not performance is proceeding
according to plan.
d. A cost driver is a mechanical basis used to assign costs to activities.
Choice B gives the definition of the term "cost driver" per Statement on Management Accounting.
Statement A - A cost driver is a measure of activity, not an accounting technique.
Statement C does not refer to a cost driver.
Statement D - A cost driver need not be a mechanical basis.
2. Product costs or inventoriable costs
a. are charged to expense when products become part of the finished goods inventory.
b. include only the prime costs of producing a product.
c. are treated as assets before the products are sold.
d. include only the conversion costs of producing the products.
Product costs are the manufacturing costs (materials, labor, and factory overhead) incurred to produce a
product. These costs become part of the cost of inventory (asset) until the products are sold when the costs
are charged to cost of goods sold (expensed).
Statement A.- When the products become part of the finished goods inventory, product costs are treated as
asset (unexpired cost).
Statement B - Prime costs are composed of materials and labor cost only. Product costs include not only
prime costs, but factory overhead costs as well.
Statement D - Product cost is composed of. conversion costs (labor, and factory overhead) and materials
costs.
3. Which of the following costs is not a product cost?
a. Wages paid to workers for rework on defective products.
b. Wages paid to truck loaders who load finished goods onto outgoing delivery trucks.
c. Fringe benefits paid to factory workers.
d. Wages paid to workers for idle time due to machine breakdown in a production department.
Wages paid to truck loaders is. not manufacturing cost, since the loaders are not involved in production.
Hence, wages paid to them is classified as period cost.
Choices A and D are manufacturing overhead costs which are classified as period cost.
Fringe benefits paid to factory workers are either direct labor or factory overhead costs, both of which are
product costs.
4. Product costs
a. are always expensed in the same period in which they are incurred
b. are inventoriable costs.
c. vary directly with changes in the cost driver.
d. are always charged to an asset account in the same period in which they are incurred.
Product costs, which are the costs incurred to manufacture products, become part of the costs of inventory.
Choices A and D - Product costs are charged to inventory (asset) first, then to cost of goods sold (expense)
when the units are sold. Such units may be sold now (current period) or in the future.
Choice C - Costs that vary directly with changes in the cost driver are variable. Product cost may be
composed of variable and fixed costs.

ITEMS 5 and 6 ARE BASED ON THE FOLLOWING INFORMATION:

Following are costs incurred by XYZ Manufacturing Corporation during the previous month:

Direct materials P 5,000

Indirect materials 2,000
Direct labor 6,000
Indirect labor 1,000
Factory utilities 4,000
Advertising costs 8,000
Sales commissions 12,000
Depreciation on administration building 3,000
Salaries of administrative personnel 20,000
Depreciation - delivery equipment 2,000
Overtime pay - factory workers 1,500
Rework cost on defective products discovered during quality inspection 2,500

5. Total product costs:

a. P67,000 c. P22,000
b. P45,000 d. P18,000
6. Total period costs:
a. P67,000 b. P45,000
 c. P49,000 d. P22,000
7. Manufacturing costs do not include
a. prime costs
b. conversion costs.
c. indirect materials.
d. salary of the company president, under whom is the vice president for production.

The salary of the company president is an administrative cost.

Prime costs are composed of materials and labor costs which are manufacturing costs.
Conversion costs are composed of direct labor and factory overhead, which are manufacturing costs.

8. Direct labor cost is a

a. prime cost. c. product cost.
b. conversion cost. d. All of the above
9. For product costing purposes, an indirect factory cost
a. is not directly chargeable to the company.
b. is chargeable to prime costs.
c. is chargeable to conversion costs.
d. is never included in the computation of product cost.
Examples of indirect costs are indirect materials and indirect labor, which are chargeable to factory
overhead, a conversion cost. Choice A - A cost that is not directly chargeable to the company is not a cost of
that company. Choice B - Prime cost is composed of direct materials and direct labor. No indirect cost is
included. Choice D - Indirect factory costs are chargeable to factory overhead, one of the items included in
the computation of product costs. (Except for fixed indirect costs under variable costing.)
10. A fixed cost that would be considered a direct cost is
a. salary of the sales manager when the cost object is the sales department.
b. salary of the controller when the cost object is a unit of product.
c. fees of the Board of Directors when the cost object is the Production Department.
d. the rental cost of the finished goods warehouse when the cost object is the Accounting Department.
A direct cost can be specifically and economically associated or traced with a single cost object. The salary of
the sales manager is directly traceable or chargeable to his own department, i.e., the sales department. The
costs mentioned in the other choices are not directly traceable/ chargeable to the specific cost objects given.
11. Indirect materials and indirect labor are
Prime Cost Conversion Cost Manufacturing Cost
a. Yes Yes Yes
b. No No Yes
c. No Yes Yes
d. Yes No No
Indirect materials and indirect labor are manufacturing costs that are charged to factory overhead, a
conversion cost.
Prime costs are composed of direct materials and direct labor.
12. Which of the following is a direct product cost?
a. Wood in a furniture factory.
b. Salary of the foreman in the assembly division of an automobile company
c. Depreciation of factory equipment.
d. Salesman's commission.
The assumption here is that such wood is used as direct materials to produce the furniture. Choices B and C -
The items refer to indirect factory costs, both of which are parts of factory overhead costs.
Choice D - Salesman's commission is a period cost, not a product cost.
13. The salaries of the factory janitorial and maintenance staff should be classified as
a. direct labor cost. c. prime cost.
b. period cost. d. factory overhead cost.
Cost of electricity (whether variable or fixed) in a manufacturing plant is a factory overhead cost - a conversion
cost that is included in the computation of product cost.
14. An income or benefit that is given up when one alternative is selected over another is called
a. loss. c. relevant cost.
b. opportunity cost. d. differential cost.
15. Within the relevant range, unit variable costs
a. are constant per unit, regardless of units produced or sold.
b. vary directly with the activity level.
c. vary inversely with the activity level.
d. are at the minimum.
Variable costs per unit are constant, though not necessarily at the minimum level, within the relevant range.
16. When production (in units) decreases, the average cost per unit of product increases. This increase in the average
cost per unit is due to the
a. increase in variable cost per unit.
b. increase in fixed cost per unit.
 c. increase in total variable costs.
d. increase in total fixed costs.
Despite the decrease in production, the total amount of fixed cost remains unchanged. This same total will
be divided by fewer units, thereby increasing the average cost per unit.
17. Consider Line AB in each of the following graphs:
Graph 1 Graph 2 Graph 3

Line AB is the
Graph 1 Graph 2 Graph 3
a. total sales line fixed cost per unit line total variable cost line
b. variable cost per unit line total variable cost line total fixed cost line
c. total variable cost line total fixed cost line total cost line
d. break-even line parallel line total sales line
Graph 1
TOTAL VARIABLE COST LINE
UNITS Total variable cost is a straight line because its slope, the variable cost per unit, is constant. It starts
from (0,0) because there will be no total variable cost if the number of units is zero. It moves upward to the
right because total variable cost is directly related to the number of units.
Graph 2
TOTAL FIXED COST LINE
A straight line because total amount is constant regardless of the change in the number of units. It does not
start from (0,0). It is possible that fixed costs is incurred even when production: or sales in units is zero.
Graph 3 COST LINE
It is composed of total variable cost and total fixed cost. It is a straight line because the variable cost per unit
and the total fixed costs are constant. It does not start from (0,0) because of the presence of fixed cost. It
moves upward to the right because of the variable cost element.
18. When activity changes, this cost shifts upward or downward by a certain interval.
a. Step cost c. Shifting cost
b. Cost interval d. Incremental cost
When activity changes, a step cost shifts upward or downward by a certain interval or step as follows: Step
variable costs have small steps. Step fixed costs have big steps.
19. In cost accounting, the term relevant range refers to the range over which
a. relevant costs are incurred.
b. production should be confined.
c. total fixed costs fluctuate.
d. cost relationships are valid.
Total Per Unit
VC varies directly with the activity Remains Unchanged
FC Remains unchanged varies directly with the activity

20. Which of the following statements about cost behavior is correct?

a. Within the relevant range, total variable costs may vary directly with activity, while total fixed costs remain
unchanged for a given period despite fluctuations in activity.
b. Within the relevant range, variable cost per unit varies directly with activity, while fixed cost per unit remains
unchanged for a given period despite fluctuations in activity.
c. Within the relevant range, fixed cost per unit varies directly with activity, while variable cost per unit remains
unchanged for a given period despite fluctuations in activity.
d. Within the relevant range, total variable costs may vary inversely with activity, while total fixed costs remain
unchanged for a given period despite fluctuations in activity

In cost behavior analysis, the Linearity Assumption states that there is a strict linear relationship between
the cost and
cost driver. The costs may therefore be shown graphically as straight lines.