Many companies recognize three major categories of costs of manufacturing a product.
These are direct materials, direct labor, and overhead. Which of the following is an
overhead cost in the production of an automobile?
Answer (A) is correct.
The cost of small tools used in mounting tires cannot be identified solely
with the manufacture of a specific automobile. This cost should be
treated as factory overhead because it is identifiable with the production
A company experienced a machinery breakdown on one of its production lines. As a
consequence of the breakdown, manufacturing fell behind schedule, and a decision was
made to schedule overtime to return manufacturing to schedule. Which one of the following
methods is the proper way to account for the overtime paid to the direct laborers?
Answer (D) is correct. Direct labor costs are wages paid to labor that can feasibly be specifically identified with the production of finished goods. Factory overhead consists of all costs, other than direct materials and direct labor, that are associated with the manufacturing process. Thus, straight-time wages would be treated as direct labor; however, because the overtime premium cost is a cost that should be borne by all production, the overtime hours times the overtime premium should be charged to manufacturing overhead.
A cost incurred for the benefit of more than one cost objective is
Answer (D) is correct. A cost incurred for the benefit of more than one cost objective is known as a common cost. Allocation of common costs is a persistent problem in responsibility accounting. For example, how should the costs of corporate headquarters be allocated to the segments of a conglomerate? Common cost is also a synonym for joint cost. In this sense, common costs are incurred in the production of two or more inseparable products (e.g., costs of refining petroleum into gasoline, diesel fuel, kerosene, lubricating oils, etc.) up to the point at which the products become separable (the split-off point).
A cost that always can be directly traced to a cost object is
Answer (D) is correct. Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product.
Conversion costs are
Answer (C) is correct. Conversion costs are the direct labor, indirect materials, and factory overhead incurred to convert raw materials and transferred-in goods in a cost center to finished goods.
The allocation of general overhead costs to operating departments can be least justified in determining
Answer (B) is correct. In the short run, management decisions are made in reference to incremental costs without regard to fixed overhead costs because fixed overhead cannot be changed in the short run. Thus, the emphasis in the short run should be on controllable costs. For example, service department costs allocated as a part of overhead may not be controllable in the short run.
A computer company charges indirect manufacturing costs to a project at a fixed percentage of a cost pool. This project is covered by a cost-plus government contract. Which of the following is an appropriate guideline for determining how costs are assigned to the pool?
Answer (A) is correct. Cost pools are accounts in which a variety of similar costs are accumulated prior to allocation to cost objectives. The overhead account is a cost pool into which various types of overhead are accumulated prior to their allocation. Indirect manufacturing costs are an element of overhead allocated to a cost pool. Ordinarily, different allocation methods are applied to variable and fixed costs, thus requiring them to be separated. Establishing separate pools allows the determination of dual overhead rates. As a result, the assessment of capacity costs, the charging of appropriate rates to user departments, and the isolation of variances are facilitated.
In a traditional manufacturing operation, direct costs would normally include
Answer (C) is correct.
Direct costs are readily identifiable with and attributable to specific units
of production. Wood is a raw material (a direct cost) of furniture
In practice, items such as wood screws and glue used in the production of school desks and
chairs wouldmost likely be classified as
Answer (B) is correct.
Those tangible inputs to the manufacturing process that cannot
practicably be traced to the product, such as wood screws and glue used
in the production of school desks and chairs, are referred to as indirect
costs. Indirect costs are one of the three components of manufacturing
overhead, the other two being indirect labor and factory operating costs
Which one of the following items would not be considered a manufacturing cost?
Answer (B) is correct.
Manufacturing costs consist of direct materials, direct labor, and
manufacturing overhead. The cream, plant property taxes, and tires are
all integral to the production of the final product and so are properly
classified as manufacturing costs. Sales commissions, however, are not
incurred until after the product has been manufactured. They are properly
classified as a selling expense.