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Managerial Accounting: Making Decisions and Motivating Performance (Datar/Rajan)
Chapter 2 An Introduction to Cost Terms and Purposes
Learning Objective 2-1
1) The cost incurred is:
A) actual costs.
B) budgeted costs.
C) cost object.
D) cost accumulation.
E) cost allocation.
Answer: A
Diff: 1 Page Ref: 31
LO: 2-1
EOC: E2-1; E2-6
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
2) A is usually measured as the amount of money that must be paid to acquire goods and
services.
A) time
B) cost
C) goal
D) product
E) prediction
Answer: B
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-10; E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
3) Which of the following explains why managers compare the budgeted costs to actual costs?
A) Managers only focus on the budgeted costs.
B) Managers only learn how to make better decisions in the future.
C) Managers know how well they did to control costs only.
D) Managers evaluate how well they did to control costs and learn how to do better in the future.
E) Managers never compare these costs.
Answer: D
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-10; E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
1
Copyright © 2014 Pearson Education, Inc.
4) The cost object is:
A) the cost incurred.
B) a collection of cost data in some organized way by means of a cost object.
C) a predicted, or forecasted, cost.
D) anything for which a measurement of costs is desired.
E) used to describe the assignment of indirect costs to a particular cost object.
Answer: C
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
5) Budgeted costs include:
A) the costs incurred this year.
B) the costs incurred last year.
C) the planned or forecasted costs.
D) the cost of a competitor.
E) the costs incurred two years ago.
Answer: C
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-6
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
6) Cost accumulation:
A) is the cost incurred.
B) is a collection of cost data in an organized way by means of a cost object.
C) predicts, or forecasts, costs.
D) measures the desired costs.
E) describes the assignment of indirect costs to a particular cost object.
Answer: B
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
2
Copyright © 2014 Pearson Education, Inc.
7) The two main ways managers use cost information are when they decisions; and,
decisions.
A) make; implement
B) create; brainstorm
C) control; create
D) brainstorm; control
E) control; accumulate
Answer: A
Diff: 2 Page Ref: 30
LO: 2-1
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
8) A/an cost is the cost incurred; and they are distinguished from a cost; which is a
predicted, forecasted, or future cost.
A) budget; object
B) actual; budgeted
C) accumulated; actual
D) budgeted; actual
E) cost object; actual
Answer: B
Diff: 3 Page Ref: 30
LO: 2-1
EOC: E2-10
AACSB: Analytic Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
9) The predicted, or forecasted costs, are:
A) actual costs.
B) budgeted costs.
C) cost object.
D) cost accumulation.
E) cost allocation.
Answer: B
Diff: 1 Page Ref: 31
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
3
Copyright © 2014 Pearson Education, Inc.
10) Evans Manufacturing has three cost objects that it uses to accumulate costs for its manufacturing plant
in Virginia. They include:
Cost Object #1: The real estate dwelling(s) (physical buildings and equipment)
Cost Object #2: The use of buildings and equipment
Cost Object #3: The use and availability of manufacturing labor
The following manufacturing overhead cost categories are found in the accounting records:
a. Depreciation on buildings and equipment
b. Machine lubricants
c. Insurance for property
d. Supervisors salaries
e. Fringe benefits
f. Property taxes
g. Utilities
Required:
Assign each of the above costs to the most appropriate cost object.
Answer:
Cost Object #1 includes categories a, c and f
Cost Object #2 includes categories b and g
Cost Object #3 includes categories d and e
Diff: 2 Page Ref: 30
LO: 2-1
EOC: E2-14
AACSB: Analytic Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
11) A BMW X6 sports activity coupe is an example of the cost object at BMW.
A) product
B) service
C) project
D) customer
E) activity
Answer: A
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
4
Copyright © 2014 Pearson Education, Inc.
12) Accountants measure the cost of direct materials or advertising at manufacturing plants by using the
monetary amount paid to acquire them.
Answer: TRUE
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-10
AACSB: Analytic Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
13) Budgeted costs are also known as predicted or forecasted costs (future costs).
Answer: TRUE
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-11; E2-12; E2-13
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
14) Managers use their knowledge about costs to help guide their decisions about product innovation,
quality, and customer service.
Answer: TRUE
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-18
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
15) The managers at BMW utilize their knowledge about costs to make decisions about product
innovation, quality, and customer service.
Answer: TRUE
Diff: 1 Page Ref: 30
LO: 2-1
EOC: E2-1
AACSB: Analytic Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
16) Recall that managers use a cost system to determine the costs of various cost objects. List and discuss
how managers use the two basic stages in this process to determine the cost.
Answer: The two stages that managers use are accumulation and assignment. In the first stage, managers
accumulate costs. For example, they collect, or accumulate, the cost data that they use in an accounting
system. In the second stage, assignment, managers assign the accumulated costs in various categories.
Diff: 2 Page Ref: 30
LO: 2-1
EOC: E2-1
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
5
Copyright © 2014 Pearson Education, Inc.
Learning Objective 2-2
1) The general term used to identify the tracing and allocation of accumulated costs to a cost object is:
A) cost accumulation.
B) cost assignment.
C) cost tracing.
D) conversion costing.
E) convertible costing.
Answer: B
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-1
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
2) Cost tracing:
A) describes the assignment of direct costs to a particular cost object.
B) is the cost incurred which is a predicted or forecasted cost.
C) is the collection of data in some organized way.
D) is used to describe the assignment of indirect costs to a particular cost object.
E) encompasses both cost tracing and allocating indirect costs to a cost object.
Answer: A
Diff: 3 Page Ref: 31
LO: 2-2
EOC: E2-12; E2-13; E2-14
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
3) Which of the following is correct about indirect costs of a cost object?
A) Cost allocation is not used to describe the assignment of these costs to a particular cost object.
B) Cost tracing is used to describe its assignment of these costs to a particular cost object.
C) Can be traced to a cost object in an economically feasible way.
D) Cannot be traced to a cost object in an economically feasible way.
E) Cost assignment is not used in indirect costing methods.
Answer: C
Diff: 3 Page Ref: 31
LO: 2-2
EOC: E2-12; E2-13; E2-14
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
6
Copyright © 2014 Pearson Education, Inc.
4) The broader definition of a cost object is:
A) the higher proportion of costs that are direct costs and the managers are more confident in the
accuracy of the cost amounts.
B) the lower proportion of costs that are direct costs and the managers are more confident in the accuracy
of the cost amounts.
C) the higher proportion of costs that are indirect costs and the managers are less confident in the
accuracy of cost amounts.
D) the lower proportion of costs that are indirect costs and the managers are less confident in the
accuracy of cost amounts.
E) the managers are never confident in the accuracy of cost amounts.
Answer: A
Diff: 3 Page Ref: 32
LO: 2-2
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
5) Which of the following is not a challenge to managers that allocate costs?
A) Assign inaccurate product costs.
B) Inaccurate product costs mislead managers about the profitability of products.
C) Managers will promote unprofitable products.
D) Managers deemphasize profitable products.
E) Assign accurate product costs.
Answer: E
Diff: 3 Page Ref: 31
LO: 2-2
EOC: E2-12; E2-13; E2-14
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
6) Which of the following statements about the direct or indirect cost classification is not true?
A) Indirect costs are always traced.
B) Indirect costs are always allocated.
C) The design of operations affects the direct or indirect cost classification.
D) The direct/indirect classification depends on the choice of the cost object.
E) All of these statements are true.
Answer: A
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Analytic Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
7
Copyright © 2014 Pearson Education, Inc.
7) We define cost tracing as:
A) the assignment of direct costs to a chosen cost object.
B) a function of cost allocation.
C) the process of tracking both direct and indirect costs associated with a cost object.
D) the process of determining the actual cost of the cost object.
E) the process of tracking only the direct and indirect costs.
Answer: A
Diff: 1 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
8) We define cost allocation as:
A) the process of tracking both direct and indirect costs associated with a cost object.
B) the process of determining the actual cost of the cost object.
C) the assignment of indirect costs to the chosen cost object.
D) a function of cost tracing.
E) not a function of cost assignment.
Answer: C
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
9) Indirect costs of a cost object can be traced to a specific cost object and direct costs of a cost object
cannot be traced to a specific cost object.
Answer: FALSE
Explanation: Indirect costs of a cost object are related to the particular cost object but cannot be traced to
it in an economically feasible way. Direct costs of a cost object are related to the particular cost object and
can be traced to it in an economically feasible way.
Diff: 1 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
10) Cost tracing is used to describe the assignment of indirect costs to a particular cost object.
Answer: FALSE
Explanation: The term cost tracing is used to describe the assignment of direct costs to a particular cost
object.
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-18; E2-19
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
8
Copyright © 2014 Pearson Education, Inc.
11) One highlight of indirect costs of a cost object is that it can be traced in an economically feasible way.
Answer: FALSE
Explanation: Indirect costs of a cost object are related to the particular cost object but cannot be traced to
it in an economically feasible way.
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-18; E2-19
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Describe the components of and prepare the four basic financial statements.
12) The cost of steel and tires to an automobile manufacturer is an example of a direct cost.
Answer: TRUE
Diff: 1 Page Ref: 31
LO: 2-2
EOC: E2-19
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
13) Ford Motor Company is an example of a plant that manufactures automobiles. The cost of the lease
where it manufactures automobiles can be categorized as an indirect cost.
Answer: TRUE
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Analytic Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
14) In general, a manager is more confident about the accuracy of direct costs of cost objects.
Answer: TRUE
Diff: 2 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
15) The plant administrative costs at a manufacturing company are indirect costs.
Answer: TRUE
Diff: 1 Page Ref: 31
LO: 2-2
EOC: E2-11
AACSB: Reflective Thinking Skills
Learning Outcome: FA-2: Describe the components of and prepare the four basic financial statements.
9
Copyright © 2014 Pearson Education, Inc.
16) Write a short essay and explain why a manager at a manufacturing company considers the direct
costs to be more accurate than indirect costs.
Answer: Managers at manufacturing companies consider the direct costs to be more accurate than
indirect costs because they can be traced to a specific or particular cost object. Indirect costs, for example,
the salaries of administrative personnel at a manufacturing company, can't be traced to a specific cost
object.
Diff: 3 Page Ref: 31
LO: 2-2
EOC: E2-11; E2-14
AACSB: Analytic Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
17) Write a short essay and explain how technological advances have improved the accounting or finance
manager's ability to track costs. Be specific.
Answer: Managers enjoy the advances in information-gathering technology because it enhances their
ability to trace direct costs. The development of bar codes now permit managers to classify low-cost
products, for example, clips and screws that were previously classified as indirect costs.
Diff: 2 Page Ref: 32
LO: 2-2
EOC: E2-11
AACSB: Use of Information Technology
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
18) Write a short essay and explain why it is important for managers to assign costs accurately to cost
objects. What are some of the challenges that managers face when they allocate costs to cost objects?
Answer: It is important for managers to assign costs accurately to cost objects because the data reported
and assigned to the product will not be accurate. Inaccurate product costs results in the inaccurate
profitability of different products. As a result, the manager may select to promote the unprofitable
product instead of the profitable product. If costs are consistently inaccurate it could affect the long-term
profit forecast of the product.
One challenge to a manager is the allocation of indirect administrative costs. Managers must decide
whether the administrative costs are calculated by the number or products produced or by the number of
administrative workers that produce the product.
Diff: 3 Page Ref: 31-32
LO: 2-2
EOC: E2-10
AACSB: Analytic Skills
Learning Outcome: MA-2: Describe the components of and prepare the four basic financial statements.
10
Copyright © 2014 Pearson Education, Inc.
19) Write a short essay and discuss some of the factors that affect the classification of direct and indirect
costs.
Answer: Some of the factors that affect the classification of direct and indirect costs include the
materiality of the cost in question, the available technology used to gather information, and the design of
the operations. In addition, managers must learn to make logical decisions based on the cost object
depending on the purpose of the cost because in certain cases, a cost could be classified as a direct cost or
an indirect cost.
Diff: 2 Page Ref: 32
LO: 2-2
EOC: E2-11
AACSB: Analytic Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
20) Write a brief summary and discuss why cost allocation is important to a manager. Discuss some of the
challenges that managers face when they allocate costs and discuss those factors that affect the
direct/indirect cost classification. Be specific.
Answer: Cost allocation is important to a manager because they must assign costs accurately to a cost
object. Managers are challenged to ensure costs are appropriately allocated to a product. For example, if
the product costs are not accurate, the true profitability to products is distorted. As a result, a manager
could sell a product that should not be sold because it is not profitable to the company.
Some of the factors that affect cost classification include the materiality of the cost in question, the amount
of available information-gathering technology, and the product design.
Diff: 3 Page Ref: 31
LO: 2-2
EOC: E2-10; E2-11
AACSB: Analytic Skills
Learning Outcome: MA-2: Discuss the legal, ethical, and business concepts that affect managerial accounting.
11
Copyright © 2014 Pearson Education, Inc.
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