Chapter 2: Basic Cost Management Concepts and Accoun ng for Mass Customiza on Opera ons

Instruc ons: Read the following ques ons carefully and choose the best answer from the op ons provided. Select
the le&er corresponding to your chosen answer. There is only one correct answer for each ques on.

1. What does the term "cost" refer to in the context of managerial accoun ng?
A) The amount of money a company generates from its opera ons.
B) The value of a product or service as perceived by customers.
C) The expenses incurred in producing goods or providing services.
D) The price at which a product is sold in the market.

Answer: C) The expenses incurred in producing goods or providing services.

Explana on: In the context of managerial accoun ng, the term "cost" refers to the expenses incurred by a company in the process of producing
goods, offering services, or conduc ng business opera ons. These expenses include direct costs (e.g., raw materials, labor) and indirect costs
(e.g., overhead, administra ve expenses) associated with crea ng and delivering products or services.

2. Which category includes costs that are directly associated with the produc on of goods and are treated as
assets un l the goods are sold?
A) Period Costs C) Product Costs
B) Expenses D) Variable Costs

Answer: C) Product Costs

Explana on: Product costs are costs directly linked to the produc on of goods. They include direct materials, direct labor, and manufacturing
overhead. Product costs are ini ally recorded as assets on the balance sheet and are only expensed as cost of goods sold when the related
products are sold. This reflects the matching principle, which aims to match expenses with the revenues they generate.

3. What are "Period Costs" in accoun ng?

A) Costs associated with producing goods and services.
B) Costs that are incurred over a specific accoun ng period and are not ed to produc on.
C) Costs that are directly a&ributable to a specific product.
D) Costs that are fixed and do not change with produc on levels.

Answer: B) Costs that are incurred over a specific accoun ng period and are not ed to produc on.
Explana on: Period costs are costs that are not ed to produc on and are incurred over a specific accoun ng period. They include items such as
selling and marke ng expenses, administra ve salaries, and office rent. Unlike product costs, period costs are expensed in the period they are
incurred rather than being treated as assets and then matched with revenue when products are sold.

4. Which financial statement primarily presents the total amount of product costs associated with goods sold
during a specific period?
A) Balance Sheet C) Cash Flow Statement
B) Income Statement D) Statement of Retained Earnings

Answer: B) Income Statement

Explana on: The Income Statement (also known as the Profit and Loss Statement) presents the revenues, expenses, and resul ng net income or
net loss for a specific period. It includes the total amount of product costs (such as direct materials, direct labor, and manufacturing overhead)
associated with goods sold, as well as other opera ng expenses. The net income or net loss represents the difference between total revenues
and total expenses.

5. What is the role of period costs in published financial statements?

A) To determine the profitability of the company.
B) To calculate the value of the company's assets.
C) To es mate the company's tax liability.
D) To provide insights into the opera ng expenses of the company.

Answer: D) To provide insights into the opera ng expenses of the company.

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Chapter 2: Basic Cost Management Concepts and Accoun ng for Mass Customiza on Opera ons

Explana on: Period costs, which include selling and marke ng expenses, administra ve expenses, and other non-produc on-related costs, are
directly expensed on the Income Statement in the period they are incurred. They provide insights into the opera ng expenses of the company
and play a crucial role in calcula ng the company's net income. By subtrac ng these expenses from the company's revenues, the Income
Statement reflects the company's profitability and overall financial performance for the period.

6. What is the primary characteris c of mass customiza on in manufacturing?

A) Producing a limited number of standardized products.
B) Customizing products to individual customer specifica ons while maintaining efficiency.
C) Employing a flexible workforce to handle changing produc on needs.
D) Using interchangeable parts in the assembly process.

Answer: B) Customizing products to individual customer specifica ons while maintaining efficiency.
Explana on: Mass customiza on is a manufacturing approach that combines the advantages of customiza on with the efficiencies of mass
produc on. It involves tailoring products to meet individual customer requirements while maintaining efficiency in the produc on process. This
approach allows companies to offer a variety of product op ons to customers without sacrificing economies of scale.

7. Which type of manufacturing opera on involves producing a wide variety of products in small quan es, oBen
customized to meet individual customer preferences?
A) Job Order Manufacturing C) Batch Manufacturing
B) Con nuous Manufacturing D) Repe ve Manufacturing

Answer: A) Job Order Manufacturing

Explana on: Job Order Manufacturing involves producing custom or unique products in small quan es, oBen tailored to the specific
requirements of individual customers. Each job is treated as a separate project, and produc on processes are flexible to accommodate
customiza on. This type of manufacturing is common for products like custom furniture, specialized machinery, and made-to-order products.

8. Which of the following is an example of a variable manufacturing cost?

A) Factory Rent C) Direct Materials
B) Supervisory Salaries D) Deprecia on of Produc on Equipment

Answer: C) Direct Materials

Explana on: Direct materials are variable manufacturing costs because they vary directly with the level of produc on. As produc on increases,
the amount of direct materials used also increases propor onally. Direct materials are the raw materials and components that go into the
produc on of goods.

9. What do fixed manufacturing costs refer to?

A) Costs that change in propor on to the level of produc on.
B) Costs that remain constant regardless of changes in produc on volume.
C) Costs incurred for marke ng and sales ac vi es.
D) Costs associated with research and development.

Answer: B) Costs that remain constant regardless of changes in produc on volume.

Explana on: Fixed manufacturing costs are costs that remain unchanged regardless of varia ons in the level of produc on. These costs include
items like factory rent, machinery deprecia on, and supervisory salaries. Unlike variable manufacturing costs, fixed manufacturing costs do not
change as produc on levels fluctuate.

10. What is the primary purpose of the Schedule of Cost of Goods Manufactured?
A) To calculate the net income of a manufacturer.
B) To determine the cost of goods sold during a specific period.
C) To summarize the direct materials, direct labor, and manufacturing overhead costs incurred during the
produc on process.
D) To list the expenses incurred for selling and marke ng ac vi es.

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Answer: C) To summarize the direct materials, direct labor, and manufacturing overhead costs incurred during the
produc on process.
Explana on: The Schedule of Cost of Goods Manufactured provides a detailed breakdown of the costs incurred in the produc on process,
including direct materials, direct labor, and manufacturing overhead. It summarizes these costs to determine the total cost of goods that have
been completed during a specific period and are ready to be sold.

11. During the produc on process, a manufacturer incurred direct materials costs of $20,000, direct labor costs of
$15,000, and manufacturing overhead costs of $10,000. What is the total cost of goods manufactured?
A) $20,000 B) $25,000 C) $45,000 D) $10,000

Answer: C) $45,000
Explana on: The total cost of goods manufactured is the sum of direct materials, direct labor, and manufacturing overhead costs. Total Cost of
Goods Manufactured = Direct Materials + Direct Labor + Manufacturing Overhead = $20,000 + $15,000 + $10,000 = $45,000.

Based on the informa on provided, what does the Schedule of Cost of Goods Sold help determine?

12. A manufacturing company produced 10,000 units of a product during the year. The beginning inventory of
finished goods was 2,000 units, and the ending inventory was 3,000 units. The direct materials cost per unit
was $20, direct labor cost per unit was $15, and manufacturing overhead cost per unit was $10.
A) The total revenue generated from sales during the year.
B) The cost of goods that were completed during the year and ready for sale.
C) The total opera ng expenses incurred by the company.
D) The value of the beginning inventory of finished goods.

Answer: B) The cost of goods that were completed during the year and ready for sale.
Explana on: The Schedule of Cost of Goods Sold helps determine the cost of goods that were completed during the year and are ready for sale.
It calculates the cost of goods sold by taking into account the beginning inventory, adding the cost of goods manufactured during the year, and
then subtrac ng the ending inventory. This calcula on provides the total cost of goods sold during the period.

13. During the produc on process, a manufacturer incurred $15,000 in direct materials costs, $10,000 in direct
labor costs, and $5,000 in manufacturing overhead costs. If the beginning work in process inventory was
$3,000 and the ending work in process inventory was $2,000, what is the cost of goods manufactured?
A) $27,000 B) $30,000 C) $31,000 D) $20,000

Answer: C) $31,000
Explana on: Cost of Goods Manufactured is calculated as follows: Cost of Goods Manufactured = Beginning WIP Inventory + Total
Manufacturing Costs - Ending WIP Inventory Cost of Goods Manufactured = $3,000 + ($15,000 + $10,000 + $5,000) - $2,000 = $31,000

14. A manufacturer's Income Statement for the year shows total revenues of $150,000 and total opera ng
expenses of $80,000. If the beginning inventory of finished goods was $10,000 and the ending inventory of
finished goods was $15,000, what is the cost of goods sold?
A) $65,000 B) $70,000 C) $75,000 D) $60,000

Answer: B) $70,000
Total Revenues - Total Opera ng Expenses ± Net Income Cost of Goods Sold = $150,000 - $80,000 ± Net Income Since Net Income is not
provided, we'll assume it's not given and the calcula on becomes: Cost of Goods Sold = $70,000 (assuming a Net Income of $0)

15. A manufacturer has the following informa on for the year:

Direct materials used: $50,000
Direct labor: $30,000
Manufacturing overhead: $20,000

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Beginning work-in-process inventory: $5,000

Ending work-in-process inventory: $8,000
Calculate the cost of goods manufactured.

A) $95,000 B) $97,000 C) $93,000 D) $88,000

Answer: B) $97,000
Explana on: Cost of Goods Manufactured = Direct Materials + Direct Labor + Manufacturing Overhead + Beginning WIP - Ending WIP Cost of
Goods Manufactured = $50,000 + $30,000 + $20,000 + $5,000 - $8,000 = $97,000

16. ABC Manufacturing incurred the following costs during the year:

Direct Materials Purchased: $150,000

Direct Materials Used: 205,000
Direct Labor: $100,000
Manufacturing Overhead: $75,000
Beginning Work in Process Inventory: $20,000
Ending Work in Process Inventory: $25,000
What is the cost of goods manufactured for ABC Manufacturing?

A) $250,000 B) $300,000 C) $400,000 D) $375,000

Answer: D) $375,000
Explana on: The cost of goods manufactured is calculated by adding the direct materials, direct labor, and manufacturing overhead to the
beginning work in process inventory, and then subtrac ng the ending work in process inventory. Calcula on: $205,000 (Direct Materials) +
$100,000 (Direct Labor) + $75,000 (Manufacturing Overhead) + $20,000 (Beginning WIP) - $25,000 (Ending WIP) = $375,000.

17. Why is iden fying an organiza on's cost drivers important?

A) It helps reduce fixed costs.
B) It increases overall produc on costs.
C) It allows for effec ve cost alloca on and control.
D) It eliminates variable costs.

Answer: C) It allows for effec ve cost alloca on and control.

Explana on: Iden fying cost drivers is crucial because it enables organiza ons to allocate costs accurately to products, services, or ac vi es. By
understanding which factors or ac vi es cause costs to vary, organiza ons can make informed decisions about resource alloca on, pricing
strategies, and process improvements. This leads to be&er cost control and efficient use of resources.

18. How does iden fying cost drivers impact decision-making in an organiza on?
A) It reduces the need for budge ng and forecas ng.
B) It limits the organiza on's ability to adapt to changing market condi ons.
C) It enhances the ability to make informed decisions about resource alloca on and pricing.
D) It only affects short-term opera onal decisions.

Answer: C) It enhances the ability to make informed decisions about resource alloca on and pricing.
Explana on: Iden fying cost drivers provides valuable insights into the factors that influence an organiza on's costs. This informa on is crucial
for making informed decisions about how to allocate resources, set prices, and manage opera ons effec vely. By understanding which ac vi es
or variables impact costs the most, organiza ons can op mize their strategies and align their decisions with their financial goals.

19. Which of the following cost behaviors is characterized by a constant cost per unit but varying total costs as
ac vity levels change?
A) Fixed Cost B) Variable Cost C) Mixed Cost D) Step Cost

Answer: B) Variable Cost

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Explana on: Variable costs remain constant on a per-unit basis but change in total as the level of ac vity changes. For example, the cost of
direct materials for producing a unit of a product is typically considered a variable cost. As more units are produced, the total cost of direct
materials will increase propor onally.

20. Which type of cost behavior involves costs that remain constant in total within a relevant range of ac vity
levels but change on a per-unit basis?
A) Fixed Cost B) Variable Cost C) Mixed Cost D) Step Cost

Answer: A) Fixed Cost

Explana on: Fixed costs remain constant in total within a certain range of ac vity levels. They do not change as the level of produc on or
ac vity fluctuates. However, on a per-unit basis, fixed costs will decrease as more units are produced. Examples of fixed costs include rent,
insurance, and salaries of permanent staff.

21. ABC Company produces widgets. Last month, it produced 1,000 widgets and incurred $5,000 in direct
materials costs. This month, it produced 1,500 widgets and incurred $7,500 in direct materials costs. What
type of cost behavior is represented by the direct materials costs?
A) Fixed Cost B) Variable Cost C) Mixed Cost D) Step Cost

Answer: B) Variable Cost

Explana on: In this scenario, the direct materials costs change in direct propor on to the level of produc on. As the number of widgets
produced increases, the total direct materials costs also increase. This is a characteris c of variable cost behavior.

22. ABC Company produces widgets. The variable cost per widget is $2. If the company produces 1,000 widgets,
what will be the total variable cost?
A) $500 B) $1,000 C) $2,000 D) $4,000

Answer: C) $2,000
Explana on: Total variable cost is calculated by mul plying the variable cost per unit by the number of units produced. In this case, Total
Variable Cost = $2 (Variable Cost per Widget) × 1,000 (Number of Widgets) = $2,000.

23. XYZ Manufacturing has fixed costs of $10,000 per month. If the company produces 500 units in a month, what
will be the fixed cost per unit?
A) $5 B) $10 C) $20 D) $50

Answer: C) $20
Explana on: Fixed cost per unit is calculated by dividing the total fixed costs by the number of units produced. In this case, Fixed Cost per Unit =
$10,000 (Fixed Costs) ÷ 500 (Number of Units) = $20.

24. Which type of cost can be traced directly to a specific cost object, such as a product, department, or project?
A) Indirect Cost C) Uncontrollable Cost
B) Controllable Cost D) Direct Cost

Answer: D) Direct Cost

Explana on: Direct costs are costs that can be traced directly to a specific cost object, such as a product, department, or project. These costs are
incurred specifically for that cost object and can be easily allocated to it. Examples of direct costs include direct materials and direct labor
associated with producing a product.

25. What is the primary characteris c of an uncontrollable cost?

A) It can be directly traced to a specific cost object.
B) It can be managed and influenced by a specific manager.
C) It remains constant within a relevant range of ac vity levels.
D) It cannot be easily changed or managed by a specific manager.

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Chapter 2: Basic Cost Management Concepts and Accoun ng for Mass Customiza on Opera ons

Answer: D) It cannot be easily changed or managed by a specific manager.

Explana on: Uncontrollable costs are costs that a specific manager or department cannot easily change or influence through their decisions and
ac ons. These costs are oBen determined by factors beyond the control of the manager, such as external market condi ons or corporate-wide
decisions. Uncontrollable costs require management to focus on other aspects of cost control and efficiency improvement.

26. ABC Company is considering two investment op ons: Op on A and Op on B. Op on A requires an ini al
investment of $10,000 and is expected to generate $15,000 in returns. Op on B requires an ini al investment
of $8,000 and is expected to generate $12,000 in returns. What is the opportunity cost of choosing Op on B
over Op on A?
A) $2,000 B) $3,000 C) $5,000 D) $10,000

Answer: B) $3,000
Explana on: The opportunity cost of choosing Op on B over Op on A is the difference in returns between the two op ons. Opportunity Cost =
Return of Op on A - Return of Op on B = $15,000 - $12,000 = $3,000. Therefore, the opportunity cost is $3,000.

27. XYZ Company is considering producing a new product. The direct materials cost per unit is $20, and the direct
labor cost per unit is $10. The fixed manufacturing overhead is $5,000 per month. What is the average cost per
unit if 500 units are produced?
A) $25 B) $35 C) $40 D) $15

Answer: C) $40
Explana on: Average Cost per Unit = (Total Cost / Number of Units Produced) = $20 + $10 + ($5,000 / 500) = $40. Therefore, the average cost
per unit is $40.

28. ABC Manufacturing incurred an out-of-the-pocket cost of $2,000 for purchasing raw materials. Addi onally, it
faced an opportunity cost of $1,000 by not choosing an alterna ve supplier with a lower price. What is the
total cost incurred?
A) $3,000 B) $1,000 C) $2,000 D) $2,500

Answer: A) $3,000
Explana on: The total cost incurred includes both out-of-the-pocket cost and opportunity cost. Total Cost = Out-of-the-Pocket Cost +
Opportunity Cost = $2,000 + $1,000 = $3,000.

29. A manufacturing process incurred a fixed cost of $10,000 and variable costs of $8,000 to produce 500 units. If
the produc on volume increases to 600 units, what is the differen al cost of producing the addi onal 100
units?
A) $10,000 B) $8,000 C) $2,000 D) $1,600

Answer: D) $1,600
Explana on: Differen al Cost is the addi onal cost incurred when choosing one alterna ve over another. In this case, the addi onal 100 units
incur variable costs of $5 per unit ($8,000 / 500 units) × 100 units = $1,600. Therefore, the differen al cost is $1,600.

30. Company A is considering two investment projects: Project X and Project Y. Project X requires an ini al
investment of $50,000 and is expected to generate $70,000 in returns. Project Y requires an ini al investment
of $40,000 and is expected to generate $60,000 in returns. What is the opportunity cost of choosing Project Y
over Project X?
A) $10,000 B) $20,000 C) $30,000 D) $50,000

Answer: A) $10,000
Explana on: The opportunity cost of choosing Project Y over Project X is the difference in returns between the two projects. Opportunity Cost =
Return of Project X - Return of Project Y = $70,000 - $60,000 = $10,000. Therefore, the opportunity cost is $10,000.

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31. A company incurred an out-of-the-pocket cost of $5,000 to hire a consultant for a project. Addi onally, it faced
an opportunity cost of $2,000 by not alloca ng resources to another project. What is the total cost incurred?
A) $2,000 B) $5,000 C) $7,000 D) $3,000

Answer: C) $7,000
Explana on: The total cost incurred includes both out-of-the-pocket cost and opportunity cost. Total Cost = Out-of-the-Pocket Cost +
Opportunity Cost = $5,000 + $2,000 = $7,000.

32. XYZ Company has incurred a sunk cost of $10,000 for research and development. What is the impact of this
sunk cost on future decision-making?
A) It affects future costs and should be considered in decision-making.
B) It can be recovered by choosing an alterna ve op on.
C) It is irrelevant for future decision-making.
D) It influences the opportunity cost of future decisions.

Answer: C) It is irrelevant for future decision-making.

Explana on: A sunk cost is a cost that has already been incurred and cannot be changed. It is not relevant for future decision-making as it does
not impact future costs or benefits.

33. A company's produc on process incurs a fixed cost of $15,000 and a variable cost of $8 per unit. If the
company produces 1,000 units, what is the average cost per unit?
A) $8 B) $15 C) $23 D) $7

Answer: C) $23
Explana on: Average Cost per Unit = (Total Cost / Number of Units Produced) = ($15,000 + ($8 × 1,000)) / 1,000 = $23. Therefore, the average
cost per unit is $23.

34. A manufacturer produces 500 units at a total cost of $15,000. If it produces an addi onal 100 units, the total
cost becomes $18,000. What is the marginal cost of producing the addi onal 100 units?
A) $3,000 B) $30 C) $2,000 D) $18

Answer: B) $30
Explana on: Marginal Cost is the addi onal cost incurred when producing one more unit. Marginal Cost = Change in Total Cost / Change in Units
Produced = ($18,000 - $15,000) / 100 = $30. Therefore, the marginal cost is $30.

35. A company's produc on process incurred an out-of-the-pocket cost of $2,000 for raw materials. Addi onally, it
faced an opportunity cost of $1,000 for not u lizing its resources for another project. What is the total cost
incurred?

A) $2,000 B) $3,000 C) $1,000 D) $4,000

Answer: B) $3,000
Explana on: The total cost incurred includes both out-of-the-pocket cost and opportunity cost. Total Cost = Out-of-the-Pocket Cost +
Opportunity Cost = $2,000 + $1,000 = $3,000.

36. A company has incurred a sunk cost of $8,000 for training its employees. How does this sunk cost affect future
decision-making?

A) It can be recovered by choosing an alterna ve op on.

B) It influences the opportunity cost of future decisions.
C) It is irrelevant for future decision-making.
D) It is considered as a differen al cost in future decisions.

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Answer: C) It is irrelevant for future decision-making.

Explana on: A sunk cost is a cost that has already been incurred and cannot be changed. It is not relevant for future decision-making as it does
not impact future costs or benefits.

37. A company produces 300 units at a total cost of $12,000. If it produces an addi onal 50 units, the total cost
becomes $13,000. What is the average cost per unit for the addi onal 50 units?

A) $25 B) $10 C) $20 D) $26

Answer: C) $20
Explana on: Average Cost per Unit = Total Cost / Number of Units Produced = ($13,000 - $12,000) / 50 = $1,000 / 50 = $20. Therefore, the
average cost per unit is $20.

-End of Examination-
Well done! You have reached the end of the examination. Your hard work and focus are greatly appreciated. Take a moment to
breathe and congratulate yourself on completing this challenge.

Thank you for your dedication and participation!

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