Do You Understand?
Self Test

Product vs Period Costs

For the Multiple Choice Questions:
After answering the question, place or hover your mouse over your selection to see if it is correct or incorrect.
The correct answer will display the explanation. To see all the answers at once please click on the link at the bottom of this practice test.

Do you understand the terms and definitions?

1. Which of the following would most likely be included as part of
manufacturing overhead for a company that makes tables?
     a. amounts paid to a worker who paints the tableIncorrect
     b. commission paid to the employees who sells the tableIncorrect
     c. the cost of glue used in the tableHow much glue is used is not easily tracked, so it would be indirect materials, a part of manufacturing overhead. (a.) is direct labor, (b.) is a period and selling cost, (d.) is direct materials since it becomes part of the product and is easy to track how much is used
     d. the cost of the wood used in the tableIncorrect

2. Direct labor combined with manufacturing overhead is
     a. a period costIncorrect
     b. conversion costsThe definition of conversion costs is direct labor + manufacturing overhead. Manufacturing overhead is not associated with a period cost (a.) Prime and direct costs are the same thing, direct material + direct labor. (c. & d.)
     c. prime costsIncorrect
     d. a direct costIncorrect

3. Product costs are also called
     a. inventoriable costsBy definition, costs that become part of inventory are product costs and are inventoriable. Both c. and d. are period costs. A discretionary cost is almost always a period cost, most product costs are necessary to make the product.
     b. discretionary costsIncorrect
     c. selling costsIncorrect
     d. administrative costsIncorrect

4. Which of the following would be direct labor?
     a. custodians who work in the factoryIncorrect
     b. supervisors on the production lineIncorrect
     c. the worker who puts the materials together Direct labor touches the product to make it, which is what is occurring in c. All of the others are not directly involved in making the product and are considered part of manufacturing overhead because they are necessary costs at the plant.
     d. the quality inspectors of the finished productsIncorrect

5. Which of the following is not a manufacturing cost?
     a. indirect laborIncorrect
     b. inexpensive materials, like glue or tapeIncorrect
     c. depreciation on a delivery truckCosts related to delivering the product is a period, selling cost. Period costs are not a manufacturing cost. Manufacturing costs are product costs; direct material, direct labor and manufacturing overhead. All of the other answers are product costs and are part of manufacturing overhead which are included manufacturing costs.
     d. depreciation on manufacturing equipmentIncorrect

6. Which of the following would be considered a direct material?
     a. the plastic handle on the productA direct material becomes part of the product and the cost is easily traced to one product. (b. & d.) are manufacturing overhead. (b.) is an indirect material because they are not easily tracked as to how much is used to make one product. (c.) is a selling expense and a period cost.
     b. materials, like glue or tape, that are difficult to trackIncorrect
     c. depreciation on a delivery truckIncorrect
     d. salaries for the inspector of the completed productIncorrect

7. The distinction between direct and indirect costs depends on whether a cost
     a. is controllable or non controllableIncorrect
     b. can be conveniently traced to a productDirect costs by definition can be easily and conveniently traced to the product and indirect costs can not. Either can be controllable or non controllable (a.) Either can be paid weekly or monthly (d.) and both can be part of manufacturing costs (c.). Manufacturing costs include direct material and direct labor (which are direct) and manufacturing overhead (which is indirect).
     c. is included in manufacturing costsIncorrect
     d. is paid weekly or monthlyIncorrect

8. Which of the following would always be a period cost
     a. salary of the accountant at the plantIncorrect
     b. salary of the inspector of the finished productIncorrect
     c. salary of the janitor at the plantIncorrect
     d. salary of the warehouse workerThe salary of the warehouse worker is always expensed as incurred and is a period cost. The accountant and the janitor could be working at the plant which would be a product cost, manufacturing overhead, or at the corporate office, which would be a period cost (a. and c.). The inspector of finished goods works at the plant and all costs incurred at the plant is a product cost, manufacturing overhead. (b.)

Problems are not interactive. Write out the answer on paper
like you would for your test and check your answers after
completing all problems.

9. Write the definition of the following terms: Do not look at the answer until
you are finished writing the definition of each term. The ones that you can
not write out are the ones that you don’t really know.

Direct Labor:

Direct Material:

Manufacturing Overhead:







Do you know how to apply the terms?

1. Property taxes at the manufacturing plant is
     a. a direct costIncorrect
     b. a manufacturing overhead and period costIncorrect
     c. a manufacturing overhead and product costExpenses that occur at the manufacturing plant, other than direct material and direct labor are manufacturing overhead which are always product costs. b. and d. are incorrect because they include period costs and can not be manufacturing overhead. Manufacturing overhead is always an indirect cost (a.)
     d. a period cost - administrativeIncorrect

2. The cost of manufacturing finished goods inventory moves from the balance sheet
to the income statement when
     a. direct materials are purchasedIncorrect
     b. production is finishedIncorrect
     c. finished goods are soldCosts of manufacturing a product are product costs. They become part of inventory and when the inventory is sold they are expensed as cost of goods sold on the income statement. Purchasing direct materials is the asset inventory - raw materials (a). Finished production is the asset inventory - finished goods (b). Moving goods from one work station to the other means they are in process, which is the asset inventory - work in process (d.)
     d. goods are moved from one work station to anotherIncorrect

3. Product costs will be found on which financial statement(s)?
     a. income statementIncorrect
     b. balance sheetIncorrect
     c. both a. and b.Product costs become inventory and inventory is on the balance sheet until it is sold and then it is on the income statement as cost of goods sold when the inventory is sold. It is reported on both the income statement and balance sheet.
     d. none of the aboveIncorrect

4. Which of the following would need to be allocated to a product?
     a. direct materialIncorrect
     b. direct laborIncorrect
     c. all manufacturing product costsIncorrect
     d. indirect manufacturing overhead costsManufacturing overhead is indirect because it can not be directly traced to an individual product. Since you can not tell how much is used to make each product, a part of the total cost must be allocated to each product. Direct material and direct labor are easy to determine how much is used to make one product (a. & b.) so the costs are not allocated. (c.) is not correct because it includes a. and b also.

5. Why is it important to determine if a cost is a product cost or period cost?
     a. period costs are always more expensive than product costsIncorrect
     b. product costs are expensed when incurredIncorrect
     c. product costs first become part of inventory and then are expensed
          when they are soldIt is important to determine which type of cost it is because product costs are inventoriable and are not expensed until the inventory is sold in order to properly match revenues with expenses. Period costs are expensed in the period they are incurred as a recurring cost of doing business. (c) is the only correct statement.

     d. period costs are expensed when they are soldIncorrect

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