MBA 2019 – MAC Session 2 Practice Questions

Question 1 – Product vs Period Costs

A product cost is also known as an inventoriable cost. Classify the following costs as either product (inventoria-
ble) costs or period (non-inventoriable) costs in a manufacturing company

Product
(Inventoriable) Cost Period Cost
1. The cost of the memory chips used in a radar set
2. Factory heating costs ...................................................................
3. Factory equipment maintenance costs .........................................
4. Training costs for new administrative employees
5. The cost of the solder that is used in assembling the radar sets ..
6. The travel costs of the company’s salespersons
7. Wages and salaries of factory security personnel
8. The cost of air-conditioning
executive offices ......................................................................
9. Wages and salaries in the department that handles billing customers

10. Depreciation on the equipment in the fitness room used by factory

workers ....................................................................................
11. Telephone expenses incurred by factory management ................
12. The costs of shipping completed radar sets to customers............
13. The wages of the workers who assemble the radar sets ..............
14. The president’s salary ..................................................................
15. Health insurance premiums for factory personnel.......................

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Question 2 – Direct vs Indirect costs

Classify the following costs as direct or indirect in relation to the cost object.

Direct Indirect
Cost Cost Object Cost Cost
1. The salary of the head chef The hotel’s restaurant
2. The salary of the head chef A particular restaurant
customer
3. Room cleaning supplies A particular hotel guest
4. Flowers for the reception A particular hotel guest
desk
5. The wages of the doorman A particular hotel guest
6. Room cleaning supplies The housecleaning de-
partment
7. Fire insurance on the hotel The hotel’s gym
building
8. Towels used in the gym The hotel’s gym
Question 3 – Fixed/Variable and Direct/Indirect

Various costs associated with manufacturing operations are given below. Classify each as either being fixed or
variable with respect to the number of units produced and sold. Also indicate whether each cost would typically
be treated as a direct cost or an indirect cost with respect to units of product.

To Units of Prod-
Cost Behavior uct
Cost Item Variable Fixed Direct Indirect
1. Plastic washers used to assemble autos* .................
2. Production superintendent’s salary ..........................
3. Wages of workers who assemble a product.............
4. Electricity to run production equipment ..................
5. Janitorial salaries .....................................................
6. Clay used to make bricks .........................................
7. Rent on a factory building .......................................
8. Wood used to make skis ..........................................
9. Screws used to make furniture*...............................
10. A supervisor’s salary ...............................................
11. Cloth used to make shirts.........................................
12. Depreciation of cafeteria equipment........................
13. Glue used to make textbooks* .................................
14. Lubricants for production equipment ......................
15. Paper used to make textbooks .................................

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Question 4 - Fixed/Variable and Direct/Indirect

The Central Area Well Baby Clinic provides a variety of health services to newborn babies and their parents. The clinic is organized
into a number of departments, one of which is the Immunization Centre. Listed below are a number of costs of the clinic and the Im-
munization Centre.

For each cost listed, indicate whether it is a direct or indirect cost of the Immunization Centre, whether it is a direct or indirect cost of
immunizing particular patients, and whether it is variable or fixed with respect to the number of immunizations administered.

Variable or Fixed
with Respect to the
Direct or Indirect Direct or Indirect Number of
Cost of the Immun- Cost of Particular Immunizations
ization Center Patients Administered
Item Description Direct Indirect Direct Indirect Variable Fixed
a. The salary of the head nurse in the Immunization
Center .........................................................................
b. Costs of incidental supplies consumed in the Immun-
ization Center such as paper towels ...........................
c. The cost of lighting and heating the Immunization
Center .........................................................................
d. The cost of disposable syringes used in the Immun-
ization Center .............................................................
e. The salary of the Central Area Well-Baby Clinic’s
Information Systems manager ....................................
f. The costs of mailing letters soliciting donations to
the Central Area Well-Baby Clinic ............................
g. The wages of nurses who work in the Immunization
Center* .......................................................................
 h. The cost of medical malpractice insurance for the
Central Area Well-Baby Clinic ..................................
i. Depreciation on the fixtures and equipment in the
Immunization Center..................................................

Question 5 – Comprehensive
Sandra Freestone has developed a new product that she has decided to produce andmarket. To proceed with this project, Sandra will
quit her present job, which pays $3,000 a month. Sandra has found a small building to rent for $500 a month that will house the pro-
duction facilities. One major piece of equipment that will be used to manufacture the product will be rented for $100 a month. Sandra
purchased all of the other needed tools five years ago for $1,500. Material costs to make the product are estimated at $3 per unit.
Monthly advertising costs for the product are estimated at $600.

Required:
Complete the chart below by placing an "X" under each heading that helps to identify the cost involved. There can be "X"s placed un-
der more than one heading for a single cost; e.g., a cost might be a sunk cost, an overhead cost, and a product cost. There would be an
"X" placed under each of these headings opposite the cost.

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*Between the alternatives of producing and not producing the product.