7.1 Cost Management Terminology Flashcards
The terms direct cost and indirect cost are commonly used in accounting. A particular cost might be considered a direct cost of a manufacturing department but an indirect cost of the product produced in the manufacturing department. Classifying a cost as either direct or indirect depends upon
A. Whether the cost is expensed in the period in which it is incurred.
B. Whether an expenditure is unavoidable because it cannot be changed regardless of any action taken.
C. The cost object to which the cost is being related.
D. The behavior of the cost in response to volume changes.
C. The cost object to which the cost is being related.
A direct cost can be specifically associated with a single cost object in an economically feasible way. An indirect cost cannot be specifically associated with a single cost object. Thus, the specific cost object influences whether a cost is direct or indirect. For example, a cost might be directly associated with a single plant. The same cost, however, might not be directly associated with a particular department in the plant.
A painting contractor maintains a job-order cost system. Job costs are accumulated by tracking the actual cost of paint and other materials used on each job, as well as the actual cost of wages earned by the painters on each job. In addition, overhead is applied to each job by using a predetermined rate based on the actual painters’ wages. A painter earned $168 today by working on Job 08-45. In computing prime cost and conversion cost for Job 08-45, how would the wages earned today by the painter be classified?
A. As a component of prime cost but not as a component of conversion cost.
B. As a component of both prime and conversion cost.
C. As a component of conversion cost but not as a component of prime cost.
D. As a component of neither prime cost nor conversion cost.
B. As a component of both prime and conversion cost.
Manufacturing costs are often grouped into the following classifications: prime cost, which equals direct materials plus direct labor (i.e., those costs directly attributable to a product), and conversion cost, which equals direct labor plus manufacturing overhead (i.e., the costs of converting raw materials into the finished product). The wages earned by a painter working for a painting contractor are thus properly classified as both a prime cost and a conversion cost.
Inventoriable costs
A. Include only the prime costs of manufacturing a product.
B. Include only the conversion costs of manufacturing a product.
C. Are expensed when products become part of finished goods inventory.
D. Are regarded as assets before the products are sold.
D. Are regarded as assets before the products are sold.
Inventoriable (product) costs include all costs necessary for good production. These include direct materials and conversion costs (direct labor and overhead). Inventoriable costs are treated as assets until the products are sold because they represent future economic benefits. These costs are expensed at the time of sale.
Which of the following is a period cost rather than a product cost of a manufacturer?
A. Direct materials.
B. Variable overhead.
C. Fixed overhead.
D. Abnormal spoilage.
D. Abnormal spoilage.
Materials, labor, and overhead (both fixed and variable) are examples of product costs. Abnormal spoilage is an example of a period cost. Abnormal spoilage is not inherent in a production process and should not be categorized as a product cost. Abnormal spoilage should be charged to a loss account in the period that detection of the spoilage occurs.
Cost drivers are
A. Activities that cause costs to increase as the activity increases.
B. Accounting techniques used to control costs.
C. Accounting measurements used to evaluate whether or not performance is proceeding according to plan.
D. A mechanical basis, such as machine hours, computer time, size of equipment, or square footage of factory, used to assign costs to activities.
A. Activities that cause costs to increase as the activity increases.
A cost driver is “a measure of activity, such as direct labor hours, machine hours, beds occupied, computer time used, flight hours, miles driven, or contracts, that is a causal factor in the incurrence of cost to an entity” (IMA). It is a basis used to assign costs to cost objects.
A cost that always can be directly traced to a cost object is
A. A prime cost.
B. A conversion cost.
C. A variable cost.
D. An indirect cost.
A. A prime cost.
Prime costs are direct materials and direct labor. They are directly identifiable elements of production costs and are directly traceable to the product.
In practice, items such as wood screws and glue used in the production of school desks and chairs would most likely be classified as
A. Period costs.
B. Factory overhead.
C. Direct materials.
D. Direct labor
B. Factory overhead.
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.
