ACC 203: Chapter 2

Question 1

What are the three most common business sectors?

Answer 1

Service, Merchandising, and Manufacturing

Question 2

Service Companies sell _____ ______. and generally have no ________.

Answer 2

Intangible Services, inventory

Question 3

Merchandising companies resell _____ products bought from ______ and _____. They carry a substantial amount of _______.

Answer 3

tangible, manufacturers, suppliers, inventory

Question 4

What do Retailers do?

Answer 4

Sell to consumers

Question 5

What do Wholesalers do?

Answer 5

Act as the “middlemen”. They buy products in bulk from manufacturers, mark up prices, and then sell those products to retailers.

Question 6

For merchandising companies, the cost of inventory includes:

Answer 6

The cost of goods, and all costs necessary to get the merchandise in place and ready to sell, such as freight-in costs and any import duties or tariffs paid on merchandise purchased from overseas suppliers.

Question 7

What do Manufacturing Companies do?

Answer 7

Use labor, plant, and equipment to convert raw materials into finished products.

Question 8

What are the three types of inventory that Manufacturers carry (name and define them)?

Answer 8

Raw Materials Inventory: All raw materials that will be used in manufacturing.
Work in Process Inventory: Goods partway through the manufacturing process but not yet complete.
Finished Goods Inventory: Completed goods that have not yet been sold.

Question 9

Are all companies strictly service, merchandising, or manufacturing firms? (Yes or No?)

Answer 9

No

Question 10

What is the value chain? (Define, and Name the Steps)

Answer 10

The activities that add value to the company’s products and services.

Research and Development (R&D), Design, Production or Phases, Marketing, Distribution, Customer Service

Question 11

What is Research and Development (R&D) (The Value Chain) ?

Answer 11

Researching and developing new or improved products and services and the processes for producing them.

Question 12

What is Design (The Value Chain)?

Answer 12

Detailed engineering of products and services
and the processes for producing them.
Ex: Rearrangement of production process to accommodate new product.

Question 13

What is Production and Purchases? (The Value Chain)

Answer 13

Resources used by manufacturers to produce a product or merchandising companies purchasing finished merchandise for resale.

Question 14

Marketing (The Value Chain)

Answer 14

Promotion and Advertising of products or services. The goal is to create customer demand for products and services.

Question 15

Distribution

Answer 15

Delivery of products or services to customers.

Question 16

Customer Service (The Value Chain)

Answer 16

Support provided for customers after the sale.
Ex: Toyota and its warranties. Warranty repairs.

Question 17

What is a Cost Object?

Answer 17

Anything for which managers want to know the cost.

Question 18

What are the two categories that Costs can be classified as?

Answer 18

Direct or Indirect Costs

Question 19

What is a Direct Cost?

Answer 19

A cost that can be traced to the cost object, meaning the company can readily identify or associate the cost with the cost object. (Direct materials or direct labor)

Question 20

What is an Indirect Cost?

Answer 20

A cost that relates to the cost object but cannot be traced specifically to it. (MOH)

Question 21

Whether a cost is direct or indirect depends on the ______ ______.

Answer 21

Cost Object

Question 22

What does it mean to assign/allocate a direct/indirect cost to a cost object?

Answer 22

Attaching a cost to the cost object

Question 23

Which is more precise, tracing direct costs, or allocating indirect costs to cost objects?

Answer 23

Tracing direct costs.

Question 24

Define Total Cost

Answer 24

Includes the costs of all resources used throughout the value chain.

Question 25

Define Product Costs

Answer 25

The costs incurred by manufacturers to produce their products or incurred by merchandisers to purchase their products.

Question 26

Define Period Costs

Answer 26

The costs incurred by the company that do not get treated as inventory but rather are expensed immediately in the period in which they are incurred.

Ex: AKA operating expenses, selling, general, and admin expenses (SG&A). (Essentially costs of operating the business over a specific period of time.), Freight On (The cost of freight on shipments to customers.)

Question 27

For merchandising companies, product costs include…

Answer 27

what the company paid for its store merchandise, plus freight-in, and import duties.

Question 28

Manufacturing Company’s product costs include:

Answer 28

Direct Materials (DM)
Direct Labor (DL)
Manufacturing Overhead (MOH)

Question 29

What are direct materials (DM)? (Manufacturing Product Costs)

Answer 29

Primary materials that become a physical part of the finished product.
Ex: Toyota. Steel, Tires, Engines, Upholstery, and so forth.

Question 30

What is direct labor (DL) (manufacturing product costs)

Answer 30

The costs of compensating employees who physically convert raw material into the company’s products.
Ex: Toyota. Wages and benefits of machine operators and technicians who build and assemble the vehicles. Can trace the time each of these employees spends working on specific units or batches of vehicles; thus the cost of this labor is considered a direct cost of the vehicles.

Question 31

What is manufacturing overhead? (manufacturing product costs)

Answer 31

• Includes all manufacturing costs other than direct materials and direct labor. All indirect manufacturing costs.
• Referred to as MOH because all of these costs relate to the factory.

Question 32

What are the three components of MOH? (manufacturing product costs, MOH)

Answer 32

Indirect Materials, Indirect Labor, Other Indirect Manufacturing Costs

Question 33

What is indirect materials? (Manufacturing product costs, MOH)

Answer 33

Include materials used in the manufacturing plant that are not easily traced to individual units. Also includes any physical components of the finished product that are very inexpensive may be treated as part of manufacturing overhead.

Ex: Janitorial supplies, oil, lubricants for machines.
Ex: Toyota, invoice sticker placed on each vehicle’s window bc it costs like 10 cents compared to the rest of materials traced to the product.

Question 34

What is indirect labor (Manufacturing Product Costs) (MOH)

Answer 34

Includes the cost of compensating all employees working in the manufacturing plant other than directly converting the raw materials into the finished product.

Ex: Toyota, indirect labor includes the salaries, wages and benefits of plant forklift operators, plant security officers, plant janitors and plant supervisors.

Question 35

What are other indirect manufacturing costs? (Manufacturing Product Cost) (MOH)

Answer 35

Include such manufacturing-related costs as depreciation on the plant and plant equipment, plant property taxes, plant insurance, plant repairs and maintenance, and plant utilities.

Question 36

What are prime costs

Answer 36

Prime Costs: Refer to the combination of direct materials and direct labor.

Question 37

What are conversion costs

Answer 37

Refer to the combination of direct labor and manufacturing overhead. These are the costs of converting raw materials into finished goods.

Question 38

What is the difference between Raw Materials, Direct Materials, and Indirect Materials?

Answer 38

Raw materials are materials that have not yet been used. Once used they can be classified as direct or indirect. Direct materials are the primary physical components of a product. Indirect materials are materials used in the production plant that don’t become part of the product but are insignificant in cost (such as the price sticker on a car.

Question 39

How do (manufacturing) product costs affect the income statement and balance sheet?

Answer 39

GAAP requires that these costs be assigned to inventory until the related products are sold. When sold, costs were removed from the company’s inventory and expensed as Cost of Goods Sold (COGS).

Raw Materials Inventory ——> Balance Sheet (Work in Process Inventory + Finished Goods Inventory) ———–> (Income Statement) COGS

Question 40

How do (manufacturing) period costs affect the income statement and balance sheet?

Answer 40

These costs are recorded directly as an operating expense in the income statement. (Expensed during the period incurred)

Question 40

How do (manufacturing) period costs affect the income statement and balance sheet?

Answer 40

These costs are recorded directly as an operating expense in the income statement. (Expensed during the period incurred)

Question 41

Differences in Balance Sheets for Service, Manufacturing, and Merchandising

Answer 41

The only difference relates to how inventory is shown in the current asset section:
- Service Companies Show no Inventory
- Merchandising companies show Inventory or Merchandise Inventory
- Manufacturing Companies show Raw Materials, Work in Process and Finished Goods Inventory.

Question 42

Relevant Costs

Answer 42

• Have the potential to influence a decision.
• Be incurred in the future rather than the past.
  Ex: CPizzaK example – the cost of wheat or flour used to make pizza dough is relevant to the decision about whether to make or buy the dough.

Question 43

Differential Cost

Answer 43

The difference in cost between two alternative courses of action.
Ex: Choosing between two cars. Any information that is the same, like price of gas is irrelevant to the purchase.

Question 44

Irrelevant Costs

Answer 44

Doesn’t influence the decision.

Question 45

Sunk Costs (Irrelevant)

Answer 45

If the expenditure occurred in the past, and is therefore, no longer relevant

Question 46

Out-of-Pocket Cost

Answer 46

Involves an actual outlay of cash. Those costs or expenses that require cash payment in the current period or during a project.
Ex: Here’s an example of work-related out-of-pocket expenses. Assume an employee has a meeting with a potential client. The employee spends $250 on airfare, $50 on Uber rides $100 on a hotel, and $100 on meals—all charged to their own credit card. After the trip, the employee submits an expense report for $500 for their out-of-pocket expenses. The employer then issues a reimbursement check for $500 to the employee.

Question 47

Opportunity Cost

Answer 47

The forgone benefit ( or lost opportunity of the path not taken). Anytime you choose to do one thing instead of another because resources are constrained ie. time and/or money).

Question 48

Fixed Cost (Total)

Answer 48

Stay constant in total over a wide range of activity levels. (Does not change no matter the amount of output (goods/services being produced).
Ex: Company ABC has a fixed cost of $10,000 per month to rent the machine it uses to produce mugs. No matter if the company were to produce no mugs or a million mugs, Company ABC would still have to pay $10,000 to rent the machine.

Question 49

Fixed Cost (Per Unit)

Answer 49

Vary inversely with the number of units produced or the number of customers served.

Ex: Company ABC has a lease of $10,000 a month on its production facility and produces 1,000 mugs per month. As such, it may spread the fixed cost of the lease at $10 per mug. If it produces 10,000 mugs a month, the fixed cost of the lease goes down to the tune of $1 per mug.

Question 50

Variable Cost

Answer 50

Change in total in direct proportion to changes in volume (any expenses that change based on how much a company produces and sells).

Ex: The more miles you drive, the higher your gasoline cost for the year.

Question 51

Variable Cost (Per Unit)

Answer 51

Remains the same no matter the output.
Ex: Producing goods in boxes, a box represents a unit. Each box costs $10, but the total number of boxes being produced could total up to $100 or $50 depending on how many boxes in total are made. However, the price of each box (per unit) is the same, $10.

Question 52

How do manufacturing costs behave? (DM, DL, MOH = Product Costs)

Answer 52

Direct Materials (Variable Cost)
Ex: The most cars Toyota makes, the more it will spend on tires, steel, and parts.
Direct Labor (Generally Treated as A Variable Cost)
Ex: The more cars Toyota produces the more assembly-line workers and machine operators it must employ.
Manufacturing Overhead ( A mixture of fixed and variable costs)
Ex: The cost of indirect materials, such as machine lubricants is variable.
Ex: The cost of property tax, insurance, and straight-line depreciation on the plant equipment is fixed.
Product cost ( a mixture of fixed and variable costs)

Question 53

Total Cost Formula

Answer 53

Total Fixed cost + Total variable cost

Question 54

Average Fixed Cost

Answer 54

total fixed cost/amount of output

Question 55

Average Variable Cost

Answer 55

Total Variable Cost/Amount of Output

Question 56

Average Cost

Answer 56

Total Cost/Output

Question 57

Cost Classification Steps

Answer 57

Step 1. All the listed costs will be relevant.
Step 2. Determine if Manufacturing or Nonmanufacturing and put M or NM.
Step 3. If Manufacturing Cost - Direct Material (DM), Direct Labor (DL), etc.
Step 4. Product + Period Costs
Step 5. Prime and Conversion Costs