Book: Costing & Cost Assignment

Question 1

Direct material costs

Answer 1

The cost of materials tied to a specific product

Question 2

Explain direct labor cost

Answer 2

The cost of labor that facilitates a specific product or service

Question 3

Indirect cost

Answer 3

Costs that cannot be tied to a specific product or service t.ex power and repair costs

Question 4

Overhead

Answer 4

Indirect costs categorized by functional area

Question 5

Prime cost

Answer 5

Direct material + direct labor costs

Question 6

Manufacturing costs

Answer 6

Direct material + direct labor + manufacturing overhead

Question 7

Conversion cost

Answer 7

Direct labor cost + manufacturing overhead, the cost if converting materials into products

Question 8

What constitutes non-manufacturing costs

Answer 8

Administrative overheads + Marketing overhead (order related costs)

Question 9

What is the benefit with direct costs when it comes to cost assignment

Answer 9

Only direct costs can be precisely accurately assigned to a cost object

Question 10

What is the difference between fixed and variable costs

Answer 10

fixed costs stay the same no matter the level of activity while variable costs varies based on the activity (short term)

Question 11

Unit fixed cost

Answer 11

Fixed cost per unit, economies of scale. Decreases logarithmically when production increases

Question 12

Semi fixed or step fixed costs

Answer 12

Fixed costs over long time may vary if capacity is reached, often in the form of a staircase

Question 13

Direct cost tracing

Answer 13

Allocate direct cost to its related cost object

Question 14

Allocation base/cost driver

Answer 14

Allocate costs based on percentages of receipts associated with a cost object

Question 15

Cause and effect allocation / driver tracing

Answer 15

Allocation of cost that is required for cost object. If no cost object no cost

Question 16

Arbitrary allocation of cost

Answer 16

Weak link between cost and cost object

Question 17

Direct costing system

Answer 17

Only allocates direct costs

Question 18

Absorption costing system

Answer 18

Allocates all costs

Question 19

Traditional costing system

Answer 19

Absorption costing system using arbitrary allocation mostly

Question 20

ABC costing system

Answer 20

Activity based costing, absorption costing system that tries to avoid arbitrary allocations

Question 21

When it is better to have a highly sophisticated cost allocation system

Answer 21

When much of the cost is indirect

Question 22

What is plant wide or blanket overhead rate

Answer 22

To allocate all costs of a plant to a single allocation base like labor hour that is then used to allocate cost indirect costs so f.ex cost of product based on labor hours it takes

Question 23

cost pool or cost center

Answer 23

A temporary pool where overheads are allocated before they are allocated to cost objects, often departments. Also called cost drivers

Question 24

Two stage allocation process

Answer 24

The process of first allocating costs to a driver t.ex a department before it is allocated to a cost object

Question 25

What is mainly distinguishes the abc system of calculating cost functionaly

Answer 25

ABC has more cost centers and drivers dividing the overhead by activities

Question 26

Does cost allocation improve decision making

Answer 26

Not necessarily, it has to be accurate and relevant to be worth it

Question 27

Do all costs need to be allocated

Answer 27

No, if they are not relevant for decision making leave them out

Question 28

Does idle capacity costs need to be allocated to products

Answer 28

In theory it would be proper but it could motivate price increases which would be counterproductive as fewer purchases means more idle facilities incurring costs

Question 29

Over and under recovery of overhead

Answer 29

When activity or expenditure differs from budget

Question 30

Volume variance

Answer 30

Fixed overhead variance that arises from activity variating from budget

Question 31

Fixed overhead expenditure variance

Answer 31

Overhead expenses varying from budget

Question 32

Should you allocate over or under recovery to products

Answer 32

No

Question 33

Why is it important to allocate costs to products

Answer 33

To evaluate inventory and cogs as well as to give managers an overview of the worth and potential of different products

Question 34

Why should budget overhead rates be used instead of the actual ones

Answer 34

Because using actual data would cause a delay as well as arbitrary fluctuations in overhead rates causing overcomplexity. More cost effective to use annual averages

Question 35

What is done in n over or under recovery

Answer 35

It is recorded as a period cost adjustment and written of as a profit or a loss that is not allocated to products

Question 36

How may non manufacturing organizations without products allocate costs

Answer 36

Either they allocate the costs to a service or they may allocate costs to departments synonymous with the service

Question 37

How do you calculate budget over or under absorption of overhead

Answer 37

You check the difference between volume variance and fixed overhead expenditure variance. Aka actual amount * budgeted price - actual overhead

Question 38

Volume variance

Answer 38

Difference in volume * value

Question 39

Fixed overhead expenditure variance

Answer 39

Budgeted overhead - actual overhead

Question 40

Is over absorption a decrease in actual overhead

Answer 40

Yes

Question 41

When calculating overhead absorption should you include prime cost

Answer 41

No only fixed and variable overheads divided by suitable unit

Question 42

How do you know what attributes to allocate by when calculating a suitable overhead absorption rate.

Answer 42

Take the dominant attribute of the department or activity, don’t have to be the same over all.

Question 43

Overhead rate / activity cost

Answer 43

Percentage of overhead divided by cost of activity per allocated unit. Can also be expressed as cost of activity / mesuring number that foes not have to be the same for all activities. $part/hpart or $overhpart/$machinepart