Ch 1 Flashcards
What are direct materials? What is an example?
Materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product
- Ex. seats that Airbus purchases for their planes
What are raw materials?
Materials that go into the final product
True or false: Raw materials can be indirect or direct
True
True or false: A finished product of one company can be the raw materials of another
True
What are indirect materials? What is an example?
Materials used in production that aren’t worth tracing to the final product
Ex. Glue use on furniture
What is direct labor? What is an example?
Labor costs that can be easily traced to individual units of product
Ex. Assembly line workers at Chevy
What is indirect labor? What is an example?
Labor costs that cannot be physically traced to particular products or that can be traced but only at great cost
Ex. Janitors and security guards
What is manufacturing overhead? What is an example?
Includes all manufacturing costs except direct materials and direct labor
Ex. Indirect materials, indirect labor, maintenance, taxes, depreciation, and insurance
What are the three categories of manufacturing costs?
1) Direct materials
2) Direct labor
3) Manufacturing overhead
What are nonmanufacturing costs?
Selling costs and administrative costs
What are selling costs? What is an example?
All costs that are incurred to secure customer orders and get the product to the customer
Ex. Advertising, shipping, commissions, salaries, cost of finished goods
What are administrative costs? What is an example?
All costs associated with the general management of an organization
Ex. Executive compensation, accounting, secretarial
What are product costs?
All costs involved in acquiring or making a product
How are product costs accounted for?
1) Inventory on balance sheet
2) When the product is sold, is it then put as COGS and matched against sales revenue
What are period costs? Give some examples.
All costs that are not product costs.
Ex. Selling and administrative expenses, rent for offices
What is prime cost?
= direct materials + direct labor cost
What is conversion cost?
= direct labor cost + manufacturing overhead
What is a variable cost? What is the formula?
Cost that varies in direct proportion to changes in the level of activity of production
(change in cost)/(change in activity)
What are committed fixed costs?
Organizational investments with a multi-year planning horizon
What are discretionary fixed costs?
Arise from annual decisions by management to spend on certain cost items
True or false: Total variable costs increases and decreases in proportion to changes in the activity level
True.
True or false: Variable cost per unit increases and decreases in proportion to changes in the activity level
False. Variable cost per unit remains constant
True or false: Total fixed cost is not affected by changes in the activity level within the relevant range
True.
True or false: Fixed cost per unit increase as the activity level increases and decreases as the activity level falls
False. Fixed cost per unit decreases as activity rises and increases as activity falls
What is the equation used to express the relationship between a mixed cost and activity level?
Y= a + bX Y - Total mixed cost a - Total fixed cost b - Variable cost per unit of activity X - Level of activity
How do you use the high-low method?
(cost at high - cost at low)/(high activity level/low activity level)
How do you calculate COGS?
= Beg. Inv. + Purchases - End Inv.
What is the contribution margin?
Amount remaining from sales revenue after variable expenses have been removed
= sales revenue - variable expenses
What is differential cost?
Difference between direct and indirect costs
What is differential revenue?
Difference between the revenues calculated from each approach
What is a sunk cost?
A cost that has already been incurred and that cannot be changed by any decision made now or in the future
