Ch. 2 - An introduction to cost terms, concepts and classifications

Question 1

Activity base

Answer 1

A measure of whatever causes the incurrence of a variable cost.

For example, the total cost of X-ray film in a hospital will increase as the number of X-rays taken increases. Therefore, the number of X-rays is an activity base for explaining the total cost of X-ray film

Question 2

Administrative costs

Answer 2

All executive, organizational and clerical costs associated with the general management of an organization rather than with manufacturing, marketing or selling.

Question 3

Common costs

Answer 3

A common cost is a cost that is common to a number of costing objects but cannot be traced to them individually.

For example, the wage cost of the pilot of a 787 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot’s wage is caused by any one passenger taking the flight.

Question 4

Conversion cost

Answer 4

Direct labour cost plus manufacturing overhead cost.

Question 5

Cost behaviour

Answer 5

The way in which a cost reacts or responds to changes in the level of business activity.

Question 6

Cost driver

Answer 6

A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs.

Question 7

Cost object

Answer 7

Anything for which cost data are desired. Examples of possible cost objects are products, product lines, customers, jobs and organizational subunits such as departments or divisions of a company.

Question 8

Cost of goods manufactured

Answer 8

The manufacturing costs associated with the goods that were finished during the period.

Question 9

Differential cost

Answer 9

A difference in cost between any two alternatives. Also see Incremental cost.

Question 10

Differential revenue

Answer 10

The difference in revenue between any two alternatives.

Question 11

Direct cost

Answer 11

A cost that can easily and conveniently be traced to the particular cost object under consideration.

Question 12

Direct labour

Answer 12

Those factory labour costs that can easily be traced to individual units of product. Also called touch labour.

Question 13

Direct materials

Answer 13

Those materials that become an integral part of a finished product and can conveniently be traced into it

Question 14

Finished goods

Answer 14

Goods that have been completed but not yet sold to customers.

Question 15

Fixed cost

Answer 15

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range.

Question 16

Incremental cost

Answer 16

An increase in cost between two alternatives. Also see Differential cost.

Question 17

Indirect cost

Answer 17

A cost that cannot easily and conveniently be traced to the particular cost object under consideration.

Question 18

Indirect labour

Answer 18

The labour costs of caretakers, supervisors, materials handlers, and other factory workers that cannot easily and conveniently be traced directly to particular products.

Question 19

Indirect materials

Answer 19

Small items of material such as glue and nails. These items may become an integral part of a finished product but are traceable to the product only at great cost or inconvenience.

Question 20

Manufacturing overhead

Answer 20

All costs associated with manufacturing except direct materials and direct labour.

Question 21

Opportunity cost

Answer 21

The potential benefit that is given up when one alternative is selected over another.

Question 22

Period costs

Answer 22

Those costs that are taken directly to the profit and loss account as expenses in the period in which they are incurred or accrued; such costs consist of selling (marketing) and administrative expenses.

Question 23

Prime cost

Answer 23

Direct materials cost plus direct labour cost.

Question 24

Product costs

Answer 24

All costs that are involved in the purchase or manufacture of goods. In the case of manufactured goods, these costs consist of direct materials, direct labour, and manufacturing overhead.

Question 25

Raw materials

Answer 25

Any materials that go into the final product.

Question 26

Schedule of cost of goods manufactured

Answer 26

A schedule showing the direct materials, direct labour and manufacturing overhead costs incurred for a period and assigned to Work in Progress and completed goods.

Question 27

Sunk cost

Answer 27

Any cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Question 28

Variable cost

Answer 28

A cost that varies, in total, in direct proportion to changes in the level of activity.

Question 29

Work in progress

Answer 29

Goods that are only partially complete and will require further work before they are ready for sale.