Ch. 2 - Cost Terms, Concepts, and Classifications

Question 1

Direct Materials (DM)

Answer 1

Can be traced directly and conveniently to each unit of product

Question 2

Direct Labour (DL)

Answer 2

Labour costs that can be easily traced to individual units of product

Question 3

Manufacturing Overhead (MOH)

Answer 3

All manufacturing costs except DM and DL, cannot be traced directly to specific units produced

Question 4

Indirect Labour (IDL)

Answer 4

Wages paid to employees who are not directly involved in production work

Question 5

Indirect Materials (IDM)

Answer 5

Materials used to support the production process

Question 6

Prime Cost

Answer 6

Prime Cost = DM + DL

Question 7

Conversion Cost

Answer 7

Conversion Cost = DL + MOH

Question 8

Period Costs

Answer 8

Costs that are identified with the period in which they are incurred instead of units produced. Includes selling costs, general and administrative costs, non-operating costs (interest), and income taxes

Question 9

What are the 3 characteristics of direct costs?

Answer 9

• Can be easily and conveniently traced to cost object
• A monetarily important part of a specified cost object
• Would not be incurred if the cost object (i.e. product or activity) was discontinued

Question 10

What are the 3 characteristics of indirect costs?

Answer 10

• Cannot be easily and conveniently traced to a cost object
• Is not a monetarily important part of a specified cost object
• Would be incurred even if the cost object (i.e. product or activity) was discontinued (no causal relationship)

Question 11

Variable Cost

Answer 11

• Total cost varies in direct proportion to activity level
• Variable cost per unit remains constant in the relevant range

Question 12

Fixed Cost

Answer 12

• Total cost does not change regardless of activity level within the relevant range
• Fixed cost per unit goes down when activity level increases

Question 13

Mixed Cost

Answer 13

A combination of fixed and variable costs
- Total cost increases when activity level increases
- Cost per unit decreases as activity level increases

Question 14

Opportunity Cost

Answer 14

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

Question 15

Sunk Cost

Answer 15

Costs that have already been incurred and cannot be changed now or in the future. They should be ignored when making decisions.