Ch2: Terminology, Concept & Source Documents

Question 1

What is a “Cost” in this context?

Answer 1

An economic sacrifice of resources made in exchange for a product or service.

Question 2

What name is given to a cost that is expected to provide a benefit beyond the current accounting period?

Answer 2

An asset

Question 3

What name is given to a cost of its benefit is not expected to last longer then the current accounting period?

Answer 3

An expense

Question 4

A current asset that will be consumed during a later period is considered an expense of that period. How is this expense accounted for?

Answer 4

Recorded using the depreciation and accumulated depreciation accounts

Question 5

What is an expense?

Answer 5

A consumption or loss of resource, also known as an expired cost

Question 6

What are fixed costs?

Answer 6

Expenses that remain the same for a period of time and the overall cost is not influenced by the range of output

Question 7

What effect does the level of production have on a fixed cost?

Answer 7

The fixed cost per unit decreases

Question 8

What are variable costs?

Answer 8

Costs that tend increase or decrease in proportion to the businesses output

Question 9

What are semi variable costs?

Answer 9

Costs that contain a portion that is both fixed and variable. This means that they will increase or decrease with a change in production, but not in direct proportion to that change

Question 10

What is one method of identifying the variable portion of a semi-variable cost?

Answer 10

The high-low method

Question 11

What is traceability?

Answer 11

The ability to trace a cost to a particular job, process or department.

Question 12

What are direct costs?

Answer 12

A cost that can be traced back to a final product or service

Question 13

What are indirect costs?

Answer 13

Costs that can’t easily be traced back to a final product or service. For example, administrative costs and labour

Question 14

What are controllable costs? Give an example

Answer 14

A cost in which a manager can exert some influence over. For example, the amount of raw materials that are used in the manufacturing process.

Question 15

What are uncontrollable costs?

Answer 15

Costs that the manager has no influence over. For example, costs paid to ASIC to register and renew the company

Question 16

Give an example of a cost that is both controllable and uncontrollable

Answer 16

Raw materials as the manager cannot control the price the supplier charges (uncontrollable) but they can control how much materials they use and which supplier they choose (controllable).

Question 17

What is a unit cost?

Answer 17

The cost incurred for each product or service produced

Question 18

What are period costs?

Answer 18

Costs incurred in disposing of goods, general administration and financial expenses. They are also referred to as operating expenses

Question 19

What are product costs?

Answer 19

Costs incurred in getting raw material and converting it to a finished product. It includes material, labour and manufacturing overheads

Question 20

What are budgeted (or standard) costs

Answer 20

Costs that are used as benchmarks to determine prices or overhead application rates

Question 21

What are prime costs?

Answer 21

Direct labour plus direct materials

Question 22

What is a conversion cost?

Answer 22

Direct labour plus manufacturing overheads

Question 23

What is a cost object?

Answer 23

An item (eg hours, units or a job) to which costs are assigned

Question 24

What is a sales order?

Answer 24

A source document which records key information of a sale, including contact details, type of job, requirements and due dates

Question 25

What is a production order?

Answer 25

A source document that is created from the details given in the sales order. It provides details on what needs to be made and when

Question 26

What is the purpose of job costing records?

Answer 26

Job costing records (such as time sheets, job cards and job summary sheets) are documents used to document charges of direct materials, direct la bour and manufacturing for each unique job or job lot. These records are used to compute and allocate costs to products and services.
When total costs are determined, the business can then charge out the job to the customer