Chapter 1

Question 1

Committed Fixed Costs

Answer 1

long term in nature; they relate to the investment in facilities, equipment, and basic organizational structure; they cannot be significantly reduced even for short periods of time without seriously impairing the profitability or long-term goals

Question 2

Discretionary Fixed Costs

Answer 2

short term in nature; they arise from annual decisions by management; they can be cut for short periods of time with minimal damage to the long-term goals of the organization

Question 3

Differential Cost

Answer 3

is a difference in cost between any two alternatives satisfying the same goal

Question 4

Administration costs

Answer 4

includes all costs associated with the general management of an organization.

Question 5

Fixed Cost

Answer 5

A fixed cost is constant within the relevant range. In other words, fixed costs do not change due to changes in the activity level that falls within the “relevant range.” example: monthly contract fee

Question 6

Cost Behavior

Answer 6

refers to how a cost reacts to changes in the level of activity within a relevant range, as the activity levels increases or decreases

Question 7

Marginal Cost

Answer 7

is the change in cost due to an increase in producing one more unit

Question 8

Marginal revenue

Answer 8

is the additional sales revenue that is generated by selling one more unit

Question 9

Opportunity Cost

Answer 9

is the potential benefit that is given up when one alternative is selected over another. i.e., the forgone alternative. example: the opportunity cost is missing out on hanging out with friends if you do your homework

Question 10

Sunk Cost

Answer 10

A cost that has already been incurred and cannot be changed by any decision made now or in the future. example: gas mileage

Question 11

Cost structure

Answer 11

refers to the relative proportion of fixed, variable, or mixed costs, of a firm’s costs

Question 12

Activity Base (cost driver)

Answer 12

is a measure of what causes the incurrence of variable costs. As the level of the activity base increases, the total variable cost increases proportionally

Question 13

Raw materials (direct & indirect)

Answer 13

All materials that can be traced to the final product

Question 14

Work in process

Answer 14

partially completed goods and will require further work before they are ready for sale to the customer

Question 15

Finished goods

Answer 15

completed units of products that have not yet been sold to customers

Question 16

Administration costs

Answer 16

Includes all costs associated with the general management of an organization. Administrative costs can be direct or indirect costs

Question 17

Marketing or selling costs

Answer 17

includes all costs necessary to secure customer orders and get the finished product into the hands of the customer. Selling costs can be either direct or indirect costs