Chapter 1

Question 0

What is a fixed cost?

Answer 0

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. (e.g. Supervisor salary, Rent space, Rent equipment, Depreciation, Advertising cost, Investments, Purchasing a building)

Question 1

What is variable cost?

Answer 1

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable is constant per unit. (e.g. Direct materials cost, Direct labor cost, Shipping cost, Electrical cost)

Question 2

What are direct materials?

Answer 2

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it. (e.g. Direct materials cost)

Question 3

What is direct labor?

Answer 3

Factory labor costs that can be easily traced to individual units of product. Also called touch labor. (e.g. Direct labor cost)

Question 4

What is manufacturing overhead?

Answer 4

All manufacturing costs except direct materials and direct labor. (e.g. Supervisor salary, Rent equipment, Depreciation, Shipping cost, Electrical cost)

Question 5

What are period costs?

Answer 5

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. (e.g. Rent space, Advertising cost, Shipping cost)

Question 6

What is an opportunity cost?

Answer 6

The potential benefit that is given up when one alternative is selected over another. (e.g. Investments)

Question 7

What is a sunk cost?

Answer 7

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