Chapter 1

Question 1

Cost Object

Answer 1

Anything for which cost data are desired including products, customers, jobs, organizational subunits, etc.

Question 2

Direct Cost

Answer 2

Costs that can be easily and conveniently traced to a specified cost object. Ex: Inventory

Question 3

Indirect Cost

Answer 3

Costs that cannot be easily and conveniently traced to a specified cost object. Ex: Managerial salary

Question 4

Common Costs

Answer 4

Indirect costs incurred to support a number of cost objects. These costs cannot be traced to an individual cost object.

Question 5

Product Cost

Answer 5

Includes all costs required to purchase or manufacture inventories.

• Retailer: purchasing inventory
• Manufacturer: manufacturing inventory

Question 6

Manufacturing Costs

Answer 6

Direct Material + Direct Labor + Manufacturing OH

Question 7

Raw Material

Answer 7

The term raw material refers to any materials that go into the final product and includes both direct and indirect materials

Question 8

Direct Labor

Answer 8

Labor costs that can be easily traced to individual units of product.

Question 9

Manufacturing OH

Answer 9

Includes all manufacturing costs except direct material and direct labor.

• Indirect Material Costs
• Indirect Labor
• Maintenance, rent, insurance on MANUFACTURING FACILITIES

Question 10

Treatment of Product Costs

Answer 10

Assign to inventory as incurred; expense through COGS when inventory is sold (matching principle)

Question 11

Period Costs “Selling & Administrative Costs”

Answer 11

Includes:

• Selling costs
• Administrative costs
• Expenses on SELLING & ADMIN FACILITIES

Question 12

Treatment of Period Costs

Answer 12

Expensed in the period incurred

Question 13

Cost Structure

Answer 13

Refers to the relative proportion of each type of cost in an organization
- variable costs vs. fixed costs

Question 14

Cost Behavior

Answer 14

Refers to how a cost will react to changes in the level of activity.
- 3 classifications

Question 15

Activity base (also called a cost driver)

Answer 15

A measure of what causes variable costs to change. Ex: units produced, units sold, labor hours, number of customers, etc.

Question 16

Relevant Range

Answer 16

The operating range over which a firm finds it practical to operate in the short-run.
- the relevant range of activity pertains to fixed costs as well as variable costs

Question 17

3 Classifications of Costs

Answer 17

1. Variable cost (VC) - cost that varies, directly and proportionally, to changes in level of activity
2. Fixed cost (FC) - cost that remains constant, regardless of changes in the level of activity
3. Mixed cost - “Semi-variable costs”

Question 18

Types of Fixed costs

Answer 18

1. Committed fixed costs - cannot be easily adjusted in the short term
   - executive salaries, manager salaries, rent, insurance, taxes
2. Discretionary fixed costs - can be easily reduced in the short term
   - training programs, R&D, advertising

Question 19

Total cost equation (mixed cost)

Answer 19

Total cost = [VC/unit of activity * activity] + total FC

Question 20

4 Methods for Analyzing Cost Behavior

Answer 20

1. Account analysis
2. Scattergraph method
3. High-low method
4. The Least-Squares/Regression method (OMIT)

Question 21

Account Analysis

Answer 21

Each account under consideration is classified as variable or fixed based on the analyst’s prior knowledge about how costs behave- limited in value

Question 22

The Scattergraph Method

Answer 22

Plot historical observations for cost and activity; then fit a line to the points so as to minimize deviations

Question 23

The high-low method “Two-Point Method”

Answer 23

1. Calculate the VC per unit of activity
   = (High cost - low cost)/(High activity - low activity)
2. Use the total cost equation to determine total FC
   = Total Cost = (VC/unit * # units) + Total FC

use high cost and high activity OR use low cost and low activity

Question 24

Traditional Income Statement

Answer 24

Sales
Less: COGS (Product Costs)
—

Question 25

Contribution Margin Income Statement

Answer 25

Sales
Less: Variable Costs (Product & Period)
—

Question 26

For a RETAILER, COGS is a _________ cost

Answer 26

Variable