Chapter 1

Question 1

What are Raw Materials?

Answer 1

The materials that go into the final product

Question 2

What are direct materials

Answer 2

refers to raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product.

This would include, for example, the seats that Airbus purchases from subcontractors to install in its commercial aircraft, the electronic components that Apple uses in its iPhones, and the doors that Whirlpool installs on its refrigerators.

Question 3

What is direct labor

Answer 3

labor costs that can be easily traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made. Examples of direct labor include assembly-line workers at Toyota, carpenters at the home builder KB Home, and electricians who install equipment on aircraft at Bombardier Learjet.

Question 4

What are prime costs

Answer 4

is the sum of direct materials cost and direct labor cost.

Question 5

What is Manufacturing Overhead

Answer 5

the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor. For example, manufacturing overhead includes a portion of raw materials know as indirect materials as well as indirect labor.

Question 6

What are Indirect Materials

Answer 6

are raw materials, such as the solder used to make electrical connections in a Samsung HDTV and the glue used to assemble an Ethan Allen chair, whose costs cannot be easily or conveniently traced to finished products

Question 7

What is indirect labor

Answer 7

refers to employees, such as janitors, supervisors, materials handlers, maintenance workers, and night security guards, that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product. Since indirect materials and indirect labor are difficult to trace to specific products, their costs are included in manufacturing overhead.

Question 8

What are conversion costs

Answer 8

refers to the sum of direct labor and manufacturing overhead. The term conversion cost is used to describe direct labor and manufacturing overhead because these costs are incurred to convert direct materials into finished products.

Question 9

What are the two categories of Nonmanufacturing costs?

Answer 9

Selling costs and administrative costs

Question 10

What are selling costs?

Answer 10

include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs.

Examples of selling costs include advertising, shipping, sales travel, sales commissions, sales salaries, and costs of finished goods warehouses. Selling costs can be either direct or indirect costs. For example, the cost of an advertising campaign dedicated to one specific product is a direct cost of that product, whereas the salary of a marketing manager who oversees numerous products is an indirect cost with respect to individual products.

Question 11

Administrative Costs

Answer 11

include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples of administrative costs include executive compensation, general accounting, secretarial, public relations, and similar costs involved in the overall, general administration of the organization as a whole. Administrative costs can be either direct or indirect costs. For example, the salary of an accounting manager in charge of accounts receivable collections in the East region is a direct cost of that region, whereas the salary of a chief financial officer who oversees all of a company’s regions is an indirect cost with respect to individual regions.

Question 12

What are product costs

Answer 12

include all costs involved in acquiring or making a product. Product costs “attach” to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale. When units of product are sold, their costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales on the income statement.

Because product costs are initially assigned to inventories, they are also known as inventoriable costs.

Question 13

What are inventoriable costs?

Answer 13

Inventoriable costs are a synonym for product costs

Question 14

What do product costs include?

Answer 14

product costs include direct materials, direct labor, and manufacturing overhead.

A manufacturer’s product costs flow through three inventory accounts on the balance sheet—Raw Materials, Work in Process, and Finished Goods—prior to being recorded in cost of goods sold on the income statement.

Question 15

What is a work in process

Answer 15

consists of units of product that are only partially complete and will require further work before they are ready for sale to the customer.

Question 16

What are Finished Goods?

Answer 16

Finished goods consist of completed units of product that have not yet been sold to customers.

Question 17

What are period costs?

Answer 17

are all the costs that are not product costs. All selling and administrative expenses are treated as period costs. For example, sales commissions, advertising, executive salaries, public relations, and the rental costs of administrative offices are all period costs. Period costs are not included as part of the cost of either purchased or manufactured goods; instead, period costs are expensed on the income statement in the period in which they are incurred using the usual rules of accrual accounting. Keep in mind that the period in which a cost is incurred is not necessarily the period in which cash changes hands. For example, as discussed earlier, the cost of liability insurance is spread across the periods that benefit from the insurance—regardless of the period in which the insurance premium is paid.

Question 18

Define Cost Behavior

Answer 18

refers to how a cost reacts to changes in the level of activity. As the activity level rises and falls, a particular cost may rise and fall as well—or it may remain constant.

Question 19

What is a cost structure?

Answer 19

The relative proportion of variable, fixed, and mixed costs in an organization.

Question 20

What is an activity base?

Answer 20

a measure of whatever causes the incurrence of a variable cost.

An activity base is sometimes referred to as a cost driver. Some of the most common activity bases are direct labor-hours, machine-hours, units produced, and units sold. Other examples of activity bases (cost drivers) include the number of miles driven by salespersons, the number of pounds of laundry cleaned by a hotel, the number of calls handled by technical support staff at a software company, and the number of beds occupied in a hospital.

Question 21

What are Fixed costs?

Answer 21

A cost that remains constant, in total, regardless of changes in the level of activity. Manufacturing overhead usually includes various fixed costs such as depreciation, insurance, property taxes, rent, and supervisory salaries. Similarly, selling and administrative costs often include fixed costs such as administrative salaries, advertising, and depreciation of nonmanufacturing assets. Unlike variable costs, fixed costs are not affected by changes in activity. Consequently, as the activity level rises and falls, total fixed costs remain constant unless influenced by some outside force, such as a landlord increasing your monthly rent.

Question 22

What are committed fixed costs?

Answer 22

organizational investments with a multiyear planning horizon that can’t be significantly reduced even for short periods of time without making fundamental changes. Examples include investments in facilities and equipment, as well as real estate taxes, insurance premiums, and salaries of top management. Even if operations are interrupted or cut back, committed fixed costs remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized.

Question 23

What are discretionary fixed costs?

Answer 23

usually arise from annual decisions by management to spend on certain fixed cost items. Examples of discretionary fixed costs include advertising, research, public relations, management development programs, and internships for students.

Question 24

What is the relevant range?

Answer 24

the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.

Question 25

What are mixed costs ?

Answer 25

contains both variable and fixed cost elements. Mixed costs are also known as semi-variable costs.

Question 26

What are your differential costs?

Answer 26

A future cost that differs between any two alternatives is known as a differential cost.
Differential costs are always relevant costs.

Question 27

What is differential revenue?

Answer 27

Future revenue that differs between any two alternatives is known as differential revenue

Question 28

What is an incremental cost?

Answer 28

A differential cost is also known as an incremental cost.

Although technically an incremental cost should refer only to an increase in cost from one alternative to another, whereas decreases in cost should be referred to as decremental costs. Differential cost is a broader term, encompassing both cost increases (incremental costs) and cost decreases (decremental costs) between alternatives.

Question 29

What is a sunk cost?

Answer 29

a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Because sunk costs cannot be changed by any decision, they are not differential costs. And because only differential costs are relevant in a decision, sunk costs should always be ignored.

Question 30

What is an opportunity Cost?

Answer 30

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

Opportunity costs are not usually found in accounting records, but they are costs that must be explicitly considered in every decision a manager makes. Virtually every alternative involves an opportunity cost.

Question 31

What is the contribution margin?

Answer 31

the amount remaining from sales revenues after all variable expenses have been deducted. This amount contributes toward covering fixed expenses and then toward profits for the period.