Chapter 2

Question 1

The 2 Classifications of Cost:

Answer 1

1. Direct Costs
2. Indirect Costs

Question 2

Cost Object

Answer 2

Anything for which cost data are desired—including products, customers, and organizational subunits.

• Classified as either direct or indirect.

Question 3

Direct Costs

Answer 3

Costs that can be easily and conveniently traced to a unit of product or other cost object.

Ex: Direct materials or direct labor.

Question 4

Indirect Costs

Answer 4

Costs that cannot be easily or conveniently traced to a unit of product or other cost object.

Ex: Manufacturing overhead and common costs (costs assigned to a number of cost objects, such as the cost of a maintenance man who fixes all the machines in a plant).

Question 5

The 3 Classifications of Manufacturing Costs:

Answer 5

1. Direct Materials
2. Direct Labor
3. Manufacturing Overhead

Question 6

Direct Materials

Answer 6

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Ex: For Ford, metal ingots or a pre-bought radio that will be integrated into an automobile.

Question 7

Direct Labor

Answer 7

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

• Sometimes called “touch labor” because the workers often directly touch the product.
• Ex: Wages paid to assembly line workers.*

Question 8

Manufacturing Overhead

Answer 8

Manufacturing costs that cannot be easily traced directly to specific units produced; includes all manufacturing costs except direct materials and direct labor

Ex: Plant utilities, indirect materials, and indirect labor.

Question 9

Indirect Materials

Answer 9

Materials used to support the production process.

Ex: Machine lubricants and cleaning supplies.

Question 10

Indirect Labor

Answer 10

Wages paid to employees who are not directly involved in production work.

Ex: Maintenance workers, janitors, and security guards.

Question 11

The 2 Classifications of Non-Manufacturing Costs:

Answer 11

1. Selling Costs
2. Administrative Costs

Question 12

Selling Costs

Answer 12

The direct and indirect costs necessary to secure the order and deliver the product.

Ex: Marketing and distribution costs.

Question 13

Administrative Costs

Answer 13

All direct and indirect executive, organizational, and clerical costs.

Question 14

The 2 Classifications of Costs on Financial Statements:

Answer 14

1. Product Costs
2. Period Costs

Question 15

Product Costs

Answer 15

All costs involved in acquiring or making a product.

• Product costs “attach” to a unit of product as it is purchased or manufactured and stay attached as long as the product remains in inventory awaiting sale. When units of product are sold, their costs are released from inventory as “COGS” expenses and matched against sales on the income statement.

Question 16

Product Costs include (3 costs)…

Answer 16

Include:

1. Direct Materials
2. Direct Labor
3. Manufacturing Overhead

They are the costs directly and indirectly related to manufacturing the product.

Question 17

Product Costs are first recorded as _____ on the ______.

Once the product is sold, they’re recorded as _____ on the _____.

Answer 17

Inventory on the _Balance Sheet

Costs of Good Sold_
on the Income Statement

Question 18

Period Costs

Answer 18

Include:

1. Selling Costs
2. Administrative Costs

They are costs related to selling and administration and are recorded in the period they’re incurred.

Question 19

Period Costs are recorded as an _____ on the _____ in the __________.

Answer 19

Expense on the Income Statement in the period they’re incurred

Question 20

Which of the following costs would be considered a period cost rather than a product cost in a manufacturing company?

A. Manufacturing equipment depreciation.
B. Property taxes on corporate headquarters.
C. Direct materials costs.
D. Electrical costs to light the production facility.
E. Sales commissions.

Answer 20

Property taxes on corporate headquarters (hence, administrative) and sales commissions.

Take Note: If it were property taxes on the manufacturing plant, that would be a product cost.

Question 21

The 2 Categories of Manufacturing Costs:

Answer 21

1. Prime Costs
2. Conversion Costs

Question 22

Prime Costs

Answer 22

Direct Material + Direct Labor

Question 23

One way to remember that Prime Costs uniquely includes Direct Materials is that…

Answer 23

Amazon Prime ships you materials.

Question 24

Conversion Costs

Answer 24

Direct Labor + Manufacturing Overhead

Question 25

Both Prime Costs and Conversion Costs overlap in the category of \_\_\_\_\_.

Answer 25

Direct Labor *Prime Costs includes labor, Conversion Costs includes labor, the redundancy labors me to tears!*

Question 26

**Cost behavior** refers to how a cost will react to changes in the level of \_\_\_\_\_.

Answer 26

activity

Question 27

The 3 Cost Behavior Classes:

Answer 27

1. **Fixed Costs** 2. **Variable Costs** 3. **Mixed Costs**

Question 28

**Variable Cost**

Answer 28

A cost that varies – in total – in direct proportion to changes in the level of activity. * The per-unit cost may be unchanging. * Ex: A pay-by-the-minute phone bill. The 5¢ per minute fee is unchanging, but the total bill varies by level of activity.*

Question 29

**Activity Base (Cost Driver)**

Answer 29

A measure of what causes the incurrence of a variable cost. *Ex: Units produced, machine hours, miles driven, labor hours...*

Question 30

**Fixed Costs**

Answer 30

A cost that remains constant – in total – regardless of changes in the level of the activity. ## Footnote *Ex: The cost of rent for a building. It's fixed month to month.*

Question 31

The 2 Types of Fixed Costs:

Answer 31

1. **Committed** 2. **Discretionary**

Question 32

**Committed [Fixed] Costs**

Answer 32

Long-term; cannot be significantly reduced in the short term. ## Footnote *Ex: Depreciation on Buildings and Equipment; Real Estate Taxes*

Question 33

**Discretionary [Fixed] Costs**

Answer 33

May be altered in the short term by current managerial decisions. ## Footnote *Ex: Advertising and Research and Development*

Question 34

Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.

Answer 34

The cost of ice cream; The cost of napkins for customers. ## Footnote *Ice cream and napkins will vary by customers served.*

Question 35

**Mixed Cost**

Answer 35

A cost that contains both variable and fixed elements. ## Footnote *Ex: A utility cost, such as internet, with a fixed monthly charge and a variable component, such as a per-GB data overage fee past a certain usage.*

Question 36

**Differential Cost**

Answer 36

A future cost that differs between any two alternatives.

Question 37

**LEFT OFF ON SLIDE 33**

Question 38

**Differential Revenue**

Answer 38

Future revenue that differs between any two alternatives. *

Question 39

**Incremental Cost**

Answer 39

An increase in cost from one alternative to another (still technically a differential cost).

Question 40

**Sunk Cost**

Answer 40

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. * Since only differential costs are relevant in a decision, sunk costs should always be ignored.

Question 41

**Opportunity Cost**

Answer 41

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