Chapter 2

Question 1

Opportunity Cost

Answer 1

the lost opportunity/benefit from choosing to do something else

Question 2

Direct Cost

Answer 2

cost that can be traced directly to a specific product i.e. assembly worker

Question 3

Indirect Cost

Answer 3

costs that can’t easily be traced to a specific product i.e. assembly line supervisor

Question 4

Variable Cost

Answer 4

costs change in total in direct proportion to changes in activity levels
i.e. need more pizza sauce if make more pizzas

Question 5

Fixed Cost

Answer 5

costs stay the same in total regardless of activity (w/in a range of activity)
i.e. cost of factory & equipment same if make 10 or 1000 pizzas.

Question 6

Differential Cost

Answer 6

costs that differ across alternatives

Question 7

Sunk Costs

Answer 7

costs that have already been incurred in the past - will NOT impact future decisions

Question 8

Product Costs

Answer 8

manufacturing costs, “inventoriable” traced through inventories, expensed when product sold

Question 9

Direct Materials

Answer 9

major inputs, can be physically/conveniently traced to final product i.e. pizza sauce

Question 10

Direct Labor

Answer 10

can be physically & conveniently traced to the product i.e. assembly workers

Question 11

Manufacturing Overhead

Answer 11

all other manufacturing costs

Question 12

Indirect materials

Answer 12

minor materials, can’t be conveniently traced to individual units i.e. seasoning

Question 13

Indirect Labor

Answer 13

don’t touch product but ARE involved in manufacturing process i.e. supervisors

Question 14

Prime Costs

Answer 14

primary costs that can be traced to end product = Direct Materials & Direct Labor

Question 15

Conversion Costs

Answer 15

convert direct materials to finished product=Direct Labor + Manufacturing Overhead

Question 16

Period Costs

Answer 16

expensed in period incurred

Question 17

Non- manufacturing Costs

Answer 17

costs to run business & sell product

Question 18

Marketing and Selling Costs

Answer 18

delivery, sales managers, advertising

Question 19

Administrative Costs

Answer 19

running organization i.e. rent for headquarters, accounting, top management

Question 20

Relevant Change

Answer 20

range of activity over which we expect our assumptions about cost behavior to hold true.

Question 21

Variable Costs

Answer 21

change in total in direct proportion to changes in activity levels, remains constant per unit

Question 22

Fixed Costs

Answer 22

remains constant in total but vary inversely to changes in activity levels (activity increases, cost per unit decreases)

Question 23

Step Costs

Answer 23

fixed over some range of activity and then increase in a step-like fashion when a capacity limit is reached.

Question 24

Step Variable Costs

Answer 24

Nearly variable costs that increase in small steps instead of continuously
i.e. add additional shifts to handle small increases in output -
0-100 donuts requires 1 shift, 100-200 2 shifts, 200-300 3 shifts

Question 25

Step Fixed Costs

Answer 25

Fixed over a wide range of activity but jump to a different amount (wider steps) for activity levels outside the range i.e. hire another salary manager or full time (40 hour) employee, open another plant

Question 26

Mixed or Semi Variable Costs

Answer 26

Has both fixed & variable components i.e. delivery truck rent (FC) + fuel (VC)

Question 27

Curvilinear

Answer 27

Exhibits both decreasing & increasing marginal costs over a specific range of activity. i.e. utility costs that have decreasing marginal costs per unit at low level but increasing marginal costs at higher level since using equipment that is less energy efficient.

Question 28

Linear equation for Mixed Costs

Answer 28

Y = A + BX
Total Cost (Y) = Total Fixed Cost (A)  + Total Variable Cost (BX)
Total Cost (Y) = Total Fixed Cost (A) + (VC/unit x # units)

Question 29

High-Low method

Answer 29

Variable Cost per unit or VC/unit = cost at highest activity – cost at lowest activity
units at highest activity – units at lowest activity

Question 30

Contribution Margin

Answer 30

Amount of sales available to cover FC & profit (after VC) = Sales - VC