Chapter 2 - An Intro. to Cost Terms and Purposes

Question 1

What is a cost object?

Answer 1

product, service, project, activity, department

Question 2

What is actual cost?

Answer 2

incurred (pas or historical cost)

Question 3

What is budgeted cost?

Answer 3

future cost (forecasted and predicted)

Question 4

What is direct cost?

Answer 4

related to a particular cost object can be easily traced to:

a) material requisitions form (Direct materials used in production)
b) Time sheet (Labor hours used in production)

Question 5

What is tracing?

Answer 5

assignment of direct cost to cost object

Question 6

What is indirect cost?

Answer 6

related to a particular cost object but cannot be traced

- have to be allocated and then assigned

Question 7

What is allocation?

Answer 7

assignment of indirect cost to cost object

Question 8

What is a variable cost?

Answer 8

a) variable in total (increases with # of units produced and vice versa) - direct relationship
b) fixed per unit

Question 9

What is a cost driver?

Answer 9

Variable such as the level of activity (designing products, setting up machines, etc.) causally affects costs over a given time span.

Question 10

What would be the variable cost driver for total cost of steering wheels?

Answer 10

of vehicles assembled

Question 11

Are there cost drivers for fixed costs (short-run, long-run)?

Answer 11

No cost driver in short-run

Cost driver in long-run

Question 12

What are fixed costs?

Answer 12

a) fixed in total

b) variable per unit (decreases with # of units produced and vice versa) - Inverse relationship

Question 13

What are the three sectors of the economy?

Answer 13

1. Manufacturing sector - purchasing materials and converting them into finish goods
2. Merchandising sector - Purchase and sell products without changing them (are type of inventory; retailing, distribution or wholesaling)
3. Service sector - providing services (e.g. legal advice or audits to customer)

Question 14

What are the three types of inventory?

Answer 14

1. Direct materials inventory: Direct materials in stock that will be used in the manufacturing process
2. Work-in-process inventory: goods partially worked on but not yet completed
3. Finished goods inventory: goods completed but not yet sold

Question 15

What is cost?

Answer 15

Cost is a resource sacrificed or foregone to achieve a specific objective.

Question 16

What are the total manufacturing costs?

Answer 16

1. Direct materials used in production
2. Direct manufacturing labor
3. Manufacturing overhead or Indirect manufacturing costs (Indirect materials, Indirect labor, other)

Question 17

What is a product cost?

Answer 17

The sum of the costs assigned to a product for a specific purpose

Question 18

What are the 6 types of product costs?

Answer 18

1. Research and development
2. Design of products and processes
3. Production
4. Marketing
5. Distribution
6. Customer service

Question 19

What would we classify as product costs?

Answer 19

1. Manufacturing costs&raquo_space;> Asset&raquo_space;> Expense

2. Inventoriable costs&raquo_space;> Inventory&raquo_space;> COGS (Income Statement)

Question 20

What is a period cost?

Answer 20

All costs in the income statement other than Costs of Goods Sold (COGS)

Question 21

What would we classify as period costs?

Answer 21

1. Selling expense
2. General expense
3. Administrative expense

Question 22

On the Inventory Balance Sheet, what would we Debit/Credit in the Direct Materials T-Account?

Answer 22

Debit: Beg. Balance + Purchase of materials = Ending Balance
Credit: Direct materials used in production

Question 23

On the Inventory Balance Sheet, what would we Debit/Credit in the Work-in-Process T-Account?

Answer 23

Debit: Beg. Balance + Direct Materials used in production + Direct Labor + Manufacturing Overhead = Ending Balance
Credit: Cost of Goods Manufactured (COGM)

Question 24

On the Inventory Balance Sheet, what would we Debit/Credit in the Finished Goods T-Account?

Answer 24

Debit: Beginning balance + Cost of Goods Manufactured (COGM) = Ending balance
Credit: Cost of Goods Sold (COGS)

Question 25

What are prime costs?

Answer 25

All direct manufacturing costs: Direct Materials + Direct Labor

Question 26

What are conversion costs?

Answer 26

All manufacturing costs other than Direct Materials cost: Direct Labor + Manufacturing Overhead

Question 27

What is the unit cost?

Answer 27

AKA Average Cost = Total Cost/# of units produced
- Over-reliance on unit cost could lead to insufficient cash being available to pay the company’s costs if volume declines.

Question 28

How do we calculate Gross Profit Margin?

Answer 28

Revenue - COGS = GPM

Question 29

How do we calculate operating income?

Answer 29

Revenue - COGS - Operating Costs = Operating Income
OR
Sales - Variable Costs - Fixed Costs = Operating Income