Chapter 2: An Introduction to Cost Terms and Purposes

Question 1

Actual Cost

Answer 1

Cost incurred ( a historical or past cost), as distinguished from a budgeted or forecasted cost

Question 2

Average Cost

Answer 2

Cost computed by dividing total cost by the number of units.

Question 3

Budgeted Cost

Answer 3

Predicted or forecasted cost (future cost) as distinguished from an actual or historical cost

Question 4

Conversion Costs

Answer 4

all manufacturing costs other than direct material costs

Question 5

Cost

Answer 5

resource sacrificed or forgone to achieve a specific objective

Question 6

Cost Accumulation

Answer 6

Collection of cost data in some organized way by means of an accounting system

Question 7

Cost Assignment

Answer 7

general term that encompases both (1) tracing accumulated costs that have a direct relationship to a cost object and (2) allocating accumulated costs that have an indirect relationship to a cost object

Question 8

Cost Driver

Answer 8

a variable, such as the level of activity or volume. that causally affects costs over a given time span

Question 9

Cost Object

Answer 9

ANything for which a measurement of costs is desired

Question 10

Cost of Goods Manufactured

Answer 10

Cost of goods brought to completion, whether they were started before or during the current accounting period

Question 11

Cost Tracing

Answer 11

describes the assignment of direct costs to a particular cost object

Question 12

Direct Costs of a cost object

Answer 12

costs related to the particular cost object that can be traced to that object in an economically feasible (cost-effective) way

Question 13

Direct Manufacturing labor costs

Answer 13

Include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way

Question 14

Direct Material Inventory

Answer 14

Direct materials in stock and awaiting use in the manufacturing process

Question 15

DIrect Material Costs

Answer 15

acquisition of costs of all materials that eventually become part of the cost object (work in process and then finished goods), and that can be traced to the cost object in an economically feasible way

Question 16

Factory overhead costs

Answer 16

All manufacturing costs that are related to the cost object (work in process and then finished goods) but that cannot be traced to that cost object in an economically feasible way.

Question 17

Finished goods inventory

Answer 17

goods completed but not yet sold

Question 18

fixed cost

Answer 18

cost that remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume

Question 19

Idle time

Answer 19

Wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like

Question 20

indirect costs of a cost object

Answer 20

costs related to the particular cost object that cannot be traced to that object in an economically feasible (cost-effective) way

Question 21

Indirect manufacturing costs

Answer 21

all manufacturing costs that are related to the cost object (work in process and then finished goods) but that cannot be traced to that cost object in an economically feasible way. Also called manufacturing overhead costs and factory overhead costs

Question 22

Inventoriable costs

Answer 22

All costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold only when the product is sold

Question 23

Manufacturing overhead costs

Answer 23

all manufacturing costs that are related to the cost object but that cannot be traced to that cot object in an economically feasible way

Question 24

Manufacturing-sector companies

Answer 24

companies that purchase materials and components and convert them into various finished goods

Question 25

Merchandising-sector companies

Answer 25

companies that purchase and then sell tangible products without changing their basic form

Question 26

Operating Income

Answer 26

total revenues from operations minus cost of goods sold and operating costs (excluding interest epense and income taxes)

Question 27

Overtime premium

Answer 27

wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates

Question 28

Period Costs

Answer 28

all costs in the income statement other than cost of goods sold

Question 29

Prime Costs

Answer 29

all direct manufacturing costs

Question 30

Product costs

Answer 30

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

Question 31

Relevant range

Answer 31

band of normal activity level or volume in which there is a specific relationship between the level of activity orvolume and the cost in question

Question 32

Revenues

Answer 32

inflows of assets (usually cash or accounts receivable) received for products or services provided to customers

Question 33

Service-sector companies

Answer 33

companies that provide services or intangible products to their customers

Question 34

Unit Cost

Answer 34

cost computed by dividing total cost by the number or units. also called average cost

Question 35

Variable Cost

Answer 35

cost that changes in total in proportion to changes in the related level of total activity or volume

Question 36

Work-in-Process inventory

Answer 36

goods partially worked on but not yet completed. also called work in progress

Question 37

Work in Progress

Answer 37

goods partially worked on but not yet completed. also called work in progress

Question 38

What is a cost object?

Answer 38

A cost object is anything for which a separate measurement of cost is needed. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department

Question 39

How do managers decide whether a cost is a direct or an indirect cost?

Answer 39

A direct cost is any cost that is related to a particular cost object and can be traced to that cost object in an economically feasible way. Indirect costs are related to the particular cost object but cannot be traced to in in an economically feasible way. The same cost can be direct for one cost object and indirect for another cost object. This book uses cost tracing to describe the assignment of direct costs to a cost object and cost allocation to describe the assignment of indirect costs to a cost object

Question 40

How do managers decide whether a cost is a variable or a fixed cost?

Answer 40

A variable cost changes in totl in proportion to changes in the related level of total activity or volume. A fixed cost remains unchanged in total for a given time period despite wide changes in the related level of total activity or volume

Question 41

How should costs be estimated?

Answer 41

In general, focus on total costs, not unit costs. When making total cost estimates, think of variable costs as an amount per unit and fixed costs as a total amount. The unit cost of a cost object should be interpreted cautiously when it includes a fixed-cost component

Question 42

What are the differences in the accounting for inventoriable versus period costs?

Answer 42

Inventoriable costs are all costs of a product that are regarded as an asset in the accounting period when they are incurred and becomes cost of goods sold in the accounting period when the product is sold. Period costs are expensed in the accounting period in which they are incurred and are all of the costs in an income statement other than cost of goods sold

Question 43

Why do managers assign different costs to the same cost objects?

Answer 43

Managers can assign different costs to the same cost object depending on the purpose. For example, for the external reporting purpose in a manufacturing company, the inventoriable cost of a product includes only manufacturing costs. In contrast, costs from all business funcitons of the value chair often are assigned to a product for pricing and product-mix decisions

Question 44

What are the three key geatures of cost accounting and cost management?

Answer 44

Three features of cost accounting and cost management are (1) calculating the cost of products, services, and other cost objects; (2) obtaining information for planning and conrol and performance evaluation; and (3) analyzing releveant information for making decisions