Chapter 2-Cost Concepts

Question 1

Raw materials

Answer 1

The materials that go into the final product. These finished products of one company can become the raw materials of another company.

Question 2

Direct materials

Answer 2

Those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product. Example: seats that Airbus purchased.

Question 3

Indirect materials

Answer 3

Largely insignificant materials to end products. These are included as manufacturing overhead.

Question 4

Prime cost

Answer 4

Direct materials cost + direct labor cost

Question 5

Conversion cost

Answer 5

Direct labor cost + manufacturing overhead cost

Question 6

Selling cost

Answer 6

Include all costs that are incurred to secure customer orders and get the finished product to the customer. Sometimes called order-getting and order-filling costs. It includes advertising, shipping, sales travel, sales commissions, sales salaries and costs of finished goods warehouses.

Question 7

Administration cost

Answer 7

Include all costs associated with the general management of an organization rather than with manufacturing or selling. Examples include executive compensation, general accounting, secretarial, and public relations.

Question 8

Manufacturing cost

Answer 8

Direct materials, indirect materials
Direct labor, indirect labor
Manufacturing overhead

Question 9

Non manufacturing cost

Answer 9

Selling costs and administration costs

Question 10

Product cost

Answer 10

All costs involved in acquiring or making a product. This counts as direct materials, direct labor and manufacturing overhead. They are initially assigned to an inventory account on the balance sheet. Product costs are attached to units of product as the goods are purchased or manufactured and they remain attached as the goods go into inventory awaiting sale. When sold they are typically called COGS thus becomes an expense on the Income Statement.

Question 11

Period cost

Answer 11

All the costs that are not product costs. This would be sales commissions and the rental cost of administration offices. Period costs are reported as expenses directly on the income statement in the period in which they are incurred using accrual accounting.

Question 12

Retailer

Answer 12

Buy their inventory already finished.

Question 13

Manufacturer

Answer 13

Produce the finished goods. Consists of direct materials, direct labor, and manufacturing overhead (indirect materials and indirect labor)

Question 14

Variable cost

Answer 14

Remain the same per unit regardless of activity. As activity goes up, TOTAL variable cost goes up. These are also known as Cost Drivers

Question 15

Fixed cost

Answer 15

Remain the same in total, regardless of activity. As activity goes up, fixed cost per unit goes down.

Question 16

Mixed cost

Answer 16

Combination of variable and fixed costs

Question 17

Contribution income statement

Answer 17

Not allowed by GAAP and IFRS. Typically only for internal users. It splits our expenses by variable and fixed costs.

Sales revenue
Less: variable expenses
= contribution margin
Less: fixed expenses
= net operating income

Question 18

Traditional income statement

Answer 18

Required by GAAP and IFRS. For external users. We split our expenses by product cost and period cost.

Sales revenue 
Less: cost of goods sold
= gross margin
Less: operating expenses (selling and admin)
= net operating income