Chapter 2 - Key terms

Question 1

Activity base

Answer 1

Refers to a measure of what causes variable costs to change. Common examples include direct labor-hours, machine hours, or units of production.

Question 2

Administrative costs

Answer 2

Costs associated with the general management of an organization, including executive compensation, accounting, secretarial work, and public relations.

Question 3

Conversion cost

Answer 3

The sum of direct labor and manufacturing overhead. These are the costs incurred to convert raw materials into finished goods.

Question 4

Cost behavior

Answer 4

Refers to how costs change in response to changes in the level of activity. Costs can be classified as variable, fixed, or mixed depending on their behavior.

Question 5

Cost driver

Answer 5

A factor that influences or causes a change in the cost of an activity. Examples include machine hours, labor hours, and the number of customer orders.

Question 6

Cost object

Answer 6

Any item for which costs are measured and assigned. Examples include products, services, projects, and departments.

Question 7

Cost of goods manufactured

Answer 7

Total cost incurred to manufacture products and move them from work-in-progress to finished goods. Includes direct materials, direct labor, and manufacturing overhead.

Question 8

Differential cost

Answer 8

The difference in cost between two alternatives. Important in decision-making as it highlights costs that will change depending on the chosen alternative.

Question 9

Direct cost

Answer 9

A cost that can be easily and conveniently traced to a specific cost object, such as direct materials or direct labor.

Question 10

Direct labor

Answer 10

Labor costs of employees who are directly involved in manufacturing the product, such as assembly line workers.

Question 11

Direct materials

Answer 11

Raw materials that are directly traceable to the finished product and become an integral part of it.

Question 12

Expense

Answer 12

Costs that are recognized as expenses on the income statement in the period in which they are incurred, including both product and period costs.

Question 13

Finished goods

Answer 13

Products that have been completed and are ready for sale but have not yet been sold.

Question 14

Fixed cost

Answer 14

A cost that remains constant regardless of changes in the level of activity, such as rent or salaries of permanent employees.

Question 15

Incremental cost

Answer 15

Another term for differential cost, referring to the additional cost incurred when choosing one alternative over another.

Question 16

Indirect cost

Answer 16

Costs that cannot be traced directly to a cost object and are usually included as part of manufacturing overhead.

Question 17

Indirect labor

Answer 17

Labor costs of employees who do not work directly on the product but are necessary for the production process, such as maintenance workers.

Question 18

Indirect materials

Answer 18

Materials used in production that cannot be traced directly to a product, like glue or cleaning supplies, considered part of manufacturing overhead.

Question 19

Inventoriable costs

Answer 19

All costs involved in acquiring or producing a product. These costs are initially recorded as inventory and later recognized as expenses when sold.

Question 20

Manufacturing overhead

Answer 20

Includes all manufacturing costs except direct materials and direct labor. Examples include maintenance, property taxes, and factory utilities.

Question 21

Marketing or selling costs

Answer 21

Costs necessary to secure customer orders and deliver the product, such as advertising and shipping costs.

Question 22

Opportunity cost

Answer 22

The potential benefit lost when one alternative is chosen over another.

Question 23

Period costs

Answer 23

Costs that are expensed in the period in which they are incurred. These include selling and administrative expenses.

Question 24

Prime cost

Answer 24

The sum of direct materials and direct labor, representing the primary costs incurred in producing a product.

Question 25

Product costs

Answer 25

Costs involved in acquiring or making a product, including direct materials, direct labor, and manufacturing overhead, assigned to inventory until sold.

Question 26

Raw materials

Answer 26

Basic materials used in production that are transformed into finished goods through the manufacturing process.

Question 27

Relevant range

Answer 27

The range of activity within which the assumptions made about cost behavior (fixed and variable costs) hold true.

Question 28

Schedule of cost of goods manufactured

Answer 28

A schedule that provides a detailed calculation of the cost of goods produced during a specific period, including direct materials, direct labor, and manufacturing overhead.

Question 29

Sunk cost

Answer 29

A cost that has already been incurred and cannot be changed by any future decision.

Question 30

Variable cost

Answer 30

A cost that varies in total in direct proportion to changes in the level of activity, such as direct materials and direct labor.

Question 31

Work in progress

Answer 31

Products that are partially completed but not yet ready for sale.