Chapter 2- Product costing concepts and systems

Question 1

What is a cost?

Answer 1

A cost is the sacrifice made, measured by the value of the resources given up, to achieve a particular purpose

A cost is not the same as an expense!!

Question 2

Total cost =

Answer 2

Direct costs + indirect costs

Question 3

Direct costs

Answer 3

Costs that can be traced easily and conveniently to a product or department

Example: Cost of paint in the paint department of an automobile assembly plant

Question 4

Indirect costs

Answer 4

Costs that need to be allocated before they can be assigned to a product or department

Example: Cost of national advertising for an airline is indirect to a given flight or route

Question 5

A cost is not..
A revenue is not..

Answer 5

1. Not an expense
2. Not a receipt

Question 6

A loan is..

Answer 6

a receipt, but not a revenue

Question 7

A stocks raising is..

Answer 7

a revenue, but not a receipts (richer, but no money)

Question 8

A stocks drop is..

Answer 8

a cost, but not an expense

Question 9

Opportunity costs

Answer 9

The potential benefit that is given up when one alternative is selected over another

Question 10

Cash/ out-of-pocket cost

Answer 10

The incremental cost paid by cash or credit to achieve a particular purpose
- this is an expense

Question 11

Accrual cost

Answer 11

Total cost of resources used during an extended time period (for example a year) divided by a measure of the resources used to pick up orders

• typical the cost in your profit and loss statement
• includes amortization, depreciation ++

(in a task example it was the total variable manufacturing costs + the fixed manufacturing overhead)

Question 12

Sunk costs

Answer 12

Past payments for resources that cannot be changed by any current or future decisions

• should not be considered in decisions

Example:
You bought a car for € 12,000 two years ago. Whatever you do with the car in the future, you cannot nullify the original transaction. If it has a trade-­in value, that value would become an opportunity cost in your future decisions.

Question 13

Variable costs

Answer 13

Vary in direct proportion to the production values

Question 14

Committed costs

Answer 14

Committed costs are incurred because of policies or contractual obligations

Question 15

Fixed costs

Answer 15

Costs that do not change within a defined range of underlying productive activity

Question 16

Cost behavior

Answer 16

How a cost will react to changes in the level of business activity.

Total variable costs: change when activity level changes

Total fixed costs: remains unchanged when activity level changes

Question 17

Product costs

Answer 17

• related to the purchase or manufacture of goods for resale
• assigned to inventory and cost of goods sold

Question 18

Period costs

Answer 18

• related to selling and administrative operations
• recognized as expenses in the same time period

Question 19

Gross margin ratio

Answer 19

Gross margin / sales turnover

(Sales turnover- cost of sales) sales turnover

Question 20

Operating income

Answer 20

Gross margin - period expenses

Question 21

Return on sales ratio

Answer 21

Operating income / sales

Question 22

Service firms

Answer 22

• provide a service that is consumed when produced
• have no inventories

Question 23

Retailers

Answer 23

• buy finished goods
• sell finished goods

Question 24

Manufacturers

Answer 24

• buy raw materials
• produce and sell finished goods

Question 25

The 3 major categories of manufacturing costs

Answer 25

1. Direct materials
2. Direct labor
3. Manufacturing overhead

Question 26

Direct materials

Answer 26

raw materials, components, and other parts that can be traced to a specific products

Question 27

Direct labor

Answer 27

Payments and benefits for those employees who convert direct materials into finished products

Question 28

Manufacturing overhead

Answer 28

• indirect material
• indirect labor
• other overhead

Question 29

Prime costs

Answer 29

direct materials and direct labor

Question 30

Conversion costs

Answer 30

Direct labor and manufacturing overhead

Question 31

Stages of production and the flow of costs

Answer 31

Raw materials:

Beginning inventory
+ Purchases
= Raw materials available for production
- Raw materials transferred to production
= ending inventory

Work in progress:
Beginning inventory
+ Raw materials transferred in
+ direct labor
+ manufacturing overhead
= total manufacturing costs incurred
- cost of goods completed and transferred to finished goods
= ending WIP inventory

Finished goods:
Beginning inventory
+ cost of goods completed and transferred from WIP
= goods available for sale
- cost of goods sold
= ending inventory

Question 32

Profit margin

Answer 32

sales price - all costs

Question 33

Gross margin

Answer 33

Sales price- cost of goods sold (manufacturing costs)