Class 1

Question 1

On page 272 of The Goal (E. M. Goldratt), Lou thinks of inventory as a liability. What does he mean?

Question 2

What are the two criteria that direct costs satisfy?

Answer 2

1. Physically observable
2. Economically meaningful

Question 3

What are common examples of direct costs?

Answer 3

• Direct Materials
• Direct Labor
• Overhead

Question 4

What is overhead?
What is another word for overhead?

Answer 4

• All manufacturing costs except DM & DL
• indirect manufacturing cost

Question 5

Give an example of overhead that is physically observable but not economically meaningful?

Question 6

Give an example of overhead that is not physically observable but is economically meaningful?

Question 7

What is the economic interpretation of gross margin as a percent of sales?

Answer 7

Revenue - Cost of Sales

Question 8

What type of costs are allocated with the product costing system?

Answer 8

• Direct Costs
  
  • DM
  • DL
• Indirect Costs
  
  • OH

Question 9

What is the overhead rate intuitively and what are the numerical quantities in the numerator and the denominator of the rate conceptually?

Answer 9

• • Estimated $ OH / Estimated Activity level

Question 10

What is the difference between a one-stage and a two-stage product costing system?

Question 11

What is cross subsidization?

Question 12

What are the best practices for developing an ABC product costing system?

Question 13

What is activity based management or ABM?

Question 14

Classification of Manufacturing Costs

Answer 14

• DM (Direct Material)
• DL (Direct Labor)
• OH (Overhead, Manufacturing Overhead)

Question 15

Manufacturing firms report three inventory numbers

Answer 15

1. Raw materials—the materials used to make the product
2. Work in process (WIP)—units that are partially complete, but require further work to be saleable
3. Finished goods (FG)—units completed but unsold

Question 16

Product costs versus period costs

Answer 16

Question 17

Cost Flows (T Accounts)

Answer 17