Classification of Cost

Question 1

What is the manufacturing cost concept in terms of financial accounting?

Answer 1

Cost is a measure of resources used or given up to achieve a stated purpose

Question 2

What is the manufacturing cost concept in terms of management accounting?

Answer 2

Product costs are the costs a company assigns to units produced

Question 3

What are manufacturing costs?

Answer 3

They are costs divided into 3 broad categories: direct materials, direct labour and manufacturing overhead. These costs are incurred to make a product and are added to the beginning balance of work in progress

Question 4

What are direct materials?

Answer 4

Raw materials, or any other materials that are used in the final product that become an integral part of the product and can be physically and conveniently traced directly to it

Question 5

What is direct labour?

Answer 5

Labour costs that can be easily, physically and conveniently traced to individual units of product, e.g. labour costs of assembly-line workers

Question 6

What are manufacturing overheads?

Answer 6

They cannot be traced directly by direct materials and direct material costs to specific units produced. Only costs associated with operating the factory are included in this category

Question 7

What are indirect costs?

Answer 7

Cannot be physically traced to the creation of products

Question 8

What are the different types of indirect costs?

Answer 8

Indirect materials, indirect labour, maintenance and repairs on production equipment, heat and light, property taxes, insurance, depreciation, etc

Question 9

What is indirect material?

Answer 9

Materials used to support the production process that are relatively insignificant or minor items

Question 10

What is indirect labour costs?

Answer 10

Wages paid to employees who are not directly involved in production work, e.g. caretakers, maintenance workers, cleaners and security guards

Question 11

What are non-manufacturing costs?

Answer 11

They are sub-classified into 2 categories: marketing or selling products and administrative costs

Question 12

What is marketing or selling products?

Answer 12

Costs necessary to secure customer orders and get the finished product/service into the hands of the customer

Question 13

What are administrative costs?

Answer 13

All executive, organisational and clerical costs

Question 14

What are product costs?

Answer 14

All the costs that are involved in making a product

Question 15

What are period costs?

Answer 15

All the costs that are not included in product cost

Question 16

What are some examples of period costs?

Answer 16

Sales commissions, office rent and selling and administrative costs

Question 17

What is conversion cost?

Answer 17

Manufacturing overhead combined with direct labour. It is the costs incurred in the conversion of materials into finished products

Question 18

What is prime cost?

Answer 18

Direct labour combined with direct materials. They are essential costs for production

Question 19

What is an accrual?

Answer 19

Costs incurred to generate particular revenues should be recognised as expenses at the same period that the revenue is recognised

Question 20

What are raw materials?

Answer 20

Materials waiting to be processed

Question 21

What is work in progress?

Answer 21

Partially complete products

Question 22

What are finished goods?

Answer 22

Completed products awaiting sale

Question 23

What are the differences for costing in service organisations?

Answer 23

Services cannot be stored as inventory, outputs are specially customised for a client and services cannot be counted, measured, inspected, tested or verified

Question 24

What happens if labour cost is high?

Answer 24

There will be a high fixed cost

Question 25

What is cost behaviour?

Answer 25

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

Question 26

What are total variable costs?

Answer 26

A cost that varies when there are changes to the level of activity

Question 27

Do variable costs remain constant per unit?

Answer 27

Yes

Question 28

What are total fixed costs?

Answer 28

A cost that remains constant regardless of changes in the level of activity

Question 29

What happens to the average fixed cost per unit?

Answer 29

It decreases as the number of units increases

Question 30

Why are costs assigned to objects?

Answer 30

Pricing, profitability studies and control of spending

Question 31

What is a cost object?

Answer 31

When cost data is desired

Question 32

What are costs classified as?

Answer 32

Direct or indirect

Question 33

What are direct costs?

Answer 33

Costs that can be easily and conveniently traced to a unit of product

Question 34

What are the different types of direct costs?

Answer 34

Direct material and direct labour

Question 35

What does common cost mean?

Answer 35

It is a type of indirect cost. It is a cost that is common to a number of costing objects but cannot trace them individually

Question 36

What are differential costs and revenues?

Answer 36

They differ among alternatives

Question 37

What does opportunity cost mean?

Answer 37

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

Question 38

What are sunk costs?

Answer 38

They cannot be changed by any decision