Formulas

Question 1

Manufacturing (or Production) Costs.

Answer 1

All costs incurred within the manufacturing -
The cost of direct material, direct labour and manufacturing overheads.

                  DM+DL+MO=Manufacturing Costs

Question 2

Overtime Premium.

Answer 2

The extra wages paid to an employee who works beyond normal working hours.
Recorded as a manufacturing overhead.
I.e Worker works 48 hours (8 hours Extra x 1.5)
DL = 48 x $30 (Wage-Not Overtime Premium)
MO = 8 x $15 (Overtime Premium)

Question 3

Conversion Costs.

Answer 3

The costs of direct labour and manufacturing overhead incurred to convert raw material to a finished product.

                   DL + MO = Conversion Cost

Question 4

Prime Costs.

Answer 4

The costs of direct material and direct labour incurred to produce a product.

  DM + DL = Prime Costs

Question 5

Costs of Goods Manufactured.

Answer 5

Cost of Goods Manufactured = Work In Progress + Total Manufacturing Costs - Ending Work In Progress.

COGM = WIP + TMC - EWIP

Question 6

Costs of Goods Sold.

Answer 6

Cost of Goods Sold = Beginning Finished Goods + Cost of Goods Manufactured - Ending Finished Goods.

   COGS = BFG + COGM - EFG

Question 7

What is a Cost Function?

Answer 7

An equation used to describe a cost behaviour.
         Y = a + bX
Y = Total Cost
a = Fixed Cost Component
b = Variable Cost Per Unit of Activity
X = The Level of Activity

Question 8

What is The Predetermined Overhead Rate?

Answer 8

Is equal to the Budgeted Manufacturing Overhead / Budgeted Direct Labour Cost.

POR = BMO/BDLC

Question 9

What are Incremental Costs?

Answer 9

These are the additional costs that arise from choosing one alternative over another.

Question 10

What is Incremental Revenue?

Answer 10

The addition revenue that will be gained by choosing one alternative over another.

Question 11

What are Avoidable Costs?

Answer 11

Costs that will not be incurred in the future if a particular decision is made.

Question 12

What are Unavoidable Costs?

Answer 12

Costs that will continue to be incurred no matter which alternative is chosen. Unavoidable costs are irrelevant to the decision.
I.e Sunk Costs & Future costs or revenues that are the same for all courses of action being considered.

Question 13

Explain what is a Sunk Cost?

Answer 13

Costs that have already been incurred and cannot be affected by any future action.