Introduction To Cost Terms And Concepts Chap 2

Question 1

Cost

Answer 1

A monetary measure of the resources, sacrifice, or forgone to achieve a specific objective, such as acquiring a good or service

Question 2

Cost object

Answer 2

If the users of accounting information want to know the cost of something it’s called cost object

Question 3

Different types of organisations classify different costs based on their activities

Answer 3

1. Manufacturing organisation
2. Merchandising organisation
3. Service organisation

Question 4

Manufacturing organisation

Answer 4

• raw material
• work in progress inventory
• finished goods

Question 5

Merchandising organisation

Answer 5

Only finished goods in inventory

Question 6

Service organisation

Answer 6

• services cannot be stored for future use
• still firms have work in progress inventory, when a service is not finished at the end of the financial period

Question 7

Direct cost

Answer 7

Direct material costs and direct labour costs

Question 8

Direct material cost

Answer 8

Représent those material costs that can be specifically and exclusively measured and identified with a particular cost object
-> wood used in manufacturing of different types of furniture can be directly identified with each specific type of furniture such as chairs, tables and bookcases

Question 9

Direct labour cost

Answer 9

Labour cost that can be specifically and exclusively identified with a particular cost object
-> a personal trainer in a gym can be specifically identified with an individual client or with a specific instance of service

Question 10

Indirect cost

Answer 10

Cannot identified specifically and exclusively with a given cost object
-> overheads manufacturing, administration, or marketing
-> cost of material used to repair machinery cannot be indent with a specific product and can therefore be classified as indirect material costs

Question 11

Manufacturing costs

Answer 11

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

Question 12

Non manufacturing costs

Answer 12

1. Administrative overhead
2. Marketing overhead

Question 13

Prime cost

Answer 13

Direct materials + direct labour

Question 14

Conversion cost

Answer 14

Direct labour + manufacturing overhead

Question 15

Cost allocation

Answer 15

The process of assigning costs when a direct measure does not exist for the quantity of resources consumed by a particular cost object

Question 16

Product cost

Answer 16

Costs that are identified with goods purchased or produced for resale

Question 17

Period costs

Answer 17

Costs that are not specifically related to manufacturing or purchasing a product or providing a service that generates revenues

Question 18

Variable costs

Answer 18

Vary in direct proportion of the volume of activity
-> doubling the level of activity will double the total variable cost
-> total variable costs are linear and unit variable costs is constant

Question 19

Fixed costs

Answer 19

Remain constant over wide ranges of activitiy for a specified time period. They are not affected by changes in activity

Question 20

Semi-fixed or step-fixed costs

Answer 20

Wi thin a given time periods costs are fixed within specified activity level, but they are eventually subject to step increases or decreases by a constant amount at various critical activity levals

Question 21

Semi-variable or mixed costs

Answer 21

Include both a fixed and a variable component

Question 22

Sunk cost

Answer 22

Cost that have been created by a decision made in the past and that cannot be changed by any decision that will be made now or in the future

Question 23

Opportunity cost

Answer 23

The opportunity (or benefit) that is lost or sacrificed when the choice of one course of action requires that an alternative course of action be given up

Question 24

Incremental or differential cost

Answer 24

The difference between the costs of each alternative action that is being considered