Manufacturing Costs Flashcards
Variability is defined in terms of what?
Volume, activity or output.
Define “prime costs.”
Product costs that can be associated with specific units of production; comprised of direct material and direct labor costs; also known as direct costs.
Define “conversion costs.”
Costs necessary to convert raw materials into a finished product: comprised of direct labor costs plus factory overhead costs.
List the three factors of production.
Direct Material;
Direct Labor;
Factory Overhead.
What is marginal cost or revenue?
Additional cost or revenue resulting from one more unit of output.
Define “product costs.”
Cost that can be associated with making or acquiring goods for sale; product costs are held in inventory until the products are sold; also known as inventoriable costs.
How do average fixed cost and average variable cost behave?
Average fixed cost decreases as volume increases, while average variable cost increases as volume increases (subject to the relevant range).
Describe the accounting treatment of normal spoilage.
Included with other costs as an inventoriable product cost.
Define “abnormal spoilage.”
Unplanned but considered controllable, for example, spoilage due to natural disaster, carelessness, inefficiency, or accidents. Abnormal spoilage is separated and deducted as a period expense in the calculation of net income.
Describe the accounting treatment of proceeds from sale of scrap.
If the amount of scrap in immaterial, any monies received from the sale of scrap can be used to reduce factory overhead, and thereby reduce Cost of Goods Sold. Alternatively, if the value of scrap is significant and is saleable, it can be treated as “other sales” in the revenue
Describe the differences between retail inventories and manufacturing inventories.
Retail = merchandising inventory; Manufacturing = raw materials, work-in-process and finished goods.
Define “normal spoilage.”
Unavoidable as part of the manufacturing process. Normal spoilage is included with other costs as an inventoriable product cost.
Define “relevant range.”
(1) the range of activity for which the assumptions of cost behavior reasonably hold true; AND (2) the range of activity over which the company plans to operate.
What is the difference between “mixed costs” and “step-variable costs”?
Mixed costs have a fixed component and a variable component, while step-variable costs remain constant in total over a small range of procuction levels, but vary with larger changes in production volume..
Define “expected value”.
The long-run average outcome; determined by calculating the weighted average of the outcomes (multiply the value of each outcome by its probability and then sum the results).
