Unit 7: Cost Management Concepts

Question 1

What is the principal concern of management accounting?

Answer 1

The principal concern of management accounting is to provide reports that improve organizational decision making to internal users.

Question 2

Define cost object.

Answer 2

A cost object is any object to which costs can be attached.

Question 3

Define cost driver.

Answer 3

A cost driver is the basis used to assign costs to a cost object.

Question 4

Define direct costs.

Answer 4

Direct costs are costs that can be associated with a particular cost object in an economically feasible way.

Question 5

Define indirect costs.

Answer 5

Indirect costs are costs that cannot be associated with a particular cost object in an economically feasible way and thus must be allocated to that object.

Question 6

What is a common cost?

Answer 6

A common cost is a cost that is incurred for the benefit of more than one cost object.

Question 7

What are the three types of manufacturing costs?

Answer 7

Direct materials
Direct labor
Manufacturing overhead

Question 8

What is a prime cost?

Answer 8

A prime cost is a cost that is directly attributable to a product and equals direct materials plus direct labor.

Question 9

What is conversion cost?

Answer 9

Conversion cost is a cost incurred in converting raw materials into the finished product. Conversion cost equals direct labor plus manufacturing overhead.

Question 10

Nonmanufacturing costs include

Answer 10

Selling (marketing) expenses
Administrative expenses

Question 11

Define product cost.

Answer 11

Product costs are costs that are capitalized as part of finished goods inventory, including direct materials, direct labor, and sometimes manufacturing overhead.

Question 12

How are period costs accounted for?

Answer 12

Period costs are expensed as incurred.

Question 13

What is a relevant range?

Answer 13

A relevant range is a range of values that defines the limits within which per-unit variable costs remain constant and fixed costs are not changeable. It is synonymous with the short run.

Question 14

Define variable cost.

Answer 14

Variable costs are those that vary depending on the volume of production.

Question 15

What type of relationship exists between variable costs and production volume?

Answer 15

Variable costs are directly related to production volume. As one increases, so does the other and vice versa.

Question 16

Define fixed cost.

Answer 16

Fixed costs are those that remain constant regardless of production levels.

Question 17

Methods of estimating mixed costs include

Answer 17

The regression (scattergraph) method
The high-low method

Question 18

When applying the high-low method, how is the variable portion of a mixed cost calculated?

Answer 18

Variable portion of mixed cost using high-low method =
Cost at highest activity level – Cost at lowest activity level
Driver at highest activity level – Driver at lowest activity level

Question 19

What is actual costing?

Answer 19

Actual costing is the recording of product costs based on actual
Cost of materials
Cost of labor
Overhead incurred

Question 20

How is normal costing applied?

Answer 20

Normal costing charges actual direct materials and direct labor to a specific product or a production department but applies overhead on the basis of a budgeted rate.

Question 21

How is the fixed portion of manufacturing overhead treated under absorption costing?

Answer 21

Fixed manufacturing overhead is “absorbed” into the cost of each unit of product.

Question 22

How is gross margin calculated under absorption costing?

Answer 22

Gross margin (gross profit) = Sales revenue – Absorption cost of goods sold

Question 23

How is the fixed portion of manufacturing overhead treated under variable costing?

Answer 23

Fixed manufacturing overhead is expensed as a period cost.

Question 24

How is contribution margin calculated?

Answer 24

Contribution margin = Sales revenue – Variable costs (including variable S&A)

Question 25

How does the treatment of fixed and variable costs differ under absorption and variable costing?

Answer 25

Absorption cost: Includes Fixed OH in product cost

Question 26

When production exceeds sales, does absorption costing or variable costing produce a higher operating income?

Answer 26

Operating income is higher under absorption costing because some fixed costs are embedded in ending inventory rather than expensed.

Question 27

When production is less than sales, does absorption costing or variable costing produce a higher operating income?

Answer 27

Operating income is higher under variable costing because under absorption costing, the fixed costs embedded in beginning inventory are expensed in addition to the current period’s fixed costs.