Cost Ch. 2

Explain why unit costs must often be interpreted with caution.

A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.

What role does the relevant-range concept play in explaining how costs behave?

Costs are described as variable or fixed with respect to a particular relevant range.

A variable, such as the level of activity or volume that causally affects total costs over a given time span; a change in this results in a change in the level of total costs

cost driver

Anything for which a separate measurement of costs is desired

cost object

Applewhite Corporation, a manufacturing company, is analyzing its cost structure in a project to achieve some cost savings. Which of the following statements is/are correct? I. The cost of the direct materials in Applewhite's products is considered a variable cost. II. The cost of the depreciation of Applewhite's plant machinery is considered a variable cost because Applewhite uses an accelerated depreciation method for both book and income tax purposes. III. The cost of electricity for Applewhite's manufacturing facility is considered a fixed cost, even if the cost of the electricity has both variable and fixed components. 1. I, II, and III are correct. 2. I only is correct. 3. II and III only are correct. 4. None of the listed choices is correct.

2. Reason: Statement I: the more Applewhite manufactures, the more the total cost of the direct materials will be Statement II: Just because a cost changes over time (which is what using an accelerated depreciation method will cause) does not mean that the cost is variable. The fact that Applewhite may use the same method for book and tax purposes is irrelevant Statement III: The cost of the electricity would be considered a "mixed" cost, not a fixed cost

Comprehensive Care Nursing Home is required by statute and regulation to maintain a minimum 3 to 1 ratio of direct service staff to residents to maintain the licensure associated with the Nursing Home beds. The salary expense associated with direct service staff for the Comprehensive Care Nursing Home would most likely be classified as: 1. Variable cost. 2. Fixed cost. 3. Overhead costs. 4. Inventoriable costs.

2. Fixed cost Reason: Costs that maintain production capacity and do not vary regardless of utilization are classified as fixed costs. 2. In this instance, the salary costs of direct service staff are required to maintain capacity based on the number of residents (doctors) and will be incurred whether the facility is full or empty. The costs are fixed. 1. Direct labor costs mandated by statute do not vary with production, they vary with the compliance requirement 3. Direct costs related to service provider salaries are considered to be direct costs of the service, not overhead costs 4. Comprehensive Care Nursing Home is a service company and does not have any inventory and therefore no inventoriable costs

Frisco Corporation is analyzing its fixed and variable costs within its current relevant range. As its cost driver activity changes within the relevant range, which of the following statements is/are correct? I. As the cost driver level increases, total fixed cost remains unchanged. II. As the cost driver level increases, unit fixed cost increases. III. As the cost driver level decreases, unit variable cost decreases. 1. I, II, and III are correct. 2. I and II only are correct. 3. I only is correct. 4. II and III only are correct.

3. Reason: I: The question asks what happens to variable and fixed costs when cost driver activity changes (i.e., when the cost driver level increases or decreases). Statement I says that, as the cost driver level increases, total fixed cost remains unchanged. Total fixed cost will remain unchanged regardless of changes in the cost driver because total fixed cost is unaffected by changes in the cost driver II: While total fixed cost will remain unchanged regardless of changes in the cost driver, unit fixed cost will not. If the cost driver level increases, total fixed cost will remain the same, but the total number of units will increase, and unit fixed cost will decrease, not increase. III: Unit variable cost will remain unchanged regardless of what happens to the cost driver

the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way.

Direct manufacturing labor costs

Frisco Corporation is analyzing its fixed and variable costs within its current relevant range. As its cost driver activity changes within the relevant​ range, which of the following statements​ is/are correct? I. As the cost driver level​ increases, total fixed cost remains unchanged. II. As the cost driver level​ increases, unit fixed cost increases. III. As the cost driver level​ decreases, unit variable cost decreases.

I. As the cost driver level​ increases, total fixed cost remains unchanged.

All costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory to accumulate the costs of creating these assets

Inventoriable costs

all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way.

Manufacturing overhead costs

purchase materials and components and convert them into various finished goods, for example automotive and textile companies

Manufacturing-sector companies

purchase and then sell tangible products without changing their basic form, for example retailing or distribution

Merchandising-sector companies

all direct manufacturing costs (direct material costs and direct manufacturing labor costs).

Prime costs

provide services or intangible products to their customers, for example, legal advice or audits.

Service-sector companies

Why do managers consider direct costs to be more accurate than indirect costs?

When costs are allocated (indirect cost), managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions.

all manufacturing costs other than direct material costs.

conversion costs

general term that encompasses the assignment of both direct costs and indirect costs to a cost object

cost assignment

related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way; traced to a cost object

direct costs of a cost object

the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way.

direct material costs

the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line

example of cost driver

the leasing cost of a machine that is unchanged for a given time period (such as a year) regardless of the number of units of product produced on the machine

example of fixed cost

sales commission paid as a percentage of each sales revenue dollar

example of variable cost

a product, a service, a project, a customer, a brand category, an activity, and a department.

examples of a cost object

remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume

fixed cost

a subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like.

idle time

related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way; allocated to a cost object

indirect costs of a cost object

the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates.

overtime premium

All costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues

period costs

the sum of the costs assigned to a product for a specific purpose

product cost

the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question

relevant range

changes in total in proportion to changes in the related level of total activity or volume

variable cost

What are three common features of cost accounting and cost management?

· calculating the costs of products, services, and other cost objects · obtaining information for planning and control and performance evaluation · analyzing the relevant information for making decisions

Purposes for computing a product cost

· pricing and product mix decisions, · contracting with government agencies, and · preparing financial statements for external reporting under GAAP.

Three factors that will affect the classification of a cost as direct or indirect

· the materiality of the cost in question · available information-gathering technology · design of operations