ACCT2130: Chapter 1

Cost Classifications

1. for assigning costs to cost objects 2. for manufacturing companies 3. for preparing financial statements 4. for predicting cost behavior 5. for making decisions

Relevant benefit

A benefit that should be considered when making decisions.

Direct cost

A cost that can be easily and conveniently traced to a specified cost object.

Indirect cost

A cost that cannot be easily and conveniently traced to a specified cost object.

Mixed cost

A cost that contains both variable and fixed cost elements.

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future.

Common cost

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually.

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity.

Relevant cost

A cost that should be considered when making decisions.

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit.

Which of the following statements are true? - A direct cost can be easily and conveniently traced to a specific cost object. - An individual cost is either direct or indirect, regardless of the cost object. - A direct cost is sometimes referred to as a common cost. - A regional sales manager's salary is a direct cost of the regional office in which the sales manager works.

A direct cost can be easily and conveniently traced to a specific cost object. A regional sales manager's salary is a direct cost of the regional office in which the sales manager works.

Differential cost

A future cost that differs between any two alternatives.

Activity base

A measure of whatever causes the incurrence of a variable cost. For example, the total cost of surgical gloves in a hospital will increase as the number of surgeries increases. Therefore, the number of surgeries is the activity base that explains the total cost of surgical gloves.

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.

Product costs

All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Also see Inventoriable costs.

Administrative costs

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.

Manufacturing overhead

All manufacturing costs except direct materials and direct labor.

Contribution approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes

Incremental cost

An increase in cost between two alternatives.

Raw materials

Any materials that go into the final product.

Cost object

Anything for which cost data are desired. Examples of cost objects are products, customers, geographic regions, and parts of the organization such as departments or divisions.

Direct labor and overhead costs incurred to change raw materials into finished products are known as ______ costs.

Blank 1: conversion

A cost that can be easily and conveniently traced to a specific cost object is a(n) ______ cost of that cost object, whereas costs that cannot be easily and conveniently traced to that specific cost object are ______ costs.

Blank 1: direct or prime Blank 2: indirect, common, or overhead

Materials that become an important component of the finished product whose cost can be easily and conveniently traced to the finished product are ______ materials.

Blank 1: direct or raw

In an automobile manufacturing plant, the assembly-line workers are classified as ______ ______ cost.

Blank 1: direct or touch Blank 2: labor or labour

Product costs are also called costs.

Blank 1: inventoriable or manufacturing

Factory burden is a synonym for ______ ______.

Blank 1: manufacturing or factory Blank 2: overhead

The accrual concept that costs incurred to generate a revenue are expensed in the same period the revenue is recognized is known as the ______ principle.

Blank 1: matching

Manufacturing costs can be divided into three categories: direct ______, ______ labor and manufacturing ______.

Blank 1: materials or material Blank 2: direct or touch Blank 3: overhead or burden

The sum of direct materials and direct labor is called ______ cost.

Blank 1: prime

The materials that go into the final product are called ______ materials.

Blank 1: raw or direct

Direct labor is also called ______ labor.

Blank 1: touch

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued.

Conversion cost

Direct labor cost plus manufacturing overhead cost.

Prime cost

Direct materials cost plus direct labor cost.

Direct labor

Factory labor costs that can be easily traced to individual units of product. Also called touch labor.

All of a company's depreciation, property taxes, and insurance premiums are considered manufacturing overhead. - True - False

False

Differential revenue

Future revenue that differs between any two alternatives.

Committed fixed costs

Investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes.

Direct materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Indirect materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

Inventoriable costs

Synonym for product costs.

Contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted.

Indirect labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products.

Managerial accounting

The phase of accounting that is concerned with providing information to managers for use within the organization.

Financial accounting

The phase of accounting that is concerned with reporting historical financial information to external parties, such as stockholders, creditors, and regulators.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another.

Relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid.

Cost structure

The relative proportion of fixed, variable, and mixed costs in an organization.

Cost behavior

The way in which a cost reacts to changes in the level of activity.

Discretionary fixed costs

Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research.

A cost may be direct or indirect, depending on the cost object. - True - False

True

The finished product of one company can become raw materials for another company. - True - False

True

Work in process

Units of product that are only partially complete and will require further work before they are ready for sale to the customer.

Finished goods

Units of product that have been completed but not yet sold to customers.

Units that are partially complete are found in ______.

Work in Process

Y = a + bX

Y = The total mixed cost. a = The total fixed cost (the vertical intercept of the line). b = The variable cost per unit of activity (the slope of the line). X = The level of activity.

Indirect labor costs include:

assembly-line supervisor salary. factory security guard wages.

A type of indirect cost incurred to benefit more than one cost object is a(n) ______ cost.

common

Costs that are shared by multiple cost objects in a company are known as ______ costs.

common

Nonmanufacturing costs include ______.

company president's salary sales commissions

Any item for which cost data is desired is called a(n) ______ ______

cost object

Cost objects include:

customers. anything for which cost data is desired. organizational subunits / departments.

Costs that can be easily and conveniently traced to a specific product are called ______ costs.

direct

Fantastic Furniture makes custom order couches. The material used to make a couch is a(n) ______ cost of the customer placing the order.

direct

A laptop computer manufacturer would consider the computer's processor chip to be a(n) ______ cost.

direct material

Prime costs include ______.

direct materials direct labor

Other names for manufacturing overhead include:

factory burden. factory overhead. indirect manufacturing costs.

Salaries of factory supervisors and factory maintenance personnel are examples of ______ labor costs.

indirect

Minor items such as nails and glue are usually considered to be ______.

indirect materials

Manufacturing overhead costs include ______.

indirect materials, factory supervisors' salaries, and factory depreciation

A manufacturing cost that cannot be easily traced to a specific cost object is a(n) ______ cost.

indirect, common, overhead, or shared

Direct materials and direct labor are both ______ costs.

manufacturing

Factory costs such as cleaning supplies, taxes, insurance, and janitor wages are classified as ______.

manufacturing overhead

Indirect materials and indirect labor are classified as ______.

manufacturing overhead

Indirect materials include ______.

nails, glue, and thread