Chapter 1

Raw materials

The materials that go into the final product are called

Finished goods

consist of completed units of product that have not yet been sold to customers.

Mixed cost

contains both variable and fixed cost elements. Mixed costs are also known as semivariable costs.

Administrative costs

include all costs associated with the general management of an organization rather than with manufacturing or selling.

Product costs

include all costs involved in acquiring or making a product. Product costs "attach" to a unit of product as it is purchased or manufactured and they stay attached to each unit of product as long as it remains in inventory awaiting sale. When units of product are sold, their costs are released from inventory as expenses (typically called cost of goods sold) and matched against sales on the income statement. Because product costs are initially assigned to inventories, they are also known as inventoriable costs Synonym for product costs.

Period costs

are all the costs that are not product costs. All selling and administrative expenses are treated as period costs.

The ________ requires that the costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized.

matching principle

Relevant range

range of activity within which the assumption that cost behavior is strictly linear is reasonably valid.3

If a firm increases its activity level, ________.

some costs will change, other costs will remain the same

In the equation, Y = a + bX, X represents ________.

the level of activity

Davidson Company has sales of $100,000, variable cost of goods sold of $40,000, variable selling expenses of $15,000, variable administrative expenses of $5,000, fixed selling expenses of $7,000, and fixed administrative expenses of $9,000. What is Davidson's contribution margin?

$40,000

Cyber Devices manufactures PCTV products that enable people to watch television content on their computers. It sells its product to retailers for $50. A tuner component that goes into each of these devices costs $5 to acquire. The total variable cost at an activity level of 1,000 units equals ________.

$5,000

Nonmanufacturing costs are often divided into two categories

(1) selling costs and (2) administrative costs

Discretionary fixed costs

(often referred to as managed fixed costs) usually arise from annual decisions by management to spend on certain fixed cost items.

Differential cost

In business decisions, each alternative will have costs and benefits that must be compared to the costs and benefits of other available alternatives. A future cost that differs between any two alternatives is known as a Always a relevant cost

Which of the following is true of the contribution approach?

It separates costs into fixed and variable categories.

How should the wages of a sheet metal worker in a fabrication plant be classified?

Product cost

Which of the following is always an irrelevant cost?

Sunk cost

Cost structure

The relative proportion of each type of cost in an organization

Work in process

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

Selling costs

include all costs that are incurred to secure customer orders and get the finished product to the customer. These costs are sometimes called order-getting and order-filling costs.

Sunk cost

is a cost that has already been incurred and that cannot be changed by any decision made now or in the future. Because sunk costs cannot be changed by any decision, they are not differential costs. And because only differential costs are relevant in a decision, sunk costs should always be ignored

Property taxes associated with a company's administrative facility are considered ________.

nonmanufacturing costs

Direct materials

refers to raw materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product

Common cost

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

Cost object

Anything for which cost data are desired—including products, customers, and organizational subunits. For purposes of assigning costs to cost objects, costs are classified as either direct or indirect.

The traditional income statement uses which of the following cost categories?

Cost of goods sold and selling and administrative expenses.

Direct labor

consists of labor costs that can be easily traced to individual units of product. Direct labor is sometimes called touch labor because direct labor workers typically touch the product while it is being made.

Opportunity cost

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

Materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product are called ________.

direct materials

Commited fixed costs

represent organizational investments with a multiyear planning horizon that can't be significantly reduced even for short periods of time without making fundamental changes

Manufacturing overhead

the third manufacturing cost category, includes all manufacturing costs except direct materials and direct labor. For example, manufacturing overhead includes a portion of raw materials known as indirect materials, as well as indirect labor Manufacturing overhead also includes other indirect costs that cannot be readily traced to finished products such as depreciation of manufacturing equipment and the utility costs, property taxes, and insurance premiums incurred to operate a manufacturing facility. Although companies also incur depreciation, utility costs, property taxes, and insurance premiums to sustain their nonmanufacturing operations, these costs are not included as part of manufacturing overhead. Only those indirect costs associated with operating the factory are included in manufacturing overhead.

Variable costs

varies, in total, in direct proportion to changes in the level of activity. Common examples of variable costs include cost of goods sold for a merchandising company, direct materials, direct labor, variable elements of manufacturing overhead, such as indirect materials, supplies, and power, and variable elements of selling and administrative expenses, such as commissions and shipping costs

Cost behavior

refers to how a cost reacts to changes in the level of activity. As the activity level rises and falls, a particular cost may rise and fall as well—or it may remain constant. For planning purposes, a manager must be able to anticipate which of these will happen; and if a cost can be expected to change, the manager must be able to estimate how much it will change. To help make such distinctions, costs are often categorized as variable, fixed, or mixed.

Differential costs are always ________.

relevant in making business decisions

A fixed cost is a cost which ________.

remains constant in total with changes in the level of activity

Which of the following is common to both prime cost and conversion cost?

Direct labor

________ is sometimes called "touch labor."

Direct labor

Audio Corporation purchased $20,000 of DVDs during the current year. The company had DVD inventory of $15,000 at the beginning of the year. An end of the year audit revealed that the company had DVD inventory of $10,000. The amount that would be reported as cost of goods sold in the income statement for the current year is ________.

$25,000

common cost

A ___________ is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost, which is a type of indirect cost, is a cost that is incurred to support a number of cost objects but cannot be traced to them individually. A common cost is a type of indirect cost.

Direct cost

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

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity. Manufacturing overhead usually includes various fixed costs such as depreciation, insurance, property taxes, rent, and supervisory salaries.

Manufacturing costs include all of the following categories except ________.

administrative costs

Indirect materials

are raw materials, such as the solder used to make electrical connections in a Samsung HDTV and the glue used to assemble an Ethan Allen chair, whose costs cannot be easily or conveniently traced to finished products

indirect cost

Adventure Holiday sells thousands of tour packages each month through its various branches. A branch manager's salary would be a(n) _________ of selling a tour package. The cost object is the sale of a tour package. The branch manager's salary is incurred as a consequence of running the entire branch—it is not incurred to sell each tour package. As such, the branch manager's salary is an indirect cost of selling a tour package.

Items such as indirect materials, indirect labor, maintenance and repairs on production equipment, depreciation, and insurance on manufacturing facilities are included in ________.

manufacturing overhead costs

direct cost

Adventure Holiday sells thousands of tour packages each month through its various branches. A branch manager's salary would be a(n) _________ of the branch. This is a direct cost. Remember to consider the cost object. In this case, the The cost object is the branch. The branch manager's salary is incurred as a consequence of running the entire branch; as such, it is a direct cost of the branch.

In a small manufacturing facility, one welder is needed for every 200 hours of machine-hours or fewer in a month. The welder is paid a monthly salary of $2,500. If the total monthly requirement is 1,300 machine-hours, the total salaried employee expense is ________.

$17,500

Indirect cost

A cost that cannot be easily and conveniently traced to a specified cost object. For example, a Campbell Soup factory may produce dozens of varieties of canned soups. The factory manager's salary would be an indirect cost of a particular variety such as chicken noodle soup.

Which of the following statements about opportunity costs is not correct?

An opportunity cost cannot be changed by any decision made now or in the future.

Differential revenue

Future revenue that differs between any two alternatives is known as.. A differential cost is also known as an incremental cost

Activity base

is a measure of whatever causes the incurrence of a variable cost. An activity base is sometimes referred to as a cost driver.

Indirect labor

refers to employees, such as janitors, supervisors, materials handlers, maintenance workers, and night security guards, that play an essential role in running a manufacturing facility; however, the cost of compensating these people cannot be easily or conveniently traced to specific units of product