Ch. 2 ACCT 302 Midterm

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

Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, 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.

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

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

Define VC and FC. Give examples.

VC = changes in total in proportion to changes in the related level of total activity or volume. Ex: sales commission that is a percentage of each sales revenue dollar. FC = remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. Ex: 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.

Name 3 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

Define: direct material costs, direct manufacturing labor costs, manufacturing OH costs, prime costs, and conversion costs.

1) Direct material costs are 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. 2) Direct manufacturing labor costs include 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. 3) Manufacturing overhead costs are 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. 4) Prime costs are all direct manufacturing costs (direct material and direct manufacturing labor). 5) Conversion costs are all manufacturing costs other than direct material costs.

Distinguish between inventoriable costs and period costs.

1) Inventoriable costs are 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 (they are "inventoried") to accumulate the costs of creating these assets. 2) Period costs are 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.

What are the differences in the accounting for inventoriable vs. period costs?

1) Inventoriable costs are all the costs of a product that a company regards as an asset in the accounting period in which they are incurred and which become COGS in which the product is sold. 2) Period costs are expensed when they are incurred and are all the costs in an income statement other than COGS

Describe how manufacturing-, merchandising-, and service-sector companies differ from one another

1) Manufacturing-sector companies purchase materials and components and convert them into various finished goods. Ex: automotive and textile companies. 2) Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution. 3) Service-sector companies provide services or intangible products to their customers. Ex: legal advice or audits.

How do managers decide where a cost is a variable or fixed cost?

1) Variable cost = changes in total in proportion to changes in the related level of total activity or volume of output produced 2) Fixed cost = remains unchanged in total for a given time period despite changes in level of total activity or volume of output produced

What are the 3 key features of cost accounting and cost management?

1) calculating the cost of products, services, and other cost objects 2) obtaining information for planning and control and performance evaluation 3) analyzing relevant information for making decisions

What are 3 common features of cost accounting and cost management?

1) calculating the costs of products, services, and other cost objects 2) obtaining information for planning and control and performance evaluation 3) analyzing the relevant information for making decisions

What are 3 different types of inventory that manufacturing companies hold?

1. Direct materials inventory = DM in stock and awaiting use in the manufacturing process. 2. Work-in-process inventory = Goods partially worked on but not yet completed. 3. Finished goods inventory = Goods completed but not yet sold.

What is a cost driver? Give example.

A cost driver is a variable, such as the level of activity or volume, that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. Ex: the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.

What is a cost object?

A cost object is anything for which a manager needs a seperate measurement of cost Ex: product, service, project, customer, brand category, activity, and a dept.

Definie a cost object. Give examples.

A cost object is anything for which a separate measurement of costs is desired. Ex: a product, a service, a project, a customer, a brand category, an activity, and a department.

Define product cost. Describe 3 different purposes for computing product costs.

A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include: 1) pricing and product mix decisions, 2) contracting with government agencies, and 3) preparing financial statements for external reporting under GAAP.

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.

How should managers estimate and interpret cost information

-Focus on total costs - not unit costs -Total costs estimates are variable costs as amount per unit and fixed costs as a total amount

What is the flow of inventoriable and period costs in manufacturing and merchandising settings?

-In manufacturing settings, inventoriable costs flow through WIP and Finished goods accounts and are expensed as COGS. Period costs are expensed as they are incurred -In merchandising settings, only the cost of merchandise is treated as inventoriable

Why do managers assign different costs to the same cost objects?

-Managers can assign different costs to the same cost object depending on the purpose -In contrast, costs from all business functions of the value chain often are assigned to a product for pricing and product-mix decisions

Describe the overtime-premium and idle-time categories of indirect labor

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

How do managers decide whether a cost is a direct or indirect cost?

1) Direct cost = any cost that is related to a particular cost object and can be traced to that cost object in an economically feasible way 2) Indirect cost = related to a particular but CANNOT be raced to it in an economically feasible way 3) Cost traciing = to describe the assignment of direct costs to a cost object 4) Cost allocation = to describe the assignment of indirect costs to a cost object

Define direct and indirect costs.

1) Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective) way. 2) Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective) way. *Direct costs are traced to a cost object, while indirect costs are allocated to a cost object*