Chapter 2: Basic Managerial Accounting Concepts

Cost Object

Any item such as products, customers, departments, projects, and so on, for which costs are measured and assigned

Which of the following differentiates cost from an expense? a. Cost is a dollar measure of the resources used to achieve a given benefit, whereas an expense is an expired cost that is used up in the production of revenues. b. Cost is a dollar measure of the resources used to achieve a given benefit, whereas an expense is the cost that can be easily and accurately traced to a cost object. c. Cost is a dollar measure of the resources used to achieve a given benefit, whereas an expense is the benefits given up or sacrificed when one alternative is chosen over another. d. Cost is a dollar measure of the resources used to repay an obligation, whereas an expense is the cost that can be easily and accurately traced to a cost object.

A

Administrative Costs

All costs associated with research, development, and general administration of the organization that cannot reasonably be assigned to either selling or production

Manufacturing Overhead

All product costs other than direct materials and labor

Service Organization

An organization that produces intangible products

Manufacturing Organizations

An organization that produces tangible products

Ending Inventory of Materials

Beginning Inventory of Materials + Purchases - Direct Materials Used in Production

Direct Labor

The labor that can be directly traced to the goods or services being produced

Product (Manufacturing) Costs

Cost of producing a product in a manufacturing firm or of acquiring a product in a merchandising firm and preparing it for sale. Include direct materials, direct labor, and manufacturing overhead

Period Costs

Cost that are not product costs

Direct Costs

Cost that can be easily traced to a cost object

Variable Cost

Cost that, in total, vary in direct proportion to changes in output within the relevant range

Expenses

Costs that are used up (expired) in the production of revenue

Indirect Costs

Costs that cannot be easily and accurately traced to a cost object

Fixed Cost

Costs that, in total, are constant within the relevant range as the level of output increases or decreases

Conversion Cost

Direct Labor + Manufacturing Overhead

Prime Cost

Direct Materials + Direct Labor

T/F: Assume at the beginning of this period, there was $45,000 worth of materials in Beginning Materials Inventory. $150,000 of raw material are purchased, and the Ending Materials Inventory contains $20,000 worth of materials. The Direct Materials Used in Production would be $125,000.

False

T/F: Cost objects do not need to be considered for all business and personal decisions.

False

T/F: The cost of goods manufactured represents the total product cost of goods completed during the current period and transferred to work in process inventory.

False

Products

Goods produced by converting raw materials through the use of labor and indirect manufacturing resources, such as the manufacturing plant, land, and machinery

Operating Income

Gross margin - selling and administrative expenses

Direct Materials

Materials that are a part of the final product and can be directly traced to the goods or services being produced

Sales Revenue

Price x Units sold

Gross Margin

Sales revenue - Cost of goods sold

Services

Tasks or activities performed for a customer or an activity performed by a customer using an organization's products or facilities

Cost

The amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization

Opportunity Cost

The benefit given up or sacrificed when one alternative is chosen over another

Work in Process (WIP)

The cost of the partially completed goods that are still being worked on at the end of a time period

Gross Margin

The difference between the sales revenue and cost of goods sold

Price

The revenue per unit

Conversion Cost

The sum of direct labor cost and overhead cost

Prime Cost

The sum of direct materials cost and direct labor cost

Cost of Goods Manufactured

The total product cost of goods completed during the current period

Cost of Goods Sold

The total product cost of goods sold during the period

Assigning Costs

The way that a cost is linked to some cost object

Accumulating Costs

The way that costs are measured and recorded

Selling Costs

Those costs necessary to market, distribute, and service a product or service

T/F: Cost of goods sold represents the cost of goods that were sold during the period and, therefore, transferred from finished goods inventory on the balance sheet to cost of goods sold on the income statement (i.e., as an inventory expense).

True

T/F: Direct Materials Used in Production equals Beginning Materials Inventory plus Purchases minus Ending Materials Inventory.

True

T/F: Product costs are recorded in inventory as an asset on the balance sheet and then are recorded on the income statement in the form of cost of goods sold as inventory is sold.

True

T/F: Some period costs are immediately recorded on the income statement as expenses as incurred, while other period costs are capitalized as assets and are recorded on the income statement as depreciation expense as the asset is used up or generates revenue over time.

True

T/F: The Cost of Goods Manufactured equals the Total Manufacturing Cost for the Period plus the Beginning WIP (Work in Process Inventory) minus the Ending WIP.

True

T/F: The Cost of Goods Sold equals the Cost of Goods Manufactured plus the Beginning Finished Goods Inventory minus the Ending Finished Goods Inventory.

True

T/F: When providing cost estimates, it is essential to know the decision to which the cost object is related

True

Allocation

When an indirect cost is assigned to a cost object using a reasonable and convenient method

Gross margin is the difference between a. sales revenue and cost of goods sold. b. sales revenue and cost of goods manufactured. c. sales revenue and total cost. d. cost of goods sold and selling and administrative expenses.

a

Product costs include: a. direct materials, direct labor, and manufacturing overhead. b. the benefit given up when one alternative is chosen over another. c. the cost that does not change in total as output changes. d. the cost associated with storing and delivering the product.

a

Which of the following is the mathematical expression for calculating the cost of goods sold? a. Cost of Goods Sold = Cost of Goods Manufactured + Beginning Finished Goods Inventory - Ending Finished Goods Inventory b. Cost of Goods Sold = Beginning Finished Goods Inventory + Ending Finished Goods Inventory - Cost of goods manufactured c. Cost of Goods Sold = Beginning WIP + Ending WIP - Cost of Goods Manufactured d. Cost of Goods Sold = Cost of Goods Manufactured + Beginning WIP - Ending WIP

a

Which of the following is true of an indirect cost? a. It is assigned to a cost object using a reasonable and convenient method. b. It can be easily and accurately traced to a cost object. c. It is a benefit given up when one alternative is chosen over another. d. It decreases in total as output increases and increases in total as output decreases.

a

Which of the following is true of direct materials cost? a. It is a part of the final product and can be directly traced to the goods being produced. b. It is a manufacturing overhead that cannot be traced to the cost object of interest. c. It is a period cost for running a company that is not carried in the inventory. d. It is a cost that cannot be assigned to products or appear as part of the reported values of inventories on the balance sheet.

a

Which of the following is true of the manufacturing overhead? a. It includes all product costs other than direct materials and direct labor. b. It forms part of the final product. c. It includes period costs that are expensed in the period in which the goods are produced. d. It is directly traced to the goods being produced.

a

Bret Inc. manufactures mobiles. Last month, direct materials, electronic components, etc., costing $600,000 were put into production. Direct labor of $900,000 was incurred, manufacturing overhead equaled $600,000, and selling and administrative costs totaled $400,000. The company manufactured 9,000 mobiles during the month. Assume that there were no beginning or ending work in process balances. Calculate the total product cost. a. $2,400,000 b. $2,100,000 c. $1,900,000 d. $2,500,000

b

Fred Inc. manufactures computers. Last month, direct materials costing $600,000 were put into production. Direct labor of $900,000 was incurred, manufacturing overhead equaled $500,000, and selling and administrative costs totaled $400,000. The company manufactured 9,000 television sets during the month. Assume that there was beginning work-in-process inventory of $80,000 and there was no ending work-in-process inventory. Calculate the cost of goods manufactured. a. $2,760,000 b. $2,080,000 c. $1,580,000 d. $2,000,000

b

Which of the following is a period expense? a. Factory insurance b. CEO salary c. Direct labor d. Factory maintenance e. All of these.

b

Which of the following is true of an opportunity cost? a. It is easily and accurately traced to a cost object. b. It is never included in the accounting records. c. It is the cost that increases in total as output increases. d. It is the cost that decreases in total as output increases.

b

Accumulating costs means that a. costs must be summed and entered on the income statement. b. each cost must be linked to some cost object. c. costs must be measured and tracked. d. costs must be allocated to units of production. e. costs have expired and must be transferred from the balance sheet to the income statement.

c

Alpha Inc. manufactures electronic gadgets. Last month, direct materials costing $500,000 were put into production. Direct labor of $600,000 was incurred, manufacturing overhead equaled $400,000, and selling and administrative costs totaled $500,000. The company manufactured 10,000 electronic gadgets during the month. Assume that there were no beginning or ending work in process balances. Calculate the per-unit prime cost. a. $190 b. $157 c. $110 d. $215

c

Kroger Company manufactures radio sets. During the year, Kroger manufactured and sold 80,000 radio sets at a sales price of $1,000 per unit. Selling and administrative expenses totaled $2,100,000 and gross margin was $2,800,000. Compute the operating income. a. $500,000 b. $600,000 c. $700,000 d. $800,000

c

Fedro Company manufactures stereos. During the year, Fedro manufactured and sold 60,000 stereos at a sales price of $750 per unit. Fedro's product cost per-unit was $600 and selling and administrative expenses totaled $2,150,000. If 58,000 stereos were produced and sold, calculate the gross margin. a. $8,100,000 b. $8,000,000 c. $7,490,000 d. $8,700,000

d

Kellogg's makes a variety of breakfast cereals. Kellogg's is which of the following? a. Wholesaler b. Retailer c. Service firm d. Manufacturing firm e. None of these.

d

Product (or manufacturing) costs consist of a. direct materials, direct labor, and selling costs. b. direct materials, direct labor, manufacturing overhead, and operating expense. c. administrative costs and conversion costs. d. prime costs and manufacturing overhead. e. selling and administrative costs.

d

Which of the following is an indirect cost? a. The cost of denim in a jeans factory b. The cost of mixing labor in a factory that makes over-the-counter pain relievers c. The cost of bottles in a shampoo factory d. The cost of restriping the parking lot at a perfume factory e. All of these.

d

Total Product Cost

direct materials + direct labor + manufacturing overhead

The accountant in a factory that produces biscuits for fast-food restaurants wants to assign costs to boxes of biscuits. Which of the following costs can be traced directly to boxes of biscuits? a. The cost of flour and baking soda b. The wages of the mixing labor c. The cost of the boxes d. The cost of packing labor e. All of these.

e