Accounting 2: Chapter 1

Quick Check 1 Which of the following costS would be considered a period rather than a product cost in a manufacturing company? A.Manufacturing equipment depreciation. B.Property taxes on corporate headquarters. C.Direct materials costs. D.Electrical costs to light the production facility. E.Sales commissions.

answers: B and E

A fixed cost is a cost which ________.

remains constant in total with changes in the level of activity

An Activity Base aka (Cost Driver) 1• A measure of what causes the incurrence of a ___ ___ examples include: -Units produced -Machine hours -Miles driven -Labor hours

variable cost

Fixed Cost 1• A cost that remains _____, in total, regardless of changes in the level of the activity. -i.e. cost of factory & equipment same if make 10 or 1000 pizzas. 2• If expressed on a per unit basis, the average fixed cost per unit varies _____ with changes in activity.

1) constant 2) inversely

Purposes of Cost Classification 1. Assigning costs to ____ objects 2. Accounting for costs in ____ companies 3. Preparing ___ statements 4. Predicting cost behavior in response to changes in ____ 5. Making ____

1) cost 2) manufacturing 3) financial 4) activity 5) decisions

1) relevant range = range of activity over which ___ ___ holds true 2) step costs- fixed over given range of activity, increase in a step-like fashion when capacity limit is ____

1) cost behavior 2) reached

The Traditional and Contribution Formats slide 50 1) Traditional Format= Used primarily for ____ reporting. 2) Contribution Format= Used primarily by ____

1) external 2) management

1) Sunk costs have already been incurred and cannot be changed now or in the ____ 2) These costs should be ____ when making decisions.

1) future. 2) ignored

Managerial vs Financial Accounting Managerial: 1- _____ use (Only used by managers, not required / don't have to follow GAAP) 2- _____ oriented- what will it cost? budget? 3- _____ & timely 4- reporting by _____: aka, divisions within the firm 5- is it required by GAAP? Financial 6- _____ use (lenders, bondholders, shareholders, required) 7- _____ oriented: past transactions for balance sheets, income statements, etc 8- objectivity & ____ 9- is it required by GAAP? 10- focus is on ____ reports

1) internal 2) future 3) relevant 4) segment 5) No 6) external 7) past 8) precision 9) Yes 10) companywide

Product Costs 1) Product costs includes all the costs that are involved in acquiring or ____ a product. -"inventoriable" traced through inventories, expensed when the product ____ 2) 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 _____ awaiting sale.

1) making; sells 2) inventory

1) Cost behavior: how costs change in response to changes in a measure of activity such as... 2) Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are ___

1) sales volume, production volume, or orders processed. 2) valid

Quick Check 2 Which of the following costs would be variable with respect to the number of ice cream cones sold at a Baskin & Robbins? (There may be more than one correct answer.) A.The cost of lighting the store. B.The wages of the store manager. C.The cost of ice cream. D.The cost of napkins for customers.

Answers: c & d

Quick Check 3 Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don't want to waste money needlessly. Is the cost of the train ticket relevant in this decision? In other words, should the cost of the train ticket affect the decision of whether you drive or take the train to Portland? A.Yes, the cost of the train ticket is relevant. B.No, the cost of the train ticket is not relevant.

answer: A.Yes, the cost of the train ticket is relevant.

Quick Check 4 Suppose you are trying to decide whether to drive or take the train to Portland to attend a concert. You have ample cash to do either, but you don't want to waste money needlessly. Is the annual cost of licensing your car relevant in this decision? A.Yes, the licensing cost is relevant. No, the licensing cost is not relevant.

answer: B.No, the licensing cost is not relevant.

The relevant range of activity for a fixed cost is the range of activity over which the graph of the cost is ____

flat.

Mixed costs 1) In the equation, Y = a + bX, X represents ________. -includes variable and fixed

1) a (fixed), b (variable per unit of activity), x (# of units) x = the level of activity

Manufacturing Overhead - Examples 1) Examples of manufacturing overhead: (4) 2) Only those indirect costs associated with operating the ____ are included in manufacturing overhead.

1) -Depreciation of manufacturing equipment -Utility costs -Property taxes -Insurance 2) factory

Differential Cost and Revenue 1) Differential costs are always ________. - future cost that differs between 2 alternatives. - ex) costs associated w A is 100,000, costs with B are 60,000, differential cost is 40,000 (you would add revenue)

1) relevant in making business decisions

1•Direct labor costs are those labor costs that can be easily ____ to individual units of product. 2•Example: ____ paid to automobile assembly workers

1) traced 2) Wages

The Linearity Assumption and the Relevant Range 1) A straight line closely approximates a curvilinear ___ ___ line within the relevant range.

1) variable cost

Formula for COGS?

Beginning inventory + purchases - ending inventory

variable costs changes to activity level. It is constant on per level basis. Rises and falls and activity rises and falls 1) 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 equal ________.

1) 5000

cost behavior 1) If a firm increases its activity level, ________.

1) some costs will change, other costs will remain the same

The Traditional Format Income Statement 1) The traditional income statement uses which of the following cost categories? sales -COGS Gross Margin -Selling & admin expenses = Net operating income

1) Cost of goods sold and selling and administrative expenses.

The Contribution Format Income Statement 1) Which of the following is true of the contribution approach? 2) Davidson Company has a product with a selling price per unit of $100, the unit variable cost is $60, and the total monthly fixed costs are $30,000. If the company sells 1,000 units, how much is Davidson's contribution margin per unit?

1) It separates costs into fixed and variable categories. 2) $40

Lean Production: 1) is also called __-___-___ ___ -process of customer placing order, to production, to goods being delivered 2) traditional manufacturing: Produce goods in ____ of Sales → Store Inventory → Make Sales from ____ Goods Inventory 3) benefits of lean production? Because lean thinking only allows production in response to customer ____, the number of units produced tends to equal the number of units ____.

1) Just-In-Time (JIT) production. 2) anticipation; Finished 3) orders; sold

Transfer of Product Costs 1) When direct materials are used in production, their costs are transferred from Raw Materials to ___ ___ __. 2) Direct labor and manufacturing overhead costs are added to Work in Process to convert direct materials into ___ ___ 3) Once units of product are completed, their costs are transferred from Work in Process to ___ ___ 4) When a manufacturer sells its finished goods to customers, the costs are transferred from Finished Goods to __ __ __ __

1) Work in Process 2) finished goods. 3) Finished Goods. 4) Cost of Goods Sold

Comparison of Cost Classifications for Predicting Cost Behavior Variable cost 1) in total: Total variable cost Increase and decrease in proportion to changes in the ___ ___. 2) per unit: Variable cost per unit remains _____. fixed cost: 3) In total: Total fixed cost is ___ ___ by changes in the activity level within the relevant range. 4) Per unit: Fixed cost per unit decreases as the activity level ____ and increases as the activity level ____.

1) activity level 2) constant 3) not affected 4) rises; falls

Opportunity Cost 1) The potential ____ that is given up when one alternative is selected over another. -These costs are not usually found in accounting records but must be explicitly considered in every decision.

1) benefit

Differential Costs 1• Differential costs (or incremental costs) are the difference in ____ between any two _____. 2• A difference in revenue between two alternatives is called ____ ___. 3• Are both always relevant to decisions? 4• Can differential costs be either fixed or variable? or both?

1) cost; alternatives 2) differential revenue 3) Yes 4) can be both

Manufacturing Overhead 1) Manufacturing overhead includes all manufacturing costs except ___ ___ and ___ ___. These costs cannot be readily ____ to finished products. 2-Includes indirect materials that cannot be easily or conveniently ____ to specific units of product. 3- Includes indirect labor costs that cannot be easily or conveniently ____ to specific units of product. -Indirect materials - minor materials, can't be conveniently traced to individual units i.e. seasoning -Indirect labor - don't touch product but ARE involved in manufacturing process i.e. kitchen manager, janitor to kitchen

1) direct material; direct labor; traced 2) traced 3) traced

1) Product costs include: 2) Period costs include all:

1) direct materials, direct labor, and manufacturing overhead. 2) selling costs and administrative costs.

Manufacturing Product Costs For manufacturing companies, product costs include: 1) Raw materials: includes any materials that go into the ____ product. 2) Work in process: consists of units of product that are only partially _____ and will require further work before they are ready for ____ to the customer. 3) Finished goods costs: consists of ____ units of product that have not yet been ____ to customers.

1) final 2) complete; sale 3) completed; sold

6 Managerial perspective includes: 1- ethics perspective: includes competency, confidentiality, integrity, credibility what is competence? 2- strategic management perspective: game plan to attract _____ 3- enterprise risk management perspective: identifies ____ and ____ 4- corporate social responsibility perspective: organizations consider the needs of all ____ when making decisions. Some may include... 5- process management perspective: series of ____ to carry out ___ in business (RD, design, manufacturing, marketing, distribution, customer service) 6- leadership perspective: Organizational leaders unite the behavior of employees around two common themes—pursuing strategic ___ and making optimal ____. -when there is an ethical conflict: follow employers policies, if this doesn't work, discuss conflict with immediate supervisor -ethical standards are important because would lead to lower quality of life with less desirable goods.

1) follow laws, provide clear and timely information 2) customers 3) risks; responses 4) stakeholders; customers, employees, community, stockholder 5) steps; tasks 6) goals; decisions

Pillars- Work of Management 1) planning: establishing ____ and how to ___ them (spending & budgets) 2) controlling: monitoring and ensuring proper execution of _____ is being followed (performance reports) 3) decision making: selecting best course of ____ (what should we be selling? who? how?)

1) goals; achieve 2) plans 3) action

customer value propositions: 1) customer intimacy strategy: understand and respond to customer ____ 2) Operational Excellence Strategy: Deliver products and services faster, more conveniently, and at ____ prices. 3) Product Leadership Strategy: Offer higher ____ products.

1) needs 2) lower 3) quality

1) the potential benefit that is given up when one alternative is selected over another 2) a cost that has already been incurred and that cannot be changed by any decision 3) a difference in costs between any 2 alternatives 4) a difference in revenues between 2 alternatives

1) opportunity cost 2) sunk cost 3) differential cost 4) differential revenue

1) direct materials + direct labor = 2) direct labor + manufacturing overhead = 3) Which observation is true of period costs?

1) prime cost (can be traced to end product) 2) conversion cost (convert direct materials to finished product) 3) They are expensed in the period in which they are incurred

Variable cost 1• A cost that varies, in total, in direct _____ to changes in the ___ __ __. -i.e. need more pizza sauce if make more pizzas 2• A variable cost per unit is ____

1) proportion; level of activity 2) constant.

1•Direct materials are ____ materials that become an integral part of the product and that can be conveniently ____ directly to it. 2•Example: A ____ installed in an automobile

1) raw, traced 2) radio

Nonmanufacturing Costs Selling Costs 1- Costs necessary to ____ the order and ____ the product. Selling costs can be either direct or indirect costs. -ie: delivery, sales managers, advertising Administrative Costs 2- All _____, organizational, and clerical costs. Administrative costs can be either direct or indirect costs. -ie: rent for headquarters, accounting, top management

1) secure; deliver 2) executive

Types of Fixed Costs Committed 1- Long-term, cannot be significantly reduced in the ___ ___ Discretionary 2- May be altered in the short-term by current ____ decisions

1) short term 2) managerial

Cost classifications for assigning costs to cost object 1) direct cost: can be easily ____ to a specified object. this includes direct ___ and direct ___. Example: if Nike assigns costs to international offices, then salary of sales manager would be direct cost of office 2) indirect cost: ____ be easily traced to object. This includes ___ ___. Example: my salary is incurred bc I run entire factory, not just selling one object 3) common cost: Indirect costs incurred to support a number of ____ objects. These costs ____ be traced to any individual cost object.

1) traced; material; labor 2) cannot; manufacturing overhead 3) cost; cannot

The total mixed cost line can be expressed as an equation: Y = a + bX Where: Y = a = b = X =

Y = The total mixed cost. (dependent) a = The total fixed cost (where line crosses y axis) b = The variable cost per unit of activity (the slope of the line). X = The level of activity. (cost driver, independent)

does relevant range apply to fixed costs?

Yes. As the anticipated level of activity changes, the level of fixed costs needed to support operations may also change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one level for all ranges of activity

when there is an increase on activity level... a) Unit fixed cost? b) Unit variable costs? c) Total fixed costs? d) Total variable costs?

a. Unit fixed costs decrease as the activity level increases. b. Unit variable costs remain constant as the activity level increases. c. Total fixed costs remain constant as the activity level increases. d. Total variable costs increase as the activity level increases.

Relevant range- applies to fixed and variable (rises vertically) 1) 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 ________.

answer: 17,500

Quick Check 5 Suppose that your car could be sold now for $5,000. Is this a sunk cost? A.Yes, it is a sunk cost. B.No, it is not a sunk cost.

answer: B) No, it is not a sunk cost.