Chapter 1. Managerial Accounting and Cost Concepts

A company purchased a 12 month insurance policy on October 1 for $1,200. On the December 31 annual financial statements,

$300 is reported as a expense and $900 is reported as an asset

Given: Sales of $360,000, Gross Margin of $140,000, Contribution Margin of $110,000, and Total Selling & Administrative Exp. of $60,000, net income using the traditional income statement format equals

$80,000 Reason: Gross Margin of $140,000 - Total Selling & Admin. Exp. of $60,000 = $80,000.

Which of the following are differences between the traditional and contribution format to income statements?

-Contribution format statements make it easier to predict how decisions affect the future. -Traditional income statements focus on cost classifications. Contribution format statements focus on cost behavior.

Which of the following statements are true?

-Period costs are expensed when incurred. -Period costs do not flow through the inventory accounts.

Period costs

-are expensed in the period incurred -include all costs that are not product costs

Cost behavior ______

-categorizes costs as fixed, mixed and variable -refers to how a cost will change as activity level changes Reason: Within the relevant range of activity, assumptions made about cost behavior are reasonably valid.

Nonmanufacturing costs include

-company president's salary -sales commissions

Manufacturing costs include

-manufacturing overhead -direct materials -direct labor

Cost objects include:

-organizational subunits. -customers. -anything for which cost data is desired.

Selling costs include

-sales commissions -advertising -sales salaries

To be traced to a cost object such as a particular product, the cost must be incurred to make the product.

False Reason: To be traced to a cost object such as a particular product, the cost must be caused by the cost object.

Which type of cost changes in total, in direct proportion to changes in activity level?

Variable

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

direct

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

direct costs

Contribution margin is

sales revenue minus variable costs

An ________ is anything for which cost data are desired—including products, customers, plants, office locations, and departments

cost object

As the level of activity moves outside of the relevant range, fixed costs,

increase or decrease in discrete steps

Cost of goods sold for a merchandising company, direct materials and commissions are all examples of

variable

Cost of goods sold for a merchandising company, direct materials and commissions are all examples of

variable costs

Cost classifications for predicting cost behavior are used on

contribution format income statements only Reason: Contribution format statements separate costs into fixed and variable components which is useful for predicting cost behavior.

Sales revenue minus variable expenses equals

contribution margin

How individual costs react to changes in activity level is referred to as

cost behavior

Selling and administrative costs are

direct or indirect

A factory manager's salary is an example of a(n)

indirect

Direct materials and direct labor are both

manufacturing costs

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

matching principle

A cost that contains both variable and fixed costs elements is called a(n)

mixed cost

A cost that contains both variable and fixed cost elements is a(n)

mixed cost Reason: Mixed costs are known as semivariable costs.

The assumption that cost behavior is strictly linear is reasonably valid within the ______

relevant range

Costs that have already been incurred and cannot be avoided regardless of what a manager decides to do are

sunk costs

Period costs are always expensed on the income statement in the period in which

they are incurred

On a traditional income statement, cost of goods sold reports the _______ costs attached to the merchandise sold and selling and administrative expenses report all ______ costs that have been incurred.

product; period