Chapter 2 Cost
Wages paid to machine operators on an assembly line are classified as a ________.
direct manufacturing labor cost
The balance sheet of a manufacturing-sector company would report _____.
direct materials inventory, work in process inventory, and finished goods inventory accounts
What is a cost driver? Give one example.
A cost driver is a variable, such as the level of activity or volume, which 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. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line.
Define product cost. Describe three 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.
Choose the correct description of variable and fixed costs.
A variable cost changes in total in proportion to changes in the related level of total activity or volume, such as a sales commission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume, such as a fixed annual leasing cost of a machine.
Frisco Corporation is analyzing its fixed and variable costs within its current relevant range. As its cost driver activity changes within the relevant range, which of the following statements is/are correct
As the cost driver level increases, total fixed cost remains unchanged.
Which of the following formulas determine cost of goods sold in a manufacturing entity?
Cost of goods manufactured + Beginning finished goods inventory minus−Ending finished goods inventory = Cost of goods sold
What are three different types of inventory that manufacturing companies hold?
Direct materials, work-in-process, and finished goods
Comprehensive CareComprehensive Care Nursing Home is required by statute and regulation to maintain a minimum 3 to 1 ratio of direct service staff to residents to maintain the licensure associated with the Nursing Home beds. The salary expense associated with direct service staff for the Comprehensive CareComprehensive Care Nursing Home would most likely be classified as
Fixed Cost
Distinguish between inventoriable costs and period costs.
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. Period costs are all costs in the income statement other than cost of goods sold. Period costs are treated as expenses of the accounting period in which they are incurred because they are expected to not benefit future periods.
Identify how manufacturing-, merchandising-, and service-sector companies differ from each other.
Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example automotive companies and textile companies. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retail stores and distribution companies. Service-sector companies provide services or intangible products to their customers, for example legal advice or audits.
Applewhite Corporation, a manufacturingcompany, is analyzing its cost structure in a project to achieve some cost savings. Which of the following statementsis/are correct?
The cost of the direct materials in Applewhites products is considered a variable cost.
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.
Why must unit costs often be interpreted with caution?
Unit costs are computed by dividing some amount of total costs by the related number of units. In many cases, the total costs include a fixed cost that will not change despite changes in the number of units. Therefore, it can be misleading to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.
Outside the relevant range, variable costs, such as direct material costs ________.
will not change proportionately with changes in production volumes
