Chapter 2
High-Low Method
1. Identify the period with lowest level of activity and the period with the highest level of activity 2. Calculate the slope of straight line Change in cost/Change in activity 3. Determine the intercept of straight line a=y-b(x)
Administrative costs include: A. Executive compensation and public relations costs B. Factory maintenance workers wages C. Sales commissions and factory supervisors salaries D. Shipping costs and sales commissions
A
What type of cost is never relevant and should be disregarded when making decisions? A. Sunk cost B. Opportunity cost C. Marginal D. Incremental
A
Which of the following is less likely fixed costs? A. Electricity to operate factory machines B. Factory rent C. Administrative salaries D. Factory insurance
A
Within the relevant range of activity, variable costs: A. vary in total. B. is not predictable. C. remain constant in total. D. vary per unit.
A
Product Costs
AKA "Inventorial Costs"; All costs involved in acquiring/making a product; attached to units until sold; turns in COGS and matched against revenue on Income Statement
Non-manufacturing Costs
AKA "SG&A"; Selling, general, and administrative
Direct Labor
AKA "Touch Labor" labor costs that can be traced to a product ex. factory line workers
A contribution format income statement: A. Focuses on calculating net income. B. Is mainly designed to assist with management decision making. C. Is prepared primarily for external reporting purpose. D. Separates costs into their fixed and mixed components.
B
A dress manufacturer would consider the cost of relatively inexpensive items like thread to be part of: A. Administrative costs B. Selling costs C. Manufacturing overhead D. Direct materials
C
AAA company is a merchandiser that provided the following information: Sales $12,000, Cost of goods sold $6,000, variable selling $1,000, fixed administrative $1,500 Depreciation expense $500 Calculate the contribution margin of this company. A. $10,000 B. $4,000 C. $5,000 D. $6,000
C
Salaries of factory supervisors and factory maintenance personnel are examples of _________ labor costs A. primary B. Direct C. Indirect D. Contributing
C
Sales salaries and commissions are $10,000 when 80,000 units are sold, $ 9,000 when 90,000 units are sold, and $14,000 when 120,000 units are sold. Using the high-low method, what is the variable portion of sales salaries and commission? A. $0.125 per unit B. $0.12 per unit C. $0.10 per unit D. $0.08 per unit
C
Which of the following statements is true? A. A particular cost is either direct or indirect, regardless of the cost object. B. As long as a cost is traceable to a specific cost object, it is direct cost. C. A regional sales manager's salary would be a direct cost of the regional office in which the sales manager works. D. A direct cost is sometimes referred to as common cost.
C
_________________ is a method of separating a mixed cost into its fixed and variable elements by fitting a line to the data that minimizes the sum of the squared errors. A. High-low B. Account analysis C. Least-square regression D. Scattergraph
C
Direct Cost
Can be easily traced to a specified cost object ex.salaries as a cost of the factory or office (not product), cost of paper
Operating Income
Contribution Margin - Fixed Costs
A laptop computer manufacturer would consider the computer's processor chip to be a(n): A. Indirect material cost B. Indirect manufacturing overhead cost C. Direct manufacturing overhead cost D. Direct material cost
D
An activity base: A. Is a measure of whatever causes fixed costs to occur. B. Is part of the organization where major operations are planned and carried out. C. Is sometimes called a cost base. D. Measures whatever causes costs to vary.
D
Indirect materials and indirect labor are classified as: A. Period costs B. Fixed costs C. Nonspecific costs D. Manufacturing overhead
D
Period costs are expensed on the income statement: A. After they are capitalized. B. Never: they do not appear on the income statement. C. In the period in which the related goods are sold. D. In the period in which they are incurred.
D
Suppose you are trying to decide whether to drive or take the train to D.C. 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. Not enough information B. Maybe C. Yes D. No
D
Which one is different from other three from the perspective of matching principle? A. Finished goods B. WIP C. Raw materials D. SG&A
D
Conversion Cost
Direct Labor + Manufacturing Overhead
Prime Cost
Direct Materials+ Direct Labor
Least Squares Regression always provides the more accurate estimate than High-Low Method because it uses all the data points
False
Selling costs are sometimes recognized as assets
False
Suppose you had purchased gold for $1,100 an ounce, but now it is selling for $950 an ounce. You should wait for the gold to reach $1,100 an ounce again to prevent loss
False
Sandpaper is direct cost in furniture manufacturing
False (indirect)
Variable In Total
Increases and decreases in portion to changes in cost driver
Manufacturing Overhead
Indirect; all other manufacturing costs that cannot be easily traced to a product ex. glue, janitors
Variable per unit
Remains Constant
Y=a+bX
a= total fixed cost b= Variable Cost per unit of activity; slope X= Cost Driver Y= Cost
Quality Cost
all of the costs that are incurred to prevent defects Prevention cost Appraisal Cost Internal Failure Cost External Failure Cost
Contribution Margin
amount contributing towards covering fixed expenses and then toward profits for that period =Sales- Variable Costs =Profits(Quantity)-Unit Variable Expense(Quantity)
Indirect Cost
can not be easily traced to a specified cost object
Fixed per unit
decreases as Cost Driver increases; increases as cost driver decreases
Differential Costs
difference in costs between any two alternatives
Fixed in total
not affected by Cost driver within relevant range
Quality of Conformance
product meets design specifications and is free of defects
Relevant Range
the range of activity within which the linearity assumption holds
