Cost Accounting - Chapter 2
Factors affecting the classification of a cost as direct or indirect include
materiality of the cost, available information-gathering technology, and design of operations.
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.
What are three features of cost accounting and cost management that can be used for a wide range of applications? (Select the three correct choices.)
- Analyzing the relevant information for making decisions. - Calculating the cost of products, services, and other cost objects. - Obtaining information for planning and control and performance evaluation.
Why do managers consider direct costs to be more accurate than indirect costs?
- When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object, and therefore, direct costs are considered to be more accurate. - Allocating indirect costs is more subjective and generally more difficult to assign to a cost object than are direct costs. Therefore, direct costs are deemed by managers to be more accurate costs than indirect costs. - Cost tracing, which is used when assigning direct costs to a particular cost object, is more accurate than cost allocation, which is used to assign indirect costs to the same cost object.
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 cost object and give three examples.
A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, and a customer.
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.
Give an example for each of the following: A cost that is variable and direct, a cost that is variable and indirect, a cost that is fixed and direct, and a cost that is fixed and indirect. Cost that is fixed and indirect
Salary for the company's CEO
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.
Give an example for each of the following: A cost that is variable and direct, a cost that is variable and indirect, a cost that is fixed and direct, and a cost that is fixed and indirect. Cost that is variable and direct
Tires used to manufacture a particular kind of car
Explain why unit costs must 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.
Select the correct definition for the following costs. Prime costs
All direct manufacturing costs.
Select the correct definition for the following costs. Conversion costs
All manufacturing costs other than direct material costs.
Select the correct definition for the following costs. Manufacturing overhead costs
All manufacturing costs related to the cost object but cannot be traced to the cost object.
Select the correct definition for the following costs. Direct manufacturing-labor costs
Compensation of all manufacturing labor that can be traced to the cost object.
Select the correct definition for the following costs. Direct material costs
Costs of all materials that can be traced to the cost object.
Give an example for each of the following: A cost that is variable and direct, a cost that is variable and indirect, a cost that is fixed and direct, and a cost that is fixed and indirect. Cost that is fixed and direct
Depreciation for a machine that is only used for one product
Distinguish direct costs from indirect costs.
Direct costs are related to the particular cost object and can be traced to that cost object in a cost-effective way while indirect costs are related to the particular cost object but cannot be traced to that cost object in a cost-effective way.
What are three different types of inventory that manufacturing companies hold?
Direct materials, work-in-process, and finished goods
Give an example for each of the following: A cost that is variable and direct, a cost that is variable and indirect, a cost that is fixed and direct, and a cost that is fixed and indirect. Cost that is variable and indirect
Electricity used in the plant where multiple products are manufactured
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.
