ACCT 201 B Chapter 1

direct cost
a cost that can be easily and conveniently traced to a specified cost object (can be easily traced)
indirect cost
a cost that cannot be easily and conveniently traced to a specified cost object (cannot be easily traced)
common cost
a cost that is incurred to support a number of cost objects but cannot be traced to them individually. (a common cost is a type of indirect cost)
Manufacturing companies such as (Texas Instruments, Ford, and DuPont) separate their costs into 2 broad categories:
1. manufacturing costs
2. nonmanufacturing costs
Most manufacturing companies further separate their manufacturing costs into 2 direct cost categories, (_____ & _____) AND one indirect cost category (_______)
1. direct materials
2. direct labor
3. manufacturing overhead
raw materials & they may include (1._____ & 2. _____)
materials that go into the final product
1. direct materials
2. indirect materials
direct materials
those materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product
2 examples of direct materials
1. seats that Airbus purchases from subcontractors ton install in its commercial aircraft
2. electronic components that Apple uses in its iPhones
direct labor
consists of labor costs that can be easily (physically & conveniently) traced to individual units of products
direct labor is sometimes called ________
touch labor b/c direct labor workers typically touch the product while it is being made
indirect labor
labor costs that cannot be physically traced to particular products, or that can be traced only at a great cost & inconvenience
manufacturing overhead
3rd manufacturing cost category, includes all manufacturing costs except direct materials and direct labor
nonmanufacturing costs are often divided into 2 categories:
1. selling costs
2. administrative costs
selling costs
includes all costs that are incurred to secure customer orders and get the finished product to the customer
administrative costs
includes all costs associated w/ general management of an organization rather than with manufacturing or selling
matching principle
based on the accrual concept that costs incurred to generate a particular revenue should be recognized as expenses in the same period that the revenue is recognized
product costs
include all costs involved in acquiring or making a product
inventoriable costs
because product costs are initially assigned to inventories
period costs
are all the costs that are not product costs
All __________ and ______________ expenses are treated as period costs
1. selling
2. administrative
product cost =
direct materials + direct labor + manufacturing overhead
period cost =
selling expenses + administrative expenses
conversion cost =
direct labor + manufacturing overhead
prime cost =
direct materials + direct labor
variable cost
varies, in total, in direct proportion to changes in the level of activity
variable cost is constant if __________________
expressed on a per unit basis
fixed cost
cost that remains constant, in total, regardless of changes in the level of activity
relevant range
is the range of activity within which the assumption that cost behavior is strictly linear is reasonably valid
mixed cost
contains both variable and fixed cost elements (aka semivariable costs)
Y = a + bX
Y = total mixed cost
a = total fixed cost
b = variable cost per unit of activity
X = activity level
account analysis
an account is classified as either variable or fixed based on analyst’s prior knowledge of how the cost in the account behaves
engineering approach
to cost analysis involves a detailed analysis of what cost behavior should be, based on an industrial engineer’s evaluation of the production methods to be used, the material specifications, labor requirements, equipment usage, production efficiency, power consumption, and so on
dependent variable
cost (the amount of cost incurred during a period depends on the level of activity for the period) — total maintenance cost–Y
independent variable
activity (causes variations in the cost) –activity —X
cost behavior is considered _________ whenever a straight line is a reasonable approximation for the relation b/w cost and activity
the fixed and variable cost elements of a mixed cost can be estimated using the ______________ method
high-low method / least-squares regression method
variable cost =
(slope of line) =
(cost at high activity level – cost at the low activity level) /
(high activity level – low activity level)
OR change in cost / change in activity
fixed cost element =
total cost – variable cost element
least-squares regression method
uses all of the data to separate a mixed cost into its fixed and variable components
cost of goods sold =
beginning ending
merchandise + purchases — merchandise
inventory inventory
contribution margin
is the amount remaining from sales revenues after variable expenses have been deducted (this amount contributes toward covering fixed expenses and then toward profits for the period)
differential cost
a diff. in costs b/w any 2 alternatives (aka “incremental cost”)
differential revenue
a diff. in revenues (usually just sales) b/w any 2 alternatives
marginal revenue
the revenue that can be obtained from selling one or more unit of product
opportunity cost
the potential benefit that is given up when one alternative is selected over another
sunk cost
cost that has already been incurred and that cannot be changed by any decision made now or in the future (**should always be ignored)
A particular cost is either direct or indirect, regardless of the cost object (true/false?)
an individual cost may be indirect to one cost object and direct to another (true/ false?)
a regional sales manager’s salary would be a direct cost of the regional office in which the sales manager works (true/ false?)
a direct cost can be easily and conveniently traced to a specific cost object (true/false)
a direct cost is sometimes referred to as a common cost (true/false)
marginal cost
the cost added by producing one extra item of a product
direct materials & direct labor are both:
manufacturing costs
manufacturing costs can be divided into 3 categories:
1. direct materials
2. direct labor
3. manufacturing overhead
indirect materials & indirect labor are classified as:
manufacturing overhead
indirect materials include:
nails, glue, thread
costs associated w/ the general management of an organization is called _______________ costs
administrative costs
advertising & sales commissions are ____________ costs
period costs
direct labor & indirect labor are ___________ costs
product costs
period costs are also called inventoriable costs (true/false)
the wages of assembly line workers are period costs (true/false)
nonmanufacturing costs are period costs (true/false)
period costs are expensed in the same period in which they were incurred (true/false)
a _____ cost changes in direct proportion to changes in the activity level: (mixed/variable/fixed)
variable costs remain fixed in total within the relevant range of activity (true/false)
Which of the following are most likely fixed costs?
(electricity to operate factory machines/ administrative salaries/ factory rent/ factory insurance)
administrative salaries
factory rent
factory insurance
within the __________ ___________ of activity, cost assumptions are reasonably valid.
relevant range
mixed costs are also commonly known as semi-________ costs
contribution margin =
sales revenue – variable expenses
A change in revenues b/w 2 alternatives is known as _______ revenue or incremental revenue
the revenue from selling one additional unit is called _______ revenue (opportunity/economic/marginal)
the cost of producing one more unit is: (marginal/differential/sunk/opportunity) cost
marginal cost
What type of cost is never relevant & should be disregarded when making decisions? (marginal/incremental/sunk/opportunity)
sunk cost
a laptop computer manufacturer would consider the computer’s processor chip to be a(n): (direct labor cost/direct material cost/ indirect material cost/ manufacturing overhead cost)
direct material cost
manufacturing costs include:
1. direct materials
2. direct labor
3. indirect labor
a dress manufacturer would consider the cost of relatively inexpensive items like thread to be part of: (manufacturing overhead/ administrative costs/ direct materials/ indirect materials)
manufacturing overhead & indirect materials
product costs are also called inventoriable costs (true/false)
all costs in a merchandising company are period costs (true/false)
period costs are expensed when incurred (true/false)
inventoriable costs are expensed in the period in which they were incurred (true/false)
period costs are expensed on the income statement:
in the period in which they were incurred
w/in the relevant range of activity total variable costs do not change (true/false)
w/in the relevant rate of activity, fixed costs remain constant in total (true/false)
the relevant range of activity is approximated by a straight line (true/false)
the level of activity w/in which variable & fixed cost assumptions are valid is known as the ________ _________
relevant range
using the high-low method, the fixed cost method is calculated:
1. after the variable cost is calculated
2. using either the high or low level of activity
variable cost per unit =
change in cost / change in units
An ________ ________ measures whatever causes costs to vary & is sometimes called a cost driver
activity base
what is the format used to prepare a contribution income statement?
sales – variable expenses = contribution margin -fixed expenses = net income
______ ________ can be products, customers, or jobs & may be assigned costs to help control spending
cost objects
a fixed cost remains fixed ___ _____ w/in relevant range of activity
in total
Examples of common activity bases: (number of purchase orders/ scrapped units/ direct labor hours/ machine hours)
number of purchase orders
direct labor hrs
machine hrs
cost structure
the relative proportion of each type of cost in an organization is known as the company’s _______
fixed costs that can be cut-back or eliminated w/out significant damage to a company’s long-term goals are _______ fixed cost and _____ fixed costs cannot be easily changed or eliminated
1. discretionary
2. committed
the components of prime costs are:
direct materials & direct labor
In Y = a + bX, b denotes
variable cost per unit of activity & slope of the line
traditional income statements focus on ______ _____
cost function
contribution format statements focus on ______ ______ & provide management w/ a tool to make _____ _____ easier
cost behavior
decision making