Ch 1

Question 1

What are direct materials? What is an example?

Answer 1

Materials that become an integral part of the finished product and whose costs can be conveniently traced to the finished product
- Ex. seats that Airbus purchases for their planes

Question 2

What are raw materials?

Answer 2

Materials that go into the final product

Question 3

True or false: Raw materials can be indirect or direct

Answer 3

True

Question 4

True or false: A finished product of one company can be the raw materials of another

Answer 4

True

Question 5

What are indirect materials? What is an example?

Answer 5

Materials used in production that aren’t worth tracing to the final product
Ex. Glue use on furniture

Question 6

What is direct labor? What is an example?

Answer 6

Labor costs that can be easily traced to individual units of product
Ex. Assembly line workers at Chevy

Question 7

What is indirect labor? What is an example?

Answer 7

Labor costs that cannot be physically traced to particular products or that can be traced but only at great cost
Ex. Janitors and security guards

Question 8

What is manufacturing overhead? What is an example?

Answer 8

Includes all manufacturing costs except direct materials and direct labor
Ex. Indirect materials, indirect labor, maintenance, taxes, depreciation, and insurance

Question 9

What are the three categories of manufacturing costs?

Answer 9

1) Direct materials
2) Direct labor
3) Manufacturing overhead

Question 10

What are nonmanufacturing costs?

Answer 10

Selling costs and administrative costs

Question 11

What are selling costs? What is an example?

Answer 11

All costs that are incurred to secure customer orders and get the product to the customer
Ex. Advertising, shipping, commissions, salaries, cost of finished goods

Question 12

What are administrative costs? What is an example?

Answer 12

All costs associated with the general management of an organization
Ex. Executive compensation, accounting, secretarial

Question 13

What are product costs?

Answer 13

All costs involved in acquiring or making a product

Question 14

How are product costs accounted for?

Answer 14

1) Inventory on balance sheet

2) When the product is sold, is it then put as COGS and matched against sales revenue

Question 15

What are period costs? Give some examples.

Answer 15

All costs that are not product costs.

Ex. Selling and administrative expenses, rent for offices

Question 16

What is prime cost?

Answer 16

= direct materials + direct labor cost

Question 17

What is conversion cost?

Answer 17

= direct labor cost + manufacturing overhead

Question 18

What is a variable cost? What is the formula?

Answer 18

Cost that varies in direct proportion to changes in the level of activity of production
(change in cost)/(change in activity)

Question 19

What are committed fixed costs?

Answer 19

Organizational investments with a multi-year planning horizon

Question 20

What are discretionary fixed costs?

Answer 20

Arise from annual decisions by management to spend on certain cost items

Question 21

True or false: Total variable costs increases and decreases in proportion to changes in the activity level

Answer 21

True.

Question 22

True or false: Variable cost per unit increases and decreases in proportion to changes in the activity level

Answer 22

False. Variable cost per unit remains constant

Question 23

True or false: Total fixed cost is not affected by changes in the activity level within the relevant range

Answer 23

True.

Question 24

True or false: Fixed cost per unit increase as the activity level increases and decreases as the activity level falls

Answer 24

False. Fixed cost per unit decreases as activity rises and increases as activity falls

Question 25

What is the equation used to express the relationship between a mixed cost and activity level?

Answer 25

Y= a + bX
Y - Total mixed cost
a - Total fixed cost 
b - Variable cost per unit of activity 
X - Level of activity

Question 26

How do you use the high-low method?

Answer 26

(cost at high - cost at low)/(high activity level/low activity level)

Question 27

How do you calculate COGS?

Answer 27

= Beg. Inv. + Purchases - End Inv.

Question 28

What is the contribution margin?

Answer 28

Amount remaining from sales revenue after variable expenses have been removed
= sales revenue - variable expenses

Question 29

What is differential cost?

Answer 29

Difference between direct and indirect costs

Question 30

What is differential revenue?

Answer 30

Difference between the revenues calculated from each approach

Question 31

What is a sunk cost?

Answer 31

A cost that has already been incurred and that cannot be changed by any decision made now or in the future