CHAPTER 1: Managerial Accounting and Cost Concepts

Question 1

What are three classifications of manufacturing costs?

Answer 1

1. Direct Materials
2. Direct Labor
3. Manufacturing Overhead

Question 2

What are Direct Materials?

Answer 2

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Question 3

What are Administrative Costs

Answer 3

All executive, organizational, and clerical costs.

Question 3

What are Indirect Materials?

Answer 3

Materials used to support the production process.

Examples: lubricants and cleaning supplies used in the automobile assembly plant.

Question 4

What is Direct Labor?

Answer 4

Those labor costs that can be easily traced to individual units of product.

Question 4

What is Manufacturing Overhead?

Answer 4

Manufacturing costs that cannot be easily traced directly to specific units produced.

Question 5

What are Period Costs?

Answer 5

These include all selling costs and administrative costs.

Question 5

What is Indirect Labor?

Answer 5

Wages paid to employees who are not directly involved in production work.

Examples: maintenance workers, janitors, and security guards.

Question 5

What are Selling Costs?

Answer 5

Costs necessary to secure the order and deliver the product.

Question 6

What are Product Costs?

Answer 6

These include direct materials, direct labor, and manufacturing overhead.

Question 8

Which costs are classified as Prime Costs?

Answer 8

Direct Materials and Direct Labor

Question 8

Fill the statements with their respective financial statement:

Inventory -
COGS -
Expense -

Answer 8

Inventory - Balance Sheet
COGS - Income Statement
Expense - Income Statement

Question 9

Which costs are classified as Conversion Costs?

Answer 9

Direct Labor and Manufacturing Overhead

Question 10

Which of the manufacturing cost is included in both Prime Costs and Conversion Costs?

Answer 10

Direct Labor

Question 11

What are the three cost behaviors?

Answer 11

1. Variable Costs
2. Fixed Costs
3. Mixed Costs

Question 12

What are variable costs?

Answer 12

These are costs that changes the total in a constant manner as the activity level rises and falls

Question 13

What is an Activity Base (Cost Driver)?

Answer 13

It is a measure of what causes the incurrence of variable costs. As the level of the activity base increases, the total variable cost increases proportionally.

Question 14

What are Fixed Costs?

Answer 14

These are costs that do not change for changes in activity that fall within the “relevant range

Question 14

What are the two types of fixed costs?

Answer 14

1. Committed
2. Discretionary

Question 15

What are Committed Fixed Costs?

Answer 15

These are long-term costs and cannot be significantly reduced in the short term. Examples: Depreciation on Bldg. and Equipment

Question 15

What are Discretionary Fixed Costs?

Answer 15

These may be altered in the short-term by current managerial decisions. Example: Advertising and R & D

Question 16

What is the relevant range?

Answer 16

It is the range of activity over which the graph of the cost is flat.

Question 17

What is the behavior of Variable costs when in a “total basis”?

Answer 17

Total variable cost increases and decreases in proportion to changes in the activity level.

Question 18

What is the behavior of Variable costs when in a "per unit basis"?

Answer 18

Variable cost per unit remains constant

Question 19

What is the behavior of Fixed costs when in a "total basis"?

Answer 19

Total fixed cost is not affected by changes in the activity level within the relevant range.

Question 20

What is the behavior of Fixed costs when in a "per unit basis"?

Answer 20

Fixed cost per unit decreases as the activity level rises and increases as the activity level falls? (INVERSE)

Question 21

Which format is used primarily for external reporting?

Answer 21

Traditional Format

Question 22

What are the uses of the contribution format?

Answer 22

1. CVP Analysis 2. Budgeting 3. Segmented reporting of profit data 4. Special decisions such pricing and make-or-buy analysis

Question 23

Which format is primarily used by management.

Answer 23

Contribution Format

Question 24

What are Direct Costs?

Answer 24

Costs that can be easily and conveniently traced to a unit of product or other cost object. Examples: Direct Materials and Direct Labor

Question 25

What are Indirect Costs?

Answer 25

Costs that cannot be easily and conveniently traced to a unit of product or other cost object. Example: Manufacturing Overhead

Question 26

What are differential costs (or incremental costs) ?

Answer 26

It is the difference in cost between any two alternatives.

Question 27

What is differential revenue?

Answer 27

A difference in revenue between two alternatives

Question 28

What are Opportunity Costs?

Answer 28

The potential benefit that is given up when one alternative is selected over another.

Question 29

What are Sunk Costs?

Answer 29

These costs have already been incurred and cannot be changed now or in the future. These costs should be ignored when making decisions.