Chapter 3: Basic Cost Management Concepts

Question 1

What are costs?

Answer 1

costs incurred when a resource is used for some purpose

Question 2

What are cost pools?

Answer 2

meaningful groups into which costs are collected

Question 3

What are cost drivers?

Answer 3

factors that causes changes in total cost of an activity

Question 4

What are cost objects?

Answer 4

any product, service, customer etc. to which costs are accumulated for some management purpose

Question 5

What are value streams?

Answer 5

group of related products, useful for preparing profitability reports as part of lean accounting; all activities required to create customer value for families of products or services.

Question 6

What is cost assignment?

Answer 6

process of assigning costs to cost pools or from cost pools to cost objects

Question 7

What are direct costs and indirect costs?

Answer 7

Direct cost: cost that can conveniently and economically be traced directly to a cost pool/object

Indirect costs: cost that can not conveniently or economically be traced to a cost pool/ object.

Question 8

What is cost allocation?

Answer 8

process of assigning indirect costs to cost pools or cost objects

Question 9

What are allocation bases?

Answer 9

cost drivers used to allocate or assign costs to cost objects.

Question 10

What are direct materials costs?

Answer 10

cost of materials in product and a reasonable allowance for scrap and defective units

Question 11

What are indirect materials costs?

Answer 11

cost of materials used in manufacturing not part of the product or not easily or economically traceable to the finished product; a component of total manufacturing overhead.

Question 12

What is direct labor costs and what is indirect labor costs?

Answer 12

Direct labor cost: labor used to manufacture the product or provide the service.

Indirect labor cost: labor cost associated with production not considered direct labor; component of total manufacturing overhead.

Question 13

What is factory overhead?

Answer 13

indirect manufacturing costs commonly combined into a single cost pool in a manufacturing firm

Question 13

What is overhead?

Answer 13

all indirect cost commonly combined into a single cost pool: called factory overhead in a manufacturing firm

Question 14

What are prime costs?

Answer 14

sum of direct materials and direct labor

Question 15

What are conversion costs?

Answer 15

direct labor and factory overhead combined into a single amount

Question 16

What are activity-based cost drivers?

Answer 16

factors causing changes in an activity. For each activity in a production process, a cost driver is determined to explain how costs incurred for that activity change.

Question 17

What is increased marginal productivity and what is diminished marginal productivity?

Answer 17

Increased marginal productivity: pattern of increasing costs at a decreasing rate Inputs are used more productively or efficiently as manufacturing output increases.

Diminshed marginal productivity: pattern of increasing costs at an increasing rate as firm’s near their production capacity and less-efficient resources are now being used.

Question 18

What is the relevant range?

Answer 18

range of cost driver in which actual value of cost drivers is expected to fall, and for which the relationship between cost and cost drivers is around linear.

Question 19

What are variable costs?

Answer 19

cost that changes in total response to changes in one or more cost drivers (units produced)

Question 20

What are fixed costs?

Answer 20

portion of total cost that, within relevant range, does not change with a change in quantity of a designated cost driver

Question 21

what are mixed costs?

Answer 21

costs that, withing relevant range, includes both variable and fixed costs components.

Question 22

what are step costs?

Answer 22

costs that vary with the cost driver, but in discrete steps within relevant range (sometimes called semi-fixed costs)

Question 23

What are unit costs?

Answer 23

total cost (materials, labor and overhead) divided by number of units of output

Question 24

What are average costs?

Answer 24

total cost of resources consumed divided by units of output

Question 25

What are structural cost drivers?

Answer 25

strategic plans and decisions that have long-term effect

Question 26

What four issues do structural cost drivers involve?

Answer 26

1. Scale: economies of scale create lower overall cost 2. Experience: Experience of employees will have lower development costs 3. Technology: new technologies can reduce costs significantly 4. Complexity: the more products (increases complexity), the higher costs will be

Question 27

What are executional cost drivers?

Answer 27

factors that firms can manage in short term to reduce costs. Examples include: 1. Workforce empowerment: Dedicated teams lower costs 2. Design of production process: Efficient production and innovation processes 3. Supplier relationship: low-cost advantages through quality, delivery or cost of materials and parts

Question 28

What is cost of goods sold?

Answer 28

cost of product transferred to the income statement when inventory is sold

Question 29

What are product costs and period costs?

Answer 29

Product costs: only the costs necessary to complete the product (direct material and labor, and factory overhead) Period costs: all nonproduct expenditures for managing the firm and selling the product (SG&A Expenses). May include nonoperating expenses such as interest.

Question 30

What are the three types of inventory?

Answer 30

Materials inventory: cost of supply of materials used in the manufacturing process or to provide the service Work-in-progress inventory: an inventory account that contains all costs put into the manufacture of products that are started but not complete at financial statement date Finished goods inventory: cost of goods ready for sale

Question 31

What is the cost of goods manufactured?

Answer 31

cost of goods that were finished and transferred out of the WIP inventory account during a given period.

Question 32

Name three attributes of cost information?

Answer 32

1. Accuracy 2. Timeliness 3. Cost and Value of cost management information

Question 33

What are internal accounting controls?

Answer 33

policies and procedures restricting and guiding activities in processing of financial data with objective of preventing or detecting errors and fraudulent acts. Ensure accuracy of cost information

Question 34

What is the difference between perpetual and periodic inventory systems?

Answer 34

Perpetual inventory system: method updating finished goods inventory account for each purchase or sale transaction Periodic inventory system: method involving a count of inventory at end of each accounting period to determine ending balance in inventory.