Learning Unit 1 - Cost Classification and Cost estimation

Question 1

What is a cost object?

Answer 1

Anything you wish to determine the cost of is a cost object.

Question 2

What is a cost driver?

Answer 2

A cost driver is a factor (called a variable) that causes a change in the cost of a cost object.

Question 3

What is a product cost?

Answer 3

Product costs are those costs that are incurred as a result of the manufacturing operation.

Question 4

What is a period cost?

Answer 4

Costs that are not incurred in the manufacturing operation and are therefore not classified as product costs.

Question 5

What are the three elements associated with the manufacturing process (product costs)?

Answer 5

1. Material costs
2. Labor costs
3. Factory overhead cost

Question 6

What are direct costs?

Answer 6

Direct costs are product costs that can be directly traced to manufactured products (cost objects), except when it is impractical to trace the costs.

Question 7

What are indirect costs?

Answer 7

a cost is considered as an indirect cost when it is either impractical or impossible or both, to trace it to the manufactured products.

Question 8

What is prime costs?

Answer 8

Prime costs are direct costs.

Question 9

What is conversion cost?

Answer 9

Conversion cost
Conversion costs are the costs incurred in converting the direct materials into finished goods

Question 10

What are fixed costs?

Answer 10

Fixed costs will remain unchanged regardless of output, provided that the output level is within relevant range.

Question 11

What are variable costs?

Answer 11

Total variable costs will increase in direct proportion to an increase in output

Question 12

What are mixed costs?

Answer 12

a mixed cost contains both fixed cost and variable cost elements.

Question 13

What is cost behavior?

Answer 13

This deals with how a cost reacts to a change in sales volume, production volume or any other activity level.

Question 14

What is a step cost?

Answer 14

A step cost is a cost that is available only in fixed allotments. It varies within the activity level, but in a stepwise rather than linear level.

Question 15

What is cost assignment

Answer 15

Cost assignment refers to tracing or allocating costs to cost objects.

Question 16

What is relevant costing?

Answer 16

Relevant costing refers to determining the financial effect of a decision on the organization.

Question 17

What are the three attributes to relevant costing?

Answer 17

• Future cost
• Differential cost
• Cash flow

Question 18

Explain future costs.

Answer 18

A future cost (or revenue) is costs that can be influenced by management’s decisions as they are yet be incurred.

Question 19

Explain differential costs.

Answer 19

Costs or revenue which can not be changed by the decision under consideration.

Question 20

What are sunk costs?

Answer 20

Costs which have already been incurred.

Question 21

What is opportunity cost?

Answer 21

An opportunity cost is the best benefit forgone by taking the proposed course of action.

Question 22

What are direct materials?

Answer 22

Direct materials are the physical inputs that can be traced in an economically feasible manner to the product that is being manufactured.

Question 23

What are indirect materials?

Answer 23

Indirect materials cannot be traced to the product in an economically feasible manner.

Question 24

What is direct labor?

Answer 24

Where it is economically feasible to trace the amount of labor that is physically expanded on a product.

Question 25

What is absorption costing method (MAC2601_LU3)?

Answer 25

The absorption costing method, also known as the full costing method, treats all production costs, i.e., direct materials, direct labour, as well as fixed overheads and variable overheads as product costs.

Question 26

What is variable costing method (MAC2601_LU3)?

Answer 26

The variable costing method, also known as the direct costing method and the marginal costing method, treats only variable production costs as product costs. Fixed production overheads are treated as period costs.