Accounting 2, Chapter 2

Front 1

What are MANUFACTURING COSTS?

Back 1

Costs involved in making a product. Consist of DIRECT MATERIALS, DIRECT LABOR, and MANUFACTURING OVERHEAD.

Front 2

What are DIRECT MATERIALS?

Back 2

materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

Front 3

The battery in a new Ford auto is an example of what?

Back 3

DIRECT MATERIAL.

Front 4

Materials such as glue are classified as what?
Why?

Back 4

INDIRECT MATERIALS b/c it's too costly and inconvenient to trace such small costs to individual units of output.

Front 5

What does DIRECT LABOR (TOUCH LABOR) consist of?

Back 5

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

Front 6

The worker who installs overhead lights in the passenger cabin in a Boeing aircraft is an example of what?

Back 6

DIRECT LABOR.

Front 7

Supervisors and janitors are considered to be what? Why?

Back 7

INDIRECT LABOR. These costs can't be traced to individual units of product.

Front 8

MANUFACTURING OVERHEAD consists of what?

Back 8

All manufacturing costs EXCEPT direct materials and direct labor. INCLUDES INDIRECT MATERIALS, INDIRECT LABOR, and other manufacturing costs such as factory rent, factory utilities, and depreciation on factory equipment and facilities.

Front 9

PRIME COST?

Back 9

consists of DIRECT MATERIALS plus DIRECT LABOR. used to categorize manufacturing costs.

Front 10

CONVERSION COST?

Back 10

consists of DIRECT LABOR plus MANUFACTURING OVERHEAD. used to categorize manufacturing costs.

Front 11

What are the two main categories of non-manufacturing costs?

Back 11

SELLING COSTS and ADMINISTRATIVE COSTS

Front 12

SELLING COSTS?

Back 12

include all costs associated with marketing finished products such as sales commissions, costs of delivery equipment, costs of finished goods warehouses, and advertising

Front 13

ADMINISTRATIVE COSTS?

Back 13

include all costs associated w/the general administration of an organization, including secretarial salaries, depreciation of general administrative facilities and equipment, and executive compensation

Front 14

For purposes of preparing external financial reports, costs can be classified as either *blank* or *blank*

Back 14

product costs or period costs

Front 15

PRODUCT COSTS?

Back 15

are matched w/units of product and are recognized as an expense on the income statement only when the units are sold. Until that time, product costs are considered to be assets and are included on the balance sheet as inventory.

Front 16

PERIOD COSTS?

Back 16

are expensed on the income statement in the period in which they are incurred. (by incurred, we mean the period in which the cost is accrued, not necessarily when it is paid. Remember from financial accounting that items such as salaries are counted as costs when the company incurs the liability to pay them rather than when they are paid. Continue to use the rules you learned in financial accounting.)

Front 17

In a manufacturing company, product costs include what?

Back 17

direct materials, direct labor, and manufacturing overhead. all other costs are period costs.

Front 18

In a merchandising company such as Macy's or WalMart, product costs consist solely of the what?

Back 18

costs of products purchased from suppliers for resale to customers. All other costs are period costs.

Front 19

For purposes of predicting cost behavior, costs are often classified as either *blank* or *blank*

Back 19

fixed or variable

Front 20

Variable cost?

Back 20

a cost that varies, in total, in proportion to changes in the level of activity. Variable costs are constant on a per unit basis.

Front 21

Activity is often measured in terms of the what?

Back 21

volume of goods produced or services provided by the organization. However, other measures of activity may be used for specific purposes such as patients admitted to a hospital, number of machinery setups performed, number of sales calls made, etc.

Front 22

How does a variable cost look on a graph?

Back 22

a variable cost is represented as a sloping straight line that goes through zero

Front 23

fixed cost?

Back 23

a cost that is constant in total within the relevant range

Front 24

Because TOTAL fixed cost is CONSTANT, the average fixed cost does what as the activity level does what?

Back 24

average fixed cost drops as the activity level increases

Front 25

What are the two ways fixed costs can be classified?

Back 25

committed or discretionary

Front 26

Committed fixed costs relate to what?

Back 26

investments in facilities, equipment, and the basic organization of a company. These costs are difficult to adjust in the short-term.

Front 27

Discretionary fixed costs result from what?

Back 27

annual decisions by management to spend in certain areas, such as advertising, research, and management development programs. These costs are easier to adjust than committed fixed costs.

Front 28

In what circumstance would committed fixed costs change?

Back 28

they may change if the change in activity is big enough. However, within the band of activity known as the relevant range, total fixed cost is constant.

Front 29

For simplicity, what do we usually assume about the relationship b/t cost and volume?

Back 29

that it's strictly linear (the graph of the cost is a straight line) However, many cost relationships are curvilinear..

Front 30

Why is the straight-line assumption reasonable?

Back 30

reasonable because any small portion of a curvilinear cost can be approximated by a straight line.

Front 31

What is the relevant range?

Back 31

the range of activity w/in which a particular straight line is a reasonable approximation to the curvilinear cost.

Front 32

Mixed cost?

Back 32

contains both variable and fixed cost elements. In the case of a mixed cost, the straight line representing the relation b/t total cost and activity does not go through zero.

examples of mixed costs: electricity, costs of processing bills, costs of admitting patients to a hospital, and maintenance.

Front 33

what is expressed in the cost formula? How can it be used?

Back 33

the fixed and variable elements of a mixed cost. can be used to predict costs at all levels of activity within the relevant range.

Front 34

What is the equation for cost formula?

Back 34

Y= a + bX

Front 35

What does each letter represent in the cost formula Y = a + bX

Which is the independent and which is the dependent variable?

Back 35

Y = total mixed cost
a = total fixed cost (vertical intercept)
b = variable cost per unit of activity (slope of the line)
X = level of activity

independent: X
dependent: Y

Front 36

The analysis of a mixed cost begins w/records of past cost and activity. What are the steps after that?

Back 36

Plot the cost and activity data on a scattergraph. The cost is Y, activity is X. If the scattergraph plot indicates that the relation w/t cost and activity is appx linear, the analysis can proceed to the next stage of estimating the variable cost per unit of activity and the fixed cost per period using the high-low method or least-squares regression method

Front 37

What is the high-low method of analyzing a mixed cost based on?

Back 37

using just the data at the highest and lowest levels of activity.

Front 38

How do you do the high-low method? What's the formula?

Back 38

Use "rise over run" for the slop of a straight line. The change in cost observed b/t the two extremes is divided by the change in activity to estimate the amount of variable cost.

USE THIS FORMULA:
Variable cost per unit of activity = (change in cost) / (change in activity)

Front 39

After using the high-low method formula, the estimated variable cost per unit of activity is then used to estimate the fixed cost how...?

Back 39

Total cost at the high activity level..
less variable portion:
high activity level x variable cost.
fixed portion of the mixed cost......

Front 40

The high-low method is quick, but why is it not reliable?

Back 40

because it is based on costs and activity for only 2 periods- the periods with the highest and lowest levels of activity. Other data are ignored. Moreover, the periods w/the highest and lowest levels of activity tend to be unusual and unrepresentative of typical cost behavior

Front 41

The high-low method is quick but....

Back 41

but not reliable b/c it is based on costs and activity for only 2 periods- the periods w/the highest and lowest levels of activity. Other data are ignored. Moreover, periods w/highest and lowest levels of activity tend to be unusual and unrepresentative of typical cost behavior