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Questions and Answers
What type of expenditure involves the acquisition of assets?
Which of the following is considered a revenue expenditure?
What does opportunity cost represent?
Which of the following is an example of a discretionary cost?
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What characterizes sunk costs in decision-making?
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Which of the following best describes overhead costs?
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Which type of cost can be controlled by a supervisor for a certain period?
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Which of the following statements about committed costs is true?
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What type of costs includes expenses like advertising costs and delivery expenses?
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Which of the following is an example of indirect costs?
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Which classification of costs are charged against revenue when they occur and are not part of inventory?
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Which costs can be traced directly to a particular object of costing?
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Which of the following is true about product costs?
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What term is used to refer to costs associated with more than one product, department, or branch?
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Which of the following is NOT a manufacturing cost?
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What distinguishes variable costs from fixed costs?
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What is the total variable cost for the Magical Citrus perfume line?
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How does the variable cost per unit change with increased production?
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What is the contribution of direct labor to the variable cost per unit for the Wild Citrus perfume?
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Which of the following costs are included in the total variable cost for each perfume line?
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If production for Victoria's Citrus is 9,500 units, what is its total variable cost?
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What is the overhead cost per bottle for the production of perfume?
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What do mixed costs consist of?
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What will happen to the total variable cost if production increases for any of the perfume lines?
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What directly affects the normal costing system in terms of job costing?
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How is the predetermined overhead rate calculated?
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What is the budgeted manufacturing overhead primarily made up of?
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In the normal costing formula, what is multiplied by the actual direct labor hours to find normal cost?
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If the actual direct labor hours utilized is higher than budgeted, how does it affect the predetermined overhead rate?
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What defines the various predetermined overhead rates if multiple rates are employed by a company?
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What is the purpose of using a predetermined overhead rate in a normal costing system?
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What is the correct formula for calculating variable cost per unit?
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Given the formula for calculating normal cost, which component would you need to identify first?
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How is the variable cost calculated at the highest level of activity?
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Which of the following is NOT a type of inventory account maintained in manufacturing?
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What is the fixed cost calculated at the lowest level of activity?
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What does the Perpetual Inventory System require for managing inventory?
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What is the calculated variable cost per unit given a total utility cost change of ₱35,000 and a change in machine hours of 2,800?
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What does Work-in-Process Inventory represent?
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What is the highest variable cost at the highest level of activity if the level is 4,700?
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How is fixed cost determined at both the highest and lowest levels of activity?
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Study Notes
Cost Classification
- Cost is always modified by context (fixed, variable, sunk, etc.).
- Classification of costs depends on the purpose of the analysis.
- Costs can be classified based on management function, traceability, timing of charge against revenue, accounting period, and relevance to decision-making.
Management Function
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Manufacturing costs are incurred in the factory to convert raw materials into finished goods.
- They include direct materials, direct labor, and factory overhead.
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Non-manufacturing costs are incurred outside the factory.
- They include selling expenses (advertising, delivery, salaries, commissions) and administrative expenses (salaries of executives, legal expenses).
Traceability
- Direct costs can be traced directly to a specific product, department, or branch (e.g., materials, direct labor).
- Indirect costs cannot be traced directly to a specific cost object (e.g., factory overhead, operating costs).
Timing of Charge Against Revenue
- Product costs are part of inventory and charged against revenue when the product is sold (e.g., direct materials, direct labor, factory overhead).
- Period costs are not inventoriable and are expensed in the period they are incurred (e.g., selling expenses, administrative expenses).
Accounting Period-Wise Classification
- Capital expenditure results in the acquisition, extension, or enhancement of an asset (e.g., acquiring land, building, machinery).
- Revenue expenditure maintains assets in working condition and is not intended to increase revenue-earning capacity (e.g., repairs, maintenance).
Relevance to Decision-Making
- Overhead cost represents ongoing business expenses not related to direct labor or materials (e.g., rent, utilities, insurance).
- Standard cost is a predetermined cost based on past experience, budgeted amounts, or industry standards.
- Opportunity cost is the benefit forgone when choosing one alternative over another (e.g., choosing to use a building for production instead of renting it out).
- Sunk costs are historical costs that are irrelevant to decision-making (e.g., acquisition cost of equipment, manufacturing costs of finished goods).
- Committed costs arise from an organization's structure or facility use (e.g., property taxes, management salaries, rent).
- Discretionary costs arise from management decisions on spending for specific purposes (e.g., research and development, charitable contributions, advertising).
- Controllable costs can be influenced or controlled by a supervisor or manager within a given period.
Variable Costs
- Variable costs change proportionally with activity levels.
- Formula for Total Variable Cost: TVC = Production in units x Variable cost per unit.
- In the given example, the variable cost per unit remains consistent at P14.00, but the total variable cost increases as production of each perfume line increases.
Mixed Costs
- Mixed costs contain both fixed and variable components.
- Formula for Variable cost per unit: Change in cost / Change in activity.
- Formula for Variable Cost: Highest or lowest level of activity x Variable cost per unit
- Formula for Fixed Cost: Highest or lowest costs - Variable cost at each level of activity.
Inventory Accounts
- Raw Materials Inventory represents available raw materials for manufacturing processes.
- Work-in-Process Inventory reflects costs of partially completed goods.
- Finished Goods Inventory summarizes costs of completed goods stored for sale.
Raw Materials Inventory System
- Perpetual Inventory System maintains stock cards or records for each raw material, tracking inflow, outflow, and balance in both quantity and peso amount.
Normal Costing System
- Normal costing charges direct materials and direct labor to the job.
- Predetermined overhead rate is used to apply overhead to production.
- Formula for Normal Cost: Predetermined overhead rate x Actual direct labor hours utilized.
- The predetermined overhead rate is calculated by dividing estimated total overhead by estimated total cost driver.
- Formula for Predetermined Overhead Rate: Budgeted manufacturing overhead / Budgeted production activity.
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Description
This quiz explores the various classifications of costs in management accounting, including fixed, variable, and sunk costs. Understand the differences between manufacturing and non-manufacturing costs, as well as direct and indirect costs, to enhance your financial analysis skills.
