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Questions and Answers
What does costing refer to?
What does costing refer to?
The method and process of ascertaining the costs.
What are the major objectives of costing? (Select all that apply)
What are the major objectives of costing? (Select all that apply)
A cost can be defined as the number of resources used in exchange for goods or services.
A cost can be defined as the number of resources used in exchange for goods or services.
True
A cost can be defined as an initial value, measured in monetary terms, incurred or potentially to be incurred to achieve a specific objective.
A cost can be defined as an initial value, measured in monetary terms, incurred or potentially to be incurred to achieve a specific objective.
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What is the main concern when studying a cost related to the nature of business?
What is the main concern when studying a cost related to the nature of business?
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What is the main concern when studying a cost related to the purpose of the cost?
What is the main concern when studying a cost related to the purpose of the cost?
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What is a cost that is directly traceable to a particular object of costing?
What is a cost that is directly traceable to a particular object of costing?
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What is a cost that forms part of the inventory and is charged against revenue?
What is a cost that forms part of the inventory and is charged against revenue?
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What is a cost that results from an asset's acquisition and affects earning capacity?
What is a cost that results from an asset's acquisition and affects earning capacity?
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What is a cost that is considered a generic term?
What is a cost that is considered a generic term?
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What types of costs are constant and do not change with an increase or decrease in the number of goods or services produced and sold?
What types of costs are constant and do not change with an increase or decrease in the number of goods or services produced and sold?
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What types of costs vary in total in direct proportion to changes in production volume?
What types of costs vary in total in direct proportion to changes in production volume?
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What types of costs are not directly related to the level of activity and include both fixed and variable components?
What types of costs are not directly related to the level of activity and include both fixed and variable components?
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What type of cost remains unchanged for a given output level and then increases by a fixed amount at a higher output level?
What type of cost remains unchanged for a given output level and then increases by a fixed amount at a higher output level?
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What method of allocating overhead costs uses the actual costs incurred in production?
What method of allocating overhead costs uses the actual costs incurred in production?
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What method of allocating overhead costs uses a predetermined overhead rate to allocate costs to jobs?
What method of allocating overhead costs uses a predetermined overhead rate to allocate costs to jobs?
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What is the primary concern in the perpetual inventory system?
What is the primary concern in the perpetual inventory system?
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What is the primary concern in the periodic inventory system?
What is the primary concern in the periodic inventory system?
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Study Notes
Costing Overview
- Costing is a method of determining the cost of products or services, involving classifying, recording, and allocating expenses. It's used for management control and guidance.
- Key objectives include determining operational costs, setting pricing policies, and guiding material purchasing decisions. It also helps managers make decisions, reduce waste, and lower manufacturing costs.
- Cost is defined as the resources exchanged for goods/services, the expenditure for a specific activity, or the initial value to achieve a specific objective.
Nature of Costs
- Costs are assessed based on the nature of the business (manufacturing vs. service). For manufacturing, per-unit costs are easily determined.
- Cost purpose influences what aspects are included. Inventory valuation focuses only on production costs, whereas pricing targets encompass all production, selling, and administrative expenses.
- Cost conditions differ based on the specific situation. For instance, work-in-progress is valued at factory cost; finished goods are valued at production cost.
- Cost context refers to the specific type of cost (fixed, variable, sunk), each having a unique attribute impacting computation.
Cost Classification
- Costs are classified in various ways to serve different management purposes.
- Management Function:
- Manufacturing costs: Raw materials, direct labor, and factory overhead costs directly related to converting inputs to finished goods.
- Non-manufacturing costs: Advertising, delivery, salaries, and other expenses not involved in transforming materials into finished products.
- Traceability:
- Direct costs: Expenses directly tied to a product/department (e.g., materials, direct labor, certain advertising costs).
- Indirect costs: Expenses not easily traceable to a particular product/department (e.g., factory overhead, general operating costs).
- Timing of Charge Against Revenue:
- Product costs: Costs included in inventory and charged to revenue when sold (e.g., manufacturing costs).
- Period costs: Costs expensed immediately (e.g., selling, administrative expenses).
- Accounting Period:
- Capital expenditure: Acquiring/enhancing an asset's earning capacity.
- Revenue expenditure: Maintaining assets' operational state.
Cost Behavior
- Fixed costs: Remain constant regardless of production volume (e.g., rent, insurance).
- Variable costs: Directly proportional to production volume (e.g., direct materials, direct labor).
- Mixed costs: Contain both fixed and variable components (e.g., utilities).
- Step costs: Constant within a range and jump at certain output levels (e.g., supervisors' salaries).
Separating Mixed Costs (High-Low Method)
- The high-low method determines variable and fixed components of a mixed cost by analyzing the highest and lowest activity levels.
Costing Systems
- Perpetual Inventory System: Tracks inventory continually.
- Periodic Inventory System: Tracks inventory periodically through a physical count.
- Normal Costing: Uses predetermined overhead rates to allocate overhead costs
- Actual Costing: Uses actual overhead costs to allocate overhead.
Inventory Accounts
- Companies track raw materials, work-in-process, and finished goods to manage production costs.
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Description
Dive into the fundamentals of costing methods and the nature of costs in various business contexts. This quiz covers key objectives, classifications, and the impact of costs on decision-making in management and manufacturing. Test your understanding of operational costs and pricing policies.
