Inventory Cost Classification and Production Costs Quiz

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30 Questions

What happens to the cost of inventory once the units are sold?

Transferred from assets to cost of goods sold

Which costs are considered product costs?

Direct materials, direct labor, and factory overhead

What do direct materials and direct labor collectively refer to?

Prime costs

What are period costs?

Costs incurred outside of production activities

Which costs are referred to as conversion costs?

Direct labor and factory overhead

What type of costs are instantly expensed once incurred?

Period costs

What is an example of a variable overhead cost?

Machine maintenance

How are fixed costs typically expressed?

In total

What will happen to total variable costs if production levels increase?

Increase

At what production level do the total costs for Ndesign Company's Bigwigs reach P400,000?

10,000 units

How do unit fixed costs change as production levels increase?

Remain constant

What effect does an increase in production levels have on unit variable costs?

Remain constant

Which type of cost is considered an inflow in the economic sense and referred to as imputed costs?

Avoidable costs

Which of the following costs do not change and remain constant, regardless of the manager's decision?

Unavoidable costs

What type of costs depend on the scope, nature, and extent of authority granted to a manager within an organization?

Controllable costs

Which of the following is an example of an unavoidable cost?

Depreciation

What term is used for the salaries of executives in the central office and other central administrative costs?

Allocated costs

Which type of cost is irrelevant in short-term decisions and includes property taxes and committed fixed costs?

Unavoidable costs

What type of cost is the 15% benefit from investing in project X considered as in this context?

Opportunity cost

Why are opportunity costs and imputed costs not recorded in the financial accounting system?

They are theoretical costs

What does it mean when costs are classified as fixed?

They remain constant regardless of the change in level of production

What distinguishes marginal cost from incremental cost?

Marginal cost represents a total increase in costs, while incremental cost is an increase in cost per unit

How is the imputed rate of using its own money instead of borrowing calculated?

By calculating the interest rate that should have been paid had the money been borrowed

Which term describes a cost that decreases regardless of the level of production and sales but changes on a per-unit basis?

Decremental cost

What is the basis of the Learning Curve Theory?

20% improvement in time with each iteration of a task

Why do total costs increase dramatically in the initial years of business operations?

Due to decreased efficiency

What happens to total costs as production continues according to the text?

Increase due to tiredness and technology adaptation

How does the Learning Curve Theory impact cost per unit of output?

Lowers it due to increased efficiency

What effect does gaining experience have on productivity according to the text?

Increases productivity

Why do total costs start to move up again as production continues according to the text?

Machines need more maintenance, and new technology is adapted

Study Notes

Classifying Costs

  • Indirect departmental costs include:
    • Salaries of executives in the central office
    • Central administrative costs (e.g. advertising, systems review, development, interest expenses, training)
    • Allocated depreciation of noncurrent assets
  • Avoidable costs are those that can be eliminated by not performing an activity
  • Unavoidable costs remain constant, regardless of a manager's decision
    • Examples: rent, depreciation, interest, property taxes, and other committed fixed costs

Controllable and Uncontrollable Costs

  • Controllable costs are those that can be influenced or decided upon by a manager
  • Uncontrollable costs are outside a manager's authority
  • The concept of controllability is related to the organizational structure of an organization

Direct and Indirect Product Costs

  • Direct product costs are directly identified with the finished goods or services
    • Direct materials and direct labor are direct product costs
  • Indirect product costs are not directly identified with the finished goods or services
    • Factory overhead is an indirect product cost

Relevant and Irrelevant Costs

  • Relevant costs are useful in making decisions
  • Irrelevant costs are not useful in making decisions

Fixed and Variable Costs

  • Fixed costs remain constant, regardless of the level of production and sales
  • Variable costs change in proportion to the level of production and sales
  • Examples of variable overhead: factory supplies, indirect materials, indirect labor, and repairs

Cost Sensitivity Sample Problem

  • Total fixed costs: P 200,000.00
  • Unit variable costs: P 20.00
  • Changes in fixed and variable costs under varying production levels

Opportunity Cost and Imputed Costs

  • Opportunity cost is the benefit that could have been obtained by choosing an alternative option
  • Imputed costs are not incurred but are implied in a given decision
  • Both opportunity costs and imputed costs are not recorded in the financial accounting system

Incremental and Marginal Costs

  • Incremental costs represent a total increase in costs
  • Marginal cost is an increase in cost per unit

Learning Curve Theory

  • Based on the idea that the time required to perform a task decreases as the same person repeats the task
  • People gain knowledge and experience, leading to lower average time required in every doubling of the same task
  • Total costs increase dramatically in the initial years of business or product operations, then decrease as experience and efficiency increase

Test your knowledge on classifying inventory costs and understanding production costs including direct materials, labor, and overhead. Learn about the transfer of inventory costs to cost of goods sold upon sale.

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