Inventory Cost Classification and Production Costs Quiz

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Questions and Answers

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

Transferred from cost of goods sold to assets

Becomes irrelevant to the company

Remains as an asset

Transferred from assets to cost of goods sold (correct)

Which costs are considered product costs?

Period costs

Indirect product costs

Direct materials, direct labor, and factory overhead (correct)

Variable production costs

What do direct materials and direct labor collectively refer to?

Variable production costs

Indirect product costs

Prime costs (correct)

Conversion costs

What are period costs?

Costs incurred outside of production activities Signup and view all the answers

Which costs are referred to as conversion costs?

Direct labor and factory overhead Signup and view all the answers

What type of costs are instantly expensed once incurred?

Period costs Signup and view all the answers

What is an example of a variable overhead cost?

Machine maintenance Signup and view all the answers

How are fixed costs typically expressed?

In total Signup and view all the answers

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

Increase Signup and view all the answers

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

10,000 units Signup and view all the answers

How do unit fixed costs change as production levels increase?

Remain constant Signup and view all the answers

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

Remain constant Signup and view all the answers

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

Avoidable costs Signup and view all the answers

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

Unavoidable costs Signup and view all the answers

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

Controllable costs Signup and view all the answers

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

Depreciation Signup and view all the answers

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

Allocated costs Signup and view all the answers

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

Unavoidable costs Signup and view all the answers

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

Opportunity cost Signup and view all the answers

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

They are theoretical costs Signup and view all the answers

What does it mean when costs are classified as fixed?

They remain constant regardless of the change in level of production Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

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

Decremental cost Signup and view all the answers

What is the basis of the Learning Curve Theory?

20% improvement in time with each iteration of a task Signup and view all the answers

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

Due to decreased efficiency Signup and view all the answers

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

Increase due to tiredness and technology adaptation Signup and view all the answers

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

Lowers it due to increased efficiency Signup and view all the answers

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

Increases productivity Signup and view all the answers

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 Signup and view all the answers

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

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Description

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.