Questions and Answers
What are raw materials?
What is direct labor?
Labor that can be easily traced to individual units of the product.
What does manufacturing overhead include?
Indirect materials, indirect labor, maintenance and repairs, heat, light, property taxes, depreciation, and insurance.
What are selling costs?
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What are administrative costs?
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What are product costs?
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What are period costs?
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Prime cost is calculated as direct materials plus __________.
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Conversion costs are the sum of __________ and manufacturing overhead.
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What is cost behavior?
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Describe variable costs.
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What is an activity base?
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What are fixed costs?
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What are mixed costs?
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What does the contribution format income statement separate?
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What are direct costs?
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What are indirect costs?
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What is a sunk cost?
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How is the predetermined overhead rate calculated?
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The 4 Step Process begins by estimating the total amount of the __________ base.
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Study Notes
Raw Materials
- Includes materials used in the final product, categorized as direct or indirect.
- Direct materials are integral to the finished product and easily traced to it, while indirect materials, like glue, fall under manufacturing overhead.
Direct Labor
- Labor costs that can be directly traced to individual product units.
- Costs that cannot be attributed to specific products are categorized as indirect labor within manufacturing overhead.
Manufacturing Overhead
- Comprises indirect materials, indirect labor, and costs related to factory operation such as maintenance, utilities, property taxes, and insurance.
- Excludes direct costs associated with product manufacturing.
Selling Costs
- Encompass all expenses incurred to secure customer orders and deliver finished products.
- Typical examples include advertising, shipping, sales commissions, and travel expenses.
Administrative Costs
- Cover costs associated with general management functions within an organization.
- Includes executive compensation, accounting, public relations, and secretarial expenses.
Product Costs
- Incurred in the process of acquiring or manufacturing a product, comprising direct materials, direct labor, and manufacturing overhead.
- Initially recorded as inventory; transferred to the income statement as Cost of Goods Sold (COGS) upon sale.
Period Costs
- Represent all costs that are not classified as product costs, typically selling and administrative expenses.
- Expensed on the income statement in the period incurred under accrual accounting principles.
Prime Cost
- The sum of direct materials and direct labor costs associated with production.
Conversion Costs
- Total of direct labor costs and manufacturing overhead, essential in converting raw materials into finished products.
Cost Behavior
- Describes how costs respond to changes in activity levels, categorized into variable, fixed, or mixed.
- Understanding cost behavior helps managers anticipate financial impacts based on activity fluctuations.
Variable Costs
- Costs that change in direct relation to activity levels, such as costs of goods sold, direct materials, and variable selling expenses like commissions.
Activity Base (Cost Driver)
- A variable cost measure determining the factors that trigger its incurrence, including direct labor hours, machine hours, units produced, or sold.
Fixed Costs
- Costs that remain constant regardless of changes in production output, such as property taxes, insurance, and salaries.
Mixed Costs
- Contain both variable and fixed cost elements; analyzed via methods like high-low and least squares regression to estimate their components.
Contribution Format Income Statement
- A financial statement format that differentiates between fixed and variable costs, providing clarity on cost structure.
Direct Costs
- Costs easily traceable to specific cost objects, providing clarity on product or project expenses.
Indirect Costs
- Costs not easily traced to specific cost objects; often included in overhead calculations.
Sunk Cost
- A past cost that has already been incurred and remains unaffected by future decisions.
Computing Predetermined Overhead Rate
- Involves determining indirect manufacturing overhead costs relative to an allocation base, calculated as:
- Predetermined Overhead Rate = (Estimated Total Manufacturing Overhead) ÷ (Estimated Total Amount of Allocation Base).
4 Step Process in Estimating Costs
- Estimate total allocation base for the next production period.
- Estimate total fixed manufacturing overhead and variable manufacturing overhead costs.
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Description
Explore essential terms and definitions from Managerial Accounting Chapters 2 and 3 with these flashcards. This quiz focuses on critical concepts such as raw materials and direct labor, providing a solid foundation for understanding managerial accounting practices.