Managerial Accounting: Cost Classifications

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Questions and Answers

What is a direct cost?

A cost that can be easily and conveniently traced to a unit of product or other cost object.

What are examples of direct costs?

Direct materials (correct)
Manufacturing overhead
Selling costs
Direct labor (correct)

What is an indirect cost?

A cost that cannot be easily and conveniently traced to a specified cost object.

What are examples of indirect costs?

Manufacturing overhead (C), Utility cost (D) Signup and view all the answers

What is manufacturing overhead?

Manufacturing costs that are indirectly associated with the manufacture of the finished product. Signup and view all the answers

What are examples of manufacturing overhead?

Property taxes (B), Utility cost (C), Depreciation of manufacturing equipment (D) Signup and view all the answers

What are the main types of manufacturing costs?

Conversion costs (A), Prime costs (C) Signup and view all the answers

What are prime costs?

Direct materials + Direct labor. Signup and view all the answers

What is a conversion cost?

Direct Labor + Manufacturing Overhead. Signup and view all the answers

What are nonmanufacturing costs?

Selling costs (B), Administrative costs (D) Signup and view all the answers

What are selling costs?

All costs incurred to secure customer orders and get the finished product or service into the hands of the customer. Signup and view all the answers

What are administrative costs?

All costs associated with the general management of an organization rather than with manufacturing or selling. Signup and view all the answers

What are the components of manufacturing product costs?

Work in process (A), Finished goods costs (B), Raw materials (C) Signup and view all the answers

What is a product cost?

All costs involved in acquiring or making a product. Signup and view all the answers

What are examples of product costs?

Direct materials + Direct labor + Manufacturing overhead. Signup and view all the answers

What is a period cost?

Expense in period on the income statement, including all selling and administrative costs. Signup and view all the answers

What are examples of period costs?

Property taxes on corporate headquarters (A), Sales commissions (C) Signup and view all the answers

What are the classifications of costs for predicting cost behavior?

Fixed cost (A), Mixed cost (C), Variable cost (D) Signup and view all the answers

What is a variable cost?

Varies, in total, in direct proportion to changes in the level of activity; variable cost per unit is constant. Signup and view all the answers

What is a fixed cost?

A cost that remains constant, in total, regardless of changes in the level of activity. Signup and view all the answers

What is a mixed cost?

A cost that contains both variable and fixed cost elements. Signup and view all the answers

What is a differential cost?

A difference in cost between any two alternatives. Signup and view all the answers

What is a sunk cost?

A cost that has already been incurred and cannot be changed by any decision made now or in the future. Signup and view all the answers

What is an opportunity cost?

The potential benefit that is given up when one alternative is selected over another. Signup and view all the answers

Study Notes

Cost Classifications in Managerial Accounting

Direct Cost: Easily traced to a unit of product or cost object; includes direct materials and direct labor.
Indirect Cost: Cannot be easily traced to a specific cost object; includes manufacturing overhead.

Manufacturing Overhead

Definition: Indirect costs associated with manufacturing a finished product.
Examples: Depreciation of manufacturing equipment, utility costs, property taxes.

Types of Manufacturing Costs

Prime Costs: Combination of direct materials and direct labor.
Conversion Costs: Combined costs of direct labor and manufacturing overhead.

Nonmanufacturing Costs

Elements: Divided into selling costs and administrative costs.
Selling Costs: Expenses incurred to obtain customer orders and deliver products.
Administrative Costs: Expenses related to general management, not directly tied to manufacturing or selling.

Product Costs

Components: Include raw materials, work in process, and finished goods costs.
Total Calculation: Sum of direct materials, direct labor, and manufacturing overhead.

Period Costs

Definition: Expenses that appear on the income statement for the period; includes all selling and administrative costs.
Examples: Sales commissions and property taxes for corporate headquarters.

Cost Classification for Behavior Prediction

Types of Costs: Variable costs, fixed costs, and mixed costs.
Variable Cost: Changes in total with activity level; cost per unit remains constant.
Fixed Cost: Remains constant regardless of activity levels.
Mixed Cost: Contains both variable and fixed cost elements.

Decision-Making Costs

Differential Cost: Difference in cost between two alternatives; critical for decision analysis.
Sunk Cost: Costs already incurred, not recoverable; should not influence current decision-making.
Opportunity Cost: Potential benefit lost when one alternative is selected over another.

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Description

This quiz focuses on the key concepts of cost classifications in managerial accounting. It covers direct and indirect costs along with their examples, providing a foundational understanding essential for effective cost management. Test your knowledge on these important terms and definitions.