Elements of Cost

Questions and Answers

What is a characteristic of variable costs?

They can be allocated based on labor hours.

They remain constant regardless of production volume.

They depend on the volume of work activity. (correct)

They include costs like rent and insurance.

Which of the following is considered a direct cost in construction?

Administrative overhead.

Property taxes.

Labor for construction. (correct)

Advertising expenses.

Indirect costs are generally allocated based on which of the following?

Direct cost elements like labor or material costs. (correct)

The number of units produced.

Net profit margins.

Total revenue generated.

Which of the following items is NOT classified as a variable cost?

Salaries of permanent staff. Signup and view all the answers

What defines a direct cost in manufacturing?

Costs that are readily assignable to a specific product. Signup and view all the answers

Which of the following best describes a primary distinction between direct and indirect costs?

Direct costs are directly linked to a specific output, while indirect costs are not. Signup and view all the answers

Which of the following would typically be categorized as an indirect cost?

Overhead expenses such as utilities. Signup and view all the answers

What is a common example of a variable cost for a manufacturing company?

Utility costs based on usage. Signup and view all the answers

What is the primary consideration when timing the purchase of capital equipment?

Ensuring sufficient cash flow for debt service. Signup and view all the answers

Which of the following strategies might an enterprise consider for installing equipment?

Install equipment as early as possible to avoid delays. Signup and view all the answers

What is a significant factor in deciding whether to lease or purchase equipment?

The financial analysis specific to the lease vs purchase option. Signup and view all the answers

What is meant by 'reproduction costs' in the context of capital equipment?

The costs associated with replicating an item at current prices. Signup and view all the answers

What is a potential downside of purchasing equipment too late in the fiscal period?

Insufficient time to amortize financing costs. Signup and view all the answers

What financial management tool can assist enterprises in evaluating equipment costs?

Rate calculators provided by equipment suppliers. Signup and view all the answers

Which method allows for working out kinks in equipment operation before full production?

Install equipment early in the business cycle. Signup and view all the answers

Why might an enterprise prefer to finance equipment rather than purchase outright?

To preserve cash flow for other investments. Signup and view all the answers

What factors influence workers' compensation rates?

All of the above Signup and view all the answers

How are contributions to a medical and life insurance program typically calculated?

On an hourly, weekly, or monthly cost basis Signup and view all the answers

In constructing unit labor costs, what is added to cover paid time off (PTO)?

An additional factor to the estimated hourly cost Signup and view all the answers

How are wages typically managed for construction crafts that work for multiple employers?

Allocated to a union-managed fund for salary distribution Signup and view all the answers

What is the primary focus of overhead in the context provided?

All costs not directly tied to labor or materials Signup and view all the answers

Why might workers' compensation rates differ for the same trade in two different states?

Differences in state labor laws and regulations Signup and view all the answers

What type of benefits are typically included in paid time off (PTO)?

Vacation, sick, and holiday time Signup and view all the answers

Which of the following best describes how overhead is discussed in the provided content?

Detailed discussion in a referenced chapter Signup and view all the answers

Which of the following resources does NOT become a cost when it is invested or consumed in an activity?

Time Signup and view all the answers

What does the term 'Lifecycle' in cost dimensions refer to?

The stages or phases that occur during the lifetime of an object or endeavor Signup and view all the answers

Which stage is NOT typically included in the Asset Life Cycle?

Maintenance Signup and view all the answers

In the context of resource consumption, which of these is classified as a consumable resource?

Travel expenses Signup and view all the answers

Which of the following does NOT represent a cost associated with facility production?

Salaries for employees Signup and view all the answers

What is implied at the end of each lifecycle according to the cost dimensions?

A new beginning occurs, suggesting potential for further investment Signup and view all the answers

Which of the following best describes the relationship between resources and costs in project management?

Resources become costs when consumed or invested Signup and view all the answers

Which of the following is NOT considered a typical component of resource costs in project management?

Quality control measures Signup and view all the answers

What is the primary function of price in the context of economics?

To distribute existing supply among potential buyers Signup and view all the answers

How is overhead generally managed in operational activities?

Through allocation based on perceived fairness Signup and view all the answers

Which statement accurately describes productivity?

The reciprocal measure of labor factors or efficiency Signup and view all the answers

Which components are included in the calculation of price?

Direct costs, indirect costs, and overhead costs Signup and view all the answers

What is a characteristic of overhead costs?

They must be handled as a business expense independent of production volume Signup and view all the answers

What is a common method to improve productivity?

Enhancing output for a given input Signup and view all the answers

How is productivity typically measured?

As output relative to input against a norm Signup and view all the answers

What role does contingency play in the price formation process?

It serves as a buffer for unexpected costs Signup and view all the answers

Study Notes

Cost Considerations in Activity and Asset Management

Essential facilities for production include tooling, electricity, taxes, and maintenance.
Additional costs encompass office supplies, communication, travel, and security.
Resources required for activities consist of consumables that can be strategic investments such as time, money, manpower, and physical assets.
Resources become a cost upon investment or consumption in a project.

Cost Dimensions

Lifecycle:
- Refers to the phases during the lifespan of an asset or project, encompassing a beginning and an end.
- Asset Life Cycles include ideation, evaluation, research, development of solutions, and selection of optimal assets.
Variable Costs:
- Costs linked to production volume such as raw materials, utilities, royalties, packaging, marketing, and chemicals.
Direct vs. Indirect Costs:
- Direct Costs: Necessary expenses directly tied to completing work, like equipment, materials, and labor in construction and manufacturing.
- Indirect Costs: Support costs related to multiple activities/assets, allocated based on direct cost elements such as labor hours or material costs.

Purchasing Considerations

Two strategies for capital equipment acquisition:
- Buy/install equipment when volume justifies expenditure to ensure cash flow for debt service.
- Purchase/install before need arises, allowing for training and integration into production.
Financial analyses are essential for assessing lease versus purchase options.

Valuation Aspects

Reproduction Costs: Price to reproduce an identical item at a specified date.
Workers Compensation: Rates vary by state, trade, and contractor experience.
Insurance Contributions: Costs calculated hourly, weekly, or monthly, added to labor costs.
Paid Time Off (PTO): Employee benefits include sick time, vacation, and holidays, requiring adjustments to unit labor costs.

Overhead and Profit

Overhead: Costs not directly attributed to specific work, requiring allocation or classification as business expenses.
Price: Money requested or given for a product, incorporating direct and indirect costs, overhead, profit, and contingencies. It serves to ration supply among buyers.
Productivity: Measures labor efficiency relative to output and input, improved by increasing output or decreasing input for a given outcome.

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