ACCT 455 EXAM STUDY GUIDE
Common cost - Answers :type of indirect cost - cost incurred to support a number of
cost objects that cannot be traced to them individually.
Prime cost - Answers :sum of direct materials and direct labor (direct manufacturing
costs)
Conversion cost - Answers :sum of direct labor and manufacturing overhead (costs
incurred to convert direct materials into finished products)
Cost behavior - Answers :how a cost reacts to changes in the level of activity (variable,
fixed, or mixed)
Cost structure - Answers :the relative proportion of each type of cost in an organization
Variable cost - Answers :varies, in total, in direct proportion to changes in the level of
activity, but stays constant per unit
Fixed cost - Answers :remains constant, in total, regardless of changes in the level of
activity, but per unit decreases as the level of activity increases
Mixed cost - Answers :contains both variable and fixed cost elements (=total fixed cost
+ [the variable cost per unit of activity*the level of activity])
Differential cost - Answers :a future cost that differs between any two alternatives
(always a relevant cost)
Opportunity cost - Answers :the potential benefit given up when one alternative is
selected over another (relevant cost)
Sunk cost - Answers :cost that has already been incurred (not relevant)
Controllable cost - Answers :can be influenced by the manager
Uncontrollable cost - Answers :cannot be influenced by the manager
Traditional vs Contribution format income statements - Answers :Traditional income
statements are prepared primarily for external reporting purposes, and rely on cost
classifications for preparing financial statements (product and period costs) to depict the
financial consequences of past transactions. Contribution format income statements are
prepared for internal management purposes. They use cost classifications for predicting
cost behavior (variable and fixed) to better inform decisions affecting the future.
, Contribution margin - Answers :the amount remaining from sales revenue after all
variable expenses have been deducted
Process costing - Answers :is used in industries that convert raw materials into
homogeneous products on a continuous basis
Differences between job-order costing and process costing - Answers :First, job-order
costing is used when a company produces many different jobs having unique
production requirements. Process costing is used when a company produces a
continuous flow of identical units. Second, job-order costing uses job cost sheets to
accumulate costs for individual jobs. Process costing accumulates costs by
departments and assigns these costs uniformly to all identical units passing through the
department. Third, job-order costing uses job cost sheets to compute unit costs for each
job. Process costing systems compute unit costs by department.
Weighted Average Method - Answers :calculates unit costs by combining costs and
outputs from the current and prior periods
FIFO method - Answers :calculates unit costs based solely on the costs and outputs
from the current period
Equivalent Units - Answers :is the product of the number of partially completed units
and the percentage completion of those units with respect to the processing in the
department. Basically, the number of complete units that could have been obtained from
the materials and effort that went into the partially completed units
Operation costing - Answers :used when products have some common characteristics
and some individual characteristics
Activity-based Costing - Answers :a costing method that provides managers with cost
conformation for strategic and other decisions that potentially affect capacity, and
therefore fixed and variable costs.
Drawbacks of traditional absorption costing for internal purposes and ABC solutions -
Answers :First, traditional only assigns manufacturing costs to products - ignoring any
nonmanufacturing costs that may be consumed by products. ABC allows for
nonmanufacturing as well as manufacturing costs to be assigned to products, but only
on a cause-and effect basis. Second, traditional assigns all manufacturing costs to
products even if those products do not consume those costs. ABC allows some
manufacturing costs to be excluded from product costs. Third, traditional relies on a
limited number of OH cost pools that always use allocation bases correlated with the
volume of output (this ignores any non-volume related cost drivers that exist in
organizations, thereby allocating too much OH to high-volume products and too little OH
to low-volume products). ABS allows for numerous cost pools, each of which is
allocated to products and other cost objects using its own unique measure of activity.
Common cost - Answers :type of indirect cost - cost incurred to support a number of
cost objects that cannot be traced to them individually.
Prime cost - Answers :sum of direct materials and direct labor (direct manufacturing
costs)
Conversion cost - Answers :sum of direct labor and manufacturing overhead (costs
incurred to convert direct materials into finished products)
Cost behavior - Answers :how a cost reacts to changes in the level of activity (variable,
fixed, or mixed)
Cost structure - Answers :the relative proportion of each type of cost in an organization
Variable cost - Answers :varies, in total, in direct proportion to changes in the level of
activity, but stays constant per unit
Fixed cost - Answers :remains constant, in total, regardless of changes in the level of
activity, but per unit decreases as the level of activity increases
Mixed cost - Answers :contains both variable and fixed cost elements (=total fixed cost
+ [the variable cost per unit of activity*the level of activity])
Differential cost - Answers :a future cost that differs between any two alternatives
(always a relevant cost)
Opportunity cost - Answers :the potential benefit given up when one alternative is
selected over another (relevant cost)
Sunk cost - Answers :cost that has already been incurred (not relevant)
Controllable cost - Answers :can be influenced by the manager
Uncontrollable cost - Answers :cannot be influenced by the manager
Traditional vs Contribution format income statements - Answers :Traditional income
statements are prepared primarily for external reporting purposes, and rely on cost
classifications for preparing financial statements (product and period costs) to depict the
financial consequences of past transactions. Contribution format income statements are
prepared for internal management purposes. They use cost classifications for predicting
cost behavior (variable and fixed) to better inform decisions affecting the future.
, Contribution margin - Answers :the amount remaining from sales revenue after all
variable expenses have been deducted
Process costing - Answers :is used in industries that convert raw materials into
homogeneous products on a continuous basis
Differences between job-order costing and process costing - Answers :First, job-order
costing is used when a company produces many different jobs having unique
production requirements. Process costing is used when a company produces a
continuous flow of identical units. Second, job-order costing uses job cost sheets to
accumulate costs for individual jobs. Process costing accumulates costs by
departments and assigns these costs uniformly to all identical units passing through the
department. Third, job-order costing uses job cost sheets to compute unit costs for each
job. Process costing systems compute unit costs by department.
Weighted Average Method - Answers :calculates unit costs by combining costs and
outputs from the current and prior periods
FIFO method - Answers :calculates unit costs based solely on the costs and outputs
from the current period
Equivalent Units - Answers :is the product of the number of partially completed units
and the percentage completion of those units with respect to the processing in the
department. Basically, the number of complete units that could have been obtained from
the materials and effort that went into the partially completed units
Operation costing - Answers :used when products have some common characteristics
and some individual characteristics
Activity-based Costing - Answers :a costing method that provides managers with cost
conformation for strategic and other decisions that potentially affect capacity, and
therefore fixed and variable costs.
Drawbacks of traditional absorption costing for internal purposes and ABC solutions -
Answers :First, traditional only assigns manufacturing costs to products - ignoring any
nonmanufacturing costs that may be consumed by products. ABC allows for
nonmanufacturing as well as manufacturing costs to be assigned to products, but only
on a cause-and effect basis. Second, traditional assigns all manufacturing costs to
products even if those products do not consume those costs. ABC allows some
manufacturing costs to be excluded from product costs. Third, traditional relies on a
limited number of OH cost pools that always use allocation bases correlated with the
volume of output (this ignores any non-volume related cost drivers that exist in
organizations, thereby allocating too much OH to high-volume products and too little OH
to low-volume products). ABS allows for numerous cost pools, each of which is
allocated to products and other cost objects using its own unique measure of activity.
