Which of the following would be considered a product cost for external financial reporting purposes? A. Cost of a warehouse used to store finished goods. B. Cost of guided public tours through the company’s facilities. C. Cost of travel necessary to sell the manufactured product. D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.
Review Questions M/C
D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.
Review Questions M/C
22. Which of the following would NOT be treated as a product cost for external financial reporting purposes? A. Depreciation on a factory building. B. Salaries of factory workers. C. Indirect labor in the factory. D. Advertising expenses.
Review Questions M/C
D. Advertising expenses.
Review Questions M/C
23. The salary of the president of a manufacturing company would be classified as which of the following? A. Product cost B. Period cost C. Manufacturing overhead D. Direct labor
Review Questions M/C
B. Period cost
Review Questions M/C
24. Conversion costs do NOT include: A. depreciation. B. direct materials. C. indirect labor. D. indirect materials.
Review Questions M/C
B. direct materials.
Review Questions M/C
Review Questions M/C
Conversion costs during the month totaled: A. $50,000 B. $59,000 C. $137,000 D. $67,000
Review Questions M/C
A. $50,000 Conversion cost = Direct labor + Manufacturing overhead = $29,000 + $21,000 = $50,000
Review Questions M/C
Review Questions M/C
Prime costs during the month totaled: A. $79,000 B. $120,000 C. $62,000 D. $40,000
Review Questions M/C
C. $62,000 Prime cost = Direct materials + Direct labor = $39,000 + $23,000 = $62,000
Learning Objective 3
Understand cost behavior patterns including variable costs, fixed costs, and mixed costs.
Learning objective number 3 is to understand cost behavior patterns including variable costs, fixed costs, and mixed costs.
Cost Classifications for Predicting Cost Behavior
Cost behavior refers to how a cost will react to changes in the level of activity. The most common classifications are:
Variable costs.
Fixed costs
Mixed costs.
Quite frequently, it is necessary to predict how a certain cost will behave in response to a change in activity. For example, a manager may want to estimate the impact that a 5% increase in sales would have on the company’s total electric bill. Cost behavior refers to how a cost will react to changes in the level of activity within the relevant range. The most commonly used classifications of cost behavior are variable and fixed costs.
Variable Cost
Your total texting bill is based on how many texts you send.
Number of Texts Sent
Total Texting Bill
A variable cost varies, in total, in direct proportion to changes in the level of activity. For example, if you don’t have a texting plan on your cell phone, text messaging costs 5 cents per text. Your total texting bill increases with the number of texts you send.
Variable Cost Per Unit
The cost per text sent is constant at
5 cents per text message.
Number of Texts Sent
Cost Per Text Sent
Although variable costs change in total as the activity level rises and falls, variable cost per unit is constant. For example, the cost per text message sent is constant at 5 cents per text.
The Activity Base (Cost Driver)
A measure of what causes the incurrence of a variable cost
Units produced
Miles driven