Accounting Quiz 1 Chapters 1-2

A sunk cost refers to a cost that has already been incurred and cannot be recovered. It is a past expense that has no influence on future decisions. Sunk costs should not be considered when making decisions as they are irrelevant to the current situation. The focus should be on future costs and potential benefits rather than dwelling on past expenses.

The predetermined rate is calculated by dividing the total estimated manufacturing overhead cost by the total estimated allocation base. This rate is used to allocate manufacturing overhead costs to individual products or jobs based on their usage of the allocation base. By using a predetermined rate, companies can estimate and allocate overhead costs more accurately, which helps in determining the cost of each product or job.

Manufacturing costs are also known as product costs. This term refers to the expenses incurred during the production process, such as raw materials, labor, and overhead costs. These costs are directly associated with the creation of a product and are essential in determining the overall cost of manufacturing a specific item. Therefore, "Product" is an appropriate alternative name for manufacturing costs.

Non-manufacturing costs are expenses that are not directly related to the production process. These costs are incurred over a specific period of time, such as rent, utilities, salaries, and advertising expenses. Therefore, "Period" is an appropriate alternative name for non-manufacturing costs as it reflects the time frame over which these expenses are incurred.

The three manufacturing costs are direct materials, direct labor, and manufacturing overhead. Direct materials refer to the cost of the raw materials that are directly used in the production process. Direct labor represents the wages and benefits paid to the workers who are directly involved in the manufacturing process. Manufacturing overhead includes all other costs that are indirectly associated with the production, such as factory rent, utilities, and equipment depreciation. These three costs are essential in determining the total cost of manufacturing a product.

The definition of differential and incremental costs is the difference in costs between two alternatives or options. It refers to the additional expenses incurred or saved when choosing one option over another. This concept is commonly used in decision-making processes to analyze the financial impact of different choices and determine the most cost-effective option. By comparing the differential or incremental costs, organizations can evaluate the potential benefits or drawbacks of each alternative and make informed decisions.

Job order costing is a costing system used by companies to track and allocate costs to specific jobs or orders. It is used when products or services are unique and different from each other, such as custom-made jewelry, homes, aircraft, jeans, and fashion. In job order costing, costs are directly assigned to each job based on its specific requirements and characteristics, allowing for accurate cost calculation and pricing. This method is particularly useful in industries where customization and individualized production are common.

Process costing is a method used to determine the cost of producing identical or similar products on a large scale. It is commonly used in industries such as food production, assembly line manufacturing, and automobile manufacturing, where the products being produced are uniform and indistinguishable from each other. This method allows for the allocation of costs to each production process or department, providing insight into the overall cost of production and helping businesses make informed decisions regarding pricing and profitability.

Under applied refers to a situation where the actual overhead costs incurred by a company are greater than the overhead costs that have been allocated or applied to a particular job, product, or department. This can occur when the estimated overhead rate used for allocation purposes is lower than the actual overhead costs incurred. Under applied overhead can result in an understatement of the cost of a job or product, leading to inaccurate financial statements and potentially impacting profitability analysis.

The two non-manufacturing costs are selling and administrative. Selling costs refer to expenses incurred in promoting and marketing a product or service, such as advertising, sales commissions, and customer support. Administrative costs, on the other hand, include expenses related to the overall management and administration of a business, such as salaries of executives, office rent, utilities, and legal fees. These costs are not directly associated with the production process but are essential for running and promoting the business.

Opportunity cost refers to the benefit or value that is forgone or given up when an individual or entity chooses one alternative or option over another. It represents the potential gain or advantage that is lost when a decision is made. In other words, it is the value of the next best alternative that is sacrificed. This concept is important in decision-making, as it helps individuals and businesses assess the trade-offs involved in choosing between different options and make more informed choices based on the potential costs and benefits.

Managers are involved in planning, directing/motivating, and control. Planning involves setting goals and creating strategies to achieve them. Directing/motivating involves guiding and motivating employees to accomplish tasks and meet objectives. Control involves monitoring performance and making necessary adjustments to ensure that goals are being achieved. These three functions are essential for managers to effectively manage and lead their teams towards success.

The steps to the schedule of costs of goods manufactured include calculating the beginning raw materials inventory, adding the purchase of raw materials, and determining the raw materials available for use. Then, subtracting the ending raw materials inventory gives the raw materials used in production. Next, calculate the direct labor and manufacturing overhead to determine the total manufacturing cost. Finally, adding the beginning work in process inventory and subtracting the ending work in process inventory gives the cost of goods manufactured.

Conversion cost refers to the expenses incurred in the process of converting raw materials into finished products. It includes both direct labor, which refers to the wages and salaries of employees directly involved in the production process, and manufacturing overhead, which includes indirect labor costs, such as supervisors' salaries, utilities, and depreciation of factory equipment. By combining these two costs, conversion cost provides a comprehensive measure of the expenses associated with the transformation of raw materials into final goods.

Financial accounting focuses on the company as a whole, preparing financial statements that are used by outside users such as investors and creditors. It follows Generally Accepted Accounting Principles (GAAP) and is mandatory for all companies. On the other hand, managerial accounting focuses on subunits within the company, preparing reports that are used by inside users such as managers and executives. It is not required to follow GAAP and is not mandatory, as it is used as needed for internal decision-making purposes.

The three manufacturer inventories are raw materials inventory, work in process inventory, and finished goods inventory. Raw materials inventory refers to the stock of materials that a manufacturer has on hand to use in the production process. Work in process inventory includes partially completed products that are still being worked on. Finished goods inventory consists of completed products that are ready to be sold or distributed. These three inventories are essential for manufacturers to manage their production and ensure a smooth flow of goods from raw materials to finished products.

Prime cost is the total cost of direct materials and direct labor used in the production of goods or services. It is the cost directly attributable to the production process and does not include any overhead costs or indirect expenses. By adding the cost of direct materials and direct labor, we can calculate the prime cost, which helps in determining the total cost of producing a product or providing a service.

Variable costs are expenses that fluctuate in total as the level of activity changes, such as production or sales. However, on a per unit basis, variable costs remain constant. This means that the cost per unit of production or sale remains the same, regardless of the level of activity. Examples of variable costs include wages, commission, and direct materials, which increase or decrease in total as the level of activity changes, but the cost per unit remains constant.

Fixed costs are expenses that do not change in total regardless of the level of activity, as long as they stay within a certain range. However, on a per unit basis, fixed costs will vary. Examples of fixed costs include salaries, rent, depreciation, insurance, and taxes. These costs are incurred regardless of the production or sales volume and are essential for the operation of a business.

This formula is used to calculate the applied overhead cost. The predetermined overhead rate is multiplied by the actual allocation base used to determine the amount of overhead cost that should be applied to a particular job or product. By multiplying these two values, the company can allocate the overhead cost based on the actual usage of the allocation base. This helps in accurately assigning the overhead cost to different jobs or products, ensuring that the cost is distributed in a fair and appropriate manner.