MGT 402 Cost & Management Accounting - 2

The given options include direct material cost, factory overhead cost, direct labor cost, and administrative expenses. All of these options are considered product costs as they are directly associated with the production of goods or services. However, administrative expenses are not directly related to the production process but are incurred for general management and administrative purposes. Therefore, administrative expenses are not considered a product cost.

Division of cost by its behavior
Basically the cost of production has two behaviors:
1. Fixed Cost
2. Variable Cost

Prime cost refers to the direct costs that are directly attributable to the production of goods or services. It includes the cost of raw materials, direct labor, and other directly related expenses. Therefore, it is correct to say that prime cost is also known as direct cost.

The concept of sharing is not included in cost accounting. Cost accounting primarily focuses on planning, controlling, and costing. Planning involves setting goals and objectives related to costs, while controlling involves monitoring and evaluating actual costs compared to planned costs. Costing involves the process of assigning costs to products or services. However, sharing, in the context of cost accounting, is not a concept that is typically associated with the discipline.

Differential Cost or Incremental cost
It is the difference of the costs of two or more alternatives.
Example
Difference between costs of raw material of two categories or quality.

The statement is true because total manufacturing cost refers to the sum of all costs incurred during the production process, including direct materials, direct labor, and manufacturing overhead. It is also known as factory cost because it represents the expenses associated with running a manufacturing facility, such as rent, utilities, and equipment maintenance.

Cost Center
Cost centre is a location where costs are incurred and may or may not be attributed to cost
units.
Examples
Workshop in a manufacturing concern
Auto service department
Electrical service department
Packaging department
Janitorial service department

Cost accounting is a branch of accounting that focuses on determining and controlling costs within a business. Its main purpose is to provide information to management for decision making. By analyzing and reporting on costs, cost accountants help management make informed decisions regarding pricing, budgeting, cost control, and resource allocation. This information is crucial for effective planning, evaluating performance, and making strategic decisions that can ultimately lead to maximizing profits. Therefore, the correct answer is to provide information to management for decision making.

Semi Variable Cost
It is also known as mixed cost. It is the cost which is part fixed and par variable. It is in fact the
mixture of both behaviors.
Examples include: Utility bills – there is a fixed line rent plus charges for units consumed.
Salesman’s salary – there is a fixed monthly salary plus commission per units sold.

The statement is true because the factory cost includes both the prime cost and the factory overhead. The prime cost refers to the direct costs of production, such as raw materials and direct labor. The factory overhead, on the other hand, includes indirect costs like rent, utilities, and maintenance. Combining these two costs gives the total factory cost, making the statement true.

Variable Costs
A variable cost is a cost which tends to very directly with the change in activity level. The variable
cost per unit is the same amount for each unit produced whereas total variable cost increases as
volume of output increases.
Graph

An increase in direct material cost can lead to an increase in total variable cost because direct materials are a key component in the production process. When the cost of direct materials rises, it directly affects the cost of producing each unit of a product. As a result, the total variable cost, which includes all costs that vary with the level of production, will also increase. This can be attributed to the fact that more expensive direct materials require more funds to purchase and use in the production process, ultimately leading to higher variable costs.

A profit centre is a section of an organization that is responsible for producing profit. Unlike a revenue centre, which focuses solely on generating revenue, a profit centre is also accountable for managing costs and expenses to ensure that the overall result is a positive profit. An investment centre, on the other hand, is responsible for managing investments and maximizing returns. Therefore, the correct answer is profit centre.

Variance
Difference between the actual cost and applied cost is calculated by subtracting actual cost from
the applied cost. Where the applied cost is greater than the actual cost it is favorable variance,
but where the applied cost is lesser than the actual cost it is unfavorable variance

When the applied factory overhead cost is less than the actual cost, it indicates that the company has underestimated the amount of overhead expenses required for production. This results in a shortfall in the allocated funds for overhead costs, leading to an unfavorable variance. This variance implies that the company has incurred higher expenses than anticipated, which can have a negative impact on profitability and budgeting.

Variable cost, fixed cost which changes within alternatives, and opportunity cost are all examples of relevant costs. Relevant costs are those costs that are directly related to a specific decision or situation. These costs are important because they can influence the outcome of the decision or affect the overall profitability of a project or business. In contrast, irrelevant costs do not have any impact on the decision-making process and can be disregarded. Product cost and period cost are not relevant in this context as they do not specifically refer to costs that are directly related to a decision or situation.

The given correct answer for the question is "Direct labor + factory overhead". Conversion cost refers to the costs incurred in converting raw materials into finished products. It includes direct labor, which is the cost of the labor directly involved in the production process, and factory overhead, which includes other indirect costs such as utilities, rent, and maintenance. Therefore, the correct answer is the sum of direct labor and factory overhead.

Under/Over applied FOH cost refers to the situation where the actual factory overhead cost incurred differs from the applied or allocated overhead cost. This discrepancy can affect various aspects of the financial statements. Adjusting the under/over applied FOH cost in the entire production ensures that the cost is properly allocated to the products. Adjusting it in the Cost of Goods Sold reflects the accurate cost of goods sold and helps in determining the gross profit. Adjusting it in the net profit ensures that the overall profitability of the company is correctly stated. Therefore, all of the above options are correct for adjusting under/over applied FOH cost.

The correct answer is "Remains constant." Variable cost per unit refers to the cost that changes in direct proportion to the level of output. In this case, the variable cost per unit remains constant, meaning it does not change regardless of the level of output. This suggests that the cost per unit of production remains the same, regardless of whether the output increases or decreases.

Depreciation of machinery is an example of a fixed cost because it is a recurring expense that does not vary with the level of production or sales. Regardless of how much the machinery is used or how many units are produced, the depreciation expense remains constant. This makes it a fixed cost that the company must incur to maintain and replace its machinery over time.

When production volume decreases, the fixed costs are spread over a smaller number of units, resulting in an increase in fixed cost per unit. This is because the fixed costs remain the same regardless of the level of production, so when fewer units are produced, the fixed costs are divided among a smaller number of units, causing the fixed cost per unit to increase.

The first statement is correct because when the applied cost is greater than the actual cost, it is considered a favorable variance. The fourth statement is also correct because when the applied FOH (Factory Overhead) cost is more than the actual FOH cost, it is referred to as over applied FOH cost.