Part 3: Questions p.47 of the textbook. Please write down the answers to them 2–
ID: 399170 • Letter: P
Question
Part 3: Questions p.47 of the textbook. Please write down the answers to them
2–1 What are the three major elements of product costs in a manufacturing company?
2–2 Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.
2–3 Explain the difference between a product cost and a period cost.
2–4 Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.
2–5 What effect does an increase in volume have on—
a.Unit fixed costs?
b.Unit variable costs?
c.Total fixed costs?
d.Total variable costs?
2–6 Define the following terms: (a) cost behavior and (b) relevant range.
2–7 What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.
2–8 Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?
2–9 Distinguish between discretionary fixed costs and committed fixed costs.
2–10 Does the concept of the relevant range apply to fixed costs? Explain.
2–11 What is the major disadvantage of the high-low method?
2–12 Give the general formula for a mixed cost. Which term represents the variable cost? The fixed cost?
2–13 What is meant by the term least-squares regression?
2–14 What is the difference between a contribution format income statement and a traditional format income statement?
2–15 What is the contribution margin?
2–16 Define the following terms: differential cost, opportunity cost, and sunk cost.
2–17 Only variable costs can be differential costs. Do you agree? Explain.
Explanation / Answer
2–1 What are the three major elements of product costs in a manufacturing company?
In a manufacturing the major elements of product cost are-Direct Labor Cost, Direct material cost, Manufacturing overhead cost.
2–2 Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.
Direct materials: These are the materials that are directly needed in manufacturing the product. E.g.: The machined surface, machining tools etc.
Indirect materials: These are the materials that are indirectly used in the manufacturing process: E.g: Lubricating oil, collant etc, that directly go into manufacturing but assist the process.
Direct labour: These are the people who are directly involved in the manufacturing process such as the workers/operators.
Indirect labour: These are the people who indirectly assist the production process but are not directly working on it. For e.g.: The maintenance person, supervisor etc.
Manufacturing overhead: These are the item that are accounted for while calculating cost. These are not teh direct inputs to the maufacturing process. For e.g.: Electricity, safety gloves etc.
2–3 Explain the difference between a product cost and a period cost.
Product cost is the cost of the product. It includes the cost of all the items such as raw material, tool, manpower, electricity etc.
A period cost is any cost that cannot be capitalized into prepaid expenses, inventory, or fixed assets. It is more closely associated with the passage of time than with a transactional event.
2–4 Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.
Variable cost is one that changes with the number of units produced. For e.g.: The raw material cost used to produce a finished product is variable cost.
Fixed cost is one which remains fixed over a period of time. For example The cost of a machine is fixed irrespective of the number of units produced on the machine.
Mixed cost is one which has both a fixed component and a variable component. For e.g.: Transportation charges paid to logistics team are in the form of $1200 fixed+ $10 per km travelled.
2–5 What effect does an increase in volume have on—
a.Unit fixed costs? As volume increases unit fixed cost decreases, since the overall cost is fixed.
b.Unit variable costs? It remains unchanged mostly, as the number of unit increases.
c.Total fixed costs? Total fixed cost remains constant and is unaffected by the increase in volume
d.Total variable costs? Total variable cost increases with increase in volume
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