Question

Questions:

1. What do we mean by cost behavior?
2. When activity increases, does the unit variable cost increase, decrease or remain the same?
3. When activity decreases, does the unit fixed cost increase, decrease or remain the same?
4. When activity decreases, does total variable cost increase, decrease or remain the same?
5. When activity increases, does total fixed cost increase, decrease or remain the same?
6. Define the following:
a. Gross margin
b. Contribution margin
7. What are the three elements of manufacturing costs? (Be able to determine a unit product cost and a
predetermined overhead rate.)
8. Which costs are considered prime costs? Conversion costs?
9. What’s the difference between an inventoriable (product) cost and a period cost, in general? What
type of costs are period costs under absorption costing? What types are product costs?
10. T/F - Under standard costing, RM, WIP and FG will always contain actual quantities but will rarely
contain actual costs.’

Answer 1

1. Cost behaviour: Costs can be classified by their behaviour, the degree to which the costs are either fixed or variable.Direct material and direct labor are generally variable costs, and indirect costs consist of both fixed and variable components. A variable cost changes proportionally with the cost units or amount of production while fixed costs remain fixed irrespective of the units of production.

2.When activity increases , per unit variable cost remain the same.

3. When activity decreases, per unit fixed cost will increase, because, with decrease in production, fixed costs will not decrease and per unit fixed cost will increase as the total fixed cost will now be divided among the lesser units.

4.When activity decreases, total variable cost will decrease.

5. When activity increases, total fixed costs will remain the same. Total fixed costs remain constatnt irrespective of the volume of activity.

6. (a) Gross margin: It is a company's sales revenue minus its cost of the goods sold. It is the percentage of revenue that remains after accounting for cost of the goods sold.

6. (b) Contribution margin: It is defined as the revenues minus variable costs.All the fixed costs are ignored while calculating contribution margin. It represents how much revenues will be contributing to the fixed expenses and / or net income.

7. The three basic elements of manufacturing costs are Direct material, Direct labor and factory overhead. Direct material are the costs of materials purchased to be used in production (including freight-in). All material which becomes an integral part of the finished product and which can be easily assigned to specific physical units comes under direct material. Direct labor is the cost of the labor that is directly related to the production. Factory overhead are the other costs needed to manufacture the product. It includes indirect material, indirect labor and indirect expenses.

8. Prime cost: It consists of costs of direct material, direct labor and direct expenses.

Conversion cost: These are the costs which are incurred to convert the raw material into the fiinished goods. So, in general all costs except direct material cost comes under conversion costs. It includes direct labor and other manufacturing overheads.

9. Inventoriable (Product costs) : Costs which become part of the cost of the product rather than expenses of the period in which they are incurred are called product costs. They are included in inventory values.

Period costs: Costs which are not associated with production are called period costs.They are treated as an expense of the period in which they are incurred.

Under absorption costing, while computing the cost of a product, all manufacturing costs whether fixed or variable are treated as product costs. While, expense like seling & distribution expenses, general & administration costs., depreciation of office equipment, salesman's commission etc are all period costs.