ADMS 2510 Midterm 1 questions fully solved & updated

What is the difference between direct and indirect costs? Direct cost can be physically identified with and/or traced to the cost object because there's a direct causal link between them For example, direct cost for a manufactured product line, include the materials which are a part of the product and labor Indirect costs cannot be conveniently and easily traced to each cost object For example, indirect costs, include the machinery, plant, and other labour necessary to manufacture the product, but are not directly traceable to the product, such as labour for inspection and supervision What is the difference between variable and fixed costs? Variable costs are those for which total cost changes with each change in the cost driver Fixed costs are the portion of total costs, which remain constant as the cost driver changes Are all fixed costs indirect? All fixed costs must be indirect since the increase in the cost driver or volume of the output does not affect the level of fixed costs. While fixed costs are indirect, some indirect costs might be variable, but are not considered direct because of the convenience factor. What does "unit cost" mean? The additional cost that is incurred as the cost driver increases by one unit What is relevant range and explain its use? Relevant range is used to provide a useful range of activity for the cost driver in which it can be assumed that variable cost will be constant per unit of the cost driver This is an assumption, since the behaviour of actual cost is likely to be non-linear over the range of the cost driver This concept allows the management accountant to use the concept of constant unit variable cost for a defined range of operations, even though actual units variable costs change over the entire range of the cost driver How do total variable cost, total fixed cost, average variable cost, and average fixed costs react to the changes in the cost driver? Total variable cost increase or decrease as the cost driver increases or decreases Total fixed cost remain constant as the cost driver changes Average variable cost remain constant as the cost driver increases Average fixed cost decrease as a cost driver increases and increase as the cost driver decreases What are the three characteristics of costing systems? 1. The cost accumulation method — job costing, process costing or joint costing 2. The cost measurement method — actual, normal, or standard costing 3. The overhead assignment — volume or activity based What documents are prepared to accumulate cost for each separate job in a costing system? A job sheet accumulates, direct materials, direct labour and factory overhead incurred for each job What is the role of material requisition forms in a job costing system? Time tickets? Bills of materials? A material requisition is a source document or online data entry that is used to request materials from the warehouse Time tickets shows the time worked on each job, the pay rate, and the total labour cost chargeable to each job The bill of materials is a list of different materials needed to manufacture a product or a part Describe the flow of cost through a job costing system for materials through finished Cost originate with purchase of materials. These direct material costs, and the direct labour costs are transferred to work in process, as work is done, and eventually to finished goods. Overhead is applied to work in process as well. Work in process is forwarded to finish goods as work is completed. These cost are transferred from finished goods to cost of goods sold when the merchandise is sold. What are the differences between an actual costing system and a normal costing system? An actual costing system uses actual cost incurred for direct materials and direct labour and assigns, or applies actual factory overhead to various jobs Normal costing uses actual cost for direct materials and direct labor, and applies factory overhead to various jobs using a predetermined overhead rate What is the difference between normal and abnormal spoilage? What is activity based costing? How can it improve an organizations costing system? Activity based costing recognizes that resources are spent on activities, and the cost of a product or service is the sum of the cost of activities performed in manufacturing the product or providing the service It traces cost to the activity that consumes resources: 1. Costs are determined based on the activities performed for cause objects, and the underlying cause drivers that consume 2. Product or service costs are determined using an activity based costing which reflects the cost of resources consumed for activities performed in