Exercise

Question 2.5

a) Direct Materials: The cost of raw materials which can be easily identified with
the unit of production. For example, the cost of glass is a direct material cost
in light bulb manufacturing. The manufacture of products or goods required
material as the prime element

b) Indirect Materials: Materials that are used in a production process, but are not
directly traceable to a cost object. Its considered overhead costs and treated
accordingly

c) Direct Labor: Employee or workers who are directly involved in the production
of goods or service

d) Indirect Labor : Employee or workers (such as accountants, supervisors,

security guards) who do not directly produce goods or services, but who
make their production possible or more efficient

e) Manufacturing Overhead: All of the costs that a factory incurs, other than the
variable costs required to build products, such as direct materials and direct
labor. This overhead is applied to the units produced within a reporting period

Question 2.6

The following are the major difference between product cost and period cost:

- Product cost is the cost which can be directly assigned to the product. Period
cost is the cost which related to a particular accounting period.
- Product cost is based on volume, because they remain same in the unit price,
but differ in the total value. On the other hand, time is taken as a basis for
period cost because as per the matching principle, the expenses should
match the revenue and therefore, the costs are ascertained and charged in
the accounting period in which they are incurred.
- Product cost is included in the inventory valuation, which is just opposite in
the case of Period cost
- Product cost comprises of all the manufacturing and production cost, but
period cost considered all the non-manufacturing costs like marketing, selling
and distribution.
- Product cost change with the change in the activity level meanwhile period
cost remain unchanged irrespective of the activity level
Question 2.13

a) Differential Cost: Difference between the cost of two alternative decisions, or

of a change in output levels. The concept is used when there are multiple
possible options to pursue, and a choice must be made to select one option
and drop the others

b) Opportunity Cost : The value of the best alternative forgone, where a choice
needs to be made between mutually exclusive alternatives given limited
resources

c) Sunk Cost: Cost that has already been incurred and cannot be recovered. Its
sometimes contrasted with respective costs, which are prospective cost that
may be incurred or changed if an action is taken

Question 2.14

Only variable costs can be differential cost. Do you agree?

- Differential costs are ones that differ between different alternatives.

Differential costs are used interchangeably with the terms avoidable,
incremental, and relevant costs. However, variable cost is simply one that
varies with different activity levels. They do not necessarily differ between
alternative. So, variable costs cant be differential cost.

Question 2.2

Direct Materials $80,000

Direct Labor $42,000

Manufacturing Overhead $19,000

Selling expenses $22,000

Administrative expenses $35,000

1. Product costs : Direct Material + Direct Labor + Manufacturing overhead

= $80,000 + $42,000 + $19,000 = $141,000

2. Period costs : Selling expenses + Administrative expenses = $22,000 +

$35,000 = $57,000

3. Conversion costs : Direct Labor + Manufacturing overhead = $42,000 +

$19,000 =$61,000
 4. Prime costs: Direct Material + Direct Labor = $80,000 + $42,000 = $122,000

Question 7.4

a) Unit level activity : Unit level activities are performed for each unit that is
produced

b) Batch level activity : Batch level activity are performed for each batch
regardless of how many units are in the batch

c) Product-level activity : Product-level activity must be carried out to support a

product regardless how much batches are run or units produced

d) Customer- level activity: Customer- level activity must be carried out to

support customers regardless of what product or services they buy

e) Organizing sustaining activity : Organizing sustaining activity are carried

out regardless of the companys precise product mix or mix of customers

Question 7.6

Why are there two stages of allocation in activity-based costing?

- Cost must first be allocated to activity cost pools and then they are allocated
from the activity cost pools to products, customers, and other cost objects.