Economics 101: Principles of Microeconomics Ch 6. Accounting & Economic Costs

cost accounting

• the internal process of collecting, organizing, and analyzing financial data from within a company

• advising management on the most-effiecient course of action

Cost Accounting Systems

• standard cost accounting

• lean accounting

• activity-based costing

• resource consumption accounting

• throughput accounting

• life-cycle costing

• environmental accounting

• target costing

cost elements

• direct materials

• direct labor

• direct overhead (either fixed or or variable)

financial accounting

the collection, organization, and dissemination of financial transactions data from prior time periods for external users

What is the difference between cost accounting and financial accounting?

1. Cost accounting provides information for internal users while financial accounting provides information for external users.

2. Cost accounting is regulated by GAAP while financial accounting is regulated by a company's own management.

3. Cost accounting provides information which is not very useful while financial accounting information provides very reliable information.

4. Cost accounting information must be presented in the same way by all companies while financial accounting information can be presented differently by each company.

Cost accounting provides information for internal users while financial accounting provides information for external users.

Who regulates a company's cost accounting systems?

1. The SEC

2. The company itself

3. GAAP

4. The Senate

The company itself

Why do companies use cost accounting systems?

1. to collect, analyze, and organize financial data to be used for current and future decision making

2. to collect, analyze, and organize financial data to be shared with their customers

3. to collect, analyze, and organize financial data to be shared with potential investors

4. to collect, analyze, and organize data to be presented on their financial statements

to collect, analyze, and organize financial data to be used for current and future decision making

Which one of the following correctly states why financial accounting information should conform to GAAP (Generally Accepted Accounting Principles)?

1. It provides useful and relevant information for managers of companies.

2. It is used by external users to make decisions about how to manage the company.

3. It uses a variety of accounting systems such as lean accounting, throughput accounting, and environmental accounting.

4. It is used by external users who need an assurance of correctness.

It is used by external users who need an assurance of correctness.

Who are the principal users of cost accounting information?

1. Investors

2. Customers

3. Regulatory agencies

4. Managers

Managers

transaction costs

the costs we incur when we make economic exchanges during the purchase of goods and services

theory of transaction cost economics

hierarchical organizations, like firms, may distribute resources more efficiently than an imperfect or limited bargaining system, like a market

search costs

costs associated with finding out whether a particular product or service is available on the market

bargaining costs

costs associated with arriving at an agreement that is acceptable to all the involved parties

policing and enforcement costs

costs involved with ensuring that the other party abides by the terms of the contract and pursuing legal steps if they do not

Identify which of these are transaction costs.

1. Legal fees

2. Telephone service

3. Internet service

4. All of these are correct.

All of these are correct.

What are the costs associated with completing economic exchanges are called?

1. Sunk costs

2. Fixed costs

3. Transaction costs

4. Variable costs

Transaction costs

Your business needs a new bathroom facility for customers. You plan on shopping around for the best fixtures at the best prices before you make a decision to purchase. You also have to shop around for a contractor to do the installation. Which type of transaction cost would apply in this situation?

1. Policing/enforcement costs

2. Variable costs

3. Bargaining costs

4. Search costs

Search costs

You had a problem with the contractor installing the bathroom fixtures for your business. In the contract, it stated that the job would take three weeks and cost $10,000. Six weeks later, the job is still not done, and the contractor wants you to give him more money before he completes the job. You file a lawsuit for damages. Which type of transaction cost will you incur?

1. Bargaining costs

2. Policing/enforcement costs

3. Opportunity costs

4. Search costs

Policing/enforcement costs

What is TRUE of the theory of transaction cost economics?

1. The theory addresses the importance of companies or firms in a market economy.

2. The theory proposes that a market may distribute resources more efficiently than a firm.

3. The theory was developed by British economist Ronald Coase in 1975.

4. The theory was refined by American economist Oliver Williamson in 1937.

The theory addresses the importance of companies or firms in a market economy.

financial statements

may only provide a snapshot of the assets and liabilities as of a particular date

the matching principle

any expenses incurred to generate income should be reported in the same period as the income

period costs

costs that are not a necessary part of the process of producing a product or service to be sold

product costs

recognition of product costs in the income statement is delayed until the product is actually sold

Select the principle that requires a company to determine which expenses incurred to generate the income (revenue) that the company earned during a certain period.

1. revenue recognition

2. cutoff

3. expense recognition

4. matching

matching

Use the information below to determine the amount of period costs for the quarter (3 months).

Office Rent $500 per month

Office Utilities $800 per month

Factory Rent $1,000 per month

Factory Utilities $2,000 per month

CEO Salary $200,000 per year

CFO Salary $150,000 per year

Factory Supervisor salary $75,000 per year

1. $1,300

2. $351,300

3. $91,400

4. $119,150

$91,400

Identify the expense that is most likely to be a period cost.

1. Rent for the factory

2. Sales and marketing costs

3. Wages for the hood assembly line workers in a car manufacturing plant

4. Gas and electricity expense for a factory plant

Sales and marketing costs

Which of the following is true about product cost?

1. Product costs are expenses that occur in a specific period.

2. Product cost is the cost of selling a product.

3. Product costs are expenses that are not recognized in the period in which they are incurred.

4. Product costs don't become expenses until the product is sold

Product costs don't become expenses until the product is sold

In what way does it matter whether a cost is a period cost or a product cost?

1. So that companies can price their products accurately.

2. So that financial statements accurately reflect income, expenses, and profit

3. Because accounting principles require you to classify them that way

4. So that companies know how much it costs to run their businesses

So that financial statements accurately reflect income, expenses, and profit

product costs

all of the costs associated with the manufacturing of a product that is intended for sale to customers

direct materials

the raw materials used to manufacture the telephone wire

direct labor

all of the manufacturing labor required to complete the manufacturing process

manufacturing overhead

auxiliary costs to manufacture the telephone wire

period cost

the selling and administrative costs associated with the sale of goods are recorded as an expense

net profit

the difference between the gross profit and the total expenses

direct material, direct labor, and manufacturing overhead

these costs are recorded in the time period in which the manufacturing occurs, while the selling and general administrative expenses are recorded in the time period in which they occur

What are the 3 parts of a product's costs?

1. Direct material, direct and indirect labor, and manufacturing overhead

2. Manufacturing overhead, travel expenses, and indirect material

3. Material, labor, and administrative expenses

4. Direct material, direct labor, and manufacturing overhead

Direct material, direct labor, and manufacturing overhead

When a product has completed the manufacturing process, it goes to finished goods inventory. If a customer buys the product, what happens on the financial statements?

1. It moves from the finished goods inventory on the balance sheet to the income statement, where it is an expense for the current period in which it is sold.

2. It moves from finished goods inventory on the balance sheet to cost of goods sold on the income statement for the current period in which it is sold.

3. None of the answers are correct

4. It moves from finished goods inventory on the cash flow schedule to the cost of goods sold on the income statement for the current period in which it is sold.

It moves from finished goods inventory on the balance sheet to cost of goods sold on the income statement for the current period in which it is sold.

Which of the following is calculated by the cost of goods manufactured schedule?

1. Total costs required to produce a product

2. Total costs required for manufacturing and selling a product

3. Total costs required for storing and selling a product

4. Total costs required for manufacturing and storing a product

Total costs required to produce a product

What type of account is a finished goods inventory account?

1. Revenue

2. Asset

3. Expense

4. Liability

Asset

A product cost is different from a period cost. Which one is NOT a period cost?

1. Manufacturing overhead

2. Sales salary

3. Bad debt expense

4. Corporate office overhead

Manufacturing overhead

cost driver

unit of activity that causes a business to endure costs

Which of the following is NOT a step in analyzing a cost driver?

1. Identify correlation

2. Summarize

3. Identify the cost

4. Analyze

Summarize

What does the investigation step in analyzing cost drivers entail?

1. Identifying the relationship between a cost and profit.

2. Correlating the relationship between a cost and investigation.

3. Determining if there is a relationship between a cost and an activity.

4. Evaluating the relationship between a cost and loss.

Determining if there is a relationship between a cost and an activity.

A cost driver is defined as:

1. A detailed outline of the potential risks and gains of a projected venture.

2. A unit of activity that causes a business to endure costs.

3. The amount of profit or loss incurred by selling a product.

4. The amount paid to get something that offers a profit.

A unit of activity that causes a business to endure costs.

Which of the following is NOT an example of a cost driver?

1. Sales markdown

2. Machine hours

3. Direct labor

4. Handling

Sales markdown

What happens during the wrap-up step when analyzing a cost driver?

1. The cost of the company is identified.

2. The company determines if the measure is working.

3. The company manages the way the cost driver is determined.

4. The company determines how direct labor affects returns on investment.

The company determines if the measure is working.

job order costing

used when the product or service is unique or custom-ordered

standard costing

• an expected or pre-determined cost or standard is calculated for manufactured items

• includes costs for raw materials, labor, & overhead

• all items are assumed to be the same to manufacture

• calculated for each product

• used as the cost basis for all items of that type

variance

the difference between the actual costs to produce the item and its calculated standard cost

price variance formula

qyt purchased x (actual price paid - budgeted price)

volume variance formula

standard cost per unit x (actual sales volume - budgeted sales volume)

favorable variance

actual cost of producing an item is less than its standard cost

unfavorable variance

actual cost is greater than the standard cost

Which inventory costing method would be most appropriate for a bakery that creates custom-ordered birthday cakes?

1. Standard costing

2. Process costing

3. Job order costing

4. Cost plus costing

Job order costing

Calculate the standard cost of an item given the following information: raw materials = $5.00; direct labor = $2.50; overhead = $1.00; variance = $1.25.

1. $5.00

2. $7.50

3. $8.50

4. $9.75

$8.50

Which components are included in calculating a standard cost?

1. Direct and indirect labor and variances

2. Raw materials, direct and indirect labor and variances

3. Raw materials and indirect labor

4. Raw materials, direct labor and overhead

Raw materials, direct labor and overhead

Which of the following scenarios would represent an unfavorable variance?

1. Standard cost = $55; actual cost = $50

2. Standard cost = $40; actual cost = $37

3. Standard cost = $100; actual cost = $97

4. Standard cost = $25; actual cost = $32

Standard cost = $25; actual cost = $32

Which of the following is an example of a raw material for a company that manufacturers wooden furniture?

1. Direct Labor

2. Overhead

3. Office Salaries

4. Lumber

Lumber

sunk costs

dollars already spent and permanently lost

If you spend $1000 to fix the brakes on your 15-year-old car, and then find out that you also need new tires, which will cost another $1000, what would be the most sensible decision to make?

1. Take the money you would have spent on new tires, and use it as a down payment for a newer car.

2. Go ahead and get the tires, since you have already spent so much money on the brakes.

3. Keep driving the car until the tires go flat.

4. Get your old brakes put back on the car and then spend the money on new tires.

Take the money you would have spent on new tires, and use it as a down payment for a newer car.

Which of the following BEST describes a sunk cost?

1. It is a part of budgeted costs.

2. It is money that has been spent, but is recoverable.

3. It is money that has been spent, and is not recoverable.

4. It is based on projected revenue.

It is money that has been spent, and is not recoverable.

When should sunk costs be considered in decision-making?

1. Always

2. When the business environment has changed

3. In special circumstances determined by management

4. Never

Never

Why is it sometimes beneficial to abandon a project with sunk costs?

1. The sunk costs can be rerouted to new projects.

2. Further money will not be spent on the project.

3. It is never beneficial to abandon a project with sunk costs.

4. The sunk costs have a better chance of being recovered.

Further money will not be spent on the project.

If someone is considering sunk costs when making a decision, what are they doing?

1. Attempting to complete the project.

2. Being proactive.

3. Attempting to justify past choices.

4. Prudently considering all aspects of the project's finances.

Attempting to justify past choices.

payback period accounting rate of return

used when estimating or projecting the return on an investment

payback period

expresses how long it takes the benefit of the investment to cover the cost of the investment

accounting rate of return

expressed by the annual rate of return generated by the investment

revenue

all the money generated by an asset or company

Which is more accurate when analyzing the return of an investment?

1. ARR and profit.

2. ARR and payback period.

3. ARR.

4. Payback period and profit.

ARR and payback period.

What role does the time value of money play in calculating ARR and payback period?

1. Time value of money plays no role in ARR or the payback period.

2. Money loses value over time, so amounts and percentages should be rounded down.

3. The future inflows of money are discounted by the internal rate of return.

4. Because ARR and time value are financial ratios, unless you discount them by the benchmarked rate, they are practically useless.

Time value of money plays no role in ARR or the payback period.

Tom is involved in a project that has a payback period of just one year, and a 5-year ARR of 40% per year.

What can be deduced about Tom's investment in the project?

1. The project will return Tom 40% on his investment.

2. Tom's return on this investment depends on his risk tolerance.

3. The project will return Tom 100% on his investment.

4. It is impossible to determine Tom's return on his investment.

It is impossible to determine Tom's return on his investment.

If an asset costs $100,000 and generates $50,000 per year, how long is the payback period?

1. 2 years

2. 6 months

3. 1 year

4. 4 years

2 years

If an asset costs $40,000 and over 5 years generates $20,000 in profits, what is the ARR?

1. 50%

2. 100%

3. 10%

4. 20%

10%

Utility

use to you at a given time

Opportunity cost

the cost of doing something, in terms of whatever you gave up to do it

Explicit Costs

costs that involve the company spending money

Implicit Cost

an opportunity cost without a dollar amount spent by the firm

Which of these is easier to calculate, explicit or implicit costs?

1. Explicit costs, as they involve the company spending money

2. Implicit costs, because they don't have a dollar amount involved

3. Explicit costs, because they don't have a dollar amount involved

4. Implicit costs, because they involve the company spending money

Explicit costs, as they involve the company spending money

If Jim could either study economics for an hour or play video games for an hour, what is the opportunity cost of studying economics?

1. 2 hours of video games

2. 2 hours of studying

3. 1 hour of video games

4. 1 hour of studying

1 hour of video games

What is true regarding an implicit cost?

1. An opportunity cost that requires someone other than the firm to spend money

2. An opportunity cost that does not require the firm to spend money

3. An opportunity cost that has a monetary cost to the firm

4. A cost that is involved in running a firm

An opportunity cost that does not require the firm to spend money

What is opportunity cost?

1. It is about how much we charge for the opportunity to study economics.

2. The cost of doing or getting something in terms of whatever we are giving up.

3. It is the cost of utilizing a particular machine to produce more of a certain product.

4. The cost to have a specific opportunity in currency.

The cost of doing or getting something in terms of whatever we are giving up.

Consider Keegan who works for $15 an hour. Instead of working one day, he went to watch a movie that costs $35 and lasts two hours.

Decide which of the following statements is true?

1. The opportunity cost of working is $50 for two hours of movie.

2. The opportunity cost of watching the movie is $20 for two hours of work.

3. The opportunity cost of working is $30 for two hours of movie.

4. The opportunity cost of watching the movie is $30 for two hours of work.

The opportunity cost of watching the movie is $30 for two hours of work.

explicit costs

expenses that require a payment and have an amount that can be calculated

• supplies

• rent or mortgage payments

• payroll

• utilities

• transportation

• taxes

implicit costs (notional, implied or opportunity costs)

• expenses to a company that do not necessarily require additional expenditures, but can have an indirect effect on the business

• opportunity costs or if things-were-different

• lost profits

• benefits without expenditures

lost profits

the company is incurring expenses regardless of whether or not revenue is tied to it

benefits without expenditures

the cost of resources that are not being charged directly to the company

The head of a bottle factory decides to cease running the factory as a 24-hour operation, only keeping it open for eight hours per day. Why is there an implicit cost to this decision?

1. A factory that is not operating is more likely to be robbed, which costs the company money.

2. When the factory is closed at night, it is saving money because no one needs to be paid for working the night shift.

3. When the machines are not operating, the bottles that could be created during that time become an opportunity cost (lost opportunity) to the company.

4. The equipment will now have more time to rest between shifts, thereby increasing its value.

When the machines are not operating, the bottles that could be created during that time become an opportunity cost (lost opportunity) to the company.

What are the two umbrella categories of expenses?

1. Mortgage expense and payroll

2. Implicit and explicit costs

3. Accounts receivable and aged accounts

4. Sales and COGS

Implicit and explicit costs

All of the following are alternative terms for implicit costs, EXCEPT:

1. Notional costs

2. Rational costs

3. Implied costs

4. Opportunity costs

Rational costs

How do implicit costs and explicit costs differ?

1. Explicit costs only apply to salaries.

2. Implicit costs only apply to salaries.

3. Explicit costs are dollar amounts that can be easily calculated; implicit costs cannot be calculated as easily.

4. Implicit costs are dollar amounts that can be easily calculated; explicit costs cannot be calculated as easily.

Explicit costs are dollar amounts that can be easily calculated; implicit costs cannot be calculated as easily.

Jesse decides to leave his job as a programmer with a salary of $70,000 to form his own startup, and he elects not to take a salary in the company's first year. Why would the $70,000 in lost income not be calculated in his company's financial records?

1. He is still in a probationary period and entrepreneurs never pay themselves during the probationary period.

2. His company is not paying him a $70,000 salary yet.

3. People who form their own startups tend to make half as much as they used to for the first year.

4. His former employer would likely give him a severance package.

His company is not paying him a $70,000 salary yet.

explicit costs

• expenses that require a payment to be made

• payroll, rent, supplies, marketing

opportunity costs

loss of income to the business because those hours were spent on activities that were not billed but were spent on unpaid activities

All of the following are examples of explicit costs, EXCEPT:

1. Utilities

2. Food for the company picnic

3. Declines in productivity

4. Rent

Declines in productivity

How do explicit costs affect businesses?

1. They increase the amount of money and cash flow in a business.

2. They decrease the market share of a business.

3. They lower the amount of money and cash flow in a business.

4. They increase a business's market share.

They lower the amount of money and cash flow in a business.

How are explicit costs in business similar to a personal budget?

1. They tend to require about the same amount of money to cover.

2. They must be paid by the 10th of the month.

3. They must be managed and cut, if necessary.

4. They only relate to the costs that individuals and businesses have in common, such as rent and utilities.

They must be managed and cut, if necessary.

Which of the following statements is TRUE?

1. Explicit costs must be paid by check.

2. Not all explicit costs can be cut.

3. Explicit costs must be paid with cash.

4. All explicit costs can be cut.

Not all explicit costs can be cut.

What are explicit costs?

1. Costs that affect only human resources.

2. Costs that are above what was budgeted.

3. Costs that are paid on credit.

4. Costs that require a payment to be made.

Costs that require a payment to be made.

accounting profit

the revenue of a company minus the explicit costs of a company

net income

the profit, the bottom line