Chapter 2
In-Class Discussion Questions and Exercises
Discussion Questions
Question 1. Match each cost term in the right column with its definitions on the left column.
Cost Terms
Definitions
1. Cost
A. involves tracing and allocating costs, depending on the type of cost
involved.
2. Actual cost
B. do not change with changes in the activity level.
3. Budgeted cost
C. the historical amount, or cost incurred.
4. Cost object
D. costs that are related to the cost object and can be traced to it in an
economically feasible (cost effective) way.
5. Cost
accumulation
E. all costs on the income statement other than cost of goods sold, are
treated as expenses of the period in which they are incurred.
6. Cost
assignment
F. a resource sacrificed or forgone to achieve a specific objective.
7. Direct costs
G. all costs of a product that are considered assets on the balance sheet
when they are incurred and include direct materials, direct labor, and
factory overhead. They become a part of the cost of the product and are
assets until sold, when they become cost of goods sold.
8. Indirect costs
H. equals direct labor plus factory overhead. It is the cost of converting
the materials into a finished product.
9. Variable cost
I. costs that are related to the cost object but cannot be traced in an
economically feasible way.
10. Fixed costs
J. is the range of activity within which costs behave as predicted. Outside
this level of activity, costs behave differently.
11. Cost driver
K. anything for which a measurement of cost is desired.
12. Relevant
range
L. a term used to describe all direct costs or direct materials plus direct
labor.
13. Product costs/
Inventoriable
costs
M. the predicted or forecasted (future) amount of cost.
14. Period costs
N. the collection of cost data in some organized manner by means of an
accounting system.
15. Prime cost
O. the level or activity or volume that causally affects costs over a given
span of time.
16. Conversion
cost
P. changes in total in proportion to changes in the activity level.
Question 2. Classification of costs, merchandising sector. Home Entertainment Center (HEC)
operates a large store in San Francisco. The store has both a video section and a music (compact
disks and tapes) section. HEC reports revenues for the video section separately from the music
section. Classify each cost item (A–H) as follows: Required
a. Direct or indirect (D or I) costs with respect to the total number of videos sold.
b. Variable or fixed (V or F) costs with respect to how the total costs of the video section change
as the total number of videos sold changes. (If in doubt, select on the basis of whether the total
costs will change substantially if there is a large change in the total number of videos sold.)
You will have two answers (D or I; V or F) for each of the following items:
Cost Item (D or I, V or F)
A. Annual retainer paid to a video distributor
B. Electricity costs of the HEC store (single bill covers entire store)
C. Costs of videos purchased for sale to customers
D. Subscription to Video Trends magazine
E. Leasing of computer software used for financial budgeting at the HEC store
F. Cost of popcorn provided free to all customers of the HEC store
G. Earthquake insurance policy for the HEC store
H. Freight-in costs of videos purchased by HEC
Question 3. Classification of costs, manufacturing sector. The Fremont, California, plant of
New United Motor Manufacturing, Inc. (NUMMI), a joint venture of General Motors and
Toyota, assembles two types of cars (Corollas and Geo Prisms). Separate assembly lines are used
