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Unformatted text preview: CHAPTER 3: COST DRIVERS AND BASIC COST CONCEPTS QUESTIONS 3-1 Relevant cost information, including differential costs and opportunity costs, is used in management planning and decision making. 3-2 Direct costs can be physically identified with and/or traced to the cost object because there is a direct causal link between them. Indirect costs cannot be traced to each cost object. Direct costs for a manufactured product include the materials (called direct materials) which are part of the product and the labor (called direct labor) which is used to assemble the product. Indirect costs include the machinery, plant and other labor necessary to manufacture the product, but which is not directly traceable to the product, such as labor for inspection and supervision. 3-3 All direct costs are variable by definition since they can be directly traced to the cost object, and thus must vary with the cost driver. 3-4 All fixed costs must be indirect, since the increase in the cost driver or volume of output does not affect the level of fixed cost. 3-5 A cost driver is any activity that has the effect of changing the level of total cost. 3-6 Variable costs are those for which total cost changes with each change in the cost driver. Fixed costs are the portion of total cost which remains constant as the cost driver changes. 3-7 A step-fixed cost varies with the cost driver, but in discrete steps. Costs remain fixed over narrow ranges of the cost driver. However, total costs increase by a constant amount at set intervals. Examples of step-fixed costs are the costs for certain clerical tasks, order filling, and other administrative tasks. tasks, order filling, and other administrative tasks....
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