Answer to Question #118265 in Financial Math for Seifu

Question

1) Explain the following terms and provide example
A. Variable cost vs. Fixed cost
B. Cost driver
C. Direct cost vs. Indirect cost
D. Relevant range
E. Prime cost vs. conversion cost
F. Process costing
2) Write the characteristics of process costing

Answer 1

1) Explain the following terms and provide example

A. Variable cost vary with change in output, for example, labor, materials, but fixed cost doesn't vary with change in output, for example, administrative costs, rent.

B. Cost driver is the unit of an activity that causes the change in activity's cost, for example, scale and scope of operations, complexity of products.

C. Direct costs are traceable to the production of a specific good or service, for example, direct labor and materials. Indirect costs may be necessary to production, but they are not traceable to the act of production, for example, office expenses, rent.

D. The relevant range refers to a specific activity level that is bounded by a minimum and maximum amount. For example, ABC Company constructs a budget within a relevant revenue range of no more than $20 million.

E. Prime costs are defined as the expenditures directly related to creating finished products, for example, to produce a car, while conversion costs are the expenses incurred when turning raw materials into a product, for example, car engine.

F. A process costing system is used by companies that produce similar or identical units of product in batches employing a consistent process. Examples of companies that use process costing include Chevron Corporation (petroleum products), the Wrigley Company (chewing gum), and Pittsburgh Paints (paint).

2) The characteristics of process costing are:

• The production is continuous.
• The product is homogeneous.
• The process is standardized.
• The output of one process becomes the raw material of another process.
• The output of the last process is transferred to finished stock.