TARLAC CHRISTIAN COLLEGE

5085 Buno Matatalaib, Tarlac City

STUDY TO SHEW THYSELF APPROVED UNTO GOD,
A workman that needeth not to be ashamed, rightly dividing the word of truth.
(II Timothy 2:15)

Name: CRISTEL ANN DOTIMAS Score:

Course/Year: BSA-2 Date:

Strategic Cost Management

Performance Task (Week 3)
Chapter 2 – Basic Cost Concepts

I. Read and study “Chapter 2 – Basic Cost Concepts” (pp. 21-59). II.
Review questions:
1. Cost vs. Expenses:
- Cost refers to the total amount of money spent on producing goods or services. It includes
all expenditures, both direct and indirect, related to the production process.
- Expense, on the other hand, is the amount of money spent or used up to generate revenue
in a particular period. It encompasses all the costs incurred in the regular operations of a
business, including overhead costs like rent, utilities, and salaries.

2. Types of Costs:
- Fixed Costs: These are costs that remain constant regardless of the level of production or
sales. Examples include rent, insurance premiums, and salaries of permanent staff.
- Variable Costs: These costs vary with the level of production or sales. Examples include
raw materials, direct labor, and commissions.
- Total Costs: These costs are the total amount of fixed cost and variable cost.

3. Incremental Cost:
- Incremental cost refers to the increase in total cost that arises from producing one
additional unit of a good or service. It includes both variable and fixed costs directly
attributable to the additional unit.
- Incremental cost is not necessarily the same as variable cost because it can include both
variable and fixed components, depending on the situation.

4. Product Costs under Absorption and Direct Costing:

- Under absorption costing, all manufacturing costs, including direct materials, direct
labor, and both variable and fixed factory overheads, are considered product costs.
- Under direct costing, only variable manufacturing costs (direct materials, direct labor, and
variable factory overhead) are considered product costs.

5. Relevance of Sunk Costs:

- Sunk costs are not relevant in decision-making because they represent costs that have
already been incurred and cannot be recovered. Decisions should focus on future costs and
benefits rather than past expenditures.

6. Period Costs vs. Product Costs:

- Period costs are expenses that are not directly tied to the production process and are
incurred over a specific period, such as selling and administrative expenses.
- Product costs are costs directly associated with producing goods, including direct
materials, direct labor, and manufacturing overhead. This distinction is important for
accurately determining the cost of goods sold and profitability.
 7. Opportunity Cost:
- Opportunity cost is the value of the next best alternative forgone when a decision is made.
It's relevant to decision-making because it helps assess the benefits of different choices.
- Decision-makers consider opportunity costs when they have multiple options and need to
evaluate the trade-offs between them.

8. Differential Costs:
- While many differential costs are variable, not all of them are. Differential costs are
simply the difference in total cost between two alternatives. This difference can include both
variable and fixed costs.

9. Difference between Loss and Expense:

- A loss occurs when expenses exceed revenues, resulting in a negative net income.
- An expense is a cost incurred in the normal course of business operations to generate
revenue. Expenses can contribute to losses but are not synonymous with them.

10. Ambiguity in Cost Statement:

- The statement "The cost of my trip to Boracay was 50,000" is ambiguous because it
doesn't specify what type of costs are included. It could include various expenses such as
transportation, accommodation, meals, and activities. Without further clarification, it's unclear
what exactly the cost entails and whether it's related to a specific aspect of the trip or the total
expenditure.

III. Fill in the Blanks

1. “COST” is the amount of expenditure, actual (incurred) or notional (attributable),
relating to cost object.
2. A “COST OBJECT” (2 words) is any items such as products, customers,
departments, projects, activities and so on, for which costs are measured and
assigned.
3. “DEFERRED COSTS” (2 words) are unexpired cost which provide benefit in
the future periods.
4. “EXPIRED COSTS” (2 words) are those which have been used in generating
revenue and benefits have been received immediately,
5. “EXPENSES” are expired costs.
6. “LOSS” is cost which expires without giving any revenue benefit.
7. “DIRECT MATERIALS” (2 words; plural) refer to the cost of the materials
which becomes a major part of the finished product.
8. “DIRECT LABOUR” (2 words) is defined as the labor of those workers who are
engaged in the production process.
9. “DIRECT EXPENSES” (2 words) include any expenditure other than direct
material and direct labor directly incurred on a specific cost unit (product or job).
10. “FACTORY OVERHEAD” (2 words) also called manufacturing expenses or
factory burden may be defined as the cost of indirect materials, indirect labor and
indirect expenses.
11. The term “INDIRECT MATERIALS” (2 words) refer to materials that are
needed for the completion of the product but whose consumption with regard to
the product is either so small or so complex that it would not be appropriate to
treat it as a direct materials item.
12. The term “INDIRECT LABOUR” (2 words) may be defined as that labor which does
not affect the construction or the composition of the finished products.