Finance Chapter 8 Questions Please Help Q 1 For most prospe

Finance - Chapter 8 Questions:

Please Help!!!

Q. #1 For most prospective decision making should we rely on average costs? Q. #2 Cost varies as volume changes because of what type of cost? Q. #3 What is the difference between cost and expense? Q. #4 What are the stages of inventory once we acquire it, up until we sell a finished product? Q. #5 Are general administrative expenses considered to be product or period? Q. #6 Explain the 3 major approaches to product costing? Q. #7 What is the basic approach to cost allocation in a non-ABC system? Q. #8 What is the focus of the ABC approach to cost allocation?

Solution

Question 1:

Prospective decision making is made during budget preparation. At that time to estimate costs we cant take extremes i.e., too high costs or too low costs which may result into wrong pediction.Even though in a single year our costs are so low due to favourable economic conditions we cannot expect that to happen in the coming years. If during a year we incur too many costs due to environmental factors then here also we cant expect the same in coming years. Our decision making should be on prudent basis and not affected by the extreme conditions.

So average costs can be relied upon when making a prospective decision making.

Question 2:

When volume changes cost also underggoes change because of VARIABLE cost.

Variable cost is the cost that increases in proportionate to volume. Another type of cost is fixed cost which does not change with volume.

Question 3:

Cost Vs Expense

I can explain this through a small example:

Example: A Inc. acquired an asset worth 5,00,000 having useful life of 10 years.

For A Inc. 5,00,000 is the cost of asset and the depreciation of 50,000 is an expense.

Cost is something which is spent to gain some benefit or revenue.

Expense is the part of cost which has been consumed.

Major difference is expense is allowed as deduction in our Income statement but not all costs are allowed as deduction.

Question 4:

Inventory first purchased will form part of raw materials.

Raw materials once processed will enter into a stage of Work in Progress.

From Work in progress it will be converted into finished product.

So the different stages of Inventory are:

a) Raw Material Stage

b) Work in progress Stage

c)Finished goods Stage.