We’ve devoted a lot of our recent video lectures to the FAR section of the CPA Exam because, as you know, it covers an unbelievable amount of information. Second only to FAR in terms of breadth is BEC.
So, this time we’re featuring a great Deep Dive video lecture on the crucial top of Cost Concepts.
The accounting concept of cost is as a measure of the money amount given up or the obligation incurred to acquire a resource. For economic and finance purposes, there are various other concepts of cost. Throughout the CPA Exam, you’ll be expected to identify and work with different concepts of cost, such as accounting cost, alternative costs and weighted averages.
1) Which of the following is assigned to goods that were either purchased or manufactured for resale?
A. Relevant cost.
B. Period cost.
C. Opportunity cost.
D. Product cost.
2) For the year ended December 31, 2004, Abel Co. incurred direct costs of $500,000 based on a particular course of action during the year. If a different course of action had been taken, direct costs would have been $400,000. In addition, Abel’s 2004 fixed costs were $90,000. The incremental cost was:
3) Egan Co. owns land that could be developed in the future. Egan estimates it can sell the land for $1,200,000, net of all selling costs. If it is not sold, Egan will continue with its plans to develop the land. As Egan evaluates it options for development or sale of the property, what type of cost would the potential selling price represent in Egan’s decision?
1) D. Product cost.
Product cost is the cost assigned to goods that were either purchased or manufactured for resale. Product cost also is often referred to as “inventoriable cost.”
2) C. $100,000
Incremental costs are those that are different between two or more alternatives under consideration. In this case, the incremental cost is the difference between the direct costs of taking one action ($400,000) versus another ($500,000). The $100,000 difference in cost is the only cost that differs between the two courses of action. The fixed costs are present regardless of which action is taken.
3) B. Opportunity.
Egan’s potential selling price of the land is its opportunity cost when deciding whether to develop or sell the land. Opportunity cost is the benefit lost from an opportunity (selling the land) as a result of choosing another opportunity (developing the land).