______ costs are expenditures that can be specifically traced to a manufactured product.
Answer a. Direct b. Indirect c. Period d. Conversion
The correct answer and explanation is:
The correct answer is a. Direct costs.
Direct costs are expenses that can be specifically and easily traced to a particular manufactured product. These costs include materials and labor that are directly involved in the production of the product. For example, the raw materials used to make a product, such as wood for furniture or fabric for clothing, are direct costs. Similarly, wages paid to workers who assemble or manufacture the product are also direct costs because their work is directly related to the product being made.
In contrast, indirect costs are expenses that cannot be traced directly to a specific product but are necessary for the overall production process. Examples of indirect costs include factory rent, utilities, and salaries of supervisors. These are often called manufacturing overhead.
Period costs are costs that are not tied to the manufacturing process and are expensed in the period they occur. Examples include selling, general, and administrative expenses like office rent or advertising costs. These costs are related to the business operations but not directly to product manufacturing.
Conversion costs refer to the combination of direct labor costs and manufacturing overhead costs. They represent the costs required to convert raw materials into finished products but exclude the cost of raw materials themselves.
Direct costs are crucial for cost accounting and product pricing because they help managers understand how much it costs to produce each unit. Accurate tracing of direct costs allows companies to set appropriate prices, control expenses, and improve profitability. Since direct costs vary with production volume, they are considered variable costs, unlike fixed indirect costs. Understanding direct costs also assists in budgeting and financial planning, as these costs fluctuate directly with manufacturing output.