University of Central Florida (UCF) ACG2071 Principles of Managerial Accounting Practice Test 1

Costs that can be easily traced to a specific cost object are referred to as direct costs. Direct costs are typically associated with specific units of production or specific activities, making them easier to identify and allocate. For instance, in a manufacturing setting, the cost of raw materials used to create a product or the wages of workers who produce the product are examples of direct costs. These costs are essential for calculating the total cost of producing a good or service and are directly involved in the production process.

In contrast, indirect costs cannot be traced directly to a specific cost object and often include overhead expenses such as utilities and administrative salaries. Variable costs change with the level of production, while fixed costs remain constant regardless of the volume of goods produced. Understanding the distinction between these types of costs is vital for effective cost management and pricing decisions in managerial accounting.

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