EXERCISE 2-2 Defining Cost Terms [LO1 - CC1; L03 - CC3; L04 - CC7] Following are a number of cost terms introduced in the chapter: Variable cost Product cost Fixed cost Sunk cost Prime cost Conversion cost Opportunity cost Period cost Required: Choose the term or terms that most appropriately describe the cost identified in each of the following situations. A term can be used more than once. 1. Lake Company produces a tote bag that is very popular with students. The cloth used in the manufacture of the bag would be called direct materials and classified as a(n) cost. In terms of cost behaviour, the cloth could also be described as a(n) cost. 2. The direct labour cost required to produce the tote bags, combined with the manufacturing overhead cost involved, would be known as a(n) cost 3. The company could have taken the funds that it has invested in production equipment and invested them in interest-bearing securities instead. The interest forgone on the securities would be called a(n) cost. 4. Taken together, the direct materials cost and the direct labour cost required to produce tote bags would be called a(n) cost. 5. The company used to produce a smaller tote bag that was not very popular. Some 300 of these smaller bags are stored in one of the company's warehouses. The amount invested in these bags would be called a(n) cost. 6. The tote bags are sold through agents who are paid a commission on each bag sold. These commissions would be classified by Lake Company as a(n) cost. In terms of cost behaviour, commissions would be classified as a(n) cost. 7. Depreciation on the equipment used to produce tote bags would be classified by Lake Company as an) cost. However, depreciation on any equipment used by the company in selling and administrative activities would be classified as a(n) cost. In terms of cost behaviour, depreciation would probably be classified as a(n) cost. 8. A(n) cost is also known as an inventoriable cost, since such costs go into the work-in- process inventory account and then into the finished goods inventory account before appearing on the income statement as part of cost of goods sold. 9. The salary of Lake Company's president would be classified as a(n) cost, since the salary will appear on the income statement as an expense in the time period in which it is incurred. 10. Costs can often be classified in several ways. For example, Lake Company pays $5,000 rent each month on its factory building. The rent would be part of manufacturing overhead. In terms of cost behaviour, it would be classified as an) cost. The rent can also be classified as a(n) cost and as part of cost