2 - Costing

Question 1

what is a cost object

Answer 1

anything for which cost data is desired
eg, products, product lines, jobs, customers or departments and divisions of a company

Question 2

what is a cost unit

Answer 2

a unit of product or service in relation to which costs may be ascertained

should be appropriate to type of business
eg audit firm trying to cost a complete audit or one chargeable hour

Question 3

what is a cost centre

Answer 3

a function or location for which costs are ascertained and related to cost units for control purposes

Question 4

what are production/service cost centres

Answer 4

PRODUCTION = those actively involved in production process
SERVICE = provide a service or backup to production departments

Question 5

what is cost classification

Answer 5

arrangement of costs into logical groups eg:
- classification by nature, eg materials/wages
- classification by function, eg admin or production
- classification by behaviour or responsibility

Question 6

what are direct costs

Answer 6

costs which can be specifically identified with and allocated to a particular cost object

usually cost object will be a cost unit and therefore direct costs can be attributed in full to a particular unit of production

Question 7

what are prime costs

Answer 7

the total of all direct production costs

Question 8

what are direct materials/labour/expenses

Answer 8

include all material becoming part of the product, including packing material

direct labour is all basic hours or overtime on work, including altering the condition, conformation or composition

direct expenses = any expenses incurred on specific product OTHER THAN direct material cost and direct wages

Question 9

what are indirect production costs

Answer 9

those costs which are incurred in the course of making a product/service but which cant be identified with a particular cost object (usually a cost unit)

Question 10

examples of all materials/labour/expenses

Answer 10

DIRECT:
- labour = wages paid to manufacturing workers or hairdressers in a hair salon
- materials = incorporated into finished product eg wood used for table
- expenses = identifiable with each unit eg patent royalties payable to inventor of new item

INDIRECT:
- labour = wages of other staff eg supervisors, storekeepers and maintenance workers
- materials = used in production but not final product eg machine lubricants and spare parts
- expenses = not spent on individual units of production, eg rent, electricity and telephone

Question 11

total cost is?

Answer 11

total cost = production costs + non production costs

Question 12

what is historic cost

Answer 12

most organisations record assets at historical cost

historic cost = original cost to the organisation

Question 13

what is economic value

Answer 13

assets can also be measured at economic value

economic value = the most someone is willing to give up in order to obtain the asset

how much a person is willing to pay for the asset tells us the economic value

Question 14

what are environmental prevention costs

Answer 14

= costs incurred to prevent the production of waste that could cause damage to the environment

Question 15

what are environmental appraisal costs

Answer 15

= costs incurred to assess whether a firms activities comply with environmental laws and standards

Question 16

what are environmental internal failure costs

Answer 16

= costs incurred after waste has been produced but not discharged into the environment

Question 17

what are environmental external failure costs

Answer 17

= costs incurred after waste has been produced and discharged into the environment, some of these costs may be paid by society as a whole

Question 18

what is a relevant cost

Answer 18

(sometimes known as an avoidable cost) = a future, incremental cash flow arising as a direct consequence of a decision

(incremental = cost incurred from additional unit produced)

Question 19

what is a future cost

Answer 19

• a decision is about the future and can’t alter what has already been done
• costs that have been incurred in the past are irrelevant to decision made ‘now’, eg past costs or sunk costs
• costs that have been incurred include not only costs that have already been paid, but also costs that have been committed

Question 20

what are the importance of cash flows in a committed cost

Answer 20

• only cash flow info is required
• this means that costs or charges that don’t reflect additional cash spending should be ignored

Question 21

what is a committed cost

Answer 21

= a future cash flow that will be incurred anyway, regardless of the decision taken now

Question 22

what are the importance of an incrumental in a committed cost

Answer 22

= the increase (only) in costs and revenues that occur as a result of the decision

Question 23

what is the opportunity cost

Answer 23

the benefit which would have been earned but has been given up by choosing one option instead of another

Question 24

what are non cash flow expenses

Answer 24

eg depreciation, apportioned overheads

Question 25

what are sunk costs

Answer 25

eg market research

Question 26

what is the historic cost of material

Answer 26

if materials are used by a project then they will either:
1. need to be replaced, so the replacement cost is the cash flow, or:
2. they won’t so the cost is zero (or lost revenue if they could have been sold as scrap)

Question 27

what is responsibility accounting

Answer 27

a system of accounting that segregates revenue and costs into areas of personal responsibility in order to monitor and assess the performance of each part of an organisation

Question 28

what is a responsibility centre

Answer 28

a department or function whose performance is the direct responsibility of a specific manager

is either a cost centre, profit centre, investment centre or revenue centre

Question 29

what are controllable and uncontrollable costs

Answer 29

CONTROLLABLE = cost which can be influenced by management decisions and actions

UNCONTROLLABLE = cost unaffected by management in a time span

Question 30

what is a cost centre

Answer 30

= managers only have responsibility for controlling costs

Question 31

what is a profit centre

Answer 31

= any section of an organisation to which both revenues and costs are assigned so that the profitability of the section may be measured

the manager of the profit centre has some say over revenues and costs

Question 32

what is a revenue centre

Answer 32

= any section of an organisation to which revenues are assigned, before they are analysed further

Question 33

what are investment centres

Answer 33

profit centres with additional responsibility for capital investment and possibly for financing