2 Types of Cost

Question 1

What is a cost object?

Answer 1

this is e.g. a product, service, centre, activity, customer or distribution channel in relation to which costs are ascertained -
Product = Kit Kat
Service = FMA Course
Centre = Sales dept
Activity = Purchase ordering
Customer = Student

Question 2

What is a cost centre?

Answer 2

Any unit of division, dept or group of employees to which costs are assigned/allocated.

Profit centres (resp for costs and revs)
Revenue centres (resp for revs only)
Investment centres (resp for costs & revs & inv capital spending)

Question 3

What is a cost unit?

Answer 3

a unit of product or service in which costs are ascertained

• firms accountants might have a ‘chargeable hour’ whereas a freight company might have tonne/kilometre as cost unit
  = Composite Cost Unit - dependent on distance as well as weight

Question 4

What is the historic cost?

Answer 4

represents costs that have actually been incurred/recorded

Question 5

What is the economic cost?

Answer 5

This includes OPPORTUNITY COSTS - next best course of action forgone which could have been take with the resources available.

Question 6

What is the economic value?

Answer 6

This is the amount that someone is willing to pay for an item. Measured in monetary terms.

Question 7

What is cost classification?

Answer 7

This is the arrangement of elements of cost into logical groups with respect to their nature, function or use in the business of the entity

Question 8

What is a direct cost?

Answer 8

this is expenditure which can be attributed to a specific cost unit e.g material that forms part of a product

Direct materials e.g. motor, metal
Direct labour e.g. wages of production line workers
Direct expenses e.g. hire of equipment for a specific job

Question 9

What is a indirect cost ?

Answer 9

this is expenditure on labout, materials or services that cannot be indentified with the specific saleable cost unit e.g. admin or distrib

Question 10

What are examples of production overheads?

Answer 10

1. Indirect materials
2. Indirect wages
3. Indirect expenses

Question 11

What are examples of non-production overheads?

Answer 11

1. Admin
2. Selling
3. Distribution

Question 12

What are controllable costs?

Answer 12

Costs that management can influence

Question 13

What are incontrollable costs?

Answer 13

Costs management cannot control within the current period of time

Question 14

What are variable costs?

Answer 14

change as the volume of activity changes

Question 15

What are fixed costs?

Answer 15

costs that do not vary (can get both a fixed and variable part of a cost = semi-fixed, semi-variable, mixed costs

Question 16

What is the marginal cost?

Answer 16

The amount by which the total cost increases if one more unit of a product is made

Question 17

What is the period cost?

Answer 17

The cost that is linked to a time period rather than directly to a product or service

Question 18

In order for a figure to be relecant in the future incremental cash flow, it must pass which 3 tests?

Answer 18

1. Future = decision made today cannot change the past, only future costs considered.
2. Incremental = only costs affected by the decision are relevant. Some are committed costs and are ignored e.g. fixed costs
3. Cash flow = factual and not based on accounting conventions

Question 19

What is the deprival value?

Answer 19

This is found by asking yourself the question - if we deprive of the use of the asset, what would we choose to do?

Question 20

What is the shareholder value ?

Answer 20

Total return to shareholders in terms of both dividends and share price growth - PV of future free cash flows of business discounted at weighted AC of capital less market value of its debt

Question 21

What are the main issues faced with environmental costs?

Answer 21

1. Identification
2. Measurement

• Conventional costs (water usage, raw mats etc)
• Clean up costs
• Compliance costs
  = Helps environment and legal requirements but builds reputation as well.