3. cost definition, classification and behaviour

Question 1

cost classification by…
(4)

Answer 1

1. by nature (direct/indirect cost)
2. by function (production marketing, research and development)
3. by behaviour (fixed or variable/marginal cost)
4. by element (material, labour or overhead expense)

Question 2

cost objects

Answer 2

• an activity for which a separate measurement of cost is required

Question 3

a cost collection system normally accounts for costs in two broad stages:

Answer 3

1. Accumulating costs by classifying them into
   certain categories (e.g. labour, materials and
   overheads).
2. Assigning costs to cost objects.

Question 4

1. direct costs
2. indirect costs

Answer 4

1. of a cost object are those that are related to a given cost object
2. are related to the particular cost object but cannot be traced to it in an economically feasible way

Question 5

define variable costs

Answer 5

costs that vary in direct proportion with activity

Question 6

define fixed costs

Answer 6

costs that remain constant over wide ranges of activity

Question 7

define semi fixed costs

Answer 7

costs that are fixed within specified activity levels, but they eventually increase or
decrease by some constant amount at critical activity levels.

Question 8

defined semi variable costs

Answer 8

costs that include both a fixed and a variable component (e.g. telephone
charges)

Question 9

CVP assumptions and terminology

Answer 9

1. Changes in the level of revenues and costs arise only because of changes in the number of
   product (or service) units produced and sold.
2. Total costs can be divided into a fixed component and a component that is variable with
   respect to the level of output.
3. When graphed, the behaviour of total revenues and total costs is linear (straight-line) in
   relation to output units within the relevant range (and time period).
4. The unit selling price, unit variable costs, and fixed costs are known and constant.
5. The analysis either covers a single product or assumes that the sales mix, when multiple
   products are sold, will remain constant as the level of total units sold changes.
6. All revenues and costs can be added and compared without taking into account the time value
   of money.