9. Cost concepts Flashcards
What is a direct cost?
Cost that can be directly traced to producing a specific G&S
ex:
- Direct raw materials
- Direct labour
What’s an indirect cost?
All costs not related to direct labour and materials
- Machine & equipment maintenance
- Indirect materials
- Indirect labour
- Depreciation of equipments and machines
- energy
- property taxes
- Insurance
- Scrap and residual material
- Spoilage (units that do not meet the specifications and sold at reduced price)
- Rework (units that do not meet the specifications and are repaired)
- Sunk costs: costs incurred in the past from past actions, not relevant for decisions
Is depreciation a direct or indirect cost?
Indirect
What is inventory? What are the types?
Property that is either held for sale or used to produce good or services for sale
types:
- Merchandise
- Raw material
- Work in progress (WIP)
- Finished goods
*basis for accounting for inventory is cash equivalent cost
What is meant by cost of goods sold?
The cost of goods sold (COGS) is the sum of all direct costs associated with manufacturing a product.
What are overhead costs?
Costs not related to production of output.
- Marketing
- General administration labour
(type of indirect cost)
What are period expenses?
ex:
- income tax
- insurance
- general expenses
- admin expenses
- selling expenses
(also indirect costs)
What’s a variable cost?
- Varies with the volume of production
- Includes direct labour and material costs (direct costs)
What are fixed costs?
Costs of providing a company’s basic operating capacity (does not depend on volume of production)
Costs flows for a company. What appears on the income statement?
- Cost of revenue (direct costs + overhead - revenue)
- Selling and admin expenses
What is a differential (incremental) cost?
Costs that represent the differences in total costs, which come from selecting one alternative instead of another (opportunity cost)
What are marginal costs?
The added cost/revenue that would result from increasing production level/output by 1 unit
- relevant for decision making
How to do marginal analysis?
- When marginal costs are examined, it is “better” to analyze the least expensive methods first, then the most expensive
- When marginal revenue is examined, it is “better” to analyze the most revenue en-enhancing method first, then the least.
What is the break-even point?
The point at which the total revenue and total cost is the same.
Break even volume = (fixed costs) / (sales price per unit - variable cost per unit)
Sales price per unit - variable cost per unit = marginal income
Should this company operate on sundays?
No! Profits will be $2000 lower if they stay open on sundays
