Ch2: Cost terms and concepts

Question 1

Why are costs important?

Answer 1

• useful for short term and long term decision making

- can be used for decision making, managing resources, creating customer/shareholder/social value

Question 2

What are the seven characteristics of traditional costing?

Answer 2

1. financial performance focus
2. internal organisational focus
3. aids managers to control costs
4. compares actual and budgeted costs
5. estimates costs of organisational departments and/or products
6. assumes production volume is the only factor that causes costs to change
7. information largely generated from internal information systems

Question 3

What are the six characteristics of modern costing?

Answer 3

1. proactive and detailed information to manage resources
2. uses non financial and qualitative information - quality, delivery, innovation etc.
3. focuses on broader range of costs - costs of activities, products, customers, suppliers etc.
4. looks internally and externally - eg. customers, competitors, suppliers etc.
5. aims to control costs and reduce them - increase organisational efficiency
6. finds root causes of costs, wasteful activities are identified and eliminated.

Question 4

What are the six ways to categorise costs?

Answer 4

1. cost behaviour
2. traceability
3. controllability
4. value chain function
5. manufacturing/product costs
6. timing of expense

Question 5

Define cost behaviour categorisation.

Answer 5

costs change with level of activity

Question 6

What are the types of cost behaviour?

Answer 6

Variable Costs - change in direct proportion to change in level of activity
Fixed costs - remains unchanged despite change in level of activity

Question 7

Define cost traceability.

Answer 7

Either direct or indirect depending on whether there is link to cost object.

Question 8

What are direct costs?

Answer 8

can be traced to cost object in an economic matter with clear and observable relationship. Therefore easy to calculate.

Question 9

What are indirect costs?

Answer 9

cannot be traced to cost object in economic manner or has no direct relationships with cost object. Indirect costs have to be apportioned or allocated.

Question 10

Define cost controllability.

Answer 10

Based on responsibility accounting - managers should only be held accountable for costs they have direct control over.

Question 11

What are the three cost categorisations in the value chain?

Answer 11

Upstream costs - R&D, Design, Supply
Primary processes - manufacturing/production
Downstream costs - marketing, distribution, customer service.

Question 12

What is the additional element of value chain costing? Provide a few examples.

Answer 12

Support services: eg

HR, Finance, Legal, Information systems, Telecommunications.

Question 13

Define manufacturing costs. What is the difference when comparing traditional and modern costing.

Answer 13

Costs incurred within the factory area.
Traditional - only manufacturing costs included in product cost.
Modern - can include allocation of upstream and downstream costs.

Question 14

What are direct manufacturing costs?

Answer 14

Direct materials and direct labour

Question 15

What are indirect manufacturing costs?

Answer 15

Manufacturing overhead, Indirect materials, Indirect labour

Question 16

Provide examples of manufacturing overhead

Answer 16

indirect material, indirect labour, depreciation, insurance, utilities, manufacturing support department costs, overtime, idle time

Question 17

Explain indirect materials and provide example

Answer 17

cannot be linked to a specific product or job. Or insubstantial quantities on a per unit basis - eg. oil, glue, tape etc.

Question 18

Explain indirect labour and provide example

Answer 18

supports manufacturing process but not directly involved. e.g. production supervisors, purchasing staff, material handling staff, quality control staff.

Question 19

What are conversion costs?

Answer 19

cost to convert material to product

direct labour + manufacturing overhead

Question 20

What are prime costs?

Answer 20

major cost associated with making a product

direct material + direct labour

Question 21

What are the two types of timing cost categorisation?

Answer 21

Product or period costs.
Product - assigned to goods that were manufactured or purchased for resale. Basis of inventory value and COGS. Asset on balance sheet until sold.

Period - selling and admin expenses from the relevant period. Not inventoried.

Question 22

What is the difference with service firms and timing cost categorisations?

Answer 22

All costs for a service firm are period costs.

Question 23

What are the three stages of physical flow of inventory.

Answer 23

1. Raw material inventory - materials scheduled for use in manufacturing
2. Work in process inventory - incomplete goods
3. Finished goods inventory - goods ready for sale

Question 24

What are the five steps of a cost of goods manufactured schedule?

Answer 24

1. calculate raw material cost - only materials used (opening raw materials + raw materials purchased - closing raw materials)
2. add direct labour cost
3. isolate manufacturing overheads from non manufacturing overheads
4. add up these three components of manufacturing cost
5. isolate cost of goods that were finished during the period (opening WIP + total cost of WIP - closing WIP)

Question 25

What is necessary to prepare a cost of goods sold schedule?

Answer 25

opening finished goods + cost of goods manufactured (from cost of goods manufactured schedule) - closing finished goods

Question 26

What is necessary to prepare income statement?

Answer 26

sales revenue
COGS
period expenses

Question 27

What make up upstream costs?

Answer 27

Research and development, Design, Supply

Question 28

What makes up primary processes?

Answer 28

Production

Question 29

What makes up downstream costs?

Answer 29

Distribution, Marketing, Customer service