Chapter 31 Costs

Question 1

Define direct costs

Answer 1

Direct costs: these costs can be clearly identified with each unit of production and can be allocated to a cost centre.

Question 2

Define fixed costs

Answer 2

Fixed costs: costs that do not vary with output in the short run.

Question 3

Define variable costs

Answer 3

Variable costs: costs that vary with output.

Question 4

Define marginal costs

Answer 4

Marginal costs: the extra cost of producing one more unit of output.

Question 5

Define indirect costs

Answer 5

Indirect costs: costs that can not be identified with a unit of production or allocated accurately to a cost centre.

Question 6

Define break even point of production

Answer 6

Break-even point of production: the level of output at which total costs equal total revenue, neither a profit nor a loss is made.

Question 7

Define margin of safety

Answer 7

Margin of safety: the amount by which the sales level exceeds the break-even level of output.

Question 8

Define contribution per unit

Answer 8

Contribution per unit: selling price less variable cost per unit.

Question 9

Define budget holder

Answer 9

Budget holder: individual responsible for the initial setting and achievement of a budget.

Question 10

Define variance analysis

Answer 10

Variance analysis: calculating differences between budgets and actual performance, and analysing reasons for such differences.

Question 11

Define budget

Answer 11

Budget: a detailed financial plan for the future.

Question 12

Define delegated budgets

Answer 12

Delegated budgets: giving some delegated authority over the setting and achievement of budgets to junior managers.

Question 13

Define incremental budget

Answer 13

Incremental budgeting: uses last year’s budget as a basis and an adjustment is made for the coming year.

Question 14

Define flexible budgeting

Answer 14

Flexible budgeting: cost budgets for each expense are allowed to vary if sales or production vary from budgeted levels.

Question 15

Define zero budgeting

Answer 15

Zero budgeting: setting budgets to zero each year and budget holders have to argue their case to receive any finance.

Question 16

Define adverse variance

Answer 16

Adverse variance: exists when the difference between the budgeted and actual figure leads to a lower-than-expected profit.

Question 17

Define favorable variance

Answer 17

Favourable variance: exists when the difference between the budgeted and actual figure leads to a higher- than-expected profit