Chapter 4: Costs and Cost Analysis

Question 1

Difference between the term “cost” between economic and accounting disciplines.

Answer 1

Implicit vs. Explicit costs
Economic cost: includes consideration of opportunity costs (implicit costs)
Accounting cost: explicit/out of pocket costs

Question 2

Opportunity Cost

Answer 2

The value forgone for not using a resource for the second-best alternative purpose

Question 3

Direct Costs

Answer 3

Costs easily traced to an objective, such as a service, project, program, activity, or department

Question 4

Indirect Costs

Answer 4

Costs not readily identifiable with a particular objective, but necessary for general operation. Benefit more than one project, difficult to trace precise benefit.

Question 5

Cost Accounting

Answer 5

Accounting system set up so that costs can be identified with the programs they benefit

Question 6

Solution to difficulty of allocating indirect costs to programs

Answer 6

Pick a method right for your organization, and stay consistent over time

Question 7

Program Centers (nonprofit department)

Answer 7

Deliver services directly to clients

Question 8

Support Centers (nonprofit department)

Answer 8

Provide services to program centers (administration & fundraising, for example)

Question 9

Two methods of allocating costs to program centers/departments

Answer 9

1. Step-Down Method (more accurate)

2. Direct Method

Question 10

Step-Down Method

of allocating costs to program centers/departments in a nonprofit

Answer 10

First transfers costs to service centers, and then down to program centers, following a step-by-step flow map. More accurate than the Direct Method.

Question 11

Direct Method

of allocating costs to program centers/departments in a nonprofit

Answer 11

Method of cost allocation. Less accurate than the step-down method.

Question 12

Fixed Costs

Answer 12

Cost elements that remain constant over a certain volume of activity

Question 13

Variable Costs

Answer 13

Costs that vary in direct proportion with service volume

Question 14

Step Costs

Answer 14

Costs that remain constant but increase to new levels in steps at certain levels of activity or usage

Question 15

Average Costs

Answer 15

AC = TC / Q

Average Costs = Total Costs divided by Quantity of Units

Question 16

Marginal Cost

Answer 16

Cost to produce one more unit of goods or services

Question 17

Economies of Scale

Answer 17

Average cost of a program declines as the number of units increases

Question 18

Marginal Analysis

Answer 18

Marginal benefits are compared with estimated marginal costs

Question 19

Marginal Benefits

Answer 19

Benefit created when one more unit of good or service is produced

Question 20

Break-Even Analysis

Answer 20

Tool used in evaluating potential financial result of adding new service or program.
Determines number of units of services that must be sold or reimbursed at a given price, to recover the cost of initiating and operating a new service or program.
Break-even point is service level at which revenue is exactly equal to expenses.