Classification of Costs Flashcards
1
Q
What is a cost
A
- value of a resource used in:
- the manufacture of a product, such as, timber used to make a chair
- carrying out other business activities, such as, electricity used in an office
2
Q
3 Types of Costs
A
- Fixed costs
- Variable Costs
- Mixed costs
3
Q
What is a fixed cost and give 3 examples
A
- Fixed costs in total, within a relevant range, do not change with the number of products manufactured
- Rent
- Insurance
- Advertising
- Depreciation of plant + equipment
- Interest on loan
- Salary of an office manager
4
Q
Variable Costs definition + 2 Examples
A
- Costs, within a relevant range, that change in proportion with the products manufactured
- Examples include:
- Raw materials
- Wages of employees who manufacture a product
5
Q
Mixed costs definition and 2 Examples
A
- Costs contain both a fixed and a variable component
- Examples include:
- Electricity
- Telephone service
6
Q
What is a cost object
A
- Cost Object - defined as anything in a business that generates costs
- Department of a business
- Product manufactured by a business
7
Q
What are direct costs and an example
A
- A cost which can be easily linked to a particular cost object
- Material used to make a product
8
Q
What are indirect costs and an example
A
- A cost which cannot be easily linked to a particular cost object
- Material/Individual which indirectly lead to a final product
9
Q
What are product costs and 3 different types
A
- Is directly linked to the manufacture of a product i.e. wood and metal of furniture
- Split into 3 types:
- Direct Material
- Direct Labour
- Factory Overhead
10
Q
Direct Material definition + 2 examples
A
- Raw materials that are turned in finished products and can be easily linked to a product
- wood
- metal
- cloth - cotton + wool
11
Q
Direct labour definition
A
Wages of the employees who manufacture a product or provide a service to customers
12
Q
Factory Overhead definition + 2 examples
A
- Costs incurred in manufacturing a product that cannot be easily linked to a product
- Wages of supervisors
- Indirect Material
- Depreciation of machinery
- Rent
13
Q
Period Costs + 2 examples
A
- Costs linked to a particular accounting period but cannot be linked to a particular product
- Advertising
- Office Rent
14
Q
Sunk Costs vs Relevant Costs
A
Sunk Cost
- Past costs which cannot be changed in the future
Relevant Costs
- Future costs linked to a particular investment proposal
15
Q
What is a relevant range
A
- Relevant range is the length of time that goes by before the costs of the business change
