Concepts related to costs

Question 1

management accounting is…

Answer 1

• part of the information system of an organisation
• supplies information that is useful and relevant to the decision making process
• helps managers to optimize resources, make decisions, plan activities, coordinate resources, mesures and control organisation performance

Question 2

cost object

Answer 2

it is the good or the service whose cost is to be valued (to respond to a particular need, to make a decision)

Question 3

total cost

Answer 3

sum of all resources required in the production of a cost object

Question 4

average cost

Answer 4

• total cost divided by the number of units produced

- regular order (regular sales, units already manufactured)

Question 5

incremental cost (marginal cost)

Answer 5

• cost of the resources consumed by the last unit produced

- special order (additional sales, units not yet manufactured)

Question 6

unit cost

Answer 6

average cost and incremental cost

Question 7

historical cost

Answer 7

cost recorded upon purchase (past cost)

Question 8

market value

Answer 8

value of a good or service on the market (current cost)

Question 9

forecasted cost

Answer 9

estimated future cost

Question 10

present value

Answer 10

present value of a future cost (forecasted cost)

Question 11

costs linked with time

Answer 11

• historical costs
• market value
• forecasted cost
• present value

Question 12

costs linked with a decision

Answer 12

• relevant cost
• sunk costs
• opportunity cost
• differential cost (differential revenue)

Question 13

costs

Answer 13

• financial information the most likely to influence a decision
• don’t all have same usefulness for decision-making

Question 14

true or false: qualitative elements must not also be considered in the decision-making process?

Answer 14

false

Question 15

relevant cost

Answer 15

• cost that is to be considered in the evaluation of a project or a proposition
• relevance is to be defined in the link with the decision (it is the context that makes the cost relevant or not)
• a cost is relevant or not depending on the decision considered (if it could alter that decision)

Question 16

sunk cost

Answer 16

• cost arising from a past irrevocable decision and that cannot be charged regardless of the decision taken
• never relevant for decision- making

Question 17

opportunity cost

Answer 17

• shortfall caused by the renunciation of an option considered best after the one considered (2nd best choice, gain foregone because of the choice made)
• always relevant for decision-making
• doesn’t generate cash flow because it doesn’t result form a transaction that will actually occur

Question 18

differential cost (differential revenue)

Answer 18

• used when more than one option is considered in order to improve the decision-making process (helps make a choice)
• cost (revenue) option A - cost (revenue) option B
• gives information on the difference of the 2 options considered

Question 19

Costs linked to volume

Answer 19

• fixed costs
• variable costs
• fixed costs by increment (non linear)
• variable costs by increment ( non linear)
• mixed costs

Question 20

total costs

Answer 20

= fixed costs (a) + variable costs (bx)

relevant range: zone in which the volumes are the most likely to be observed in a given period

Question 21

variable costs

Answer 21

= total variable cost proportional to activity level

• variable unit cost is a constant
• relevant range: valid assumption within a specific zone of activity level

Question 22

fixed costs

Answer 22

• total fixed cost is a constant

- unit fixed cost dependant on volume

Question 23

cost controllability (influences, time frames)

Answer 23

influences:
- who determines the costs (manager, other within the organization, others outside of the organization)
time frame considered:
- short term 
- long term

Question 24

cost controllability

Answer 24

discretionary costs
- controllable costs (short term basis)
- planned through the budgetary process)
- arise form the manager's decision 
incurrent costs 
- non-controllable costs (short term basis)
- caused by previous decisions 
- usually fixed