Concepts related to costs Flashcards
management accounting is…
- 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
cost object
it is the good or the service whose cost is to be valued (to respond to a particular need, to make a decision)
total cost
sum of all resources required in the production of a cost object
average cost
- total cost divided by the number of units produced
- regular order (regular sales, units already manufactured)
incremental cost (marginal cost)
- cost of the resources consumed by the last unit produced
- special order (additional sales, units not yet manufactured)
unit cost
average cost and incremental cost
historical cost
cost recorded upon purchase (past cost)
market value
value of a good or service on the market (current cost)
forecasted cost
estimated future cost
present value
present value of a future cost (forecasted cost)
costs linked with time
- historical costs
- market value
- forecasted cost
- present value
costs linked with a decision
- relevant cost
- sunk costs
- opportunity cost
- differential cost (differential revenue)
costs
- financial information the most likely to influence a decision
- don’t all have same usefulness for decision-making
true or false: qualitative elements must not also be considered in the decision-making process?
false
relevant cost
- 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)
sunk cost
- cost arising from a past irrevocable decision and that cannot be charged regardless of the decision taken
- never relevant for decision- making
opportunity cost
- 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
differential cost (differential revenue)
- 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
Costs linked to volume
- fixed costs
- variable costs
- fixed costs by increment (non linear)
- variable costs by increment ( non linear)
- mixed costs
total costs
= fixed costs (a) + variable costs (bx)
relevant range: zone in which the volumes are the most likely to be observed in a given period
variable costs
= total variable cost proportional to activity level
- variable unit cost is a constant
- relevant range: valid assumption within a specific zone of activity level
fixed costs
- total fixed cost is a constant
- unit fixed cost dependant on volume
cost controllability (influences, time frames)
influences: - who determines the costs (manager, other within the organization, others outside of the organization) time frame considered: - short term - long term
cost controllability
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
