Cost Analysis

Question 1

What is cost?

Answer 1

Cost is the amount of resources given up in exchange for goods or services, expressed in monetary units.

Question 1

What are direct costs?

Answer 1

Direct costs are easily traceable to a product or costing unit, e.g., the cost of wood for making furniture. Also called traceable costs.

Question 2

What are indirect costs?

Answer 2

Indirect costs are difficult to trace to a single product and are common to several products, e.g., the salary of a factory manager. Also called common costs.

Question 3

How are costs classified?

Answer 3

Costs are classified as:

Manufacturing costs (direct material, direct labor, overheads).
Non-manufacturing costs (marketing, administrative expenses, etc.).
Fixed costs (remain constant regardless of production).
Variable costs (change with production level).
Mixed costs (contain both fixed and variable components).

Question 4

What are the elements of manufacturing cost?

Answer 4

Direct material cost: Cost of raw materials used in production.
Direct labor cost: Cost of labor directly involved in production.
Manufacturing overheads: Other input costs like electricity, machine depreciation.

Question 5

What are non-manufacturing costs?

Answer 5

Non-manufacturing costs include marketing, advertising, administrative expenses, and non-manufacturing overheads like electricity for non-production purposes.

Question 6

What is break-even analysis?

Answer 6

Break-even analysis, also called cost-volume-profit (CVP) analysis, determines the level of sales at which total revenues equal total costs, leading to neither profit nor loss.

Question 7

How does a change in fixed costs affect the break-even point?

Answer 7

Decrease in fixed costs → Break-even point shifts to the left (reached earlier).
Increase in fixed costs → Break-even point shifts to the right (reached later).

Question 8

How does a change in variable costs affect the break-even point?

Answer 8

Increase in variable costs → Break-even point shifts right (more units needed for break-even).
Decrease in variable costs → Break-even point shifts left (fewer units needed for break-even).

Question 9

What is the profit/volume (P/V) ratio?

Answer 9

P/V ratio is the percentage of contribution margin to sales, indicating the rate at which profit increases with sales volume.

Question 10

How is P/V ratio calculated?

Answer 10

P/V ratio = (Sales - Variable Costs) / Sales
P/V ratio = Contribution / Sales

Question 11

What is margin of safety (M.S.)?

Answer 11

The margin of safety is the difference between actual sales and break-even sales. It indicates how much sales can drop before the company incurs a loss.

Question 12

How is margin of safety calculated?

Answer 12

M.S. = Total Sales - Break-even Sales
M.S. = Profit / P/V Ratio

Question 13

What is marginal cost?

Answer 13

Marginal cost is the cost of producing one additional unit of a product.

Question 14

What is marginal revenue?

Answer 14

Marginal revenue is the additional revenue earned from selling one more unit of a product.

Question 15

What is a sunk cost?

Answer 15

Sunk cost refers to the cost that has already been incurred and cannot be recovered. It should not be considered in future decision-making.

Question 16

What is opportunity cost?

Answer 16

Opportunity cost is the return that is foregone by choosing one alternative over another. It’s the cost of the next best option.

Question 17

How do you calculate the contribution margin?

Answer 17

Contribution = Sales - Variable Costs

Question 18

What is the formula for profit?

Answer 18

Profit = Contribution - Fixed Costs

Question 19

What are recurring costs?

Answer 19

Recurring costs are expenses that repeat at regular intervals and are necessary for ongoing operations, such as maintenance, utilities, salaries, and consumables.

Question 20

Give an example of recurring costs in a civil engineering project.

Answer 20

In a civil engineering project to maintain a bridge, recurring costs might include monthly inspections, salaries for maintenance personnel, and annual painting expenditures.

Question 21

What are nonrecurring costs?

Answer 21

Nonrecurring costs, or one-time costs, are expenditures not expected to repeat once the project is complete, such as design and development, equipment purchase, prototyping, and training.

Question 22

Provide an example of nonrecurring costs in a mechanical engineering project.

Answer 22

In a mechanical engineering project to design a new engine, nonrecurring costs could include research and development, purchasing specialized equipment, and conducting performance testing.

Question 23

What are incremental costs?

Answer 23

Incremental costs are additional expenses incurred by making a specific decision or undertaking a particular action, often arising when evaluating alternatives in a project.

Question 24

How do you calculate incremental costs in bridge design?

Answer 24

Incremental costs in bridge design might include differences in construction costs, engineering fees, maintenance costs, and environmental impact costs between two design options.

Question 25

Define cash cost.

Answer 25

Cash cost refers to the actual expenditure of cash for a transaction or operation, representing cash outflow from a company’s accounts.

Question 26

Define book cost.

Answer 26

Book cost is the cost of an asset recorded in a company’s accounting records, including historical cost, depreciation, and adjustments made over time.

Question 27

What are the key differences between cash cost and book cost?

Answer 27

Cash cost is the actual cash outlay, while book cost is the accounting value.
Cash cost affects liquidity, while book cost influences financial statements.
Cash cost is immediate, while book cost involves accounting principles.