Cost and Cost Behavior Flashcards
Management accounting aims…
…to provide info to management in order to help them make decisions that will result in max shareholder value.
FR vs Management accounting
External / internal users Framework (IFRS, none) Reporting period (past, past & future)
Cost behavior is…
…the relationship between cost and activity. Helps us understand costs and what drives them up.
Variance is…
…the diff between our set budget and what we actually did
Fixed costs
behavior stays the same
Variable costs
change depending on activity level
Cost behavior helps us to…
(variable / fixed)
- plan & budget costs
- control costs
- make decisions
Cost traceability helps us to…
(direct or indirect)
estimate the cost of goods and services
Cost controllability helps us to…
(controllable / uncontrollable)
measure the performance of departments and managers
Value chain helps us to…
(upstream / downstream)
analyze cost structure and identify strategies to control and manage costs and how they are incurred
Manufacturing costs examples
direct material
direct labor
manufacturing overheads
Timing of expenses examples
period costs
product costs
Managers objectives
- develop & pursue a strategy for managing the bus
- maximize shareholder wealth
What do managers need to know so they pursue their objectives?
- they need to understand the bus environment
- need to know which economic cycle they’re in
Managerial decision-making process
- identify objectives
- search for alternative courses of action
- select appropriate courses of actions
- implement decisions
- compare planned & actual outcomes
- respond to divergencies from the plan
Cost estimation is…
the process of determining cost behavior, often focuses on historical data
Cost prediction is…
using knowledge of cost behavior to forecast the cost level of a particular activity level
Cost objective is…
any activity for which a separate measurement of cost is required
Direct costs are…
directly / physically traced to your p&s
How are indirect costs allocated?
Using an allocation base
Prime cost =
DL + DM + Direct exp
Production cost =
Prime cost + manufacturing overheads
Total cost =
Production cost + other overheads
If a cost is controllable…
management can influence the cost (quantity and price paid)
If a cost is uncontrollable…
management can’t influence the cost
Three levels to assess performance
- Cost level
- Price
- Activity level
Product costs are…
costs identified with the goods purchased for resale or produced for sale
Non-manufacturing costs are…
necessary to keep the business activities going but aren’t involved in the physical manu process (period costs)
What converts raw mat to FG?
labor and manu overheads
Period costs are…
costs incurred during a period of time that are not calculated into the cost of goods sold
Inv costs should include…
- conversion costs
- purchase costs
- costs incurred to bring it to present location
Inv costs should NOT include…
- abnormal waste
- storage costs
- selling costs
- admin costs not related to production
Value chain definition
A set of integrated value-creating activities. By examining value chain, the bus can change their activities and reduce supplier cost.
Value chain examples
- research & development
- design
- production
- marketing
- distribution
Support services examples
IT, HHR, telecommunications
Differential costs are…
the diff between the costs of each alternative action under consideration (incremental costs)
Irrelevant costs are…
future costs and revenues that will not be affected by a decision
Opportunity costs are…
costs that measure the opportunity sacrificed when the choice of one course of action requires that an alternative is given up
Sunk costs are…
costs that have been incurred by a decision made in the past and that cannot be changed by any future decision
Unavoidable costs are…
costs that cannot be saved, whether or not an alternative is adopted
Direct material / labor costs are…
costs that specifically & exclusively identify with a particular cost object
Indirect costs are…
costs that cannot be specifically & exclusively identify with a particular cost object
Mixed costs are…
contain both a fixed & variable components
Semi/Step-fixed costs are…
remain fixed within specific activity levels for a specific amt of time but eventually inc/dec by a constant amt of critical activity levels
Nature of costs
non-manu / manu
direct / indirect
Behavior of costs
variable / fixed
Cost drivers…
drive costs up and down
What is a cost?
A resource sacrificed in order to achieve a certain obj.
Primary material?
the basic raw material converted to FG (direct cost)
Secondary material?
used in manufacturing process which contributes to the conversion process (indirect costs)
What affects productivity?
- Employee attitude towards work / the employer
- Capacity at which employees work
- Employee skills
- Work env
Different employment records?
- personnel: employee history, contract
- job cards: time spent on task
- clock cards: supplies indisputable evidence of employee attendance
- production reports: total hours worked
Curvilinear cost?
an expense that increases at an inconsistent rate as production volume increases
Step-variable cost?
a cost that generally varies with activity level but tends to be incurred at certain discrete points and to involve large changes in amount when these points are reached
