Cost Classification

Question 1

What characteristics are the perspectives from which cost info are viewed based on?

Answer 1

Cost behaviour, Assignment, Relevance, Function and Timing

Question 2

What is a VARIABLE cost?

Answer 2

It increases/decreases in proportion with the level of activity

Question 3

What is FIXED cost?

Answer 3

A cost that in total is unresponsive to change in activity. (Cost per unit would decrease as activity increase)

Question 4

Is fixed costs, fixed for ALWAYS?

Answer 4

No, only fixed for a specific period of time (example: salary increase yearly)

Question 5

What is a STEP cost?

Answer 5

Cost that is available only in fixed allotments - it varies with activity, but in a stepwise rather than linear

Question 6

What is a MIXED cost?

Answer 6

Consists of 2 components: usually fixed and variable (example: telephone - fixed rental & variable call charges depending on length)

Question 7

How does a mixed cost change with activity level?

Answer 7

Need to be split in the fixed and variable components first before it can be determined

Question 8

Why do auditors carry out audit procedures?

Answer 8

To gain assurance that the FS are free from material misstatement

Question 9

What is cost ASSIGNMENT?

Answer 9

Tracing or allocating costs to cost objects

Question 10

What is a cost object?

Answer 10

The item to which the cost is to be traced or allocated

Question 11

What is a DIRECT cost?

Answer 11

When it is feasible to trace the cost to the cost object

Question 12

What is a INDIRECT cost?

Answer 12

When it is impossible or not feasible to trace the cost to the cost object

Question 13

Are indirect costs then not assigned to cost objects?

Answer 13

Not necessarily, they can be traced to cost objects on some reasonable basis

Question 14

What is a synonym for indirect costs?

Answer 14

Overhead Costs

Question 15

What is RELEVANT costs?

Answer 15

To determine the financial effect of a decision

Question 16

Three attributes of a relevant cost

Answer 16

1. A future cost: value is determined by future cash flows (cost that has already happened cannot be changed by a decision (sunk cost))
2. A differential cost: If a cost will not be changed by the decision, then it is irrelevant
3. A cash flow: non-cash items (depreciation) are irrelevant for establishing the financial effect of the decision

Question 17

What is an OPPORTUINITY cost?

Answer 17

The best benefit forgone by taking the proposed course of action

Question 18

What is a DIFFERENTIAL cost?

Answer 18

A cost that differs between 2 alternatives

Question 19

What is a SUNK cost?

Answer 19

A cost that has been already incurred and cannot be altered, and therefore not relevant

Question 20

What is the FUNCTION of a cost?

Answer 20

It refers to the classification of costs in the FS in accordance with the function (or purpose)

Question 21

Is function an aid to decision-making?

Answer 21

No, this is a matter of presentation

Question 22

Is function an aid to decision-making?

Answer 22

No, this is a matter of presentation

Question 23

When costs are classified by function, they are divided between what?

Answer 23

Inventoriable Costs and Non-inventoriable costs

Question 24

What is INVENTORIABLE costs?

Answer 24

Costs that are included in inventory (all costs required in order to bring inventory to its present location and condition)

Question 25

What is NON-INVENTORIABLE cost?

Answer 25

Operating costs: often subdivided into selling costs (sales commission) and admin costs (salary of accounting staff)

Question 26

Manufacturing costs are inventoriable and can be subdivided into what?

Answer 26

Direct materials, direct labour and manufacturing overheads

Question 27

Manufacturing costs are inventoriable and can be subdivided into what?

Answer 27

Direct materials, direct labour and manufacturing overheads

Question 28

What is DIRECT material?

Answer 28

The physical inputs that can be traced to the manufactured product

Question 29

What is DIRECT labour?

Answer 29

The amount of labour that is physically expended on a manufactured product

Question 30

What is MANUFACTURING OVERHEADS?

Answer 30

Manufacturing costs that are classified as indirect when the product is the cost object (indirect materials & indirect labour)

Question 31

What is manufacturing overheads further subdivided into?

Answer 31

Variable and fixed

Question 32

What is the TIMING of a cost?

Answer 32

When a cost is recognised as an expense

Question 33

What is a period cost?

Answer 33

A cost recognised as an expense immediately on being incurred

Question 34

What is a product cost?

Answer 34

In an absorption costing system are absorbed in inventory and expensed only when inventory is sold

Question 35

What is a product cost?

Answer 35

In an absorption costing system are absorbed in inventory and expensed only when inventory is sold

Question 36

What are manufacturing costs classified as in a absorption costing system?

Answer 36

Product costs (non-manufacturing costs are period costs)

Question 37

Name a few costs that would be regarded to get inventory into a saleable position

Answer 37

1. Manufacturing costs: raw materials, labour
2. Overheads: fixed & variable, typical expenses like depr, electricity, water, rent
3. Delivery costs: incurred to get the product to the location from where it is sold
4. Packaging costs: if any to get the product from where it will be sold (protective package)

Question 38

What is an alternative inventory costing system to the absorption costing?

Answer 38

The variable costing system - this is more useful for internal reporting & decision-making

Question 39

How does a variable costing system work?

Answer 39

It requires all FIXED costs to be recognised as an expense in the period in which they are incurred