Cost Concepts

Question 1

What is cost classification?

Answer 1

A matter of grouping together costs which share the same attributes relative to a stated cost objective

Question 2

What is the cost objective/object?

Answer 2

Any activity for which a separate measurement of costs is required e.g cost of a product or service (The purpose we need the info for)

Question 3

What are some of the reasons costs can be assigned to objects?

Answer 3

Pricing, profitability and control

Question 4

What should the cost objective determine?

Answer 4

The classification to be used

Question 5

What may changing the cost objective do?

Answer 5

Alter the categorisation of a specific cost within a given classification

Question 6

Cost collection systems ordinarily account for costs in two stages:

Answer 6

They ‘accumulate costs by classifying them into certain categories such as by type of expense (e.g direct labour, direct materials and indirect costs) or by cost behaviour (such as fixed or variable costs). It then assigns these costs to cost objectives’

Question 7

What are the main cost objectives?

Answer 7

• Assigning costs to cost objects - traceability (direct or indirect costs)
• Financial reporting - inventoriable or expensed (product or period costs)
• Predicting cost behaviour in response to changes in activity (fixed or variable costs)
• Assessing performance (controllable or uncontrollable costs)
• Making decisions (differential, sunk, opportunity costs)

Question 8

What do retailers do?

Answer 8

Buy finished goods and sell finished goods
- They accumulate the purchased cost of goods
- They have only one type of inventory (merchandise inventory)

Question 9

What do manufacturers do?

Answer 9

Buy raw materials, then produce and sell finished goods
- They must accumulate the costs of manufacturing products
- Their inventory consists of materials, work in progress and finished goods

Question 10

What do both manufacturers and retailers report?

Answer 10

• The cost of unsold goods on the Statement of Financial Position
• The cost of goods sold on the Statement of Profit or Loss

Question 11

Where does the closing inventory get recorded?

Answer 11

Into the Statement of Financial Position

Question 12

Where does the cost of sales get recorded?

Answer 12

Into the Statement of Profit or Loss

Question 13

Where does the closing finished goods inventory get recorded?

Answer 13

Statement of Financial Position

Question 14

Where does the cost of goods sold get recorded?

Answer 14

Statement of Profit or Loss