Cost estimation and behaviour

Question 1

What is the 3 primary functions of management and cost accounting?

Answer 1

1. Allocate costs between the cost of goods sold and inventories for internal and external profit reporting.
2. Provide relevant information to help managers make better decisions.
3. Provide information for planning, control and
   performance measurement.

Question 2

What is a cost object?

Answer 2

A cost object is any activity for which a separate measurement of costs is desired.

Question 3

Define direct costs

Answer 3

Costs that can be specifically and exclusively identified with a particular object

Question 4

Define indirect costs

Answer 4

They cannot be identified specifically with a given cost object

Question 5

Define raw materials

Answer 5

Inventories consisting of purchased raw materials in stock awaiting use in the manufacturing process.

Question 6

Define work in progress

Answer 6

Inventory (also called work in process) consisting of partially complete products awaiting completion.

Question 7

Define finished goods

Answer 7

Inventory consisting of fully completed products that have not yet been sold.

Question 8

Define direct material costs

Answer 8

Represent those material costs that can be specifically and exclusively identified with a particular cost object.

In manufacturing organisations where the cost object is a product, physical observation can be used to measure the quantity consumed by each individual product, and the cost of direct materials can be directly charged to them.

Question 9

Define direct labour

Answer 9

Costs are those labour costs that can be specifically and exclusively identified with a particular cost object. Physical observation can be used to measure the quantity of labour used to produce a specific product or provide a service. The direct labour cost in producing a product includes the cost of converting the raw materials into a product, such as the costs of the machine operatives engaged in the production process in the manufacture of televisions.

Question 10

Define product costs

Answer 10

Are those identified with goods purchased or produced for resale. In a manufacturing organization, they are costs attached to the product and included in the inventory valuation for finished goods or for partly completed goods (work in progress) until they are sold; they are then recorded as expenses and matched against sales to calculate profit.

Question 11

Define period costs

Answer 11

Are those costs that are not specifically related to manufacturing or purchasing a product or providing a service that generates revenues. Therefore they are not included in the inventory valuation and, as a result, are treated as expenses in the period in which they are incurred. Hence no attempt is made to attach period costs to products for inventory valuation purposes.

Question 12

Explain variable costs

Answer 12

The total amount of a variable cost increases in proportion to the increase in an activity. The total amount of a variable cost will also decrease in proportion to the decrease in an activity.

Question 13

Explain fixed costs

Answer 13

Fixed costs are those which do not change with the level of activity within the relevant range. These costs will be incurred even if no units are produced.

Question 14

Explain step-fixed costs

Answer 14

Costs that behave in this manner are described
as semi fixed or step fixed costs .
The distinguishing feature of step fixed costs is that within a given time period, they are fixed within specified activity levels, but they are eventually subject to step increases or decreases by a constant amount at various critical activity levels.

Question 15

Distinguish between relevant and irrelevant cost and revenues

Answer 15

Relevant costs and revenues are those future costs and revenues that will be changed by a decision, whereas irrelevant costs and revenues will not be affected by the decision.

Question 16

Distinguish between avoidable and unavoidable costs

Answer 16

• Avoidable costs are those costs that may be saved by not adopting a given alternative, whereas unavoidable costs cannot be saved . Only avoidable costs are relevant for
  decision making purposes.
• The rule is to accept those alternatives that generate revenues which exceed the avoidable costs .
• Unavoidable costs are ignored since they will not be affected by the decision.

Question 17

Explain sunk cost

Answer 17

These costs are the cost of resources already incurred where the total will be unaffected by the choice between various alternatives. They are costs that have been created by a decision made in the past and that cannot be changed by any decision that will be made now or in the future.

Question 18

True or false

Sunk costs are relevant for decision making, but not all relevant costs are sunk costs.

Answer 18

False

Sunk costs are irrelevant for decision making, but not all **irrelevant ** costs are sunk costs.

Question 19

Explain opportunity costs

Answer 19

Opportunity cost is a cost that measures the opportunity that is lost or sacrificed when the choice of one course of action requires that an alternative course of action is given up.

Question 20

True or False

Opportunity costs are of vital importance for decision making. If no alternative use of resources exists then the opportunity cost is zero, but if resources have an alternative use, and are scarce, then an opportunity cost does exist.

Answer 20

True

Question 21

Explain least squares regression

Answer 21

• Statistical approach to determine equation of the line.
• All the data points are included in the calculation.
• The best fit line is the line that reduces the sum of the squares of the regression errors.
• A regression error is the distance between the line and the point.
• The most accurate method, but seldom used.