Costing (LECTURE 1)

Question 1

AVOIDABLE COSTS

Answer 1

Costs that may be saved by not adopting a given alternative.

Question 2

CONVERSION COSTS

Answer 2

The sum of direct labour and manufacturing overhead costs; it is the cost of converting raw materials in to finished products.

Question 3

COST ALLOCATION

Answer 3

The process of assigning costs to cost objects when a direct measure of the resources consumed by these cost objects does not exist.

Question 4

COST OBJECT

Answer 4

Any activity for which a separate measurement of cost is desired.

Question 5

DIFFERENTIAL / INCREMENTAL COSTS

Answer 5

The difference between the costs of each alternative actin under consideration.

Question 6

DIRECT LABOUR COSTS

Answer 6

Labour costs that can be specifically and exclusively identified with a particular cost object.

Question 7

DIRECT MATERIALS COSTS

Answer 7

Material costs that can be specifically and exclusively identified with a particular cost object.

Question 8

FIXED COSTS

Answer 8

Costs that remain constant for a specified time period and which are not affected by the volume of activity.

Question 9

INDIRECT COSTS / OVERHEADS

Answer 9

Costs that cannot be identified specifically and exclusively with a given cost object.

Question 10

IRRELEVANT COSTS AND REVENUES

Answer 10

Future costs and revenues that will not be affected by a decision.

Question 11

MARGINAL COST

Answer 11

The additional cost of one extra unit of output.

Question 12

MARGINAL REVENUE

Answer 12

The additional revenue from one extra unit of output.

Question 13

MIXED COSTS / SEMI VARIABLE COSTS

Answer 13

Costs that contain both a fixed an variable component.

Question 14

OPPORTUNITY COSTS

Answer 14

Costs that measure the opportunity that is sacrificed when the choice of one course of action requires that an alternative is given up.

Question 15

PERIOD COSTS

Answer 15

Costs that are not included in the inventory valuation of goods and which are treated as expenses for the period in which they are incurred.

Time period costs are expensed in the accounting period to which they relate.

Question 16

PRIME COST

Answer 16

The sum of all direct manufacturing costs.

Question 17

PRODUCT COSTS

Answer 17

Costs that are identified with goods purchased or produced for resale and which are attached to products and included in the inventory valuation of goods.

Inexorably and intrinsically linked with the production/service provision process.

Expensed when the product is sold, or the work is invoiced to the client.

Question 18

RELEVANT COSTS AND REVENUES

Answer 18

Future costs and revenues that will be changed by a decision.

Question 19

RESPONSIBILITY ACCOUNTING

Answer 19

Accounting that involves tracing costs and revenues to responsibility centres.

Question 20

RESPONSIBILITY CENTRE

Answer 20

A unit or department within an organisation for whose performance a manager is held responsible.

Question 21

SEMI-FIXED COSTS / STEP-FIXED COSTS

Answer 21

Costs that remain fixed within specified activity levels for a given amount of time but which eventually increase or decrease by a constant amount at critical activity levels.

Question 22

SUNK COSTS

Answer 22

Costs that have been incurred by a decision made in the past and that cannot be changed by any decision that will be made in the future.

Question 23

UNAVOIDABLE COSTS

Answer 23

Costs that cannot be saved, whether or not an alternative is adopted.

Question 24

VARIABLE COSTS

Answer 24

Costs that vary in direct proportion to the volume of activity.

Question 25

What is the steps of decision making?

Answer 25

1. Setting objectives.
Maximise shareholder wealth?
Too simplistic.
Wide range of stakeholders.
Profit maximisation?
Promotes survival of the business entity which keep stakeholders satisfied. 

2. We need to take a decision relevant approach to costs and exclude any costs unaffected by the decision.
3. Need to monitor and control the subsequent performance of the project via periodic performance reports and analysis divergences from the plan.
4. We seek and evaluate explanations from colleagues for any such variances.

Question 26

What was traditional score-keeping designed for?

Answer 26

An era in which:

• Few suppliers made goods for mostly local consumption.
• Demand was high, prices could be set high due to absence of competition.
• Labour costs were relatively high but labour was often cheap, unskilled and plentiful.
• Fixed O/H were really low.
• Production was mainly for inventory, with no definite buyer in mind.

Question 27

What changes have occurred to businesses since 1980’s?

Answer 27

• Shorter product life cycles.
• A bigger proportion of fixed costs being built into items at design stage.
• More exacting customer requirements.
• Much greater choice.
• Globalisation.
• Big changes in service providers.

Question 28

How do you identify the cost object?

Answer 28

1. The accumulation and classification of costs.

2. The assignation of these costs to the cost object.

Question 29

What kind of inventories do primary producers generally have?

Answer 29

Raw materials.

Question 30

What are direct materials replaced by in the case of merchandisers and service providers?

Answer 30

Purchases for resale.

Question 31

What is an important distinction to make in a manufacturing environment?

Answer 31

Distinction between manufacturing and non-manufacturing overheads.

Question 32

COST BEHAVIOUR

Answer 32

Nothing to do with profit measurement and inventory valuation.

Essentially it’s an important decision-making and planning approach to cost classification.

Graphical representation of cost (vertical axis) against volume (horizontal axis).

Assumes a linear relationship and a short-term outlook.

Question 33

Fixed cost graph.

Answer 33

Fixed costs are constant and static despite changing volumes.

Parallel to horizontal axis.

E.g. factory business rates.

Unit fixed cost declines with increased production.

Question 34

Variable cost graph.

Answer 34

Variable costs vary directly with changing levels of production.

Straight diagonal line.

E.g. direct materials

Unit variable cost is constant over the “relevant range”.

Question 35

Semi-variable cost graph.

Answer 35

Graph with a cost line parallel to the horizontal for long periods of activity. At a specific point, the line changes direction, and slopes upwards.

E.g. planned maintenance, land line, and contract mobile telephone charges, sales person salaries where mixture of basic plus commission is paid.

Question 36

How do you separate fixed costs from variable costs?

Activity:
2,000 units
Cost:
£9,000

Activity:
3,000 units
Cost:
£13,000

Activity:
5,000 units
Cost:
£21,000

Answer 36

HIGH LOW METHOD:

Between each 1,000 units, there is a £4,000 cost increment. So unit variable cost is (£4,000/1,000) = £4.

To make 2,000 units, total variable cost would be £8,000.

However, total cost at 2,000 units was £9,000.
The missing £1,000 is therefore fixed cost.

Question 37

Semi fixed cost graph.

Answer 37

Behaves like any fixed cost over a given range of production, but at a critical point increases vertically to set off a new “plateau”.

E.g. supervisor wages.

Question 38

DIFFERENTIAL COSTING

Answer 38

We typically assess the total impact of a planned change. Anything which is not differential is not relevant.

Question 39

What responsibility centres are identified?

Answer 39

Cost
Revenue
Profit
Investment

Question 40

What must costs assigned to each responsibility centre be divided into?

Answer 40

Controllable costs

Uncontrollable costs