Intro to MA, cost terms, concepts & classifications (lecture 2)

Question 1

Definition of Cost and Cost Object

Answer 1

Cost: Expenditure incurred for acquiring or rendering a given thing(product or service)
Cost Object: Any act that needs a measurement of its costs.

Question 2

Manufacturing vs Merchandising vs Service organisations

Answer 2

Manu- Purchase raw materials to convert them into final goods using direct materials, labour and MOH.
Merch- Sell findished goods they purchased.
Serv- Provide tasks/product offering/services

Question 3

Costs can be classified into?

Answer 3

Direct materials- These become part of the product/cost object.
Direct labour- labour used to produce/provide a product/service.
Indirect costs- Can’t be attributed to a specific cost object e.g indirect labour, materials & expenses. Manu Overhead is one.

Question 4

Prime v Conversion costs

Answer 4

Prime- Direct materials+Labour
Conversion- Direct labour+MOH

Question 5

Product v Period costs

Answer 5

Product- direct costs, treated as COGS. Kept as inventory when unsold(SOFP) and expense when sold(SOPL)
Period- Indirect costs, treated as an expense(SOPL)

Question 6

What are the four cost behaviours?

Answer 6

1)Fixed- Remain constant.(Total are constant while Unit decrease propor with act level)
2)Semi-fixed/step- Fixed for a short period of time.
3)Variable- Vary in proportion to volume(Total are linear while Unit are constant)
4)Semi-variable/mixed- Has both a variable and fixed costs component to it.

Question 7

Relevant v Irrelevant costs and revenues

Answer 7

Relevant- Future costs and revenues that change by a decision.
Irrelevant- Not affected by a decision.

Question 8

Avoidable v Unavoidable costs

Answer 8

Avoid- Costs saved by not adopting a given alternative(relevant)
Unavoid- Can’t be saved(irrelevant)

Question 9

Sunk v Opportunity

Answer 9

Sunk- Cost of resources already acquired where the total will be unaffected by the choice of various alternatives(they’re irrelevant)
Opportunity- Cost that measures the benefit lost when choosing one choice over the alternative.

Question 10

Incremental/differential v Marginal Costs

Answer 10

Incremental/ differential costs- Difference in cost of each alternative action that is considered.
Marginal costs- Add cost of one extra unit of output.