Lecture 1 B Flashcards
What are fixed costs
Fixed costs are costs that do not change with the level of production or sales
What are some examples of fixed costs
Examples of fixed costs are:
- Rent for office or factory space
- Salaries of permanent employees
- Insurance premiums
- Depreciation
What are variable costs
Variable costs are costs that fluctuate in direct proportion to the level of production or sales
What are some examples of variable costs
Examples of variable costs are:
- Raw materials
- Direct labor
- Utilities
- Shipping costs
What are direct costs
Direct costs are costs that can be directly traced to the production of specific goods or services
How are direct costs incurred
Direct costs are incurred directly as a result of manufacturing or delivering a product
What are examples of direct costs
Examples of direct costs are:
- Direct materials
- Direct labour
What are indirect costs
Indirect costs are costs that are not directly traceable to a specific product or service but are necessary for the overall operation of the business
What are examples of indirect costs
Examples of indirect costs are:
- Rent for the building
- Utilities
- Administrative salaries
What are semi variable costs
Semi variable costs are costs that have both fixed and variable components
What are examples of semi variable costs
Examples of semi variable costs are:
- Utility bills
- Salaries of employees
- Maintenance costs
What are sunk costs
Sunk costs are costs that have already been incurred and cannot be recovered
Why are sunk costs irrelevant to future decisions
Sunk costs are irrelevant to future decisions because they cannot be altered
What are examples of sunk costs
Examples of sunk costs are:
- Money spent on research and development for a product that was discontinued
- Investment in a project that has already been completed
What is opportunity cost
Opportunity cost is the cost of forgoing the next best alternative when making a decision
What does opportunity cost represent
Opportunity cost represents the benefits that could have been obtained by choosing the alternative
What are marginal costs
Marginal costs are additional cost incurred by producing one more unit of output
Why are fixed costs irrelevant for short term decision making
Since fixed costs are incurred regardless of whether a decision is made to increase or decrease production, they are not relevant for short-term decisions
What is the primary goal of cost control
The primary goal of cost control is to ensure that a business’s actual costs align with its budgeted or expected costs
What can businesses ensure by closely monitoring and managing costs
By closely monitoring and managing costs, businesses can ensure they stay within budget and identify areas for improvement or potential inefficiencies
How does cost control work
Cost control works by:
- Budgeting
- Variance Analysis
- Cost Reduction
How does regularly comparing actual costs with budgeted costs help businesses
Regularly comparing actual costs with budgeted or standard costs helps identify variances and investigate the reasons for discrepancies
What is cost reduction
Cost reduction is identifying areas where costs can be reduced without affecting the quality or output of the business
What do businesses need to understand to ensure profitability
To ensure profitability, businesses need to understand their cost structure and set prices that cover both fixed and variable costs
What does cost plus pricing involve
Cost plus pricing involves calculating the total cost of producing a product and adding a markup to achieve the desired profit margin
What does break even analysis help businesses involve
Break even analysis helps determine the price at which a business can cover its fixed costs and start generating profit
Why is cost information helpful for short and long term decision making
Cost information is necessary for short-term and long-term decision-making, helping businesses choose the most cost-effective alternatives and make strategic decisions regarding operations
What are the three primary purposes of cost information
The three primary purposes of cost information are:
- Cost control and management
- Pricing decisions
- Decision making and financial planning
