Lecture 1 - Introduction Flashcards
What is a cost object
The thing we want to know the cost of
What is a cost driver
It is the factor that causes a change in costs
What are direct costs
Costs that are easily traced to cost objects
What are overhead costs
Costs that are not easily traced to the cost object and must be allocated using a cost driver
What is variable costs
Costs that change in proportion with the volume of cost driver
What are fixed costs
Costs that do not change in proportion with volume of a cost driver within a certain range
What happens to fixed costs over the long-term
Fixed costs become variable costs over the long term. If a business either increases or decreases its business activity to the point that there is too little or too much capacity, the business may choose to invest or divest
What are product costs
Costs necessary to complete product at the manufacturing step (manufacturing) or to purchase and transport the product to the location of sale (merchandising)
What is the purpose of fixed and variable costs
To understand cost behaviour
What is the purpose of direct vs indirect costs
To estimate the costs of products, customers, and divisions
What is the purpose of product vs period costs
For financial reporting
What are period costs
Costs incurred in managing or selling the product (outside of the manufacturing step)
What are relevant costs
Costs that differ between alternative courses of action and affect future cash flows
What are irrelevant costs?
Costs that have already been incurred (sunk)
