Lectures 1 - 4 Flashcards
A cost is
the sacrifice made, measured by the value of resources given up to achieve a particular purpose
Total costs =
Direct costs + Indirect costs
Direct costs are
costs that can be traced easily and conveniently to a product / department
Indirect costs are
costs that need to be allocated before theyre assigned to a product / department
opportunity costs
the potential benefit that is given up when one alternative is selected as opposed to another
cash/out of pocket cost
the incremental cost paid by cash or credit to achieve a purpose
Sunk cost
past payments for resources that cant be changed by any current/future decisions
Variable costs
vary in direct proportion to production values
committed costs
incurred due to a contractual obligation or policy
Fixed costs
costs that dont change
Product costs
related to the purchase or manufacture of goods for resale
Period costs
related to selling and admin operations
Gross margin ration=
(sales turnover-cost of sales) / sales turnover
Operating income =
gross margin - period expenses
return on sales ratio
operating income / sales
Service firm
provide a service that is consumed when produced - have no inventories
Retailers
buy finished goods and sell them
manufacturers
buy raw materials, produce and sell finished goods
direct materials
raw materials that can be traced back to a specific product
direct labour
payments to employees who convert DM into finished product
manufacturing overhead
indirect materials, indirect labour, other overhead
PRIME COSTS
direct materials + direct labour
CONVERSION COSTS
direct labour and manufacturing overhead
cost estimation is used to
manage costs, make strategic decisions and plan standards
mixed costs
has a fixed and variable component
non linear cost behaviour
curved cost
5 cost estimation methods
account analysis/linear regression/high-low/multiple regression/engineering estimate
Multiple regression analysis
has more than one independent variable
traditional costing systems
were created when manufacturing processes were labour intensive
Activity based costing is a
costing method that identifies activities performed in the company
activity based costing VS traditional based costing
level of complexity, cost and benefits are low with TC but hight with ABC
ABC 4 steps
1/identify and classify activities
2/estimate cost of each activity
3/calculate cost driver rate
4/assign activity costs to products using cost driver rate
COST DRIVER RATES
activity cost / activity volume
Customer profitability has 2 objectives
measure customer profitability &
identify effective and ineffective customer related activities
possible reasons to retain unprofitable customers
customer prestige/ knowledge/ expertise
Target costing
determine targets and redesign products and processes to achieve cost reduction target
ABM 3 further steps
5/identify value or non value added activities
6/score as high or low from customers PoV
7/enhance value added and reduce or eliminate non value added
value added activities
enhance the value of products and services in the eyes of customers whilst meeting the goals of the organisation
Non value added activities
do not contribute to customer perceived value
why do companies reduce non value added activities ?
competition and allocate the resources to value added activities
sources of non value added activities
producing defective products/processing time/moving products and workers
Necessary activities
arent value added or non value added
e.g. technological/policy/regulatory requirements
2 objectives of ABM
identify and reduce non value added activities
enhance value added activities
focus of ABC
developing improved product or service costs given current processes
focus of ABM
identifying opportunities to improve processes
resources necessary for ABM and ABC
management commitment
technology
personnel and time
