Module 2 (lesson 3+4) Flashcards
What types of cost behaviours are there?
variable, fixed, and (mixed)
What is cost drivers?
The term for what causes a variable cost to change
What examples of cost drivers are there?
- Direct labour hours
- Machine hours
- Units produced or sold
- Miles driven
- Kilos produced
- Number of calls handled etc.
What types of cost drivers are there?
- Volume-based drivers
- Activity-based drivers
- Time-based drivers
- Complexity-based drivers
- Technology-based drivers
- Capacity-based drivers
Does the amount and types of variable cost in a company depend on what type of company it is and is set up?
Yes
- Public Utilities (e.g., E.ON): Few variable costs. They invest a lot in equipment and infrastructure. Their costs don’t change much with the amount of service they provide.
- Manufacturing Companies (e.g., Black and Decker): Many variable costs. Costs are related to making and shipping products. More production means higher costs for materials and shipping.
- Merchandising Companies (e.g., Ikea): High proportion of variable costs. The cost of buying merchandise to sell is a big part of their expenses and changes with the amount of merchandise they buy and sell.
- Service Companies: Examples: Café Rouge (restaurant), consulting firms, hospitals. Variable costs vary widely. Café Rouge: Higher variable costs due to the cost of ingredients.
Consulting or Medical Services: Large fixed costs due to expensive facilities and highly paid employees. Variable costs may be less significant compared to fixed costs.
What is true and step variable cost?
- True variable cost: Costs that change directly and smoothly with the level of activity. Examples are Direct materials like raw ingredients. If you make more products, you use more materials. If you make fewer products, you use fewer materials.
- Step-variable cost: Costs that change in chunks or steps rather than smoothly. Examples are wages for maintenance workers. Their cost doesn’t adjust smoothly but changes in bigger steps.
What types of fixex costs are there?
- Committed fixed costs: Fixed costs that comes from long-term investments and commitments. These costs are usually tied to the company’s basic infrastructure and long-term operations. Examples: depreciation, property taxed, insurance and salary.
- Discretionary fixed costs: Fixed cost that the company can adjust or eliminate in the short-term, often without impact the operation.
- Traceable fixed costs: Fixed costs that you can directly trace to a specific segment or product-
What is mixed costs?
Mixed costs contains both fixed and variable components. This means part of the cost stays the same no matter how much you produce or use, while another part changes with the level of activity.
What is the high-low method?
The high-low method is a simple technique used in cost accounting to separate fixed and variable costs from a set of total costs. It helps businesses estimate how their costs behave by analyzing the relationship between cost and activity level.
It is used for:
- Estimating Cost Behavior: The method helps businesses understand how much of their total cost is variable (changes with the level of activity) and how much is fixed (remains the same regardless of the activity level).
- Budgeting and Forecasting: By separating fixed and variable costs, managers can better forecast costs at different activity levels, aiding in budgeting and decision-making.
What is a sensitivity analysis?
- Is a way to see how changes in important inputs affect the outcome of a decision or model
- Helps to understand which factors have the biggest impact so that you can manage those
- By testing different scenarios, it shows what might happen under best and worst case
What is relevant costs?
Costs that can be influenced or controlled by a specific manager within a given period. It is costs that can be affected by a decision and therefore should be considered.
What is irrelevant costs?
Costs that will not be affected by a decision and therefore we should not consider those. (sunk cost and fixed cost (sometimes)).
Why is relevant costs important?
Managers need to make decisions in terms of how the relevant costs differe between alternatives and which alternative will make a good investment – relevant cost materials, labour vs purchasing:
- Special orders: when deciding whether to accept a special order
- Make or Buy: deciding whether to produce a component in-house or purchase it from external suppliers - relevant costs would be materials and labour
- Discontinuing a product or segment: when deciding discontinuing a product line or segment – savings from eliminating variable costs.
