P1: 4.3 Cost Classification

Question 1

Non controllable costs

Answer 1

• Determined by different levels of management and not inherent to nature of a cost

Ex. New machinery is determined by VP or owner and not the plant manager

Question 2

Avoidable costs

Answer 2

• Cost that would not be there if an activity was not engaged or done more efficiently

Ex. Saving material cost by stopping production

Question 3

Committed costs

Answer 3

• arise from having property, plant, equipment.

- costs that don’t go away when short term production stops or decreases

Question 4

Incremental costs

Answer 4

Additional costs due to a given decision

Question 5

Differential costs

Answer 5

• the difference in the total cost between two decisions

Question 6

Engineered costs

Answer 6

• costs that have a direct, observable, quantifiable cause and effect relationship between level of output and quantity of resources consumed

Ex. Direct materials and direct labor

Question 7

Discretionary costs

Answer 7

• usually due to a periodic (annual) outlay decision

- R&D costs and some routine maintenance cost may count as well

Question 8

Outlay cost

Answer 8

• actual cash disbursement

- aka explicit, accounting, or out of pocket costs

Question 9

Opportunity cost

Answer 9

• implicit cost
• when a maximum outcome / benefit is lost due to using a scarce resource and the outcome is not the best alternative.

Ex. Going to college instead of working full time

Question 10

Economic cost

Answer 10

• the sum of explicit and implicit costs

Question 11

Imputed costs

Answer 11

• type of opportunity cost

- ex. Profit lost if company cannot keep up with sales when there is low inventory

Question 12

Relevant costs

Answer 12

• future costs that will vary depending on the decision that is made. All other cost are not dependent on the activity and is constant.

Ex. Tuition that must be spent to attend college

Question 13

Sunk costs

Answer 13

• costs already incurred or committed. Since the are unavoidable they are not relevant to future decisions

Ex. Even after spending 3 yrs of tuition, there would be no guarantee that the 4th year would happen

Question 14

Historical costs

Answer 14

• actual (explicit) price paid for an asset.

Question 15

Joint costs

Answer 15

• juncture in a production process where the product stream splits in two or more distinct products which become identifiable as joint products.

Ex. Cost of tree also is joint cost for a lumber yard

Question 16

Separable costs

Answer 16

• cost that are incurred after the split off cost

- expense that can be directly assigned to a specific activity or transaction

Question 17

By - products

Answer 17

• produced simultaneously from a common manufacturing process.
• ex. Lumber yard creates sawdust during cutting of lumber

Question 18

Normal spoilage

Answer 18

• spoilage that occurs under normal operating conditions

- uncontrollable in the short run

Question 19

Abnormal spoilage

Answer 19

• spoilage that is not expected
• treated as a period cost
• cost of abnormal spoilage should be separately identified and reported to mgmt

Question 20

Rework

Answer 20

• product that is sent back to be fixed

- bringing a non salable product back to salability.

Question 21

Scrap

Answer 21

• left over raw materials that can still be used for another purpose.

Question 22

Waste

Answer 22

• raw material left over from production cycle that has no further use.
• must be discarded

Question 23

Other costs

Answer 23

• carrying costs
• transferred-in costs
• value-adding costs

Question 24

Carrying costs

Answer 24

• cost of storing or holding inventory

Ex. Cost of capital, insurance, warehousing, breakage, and obsolescence.

Question 25

Transferred- in costs

Answer 25

• costs that transfer from one production station to another ( in a multi level production setting)

Question 26

Normal capacity

Answer 26

• long term average level of activity over period of seasonal,cyclical, and trend variations
• any deviations will adjust in the coming years

Question 27

Practical capacity

Answer 27

• maximum level of output that the product is produced efficiently
• allows for holidays and maintenance

Question 28

Theoretical (ideal) capacity

Answer 28

• maximum capacity assuming no holidays, downtime, etc

- continuous production

Question 29

Controllable cost

Answer 29

• costs that are under the discretion of the manager