P1: 4.3 Cost Classification Flashcards
Non controllable costs
- 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
Avoidable costs
- Cost that would not be there if an activity was not engaged or done more efficiently
Ex. Saving material cost by stopping production
Committed costs
- arise from having property, plant, equipment.
- costs that don’t go away when short term production stops or decreases
Incremental costs
Additional costs due to a given decision
Differential costs
- the difference in the total cost between two decisions
Engineered costs
- 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
Discretionary costs
- usually due to a periodic (annual) outlay decision
- R&D costs and some routine maintenance cost may count as well
Outlay cost
- actual cash disbursement
- aka explicit, accounting, or out of pocket costs
Opportunity cost
- 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
Economic cost
- the sum of explicit and implicit costs
Imputed costs
- type of opportunity cost
- ex. Profit lost if company cannot keep up with sales when there is low inventory
Relevant costs
- 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
Sunk costs
- 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
Historical costs
- actual (explicit) price paid for an asset.
Joint costs
- 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
Separable costs
- cost that are incurred after the split off cost
- expense that can be directly assigned to a specific activity or transaction
By - products
- produced simultaneously from a common manufacturing process.
- ex. Lumber yard creates sawdust during cutting of lumber
Normal spoilage
- spoilage that occurs under normal operating conditions
- uncontrollable in the short run
Abnormal spoilage
- spoilage that is not expected
- treated as a period cost
- cost of abnormal spoilage should be separately identified and reported to mgmt
Rework
- product that is sent back to be fixed
- bringing a non salable product back to salability.
Scrap
- left over raw materials that can still be used for another purpose.
Waste
- raw material left over from production cycle that has no further use.
- must be discarded
Other costs
- carrying costs
- transferred-in costs
- value-adding costs
Carrying costs
- cost of storing or holding inventory
Ex. Cost of capital, insurance, warehousing, breakage, and obsolescence.
Transferred- in costs
- costs that transfer from one production station to another ( in a multi level production setting)
Normal capacity
- long term average level of activity over period of seasonal,cyclical, and trend variations
- any deviations will adjust in the coming years
Practical capacity
- maximum level of output that the product is produced efficiently
- allows for holidays and maintenance
Theoretical (ideal) capacity
- maximum capacity assuming no holidays, downtime, etc
- continuous production
Controllable cost
- costs that are under the discretion of the manager
