Types of Cost

Question 1

What is a cost object?

Answer 1

Anything for which costs are incurred- product, service, centre, activity, customer or distributions channel

Question 2

What is a cost centre?

Answer 2

Any unit/location/division to which costs are assigned or allocated

Question 3

What is a profit centre?

Answer 3

type of division with responsibility for operating costs and revenues (statement of profit or loss)

Question 4

What is a revenue centre?

Answer 4

responsibility to generate revenues only (no cost monitoring) ie sales division

Question 5

What is an investment centre?

Answer 5

responsible for operating costs and revenues plus capital investment (has power to buy, ie asset purchases)

Question 6

What is a cost unit?

Answer 6

unit of product or service in relation to which costs are determined (for example 1 nail is a cost object, 20 nails is a cost unit)

Question 7

What is a composite cost unit?

Answer 7

two elements to the cost unit- ie patient/day or tonne/kilometer

Question 8

what is historic cost?

Answer 8

historic cost of a item is what accountants usually use to produce accounts- costs that have already been incurred/recorded

Question 9

what is economic cost?

Answer 9

opportunity cost (represents the next best course of action)

Question 10

what is economic value?

Answer 10

amount someone is willing to pay for a item

Question 11

What is a cost classification?

Answer 11

How to understand costs- arranging elements of cost into logical groups (fixed, variable, value adding), function or use

Question 12

What is a direct cost?

Answer 12

expenditure that can be attributed to a specific cost unit (ie material)

Question 13

What is the total of all direct costs?

Answer 13

Prime Cost

Question 14

What is an indirect cost?

Answer 14

OVERHEADS- expenditure on labour/material/services that cannot be economically identified with a specific cost unit- Split into production and non-production overheads

Question 15

What are productions overheads?

Answer 15

Indirect materials, wages, expenses (ie rent, rates, supervisor salary)

Question 16

What are non-production overheads?

Answer 16

Admin, selling, distribution (salaries of head office, brochures, running costs of lorries)

Question 17

How is labour different?

Answer 17

If overtime (premium) paid then that becomes an indirect cost UNLESS the customer has requested it or overtime is worked regularly

Question 18

What are controllable costs?

Answer 18

costs that management can influence

Question 19

what are uncontrollable costs?

Answer 19

costs that management cannot control within the current time period (ie tax)

Question 20

what are variable costs?

Answer 20

costs that change as the level of activity changes

Question 21

what are fixed costs?

Answer 21

costs that do not vary with activity

Question 22

What is full production cost?

Answer 22

total of all production costs (material, labour etc) NOT non-production overheads

Question 23

What is full cost?

Answer 23

total of all production and non-production costs

Prime Cost+ Full Production Cost+ Non-production overheads= FULL COST

Question 24

what is marginal cost?

Answer 24

amount by which the total cost increases if one more unit of product is made (different from variable as it also includes fixed)

Question 25

what is a period cost?

Answer 25

cost that is linked to a time period (usually fixed like salary) rather than directly to a unit of product or service

Question 26

What 3 tests must a relevant cost pass?

Answer 26

Future Incremental cash flow

Question 27

What is Future (in relevant cost)

Answer 27

decision being made today cannot change the past- only consider future costs (not past/sunk costs)

Question 28

What is incremental (relevant cost)

Answer 28

only the costs affected by the decision are relevant (fixed costs can be ignored)

Question 29

What is cash flow (relevant cost)

Answer 29

factual, not based on accounting conventions (depreciation and notional costs are not relevant)

Question 30

Relevant cost analysis for materials?

Answer 30

is it in inventory= NO= relevant cost is current purchasing price
YES= is it currently being used somewhere else? NO=if used only losing scrap value
YES= can it be replaced? NO=opportunity cost (what could it have made elsewhere)
YES= Will need to buy more therefore current purchase price is relevant

Question 31

Labour cost analysis?

Answer 31

Is labour at full capacity? NO= relevant cots is zero as they are idle
YES=could we hire more or work overtime? NO= relevant cost is the opportunity cost (VC of labour +lost contribution)
YES= relevant cost is cost of hiring more staff or the overtime cost

Question 32

what is the deprival value?

Answer 32

If we were deprived of the asset, what would we chose to do? (value in use+scrap value vs replacement cost)

Question 33

What is shareholder value?

Answer 33

total return to shareholders in terms of dividends and share price,

Question 34

Why is identifying all costs important?

Answer 34

Cost reduction and cost control schemes and pricing decisions, maybe also legislation and adherence to standards (esp environmental)

Question 35

What are the main issues faced with managing environmental costs?

Answer 35

identification and measurement (compliance costs, clean-up costs, conventional costs)