Week 2- Cost Concepts, Behaviour and Terminology

Question 1

The cost object

Answer 1

The object where the costs are accumulated

Question 2

Make up of total costs

Answer 2

Total costs= direct costs + indirect costs

Question 3

Direct costs

Answer 3

A cost directly associated with building the object- direct cost wouldn’t exist without JCB.

Question 4

Indirect cost

Answer 4

Costs indirectly associated with the making of the product- e.g. insurance, marketing, security, rent

Question 5

3 manufacturing costs

Answer 5

• Direct materials
• Direct labour
• Manufacturing overhead (indirect cost)

Question 6

Manufacturing overhead

Answer 6

Costs that cannot be traced directly to specific units produced.
Indirect labour- wages paid to those not currently on the production line- maintenance, security workers
Indirect materials- used to support the production process- cleaning supplies, car assembly plant.

Question 7

Prime cost

Answer 7

Direct cost

Question 8

Conversion cost

Answer 8

Direct costs + manufacturing overhead

Question 9

Manufacturing and non-manufacturing costs

Answer 9

• Manufacturing- associated with the production function in the factory
• Non-manufacturing- marketing and selling costs (costs necessary to get the order and deliver the product), administrative costs (all executive, organisational costs).

Question 10

Product cost

Answer 10

Those costs that are incurred to acquire, manufacture or construct a product.
Consist of direct materials, direct labour and manufacturing overhead.

Question 11

Period cost

Answer 11

Costs relating to a time period rather than to the output (sales) of products and services.

Question 12

Difference between product and period costs

Answer 12

Product costs are costs incurred in purchasing or making the product. Period costs are all other costs.

Question 13

Product costs on financial statements

Answer 13

• Inventory on SoFP
• Costs of Good Sold- on income statement.

Question 14

Period costs on financial statement

Answer 14

• Expenses on income statement

Question 15

Inventory for retailer vs manufacturer

Answer 15

• Retailer like TK maxx their inventory is the price they buy clothes for
• For manufacturer its the cost of their raw material, work in progress, finished goods.

Question 16

Manufacturing cost flows

Answer 16

• Material purchases- raw materials
• Direct labour and manufacturing overhead- work in progress
• Finished goods- cost of goods sold

Question 17

Fixed cost

Answer 17

Reduces as activity level increases- per unit
Remains the same within relevant range of activity- in total

Question 18

Variable

Answer 18

Per unit- remains same over range of activity
In total- proportional to the level of activity in relevant range

Question 19

Mixed costs

Answer 19

Have both a fixed and variable component e.g. mobile phone

Question 20

Analysis of mixed costs

Answer 20

High-low method

Question 21

Types of fixed costs

Answer 21

• Committed- long term, cannot reduce short term like depreciation on buildings and equipment
• Discretionary- may be altered in the short-term by current managerial decisions- e.g. advertising, R&D

Question 22

Opportunity costs

Answer 22

The potential benefit given up when one alternative is selected over another.

Question 23

Sunk costs

Answer 23

Costs that cannot be changed by any decision- they are not differential and should be ignored when making a decision e.g. HS2.