Week 5 - Cost Concepts

Question 1

What is cost classification?

Answer 1

Essentially a matter of grouping together costs which share the same attributes, relative to a stated cost objective

Question 2

What is the cost objective/object?

Answer 2

Any activity for which a separate measurement of costs is required e.g cost of a product or a service (the purpose we need the information for)

Question 3

What are some reasons that costs can be assigned to objects?

Answer 3

Pricing, profitability, control…

Question 4

What should the cost object/objective determine?

Answer 4

The classification to be used

Question 5

What may changing the cost objective do?

Answer 5

It may alter the categorisation of a specific cost within a given classification

Question 6

Cost collection systems ordinarily account for costs in two stages. What is the first stage?

Answer 6

‘Accumulate costs by classifying them into certain categories such as by type of expense (e.g direct labour, direct materials and indirect costs) or by cost behaviour (e.g fixed or variable cost)’

Question 7

Cost collection systems ordinarily account for costs in two stages. What is the second stage?

Answer 7

‘It then assigns these costs to cost objects’

Question 8

What are the two stages of cost collection systems accounting for costs?

Answer 8

• accumulate costs by classifying them into certain categories such as by type of expense or by cost behaviour
• assign these costs to cost objects

Question 9

What is the first main cost objective?

Answer 9

Assigning costs to cost objects - trace costs back to specific products/services. Some costs may be direct, others may be indirect

Question 10

What is the second main cost objective?

Answer 10

Financial reporting - trying to understand the inventory cost or the cost expensed in a product or period

Question 11

What is the third main cost objective?

Answer 11

Predicting cost behaviour changes in response to changes in activity, e.g increasing production by 10% - need to understand which of our costs are variable or fixed to do so

Question 12

What is the fourth main cost objective?

Answer 12

Assessing performance - costs our managers have control over, and those they don’t - only judge performance on costs they can control

Question 13

What is the fifth main cost objective?

Answer 13

Making decisions by looking at type of costs e.g differential, sunk, opportunity etc

Question 14

What are the five main cost objectives?

Answer 14

• assigning costs to cost objectives
• financial reporting
• predicting cost behaviour in response to changes in activity
• assessing performance
• making decisions

Question 15

What is the difference between retailing and manufacturing activities?

Answer 15

Retailers buy finished goods and sell finished goods.
Manufacturers buy raw materials, and then produce and sell finished goods

Question 16

What are companies called if they both manufacture and sell a product?

Answer 16

Vertically integrated

Question 17

What are the two facts about inventory and costs for retailers?

Answer 17

• they accumulate the purchased cost of goods
• they have only one type of inventory (merchandise inventory)

Question 18

What are the two facts about inventory and costs for manufacturers?

Answer 18

• they must accumulate the costs of manufacturing products
• their inventory consists of materials, work in process and finished goods

Question 19

What do both manufacturing and retailer organisations report?

Answer 19

• The cost of unsold goods on the Statement of Financial Position
• The cost of goods sold on the Statement of Profit or Loss