Week 7-11 Flashcards
Direct Costs
Costs that can be easily traced to a unit of product or other cost objective e.g. direct material/labour
Indirect Costs
Costs cannot be easily traced to a unit of product or other cost object e.g. manufacturing overhead
Cost behaviour
indicator of how costs will vary in total when the level of activity within the business changes
types of cost behaviour
variable costs
fixed costs
mixed or semi variable costs
how will a cost react to changes in level of business activity
total variable costs change when activity changes
total fixed costs remain unchanged when activity changes
behaviour of costs: per unit
variable cost per unit remainss the same over wide ranges of activity
fixed cost per unit goes down as activity level goes up
Semi-variable costs
costs that have both a fixed and variable element
e.g. if the electricity cost for the factory has a standing charge and a cost per unit produced
step fixed costs
costs that are constant for different levels of activity
e.g. if for each 1000 chairs the company produces, they need to employ an inspector
relevant costs
future costs that will be changed by the decision
irrelevant costs
Costs that will not be affected by the decision
opportunity costs
the profit lost when one alternative is selected over another
replacement cost
the cost of purchasing a substitute asset for the current asset being used by a company
Sunk cost
a cost already incurred regardless of what action is taken, therefore, NOT a relevant cost.
budgeting
a quantitative expression of a plan, of an action prepared in advance of the period to which it relates
what is budget starting point
- sales budget
- Production plan - which feeds into:
- Materials usage
- Materials purchase
- Labour
- overheads
- Capital expenditure
budget criticisms
- fast changing environments
- Focus on short term
- Quantitative rather than qualitative
- Re-enforce “command and control”
- Restrict activities
- Time consuming to set
- Based around business functions
- Protect costs
- Encourage manipulation of accounts
preference shares
contain the right to revieve a dividend before an ordinary shareholder i.e they take preference
debentures
written documents setting out the terms of a loan (interest rate, payment schedules…)
cost of capital
whether a company finances itself through equity and/or debt both incur a cost to the company
Investment appraisal
process of analysing whether an investment project is worthwhile or not
NPV
Net present value
method used in investment planning to help managers make sensible investment decisions and to analyse the profitability of a project of investment
Why does time value of money matter
- inflation
- income lost - cost opportunity/interest earning
- uncertain future
- risk: great return
The time value of money
A sum of money in the hand has greater value that the sum to be paid in the future.
Purchasing power of money differs as time goes by
present value of money
money that could be invested when in hand for a better return in the future
future value of money
the same amount of money is subject to uncertainties and loses money in the future
