2- Cost Concepts, Behaviour and Terminology

Question 1

What is a cost?

Answer 1

A cost is a measure of resources used or

given up to achieve a stated purpose

Question 2

A cost objective is …

A cost object is ….

Answer 2

• any activity for which a
  separate measurement of costs is required
• anything for which cost data are
  desired – including products, product lines,
  customers, jobs and organizational subunits

Question 3

x5 Cost Objectives and their Classifications [x2 for each objective]

Answer 3

1. Assigning costs to cost objects - traceability (direct or
   indirect)
2. Financial reporting - inventoriable or expensed
   (product or period)
3. Predicting cost behaviour in response to changes in
   activity (fixed or variable)
4. Assessing performance (controllable or
   uncontrollable)
5. Making decisions (differential, sunk, opportunity)

Question 4

Compare Retailing and Manufacturing:

• Activity
• Inventory

Answer 4

• Activity:
  R- Buy finished goods, Sell finished goods
  M- Buy raw materials, Produce and sell finished goods
• Inventory:
  R- Only 1 type of inventory (merchandise inventory)
  M- 3 types of inventory: raw material, work in progress,
  finished goods

Question 5

Where is the costs of unsold goods reported?

Where is the cost of goods sold reported?

Answer 5

The cost of unsold goods is reported on the balance sheet
▪ The cost of goods sold is reported on the profit and loss account/income
statement

Question 6

what are product costs?

Answer 6

The costs a company assigns to units produced

Question 7

Manufacturing Costs? x3

Answer 7

Direct Labour
Direct Materials
Manufacturing Overheads

Question 8

Def direct materials and eg

Answer 8

Those materials that become an integral part of the product and that can be
conveniently traced directly to it
Example: A radio installed in a car

Question 9

Def Direct labour and eg

Answer 9

Those labour costs that can be easily traced to individual units of product
Example: Wages paid to car assembly workers

Question 10

def manufacturing overheads?

x2 types, 2 egs for each

Answer 10

Manufacturing costs that cannot be traced directly to specific units produced
Examples:
1. Indirect labour:
Wages paid to employees who are not directly involved in production work
Examples: maintenance workers, cleaners and security guards
2. indirect materials
Materials used to support the production process
Examples: lubricants and cleaning supplies used in the
car assembly plant

Question 11

Classification of Costs:

What is Classified as Prime costs and what is classified as conversion costs?

Answer 11

Prime Costs: direct materials and direct labour

Conversion Costs: direct labour and manufacturing overheads

Question 12

Give examples of non-manufacturing costs [x2 + explanation{

Answer 12

Marketing and selling costs . .
• Costs necessary to get the order
and deliver the product
Administrative costs . . .
• All executive, organisational and
clerical costs

Question 13

Financial reporting requires classification into [2]

Answer 13

Product and Period costs

Question 14

Product Costs include
What are Sold goods recorded on? What are they recorded as?
What are Stocks of goods recorded on?

Answer 14

Direct Materials, direct labour, manufacturing overhead

Under ‘Cost of Goods Sold’ on the Income Statement

Question 15

What are period costs reported on? What do they come under/are they classified as?

Answer 15

Period costs are not included in product costs.

They are expensed on the profit statement under expenses

Question 16

What is under the current assets section of the balance sheet for a retailer?

Answer 16

Retailer
Current Assets
•Cash
•Debtors
•Prepaid Expenses
•Merchandise Stock

Question 17

What is under the current assets section of the balance sheet for a manufacturer?

Answer 17

Current Assets
➢ Cash
➢ Debtors
➢ Prepaid Expenses
➢ Stock:
               Raw Materials 
               Work in Progress
               Finished Goods

Question 18

How does Cost of goods sold for manufacturers differ only slightly from cost of goods sold for retailers?

Answer 18

For Retailers, under ‘costs of goods sold’, it will be stated as ‘purchases’. For Manufacturers, it will be stated as ‘costs of goods manufactured’

Question 19

Where do Direct Material, direct labour and manufacturing overheads come on Balance sheet and Income statement respectively?

Answer 19

Balance sheet:
Direct materials = raw materials
Direct labour and manufacturing overheads = work in progess,

Income statement:
All under finished goods (not recorded on income statement unless finished)

Question 20

Product costs go into the ____ sheet as
____ and only go through the ____ statement when
the product is ___
• Period costs go on the incomce statement in the
period in which they are _____
(not necessarily when ___ ___ ____!)

Answer 20

balance
assets
incomce
sold

Incurred
they are paid

Question 21

Classifying cost behaviour involves identifying …

Answer 21

fixed and variable costs

Question 22

Behaviour of variable costs in total and per unit?

Answer 22

In Total: Total variable cost changes Variable cost per unit remains
Per Unit: Variable as activity level changes the same over wide ranges of activity

Question 23

Examples of variable costs x4

1 - x1
2- x3
3- x2
4- x2

Answer 23

Retailers: Cost of Goods Sold
Manufacturers: Direct Material, direct labour, and variable manufacturing overhead
Retailers and Manufacturers: Sales commissions and
shipping costs
Service Organisations: Supplies and travel

Question 24

Behaviour of fixed costs in total and per unit?

Answer 24

The fixed cost remains the same even when the activity level changes

The fixed cost per unit goes down as activity goes up

Question 25

Examples of fixed costs x4

Answer 25

Retailers, manufacturers, and service
organisations
Taxes, insurance, sales salaries depreciation, advertising

Question 26

What does relevant range refer to in fixed costs?

Answer 26

Seldom is a fixed cost fixed over all levels
of activity
• The relevant range is the volume range
within which actual operations are
likely to occur

Question 27

What are ‘committed’ fixed costs?

Answer 27

Long-term, cannot be reduced in the short term
Examples:
Depreciation on
Buildings and
Equipment

Question 28

What are ‘discretionary’ fixed costs?

Answer 28

May be altered in the short-term by current managerial decisions
Examples:
Advertising and
Research and
Development

Question 29

What are differential costs and revs?

Answer 29

Costs and revenues that differ among alternatives

Question 30

What is a sunk cost?
Should it be account for when making economic decisions?
Opp cost

Answer 30

Sunk costs cannot be changed by any decision.
They are not differential costs and should be
ignored when making decisions