Costing

Question 1

What is a cost

Answer 1

Item of expenditure. The number of resources sacrificed to achieve a particular objective

Question 2

What are the three cost classifications

Answer 2

Decision making
Allocation to products
Behaviour

Question 3

What comes under decision making

Answer 3

Relevant or irrelevant

Question 4

What comes under allocation to products

Answer 4

Direct or indirect

Question 5

What comes under behaviour

Answer 5

Variable, semi variable, fixed, step fixed

Question 6

What is a relevant cost

Answer 6

Any cost affected by a decision e.g opportunity or future outlay. They have not yet been incurred

Question 7

What is an opportunity cost

Answer 7

The value of the opportunity foregone to pursue an alternative course of action

Question 8

What is a future outlay cost

Answer 8

A cost which will be incurred in the future to achieve an objective

Question 9

What is an irrelevant cost

Answer 9

Not affected by a decision. They have been incurred. Includes historic, sunk and committed.

Question 10

What is a historic cost

Answer 10

The original cost

Question 11

What is a sunk cost

Answer 11

A past cost which cannot be recovered

Question 12

What is a committed cost

Answer 12

Future, agreed cost

Question 13

What is a direct cost

Answer 13

Can be attributed directly to the product e.g direct labour

Question 14

What is an indirect cost

Answer 14

Cannot be directly attributed to the product and therefore should be shared e.g rent

Question 15

What is cost behaviour

Answer 15

How a cost varies with activity

Question 16

What are variable costs

Answer 16

Vary directly with the number of units e.g cost of making materials

Question 17

What are fixed costs

Answer 17

remain the same whatever the level of output e.g rent

Question 18

What are semi-variable costs

Answer 18

Fixed with variable elements e.g telephone bills

Question 19

What are step-fixed costs

Answer 19

Remain fixed as output increases until output reaches a level where it must increase sharply e.g supervisor costs

Question 20

What does CVP mean

Answer 20

Cost volume profitability

Question 21

What is cost volume profitability

Answer 21

Assists the relationship between cost and volume or activity and profit

Question 22

What is the break even point

Answer 22

Where revenue will exactly equal total cost so there will be no profit or loss

Question 23

Break even point equation

Answer 23

BEP = Fixed cost / (revenue - variable cost)

Also known as contribution per unit

Question 24

What is the margin of safety

Answer 24

How many sales can be lost before there is a loss in profit. Difference between profit and break even

Question 25

Margin of safety equation

Answer 25

(expected sales - break even sales) / expected sales x 100

Question 26

What are the uses of break even analysis

Answer 26

- Working out how much to sell when starting a new business - creating annual budgets - Making changes to strategy - Answering 'what if' statements

Question 27

Limitations of break even analysis

Answer 27

- Multiproduct businesses - sales of other products may affect sales of another, hard to assign fixed costs to production lines therefore lacks accuracy. -Assumes costs stay constant, the model must keep changing where costs do not stay the same so hard to build strategy off. Lacks reliability -Doesn't account for demand, hard to control external factors so it may not break even as predicted -Doesnt account for changes in sales price (sales)

Question 28

Usefulness of costing information

Answer 28

- Benchmarking against similar activities/ products - Developing budgets and comparing outcomes to budgets - Assessing performance by comparing outcomes to budgets - Assessing performance by comparing to sales revenue - Informing pricing (cost + a margin) - Evaluating whether to enter a market

Question 29

Full cost

Answer 29

Amount of resources sacrificed to achieve a given objective, considers all resources sacrificed

Question 30

Relevant costing

Answer 30

Short term decision making

Question 31

Full costing

Answer 31

Long term decision making e.g ensuring prices cover all costs

Question 32

Job costing

Answer 32

Accumulation of costs to a distinct individual output (job) to determine the full cost

Question 33

Full cost equation

Answer 33

Full cost = direct cost + fair share or indirect cost

Question 34

What is another word for indirect cost

Answer 34

Overheads

Question 35

What was traditional costing

Answer 35

Low levels of indirect cost with most costs spent on employees Direct labour intensive Even spread of overheads across products

Question 36

What is the new order

Answer 36

Capital intensive Machine intensive High indirect costs Volatile changes in consumer demand

Question 37

What is total life cycle costing

Answer 37

Calculates total cost over its entire life

Question 38

What are the steps of total life costing

Answer 38

1. Pre-production phase (research and development, production set up, pre-production marketing) 2.Production phase (Manufacturing and marketing) 3.Post-production phase (after sales service)

Question 39

What did Kaizen costing do for total life costing

Answer 39

Focused on the pre-producing costing phase

Question 40

What is target costing

Answer 40

Selling price - target profit = target cost

Question 41

Process of target costing

Answer 41

Market research to determine what price the market will bear Steps taken to ensure actual cost equals target cost

Question 42

What does ABC costing assume

Answer 42

Overheads increase and decrease due to activities

Question 43

What are cost drivers

Answer 43

Any factor which affects total costs

Question 44

What are cost pools

Answer 44

Relevant costs to a task, pooled together

Question 45

How does ABC allocate overheads

Answer 45

Reflects proportions

Question 46

ABC costing short run and long run variable costs

Answer 46

Short run variable costs vary with production volume (e.g sales commission) Long run variable costs vary with level of activity (e.g marketing)

Question 47

What are the 4 quality costs

Answer 47

Prevention, appraisal, internal failure and external failure

Question 48

What are the 4 quality costs: Prevention

Answer 48

e.g staff training costs on quality issues

Question 49

What are the 4 quality costs: Appraisal

Answer 49

e.g costs associated with monitoring quality processes

Question 50

What are the 4 quality costs: Internal failure costs

Answer 50

Costs of substandard products or scraps

Question 51

What are the 4 quality costs: External failure costs

Answer 51

Failure costs after the product reaches the consumer e.g loss of reputation

Question 52

What does JIT manufacturing stand for and mean

Answer 52

Just in time for Manufacturing begins only when necessary Goods are created to meet demand

Question 53

JIT manufacturing 6 step process

Answer 53

1. rearrangement of production process to 1 product 2.reduce set up time 3.Increase emphasis on total quality management to eliminate defective production 4.Production cell workers trained to multitask 5.Adoption of JIT purchasing techniques so delivery immediately precedes use 6. Modification of management accounting performance measures and product costing systems to support JIT production systems.