Lecture 2 Flashcards
What is a Cost Object?
Anything for which a separate measurement of costs is desired. e.g. a product or a machine
Why is specification of the cost object critical to classification of costs?
Costs are assigned to cost objects to help decisions be made. If the costs are assigned incorrectly it can lead to incorrect decisions and poor management.
What is a cost driver?
Any factor that affects total costs. A change in the level of the cost driver will cause a change in the level of the total cost of a related cost object.
Variable versus fixed costs
Variable costs is a cost that changes in total proportion to changes in the related level of total activity or volume.
Fixed costs are costs that do not change in total despite changes in the related level of total activity or volume.
Direct costs versus indirect costs
Direct: costs that are related to the particular cost object and can be feasibly traced to it. Usually become a physical part of the product.
Indirect: costs that are related to the particular cost object but cannot be feasibly traced to it.
Relevant range
The range of the cost driver in which a specific relationship between cost and the level of activity or volume is valid.
Name the two cost measurement tasks
accumulation (recording) and assignment (to the cost objects)
Explain economic feasibility
the cost of tracing the cost to each product may exceed the benefits of doing so, therefore it is not economically feasible
Criteria of classifying as variable
total variable costs change as volume changes. Variable costs per unit remain the same over wide ranges of volume
Criteria of classifying as fixed
total fixed costs remain the same even when vol changes. fixed costs per unit goes down as vol goes up
Define opportunity cost
the value of the best alternative forgone. not captured by FS but still need to take it into account
Costs of conversion=
Direct Labour + mfg OH
Costs of purchase =
net purchases + freight in
Inventoriable vs non-inventoriable
Manufacturing firm - inventoriable = DM, DL F and V production OH
Only costs that make up the value of inventory in the FS.
Stocks v Flows
stocks measured at a specific point in time
flow measure of changes over time
