MA Lecture 1

Question 1

What are thet wo competitive strategies?

Answer 1

• Product differentiation: Unique offerings relative to offerings of competitors, which leads to brand loyalty and willingness of customers to pay high prices
• Cost leadership: outperforming at producing at lowest costs. Focus is on productivity and efficiency improvements, elimination of waste, and tight cost control. This leads to lower selling prices.

Question 2

What are cost objects?

Answer 2

Things we want to know the cost of?

Question 3

What is the difference between direct and indirect costs?

Answer 3

• Direct costs: can be easily traced to cost objects
• Indirect costs (overhead costs) can’t be traced. They must be allocated to cost objects using a cost driver

Question 4

What are cost drivers?

Answer 4

Factors that cause a change in cost

Question 5

What are variable costs?

Answer 5

change in proportion with volume of a cost driver, such as production or sales quantity.

Question 6

What are fixed costs?

Answer 6

costs that don’t change in proportion with volume of a cost driver, at least not withing relevant range

Question 7

Name three phases in variable costs?

Answer 7

1. Learning curve (steep)
2. Normal activity level (stable)
3. Diseconomies of scale (steep)

Question 8

What are marginal costs?

Answer 8

increase in costs from producing one additional unit of output at point x

Question 9

Name two assumptions of linear variable costs?

Answer 9

• Variations in cost driver explain variations in total costs
• Cost behavior is approximated by a linear cost function within relevant range (level of normal activity)

Question 10

What is the relevant range in variable costs?

Answer 10

range in which the relationship between activity/volume level and respective cost is constant

Question 11

What does a firm do when business activity declines or increases?

Answer 11

• When business activity declines, firms divest to eliminate excess capacity
• When business activity increases, firms invest to increase capacity
• Over long-term, fixed costs behave like step-functions

Question 12

Name the two criteria of relevant costs and revenues (used for internal decision )

Answer 12

• Differ between alternative courses of action
• Affect future cash flows

Already incurred costs are sunk and thus irrelevant

Question 13

What are product costs?

Answer 13

include only costs necessary to complete product at manufacturing step in value chain or to purchase and transport product to location of sale

Question 14

What are period costs?

Answer 14

include all other costs incurred by firm in managing or selling product (selling or administrative expenses)

Question 15

Why would you need different cost classificications?

Answer 15

• Fixed vs Variable costs  Understanding cost behavior
• Direct vs indirect costs  Estimating costs of products, customers, divisions
• Product vs Period  External financial reporting
• Relevant vs Irrelevant  Internal decision making